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A simple math with our income and debt per capita

*The issue of external and domestic debts has become a very crucial topic these days. Not only are we terrified by their totals, but more importantly their impact to our national development is very serious. I hope readers can express and write their observations about this issue. If you want to discuss about this topic, please send me your opinion so I can post it here. 

Imagine an economy where the only source of income is external (foreign) debts. Suppose also that in the beginning of a period, the country is endowed with a certain amount of income. This simplification is common in any science and problem, so nothing wrong with it. Now let's pick two dates, say the years of 1970 and 1999, in which we can study the performances of certain variables such as income per capita and external debts. Through out this short article, we will perform simple math, so please pay attention to the numbers.

We start from the first date. Thirty years ago, in 1970, Indonesia’s income per capita was around $300. At that time total population was around 120 millions and total external debts was not more than $10 billions. Thirty years later, in 1999, the national income was around $911, total population was 210 millions and total external debts (or foreign debts) was around $151 billions (all figures are taken from the World Bank's website). The external debts comprise both private and public debts.

Now, let us do a simple math. External debt per capita (total debt divided by total population) in 1970 was $83. This means on average, each person in the country owed debt with the amount of $83. Imagine the amount at that time. One could use the money to sustain his life for almost 3 months. Before the new millennium, our debt per capita already escalated to $719. This is an increase of $636 of a debt per capita. Suppose the population growth were zero so that the total population in 1999 would stay at 120 millions. The debt per capita would be $1,258. In other words, during the period, each person in the country accumulated his debt with the amount of $1,175.

During the period, the country’s income per capita increased by $611. This is less than an increase in its debt per capita. It simply implies that each Indonesian borrowed more than what he or she could produce. The deficit was $25. Again, suppose there were no population growth so that total population would stay at 120 millions. Using the total income in 1999, Indonesia’s per capita income would be $1,740. Compared to the accumulated debt per capita, it has a positive balance of $565 between debt and income per capita.

What do those numbers tell us? Firstly, there has been claim that the huge size of its population is one of the sources of Indonesia’s problems. This turns out to be wrong because even though one assumes that the population growth were zero, the income per capita would only increase by $565. Assuming no population growth, this means that in 30 years of development Indonesia was only able to increase its income per capita by $565.

Secondly, one will never realize how huge is Indonesia’s external debt until one expresses it in terms of per capita ($1,258) and then compare it with the country’s income per capita ($991). Such amount of debt would enough to sustain a life of an average Indonesian for more than one year (the salary of a fresh university graduated worker is around $80-90 per month).

Thirdly, one may argue that the country might be better off by just borrowing money from abroad and did not perform any work at all. His argument points to the fact that during the period the country’s natural resources have already been depleted and the capital stocks, such as machines and energy accumulated are far from sufficient compared to the costs the nation already incurred.

Perhaps it will be useful to compare Indonesia’s economic performance to its closest neighbor, Malaysia. After all, without a comparison, one will have difficulties in drawing convincing conclusion from the simple illustration above.

Thirty years ago, in 1970, Malaysia's income per capita was around $1,357. At that time total population was nearly 11 millions and external debts were not more than $2,5 billions. In 1999, the income per capita became $4,305, total population was 23 millions and external debts increased to $46 billions.

Now let us do a simple math. During the period, Malaysia's debt and income per capita increased by $1,773 and $2,948, respectively. The balance is positive of $1,175. Again, suppose there were no population growth so that total population would stay at 11 millions. Using the total income in 1999, Malaysia's debt and income per capita income would be $4,182 and $9,001, respectively. Comparing this with the accumulated debt per capita, they have a large positive balance of $4,820 between debt and income per capita.

Again, what do those numbers tell us? Firstly, in both cases, whether we let the population grow or not, the productivity of external debts in Malaysia is higher than in Indonesia. For example, suppose, as in reality, population grew. In Indonesia, during the period of 1970-99, income and debt per capita increased by $611 and $636, respectively. The ratio of the increments of income and debt per capita (which can be say as the productivity of debt) is 0.96. For Malaysia, this ratio is 1.66. By similar token, assuming no population growth, the ratio would be 1.22 and 1.93 for Indonesia and Malaysia, respectively. In both cases, the productivity of debts in Malaysia is higher 0.70. Again this shows us that it is not the problem of population size, rather how good a country manages and utilizes the external debts.

The major problem with Indonesia is the poor management of its resources. When the nation will have a good government that can utilize its resources, either external debts or natural resources, optimally for the welfare of its people? It is certainly not an easy answer. One thing for sure is there will never be such government unless the current government learns and understands the failures of the past government. Similarly, Indonesia will never be a competitive nation unless the current young generations learn from the older generations’ mistakes and weaknesses.

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