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Modeling the Importance of Financial Liberalization to Indonesia's Economic Growth

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  • Gupta, Krisna

Abstract

Indonesia has been struggling to get its pre-Asian Financial Crisis growth level. The latest development roadmap, dubbed “Making Indonesia 4.0”, aims to exploit high-tech manufacturing to pursue an export-oriented growth. The government, realizing the needs for external finance as well as technology, is trying to formulate more liberalized investment policies, both on the portfolio investment and direct investment, while also control the risk premia that may be associated with financial liberalization. This paper examines the mechanisms afforded by the policies to, among other things, improve access to finance and encourage productivity growth through more effective matching of labor and capital, as well as attaining global best practices. Drawing on comparative information on the cost of capital in Indonesia and Indonesia’s productivity levels, the paper suggests effective reform could deliver substantial economic gains, raising living standards in Indonesia. The potential gains to the Indonesian economy are illustrated using a version of the GTAP model extended to model possible changes in the cost of capital in the standard version of the model. The results provide an indication of the substantial potential economic benefits that could accrue to the Indonesian economy through successful implementation of the roadmap.

Suggested Citation

  • Gupta, Krisna, 2019. "Modeling the Importance of Financial Liberalization to Indonesia's Economic Growth," Conference papers 333064, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:333064
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    References listed on IDEAS

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