Classification and Various Economic Problems in Indonesia

Indonesia’s Economic Problems –  As long as resources are available in limited quantities while human needs are unlimited, there will always be economic problems. An example of an economic problem, for example, is the scarcity of rice in Indonesia, while rice is a basic need for most of our society.

Check out a more complete explanation of economic problems, as well as the factors that influence them, as follows:

Factors Affecting Economic Problems

In economic problems, humans are faced with demands to meet the necessities of life both in terms of food, clothing and housing. Factors that influence the economic problems themselves include:

1. Natural Resources

Natural resources are all things that come from nature and can be used to meet the needs of all human life. Based on its formation, natural resources are divided into renewable resources (the amount is unlimited) and non-renewable natural resources (the amount is limited and can be used up).

Natural resources and their relation to economic problems are closely related to the availability or absence of raw materials because of the high rate of population growth, and the narrowing of the land available for natural resources.

To understand more about the economics of natural resources, Sinaumed’s can read the book Natural Resource Economics which is equipped with a graphical and mathematical approach that can help you to understand it better.

 

2. Human Resources

The Human Resources (HR) factor includes the availability of skilled and professional workers. Human Resources (HR) as productive individuals who work as a driving force for an organization, both in institutions and companies which can be clearly studied in the book Economics of Human Resources .

HR as the main element of the organization compared to other resource elements such as capital, technology, because it is humans who play a role in controlling other factors.

The definition of Human Resources (HR) itself is further divided into two, namely Macro Human Resources (HR) or the number of people of productive age in an area, and Micro Human Resources (HR), namely individuals who work in an institution or company.

Increasing HR competencies can be realized through a number of education and training programs that focus on developing leadership, and competencies according to their interests and the field of work they are engaged in.

3. Working Capital

The production process certainly requires working capital so that production can be completed properly, and meet consumer demand. Although sometimes working capital is very difficult to obtain, especially during a pandemic like now.

Because the impact of Covid-19 not only affects individuals but also the banking sector as a provider of working capital has also experienced paralysis. Working capital as the sum of current assets. The timing of the availability of working capital will depend on the type and level of liquidity of the elements of current assets, such as cash, securities, receivables and inventories.

4. Distribution Process

Even though it is fairly simple and is a classic economic problem. The distribution process is quite influential in economic matters, especially in the basic goods produced to meet the needs of an even distribution.

Distribution as an activity or act of moving products from suppliers to consumers in the form of a supply chain. Distribution is one of the key advantages for the company because it will directly affect product costs and consumer needs.

The existence of proper distribution activities will be very useful to achieve company profits. For example, companies can further reduce capital costs and create high consumer demand for these products.

With the development of digital technology in the current 4.0 era, the distribution process will also change and adapt according to developments. You can learn how distributors can adapt in the Complete Distribution Management Guide book .

 

5. Consumption Level

The difference in lifestyle is of course directly proportional to how many levels of consumption are carried out by consumers. There are several factors that cause the level of consumer consumption to continue to decline, this is what will cause economic problems if this continues.

These reasons include limited employment opportunities. The effect of limited employment opportunities is the high unemployment rate which in turn reduces the level of prosperity.

The decline in people’s welfare due to unemployment will certainly reduce a person’s desire to buy goods. In addition, price increases will also have a major impact on the economy.

Other causes of course or the process of increasing prices continuously. Inflation as a process of continuous decline in currency values. This can happen due to an increase in the number of needs but limited stock, production or service costs have increased, or the amount of money circulating in the community is quite high.

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Classification of Economic Problems

1. Classical Economic Problems

In 1870 the classical economic theory was developed pioneered by Adam Smith. Adherents of these theories argue that economic problems are a unified process consisting of production, distribution and consumption processes. Here’s the explanation:

a. Distribution Issues

Distribution is the initial stage in the product marketing process. Distribution as an important marketing process for all types of industries. Distribution can add value to products through various functions such as utility, place, time and product ownership rights.

b. Distribution benefits

Distribution problems include as a link between production and consumption activities. So that the marketing process will be easier.

Some of the factors that influence distribution channels are markets, goods, companies, and buying habits. Distribution itself can be done in two ways, namely direct distribution and indirect distribution.

c. Production Problems

Production is a process of producing goods or services that aim to meet consumer needs. However, of course not all human needs can be met, because human needs can be met only if he consumes goods or services according to his needs.

Meanwhile, the process of producing goods and services requires other resources, from natural resources (SDA), human resources (HR), capital resources to entrepreneur skills.

In addition, after goods and services reach consumers, the next problem is, of course, whether these goods will be consumed or even wasted because the prices are not affordable. This is also another problem that must be answered by manufacturers as product makers.

d. Consumption Problems

Consumption is the activity of using, spending or utilizing goods produced by producers. There are two factors that affect consumption activities, including income (because the greater the income received, the greater the purchasing power).

On the other hand, as consumers, we must be able to increase our income so that we can reach the products we want. Apart from that, prices of goods and services, customs and habits of consumers, as well as substitute goods or also known as substitute goods, will also affect the level of public consumption.

2. Modern Economic Problems

The essence of modern economic problems is how to make the right choices in allocating resources to meet the various human needs that are increasingly diverse. Modern economic problems are usually obliged to answer between three questions, namely:

What will be produced?

Society must decide what goods and services to produce in order to meet the right target needs. The production of goods and services must be selective with an accurate priority scale due to limited resources. The basic considerations for the goods and services produced are:

  • The most efficient allocation of resources (natural, human, and capital), the goal is to conserve resource utilization. For example, saving oil and gas, electricity and water, as well as the use of alternative resources.
  • Based on the priority scale of market needs, the community will distinguish which needs are urgent to fulfill, less urgent, and non-urgent needs that must be postponed. For example, the priority is to increase production of basic necessities every Idul Fitri holiday and at the end of the year in order to avoid price increases that are too high or the emergence of inequality.
  • Public Purchasing Power, circulating goods and services must have prices that are affordable by as many citizens as possible. This aims to make the consumption of goods and services right on target.

How to produce?

The selection and production priority scale are followed up by determining the right strategy in the production process so that it remains effective and efficient. This strategy is then realized in a production process based on careful planning and management. There are several basic considerations of how a producer performs production actions including:

  • Choice of Combination of Resources, which are used are natural resources, human resources, and capital resources. For example, electricity production in Java is more appropriate with hydropower because there are many rivers in the region.
  • Technology Choice, because it allows producers to determine whether the company will operate in labor-intensive or capital-intensive conditions. For example, a shoe factory that requires more manual labor should be established in a densely populated area to absorb as much labor as possible.
  • Production Cost Efficiency, production cost efficiency is carried out so that with a certain cost maximum profit can be obtained. For example, a printer determines production costs based on targeted sales forecasts. In this way, the maximum profit that will be obtained can be estimated.

For Whom Produced?

Production effectiveness is based on the knowledge of who needs the goods and services produced even before production activities are carried out. Producers will use a variety of basic considerations, starting from assessing consumer purchasing power and interest, knowing market segmentation so that the goods and services produced are clearly aimed at consumers according to their economic and social conditions, determining the distribution channel from producers to consumers so that goods and services really reach their customers. the hands of consumers who need it at the right time.

For example, transporting and distributing rice and basic food products to markets and stalls that are easily accessible to consumers.

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Economic Problems in Indonesia

Economic and social welfare issues are still the main problems in Indonesia. The following are some of them summarized by Indef Senior Economist Nawir Messi:

1. Urgency to Improve the Quantity and Quality of Economic Growth

Indef noted that Indonesia has experienced growth at an average rate of 5.27% in the last two decades (2000-2018). But to get out of the trap of middle-income country status and become a developed country, this growth rate is not enough.

In addition, Indonesia is also facing the problem of the quality of economic growth. This is because poverty, social inequality, and unemployment are still high. The GDP portion is still 58.5% concentrated in Java and has increased in the last five years.

2. The Dilemma of Economic Growth vs. Import

Indonesia’s import level is still high because output in the agricultural and livestock sectors is decreasing while population growth, especially the middle class, continues to increase.

Import itself is the activity of transporting goods or commodities from one country to another. The import process is generally an activity of bringing goods or commodities from another country into the country.

Bulk imports of goods generally require intervention from customs in the sending and receiving countries. The industrial sector also still relies on imported raw materials, whose growth has now reached 9% in the last three years.

This then shows that the domestic industry is unable to meet demand due to the increasingly shifting economic structure towards services. In addition, deindustrialization also occurs more quickly.

Indonesia has experienced a decline in the share of manufacturing to GDP by 7% in the last ten years, whereas in Thailand and Malaysia it is no more than 4%. Deindustrialization in Indonesia is also exacerbated by changes in patterns of foreign investment (FDI) which tend to be in the tertiary sector (services, digital economy) compared to the secondary (manufacturing industry).

In regulating various economic activities in Indonesia, the government makes economic laws that are enforced and applied by all parties involved which Sinaumed’s can learn from in the book Indonesian Economic Law An Introduction .

 

3. Purchasing Power Stagnant

Inflation on an annual basis was recorded at 2.48% from year to year, however this did not succeed in lifting purchasing power which was still stagnant. It is very possible that the current low inflation will also be accompanied by a decline in people’s purchasing power.

In addition, loan interest rates were fixed until finally the expansion of the business world did not accelerate. The cause of the stagnant purchasing power of the public is generally influenced by the income they receive, the prices of goods and services, to the amount of goods they consume.

4. Low Competitiveness

In the last three years, Indonesia as a destination country for direct investment has continued to decline. In addition, the number of companies in Indonesia also began to decrease. On the other hand, Vietnam continues to show improved performance in attracting FDI, one of which is from Japan. In contrast to Indonesia, Vietnam’s popularity for Japanese investors has continued to increase in the last three years.

5. Unpreparedness to Face the Industrial Revolution 4.0

INDEF views that the 4.0 Industrial Revolution discourse was not carried out with careful planning. This is caused by basic planning regarding what needs to be developed in priority sectors and there is no planning for the basic infrastructure of industry 4.0, namely the Internet of Things (IoT), besides that there is no planning in mitigating the workforce affected by the implementation of automation in this sector.

6. Inconsistency of Energy Subsidy Policy

In 2015, energy subsidies were cut by 65.16% to IDR 119 trillion. The reduction in subsidies continued in 2016 and 2017. However, in 2018, energy subsidies again jumped to 57%, and in 2019 they rose again to 4.23%.

In order for energy subsidies not to continue to soar, INDEF assesses, the government needs to improve the targeting of subsidy recipients to make it more precise, such as 3 kg of gas, 900 VA electricity customers who can afford it.

In addition, the government’s commitment to gradually reducing energy subsidies must also be followed by infrastructure development for New, Renewable Energy (EBT) in order to achieve the EBT mix target of 23% by 2025.

7. Low Tax Performance While Increasing Debt Ratio

INDEF noted that Indonesia’s tax ratio has decreased during the 2012-2017 period. The achievement of the tax ratio is also still far from the target in the 2015-2019 RPJMN of 15.2%.

Tax revenue that is not optimal is also reflected in the tax shortfall that still occurs. Meanwhile, the increase in the ratio of debt to GDP is inversely proportional to the tax ratio. The implication is that the burden of debt interest payments on central government spending is getting higher, from 11% in 2014 to 17.13% per.

8. Troubled Village Funds

Village Fund allocation continues to increase from IDR 20.8 trillion to IDR 70 trillion this year. The proportion of Village Funds to Transfers to Regions also continued to increase from 3.45% to 8.47%. However, INDEF noted that the increase in funds was not directly proportional to the increase in social indicators in rural areas.

There are still 10 provinces with higher levels of rural inequality than the national level, namely Yogyakarta, East Java, NTB, NTT, North Sulawesi, South Sulawesi, Southeast Sulawesi, Gorontalo, Papua and West Papua.

Economic Book Recommendations

1. Globalization, Constitutional Economics, and the Economics Nobel

2. Monetary Economy: Case Study of Indonesia

3. Indonesian Economic Politics