Comparison of Economic Growth and Living Standards Between Indonesia and the United States

Introduction

Economic growth is the cumulative measure of the market value of goods and services produced in an economy over time. The inflation effect is usually adjusted. Economists measure economic growth as the percentage increase in real gross domestic product (GDP). The real GDP of Indonesia in 2016 was 5.02% while that of the United States was 1.6% (Worldbank, 2018). Indonesia seems to be economically growing at a higher rate than the United States.

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One can also assess the economic growth by looking at the per capita GDP at current prices. In 1970, Indonesia's per capita GDP at current prices measured in US dollars was 271 billion, and this has grown to 3,570 billion in 2016 (United Nations Data, 2018). This represents a growth of 1271% over the 46-year period. On the other hand, the United States recorded a per capita of 5, 133 billion US dollars in 1970 and this figure has grown to 57,808 billion US dollars in 2016 (United Nations Data, 2018). This represents an increase of 1026% over the 46-year period. Again, Indonesia seems to have realized higher economic growth over the 46-year period than the United States.

The standards of living of people in a country are the measure of comfort, wealth, necessities available and the material goods. United Nations measures the standards of living using the human development index (HDI). HDI emphasizes on people and their capabilities as the determinants of development in a country as contrasted to economic growth only. HDI is a summary that measures achievement in three key dimensions including a long and healthy life, decent standard of living and being knowledgeable. This means that HDI measures health (life expectancy at birth), education (mean of years of schooling) and standard of living (using the gross national income per capita) (Roser, 2018). The United States overall has a higher standard of living than Indonesia. The United States posted an HDI value of 0.920 in 2015 positioning the country 10th out of 188 countries. Between 1990 and 2015, this value increased at 6.9%. Life expectancy at birth was 79.2, expected years of schooling 16.5, mean years of schooling 13.2 and gross national product of (2011 Purchasing Power Parity (PPP)$) 53, 245 (United Nations Development Program, 2018). On the other hand, Indonesia posted an HDI value of 0.689 positioning the country at 113 out of 188 countries and territories in 2015. Between 1990 and 2015, HDI had increased by 30%. In the same year, life expectancy at birth was 69.1, expected years of schooling 12.9, mean years of schooling 7.9, gross national income per (2011 PPP$) 10, 063 (United Nations Development Program, 2018). The United States has higher standards of living for the people as indicated by a gross national income of 53, 245 which is almost five times that of Indonesia.

The Contribution of Economic Growth to Living Standards in Indonesia and United States

Often, economic growth is not related to improvements in living standards of the people. This has been demonstrated by the comparison between the United States and Indonesia. Despite the fact that Indonesia posted a GDP (a measure of the economic growth) of 5.02% in 2016, it still posted a low HDI (indicative of living standards of 0.689 as compared to the United States that posted a relatively low GDP of 1.62% but still had a higher HDI of 0.920. From this, it may be concluded that economic growth has had only a little impact on the living standards. This is considering the undeniable fact that perhaps as a result of an increase in GDP of Indonesia from 1970 to 2016 may have caused the increase of 30% in HDI between 1990 and 2015.

The low impact of increased economic growth on the living standards of the people in Indonesia may be because such GDP could be exclusive whereas the United State's GDP (despite being low) was inclusive. Exclusive GDP is where the productivity is credited to a few people, and the majority are left out (Jackson, 2009, p. 56). The majority could be employed by a few capitalists paying them low incomes. On the other hand, inclusive GDP, the economic policies are attuned to the expansion of social participation so that the benefits of economic growth (no matter how little they may be) affect the entire population (Samans, Blanke, Corrigan, and Drzeniek, 2015, p. 24).

The high living standards realized in the United States may be partially accounted for by the inclusive economic growth. However, as argued by Ivkovic (2016), GDP focuses on productivity in a country, and it may not account for progress and well-being of the populations, meaning that factors other than economic growth may have contributed to higher HDI. For example, improvements in health and education may have played a larger part in increasing HDI. Education, for instance, improves people's knowledge and skills leading to higher income earning which enhances gross national income. Proceeding in this view suggests that higher economic growth in countries with low living standards may not lead to an improvement in the progress and well being (HDI) of the people. First, this is because of the reason earlier mentioned that higher economic growth might be a contribution of a few capitalists and the returns go into the pockets of the few in the country when the majority are earning little or no income. The impact is low gross national income. The second reason is that economic growth accounts for productivity and may exclude important aspects such as health which play a part in living standards of the people in a country as they determine life expectancy at birth (child and maternal mortality rates).

Conclusion and Recommendations

The fact that Indonesia has had a high economic growth over the years and higher per capita of 5.02% as compared to the United States that has had a lower economic growth over the years and per capita of 1.62% in 2016 yet the United States still beats Indonesia on standard living index suggests that real GDP does not always measure progress and well-being in nation. A country might have high economic growth, but the returns of that productivity end up in the hands of a few people when the majority are still earning low or no incomes at all. If at all GDP has to be used as a measure of living standards of the people, then economic policies should be inclusive such that everyone benefits from the increased productivity in the country. Alternatively, HDI and gross national income may be used to measure living standards of the people in a country because they take into account other crucial factors contributing to progress and well-being such as education and health.

References

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Jackson, T., 2009. Prosperity without growth: Economics for a finite planet. Routledge.

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Samans, R., Blanke, J., Corrigan, G. and Drzeniek, M., 2015, September. The inclusive growth and development report 2015. In Geneva: World Economic Forum (Vol. 13).

United Nations Data, 2018. UNdata | record view | Per capita GDP at current prices - US dollars. [online] United Nations. Available at: <http://data.un.org/Data.aspx?q=indonesia&d=SNAAMA&f=grID:101;currID:USD;pcFlag:1;crID:360> [Accessed 10 May 2018].

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