New Model of Economic Growth

Kompas/Wisnu Widiantoro

IMF managing director Christine Lagarde (left) speaks to journalists alongside (second left) President Joko Widodo, Jakarta Governor Anies Baswedan, Finance Minister Sri Mulyani Indrawati and Bank Indonesia Governor Agus Martowardoyo on Monday (26/2), after a visit to Jakarta’s Tanah Abang Market. The President also took Lagarde to Pertamina Hospital to observe its healthcare services.

At a high-level international conference in Jakarta last week, Christine Lagarde, the managing director of the International Monetary Fund (IMF), called for the need to establish a new model of economic growth to face uncertainties and technological advancements. Certainly, this is not a new thing, but its relevance and urgency have increased dramatically of late.

In fact, the link between innovation (technology) and business cycles and economic growth has long been studied. In the 1930s, Joseph Schumpeter, the pioneer of the Austrian school of thought, had seen the role (innovation) of technology in the dynamics of the rise and fall of the economy (business cycle). In the 1980s, Paul Romer and Robert Lucas highlighted endogenous factors, such as knowledge, technology and even managerial techniques, as determinants of economic growth.

In the future, the implication of the arrival of Industrial Revolution 4.0 will dictate the dynamics of the economy. The essence of Industrial Revolution 4.0 is the incorporation of three main aspects, physical, digital and biological assets, in a single entity (ecosystem). All innovations in almost all sectors will be supported by the three major ecosystems of big data, cloud computing and the Internet of Things (IoT).

Due to this revolutionary advancement, business processes have also changed radically, with faster features, more concise, accessible, and inexpensive. For consumers, it is certainly more profitable. However, the challenge is that the need for manpower will decline drastically.

As cited by Christine Lagarde, McKinsey\'s study shows, about 60 percent of the active workforce can be eliminated with technological advancement. For developed countries, this is a solution, considering they have a labor shortage. However, what about us in the developing world experiencing a demographic dividend?

Our economy this year is projected to grow 5.3 percent with good prospects in the medium term. If managed well, in the next five years, the economy will grow 6-7 percent. Despite good medium-term prospects, there are some notes for the short term. First, the fluctuation in the exchange rate is wide.

Secondly, from the fiscal side, there are several vulnerable points, such as subsidized costs that increase because of the rise in oil prices to US$60 per barrel, or above the State Budget assumption. In addition, vulnerability also emerges in the gap between increased spending on infrastructure projects and stagnant revenues. Tax reform is necessary, but it cannot be expected in the short term.

Third, in terms of the real economy, while efforts to improve competitiveness continue, the gap remains too wide. The acceleration of infrastructure development should consider risk management and should not neglect safety issues, as seen in recent incidents.

The economic policy package is also still tangled in its implementation, and requires a few more years to fully implement it. In essence, structural transformation takes time. Even if the direction is correct, its results cannot be enjoyed immediately.

In such a situation, technology should be adopted. How can we maximize technology as a source of new growth? First, from the monetary side, our dependence on foreign liquidity is so high that even a small turmoil has a significant impact on us.

Thus, the issue is how technology advancement can be used to increase the penetration of the financial sector so that the supply of liquidity from within the country increases. Although it is not quick, the financial inclusion program should be pushed forward through utilizing technological advancements.

Kompas/Heru Sri Kumoro

A Prasetyantoko

Second, tax reform to increase revenues can also be accelerated with the adoption of technology. Third, structural transformation can be directed to spur the development of technology industries (digital). Of the approximately 17,000 startup businesses in Indonesia, four are unicorn companies, worth more than US$1 billion: GO-Jek, Tokopedia, Traveloka and Bukalapak. Their existence should be supported by a good ecosystem in order to give added value to our economy.

In her speech, Lagarde touched on three key aspects: managing uncertainty, encouraging inclusion in the economy and preparing for the digital revolution. Technological advancements will be followed by the growing uncertainties. The best way to deal with this is to use technology itself to strengthen economic sustainability through an inclusive approach.

A PRASETYANTOKO, Economist, Atma Jaya Catholic University