3.5 Years of the Jokowi Economy
Nordhaus (1972) was the first person to observe that there was a pattern of business cycles outside the existing conjuncture. This cycle is found in a democracy based on the presidential system.
Nordhaus (1972) was the first person to observe that there was a pattern of business cycles outside the existing conjuncture. This cycle is found in a democracy based on the presidential system.
The cycle is triggered by the sequence of the presidential elections, formation of government, the activities of the government and the upcoming elections. The variables of concerns are economic growth and inflation. To illustrate the reality in this mortal world, there is always a consequence of a choice of action or exchange (trade-off) as indicated in the framework of the Philips Curve, in which achieving higher growth will add to inflationary pressures (Persson and Tabellini [ 2000]).
It occurs because the aggregate demand of the economy will tend to exceed the economic production capacity. On the other hand, if the inflation is pushed too low, the economic growth will consequently decline. While the community as voters prefer growth rather than inflation. The point is that the government’s job is not easy because it must be able to balance the policy options (popular term ngono ning ojo ngono).
In this game, the competence is reflected by the ability to generate viable growth without causing high inflation or balancing between growth and inflation (optimal growth and inflation). The competency is assessed by the people in every election cycle. This model is used to observe the cycle of the political business, especially in the United States, because the country has held presidential elections since 1776.
The observation shows that the business cycle pattern tends to have a “J” pattern. The first year is usually needed for acclimatization and the following years are used to run the program to show real performance as a sign of competence.
Post-commodity boom
In late 2014 and early 2015, President Joko “Jokowi” Widodo\'s administration entered its first year when the commodity boom was over. The gains in the form of purchasing power from commodity exports, which had caused an increase in domestic property sales and investment, as enjoyed by previous government, no longer existed.
In fact, the world economic slowdown has served as the head wind that has the potential to slow down the domestic economy. In resolving this problem, a new strategy is needed to optimize new sources of growth.
In addition, Indonesia was also unable to take the opportunities, while other countries grew rapidly. It was indicated by the country’s development indices such as competitiveness index and the ease of doing business index, which in early 2014 were overtaken by other countries.
The index is not a queue when we have to wait, but rather a position which should be seized with an appropriate development strategy, with a real impact. Unlike previous government strategies, the Jokowi administration chose to focus on infrastructure development.
The strategy is different from the sectoral concept in which action is planned and performed for each sector. The infrastructure strategy is similar to the strike in a bowling game.
The highest score is achieved if with only one throw, all the balls can be dropped. All activities in a value chain are heavily dependent on infrastructure. With the production process becoming more fragmented, not only in different locations in one country, but also in some countries within a region (eg East Asia), it will become increasingly difficult for a country with poor infrastructure to join the global value chain. Export activities will certainly be affected.
This strategy fits well with the change in the concept of the world economic activity from production sites and consumption to access to these places. The strategy is also suitable for recycling (purchasing power) from cities in Indonesia to remote areas through the tourism sector to achieve more inclusive growth.
With the political business cycle model, the production capacity of the economy is considered unchanged because economic stimulation, which is based on aggregate demand, is carried out seasonally for short-term economic goals. It results in a cycle pattern because it must be carried out again in accordance with the timing of the elections.
Jokowi\'s government model is quite different from the classical model of the political business cycle because it is started with the infrastructure development -- that will increase the production capacity of the economy in the long term -- as the basis in raising the productivity of all players in the economy. Thus, the classical model of the political business cycle needs to be revised into a long-term model.
Unlike other countries in Southeast Asia, Indonesia has a larger population that can be used as a market, as a consumer, as a producer, or as a buffer of purchasing power, if the economy is slowing down. One of the important things in improving national productivity is population density. In economics, this is known as agglomeration.
Agglomeration of economic activities
The optimum population density is needed to organize production, consumption, and local government activities in a synergy to produce a positive externality, that is, an increase in common productivities.
A country with a low population density cannot produce the extra productivity. This is the logic of urban existence. Although a number of countries have a small population, it can be improved by concentrating it in several cities on a hierarchy from the most populous to the smaller towns and the rural/hinterland.
The logic of infrastructure development is to increase connectivity by connecting cities within a hierarchy to generate greater production externalities.
This is an attempt to stabilize economic growth at a decent rate when the external situation is not very favorable to Indonesia. This new production capacity is called a beach head area (military term. It is called bridge head if it is in the riverbank) creates new sources of domestic economic growth now and in the future.
Aggregate demand
In further developments, the characteristic of the political business cycle model persists. Although the infrastructure development can only increase the capacity of economic production over the long term, the reality requires that competencies must produce a concrete result in the short term.
In this case, the aggregate demand in general and people\'s purchasing power can be maintained. Infrastructure development, including those affected by technological advancements, has become more capital-intensive than it was 20 or 30 years ago. As a result, labor-intensive rural infrastructure programs, such as village irrigation, rural roads, social forests can help increase the purchasing power of lower middle income people.
As a source of infrastructure financing, the tax amnesty program is essentially the exchange of current consumption and investment of the people into national production capacity and infrastructure funding source for the future.
Other sources of financing, such as banking, bond markets and capital markets, are still needed because there are limitations on where current spending and investment can be converted into future economic activities.
The commodity boom, which took place from 2005 to 2012, had resulted in the growth of medium cities, such as Yogyakarta, Malang, and Bandung, with the local middle-income bracket. The rapid development of these medium-sized cities helped sustain Indonesia\'s economic growth so that it could support the manufacturing sector as the driving force of the economy that was no longer dominant (since 2005).
The interesting thing is that the new middle-income bracket, part of a millennial generation, has an unpredictable shopping cycle. Their spending choices are no longer related only to goods, but also experiences and lifestyles that include the service sector.
The development of the information technology also allows them to manage their personal finances and shopping cycles from their smart phones. Their plan to watch a Cold Play concert in Paris, for example, can force them to save for months, which means they should cut down their monthly spending on goods. For the middle-income bracket, this trend needs to be promoted to raise positive expectations that can contribute to the economy.
The “J” letter pattern
Everything takes time, nothing is instant. Although it does not look like a Formula 1 super fast race car, Indonesia has started to look like a car with a modern rail injection equipped with turbocharger (like Mitsubishi Pajero or Toyota Fortuner). The momentum began in 2015 with some improvement in the economic performance index. In 2017 Indonesia\'s Ease of Doing Business Index increased from 106th position to 91th, up by 15 levels, making Indonesia among the top 10 biggest climbers.
For the competitiveness index in 2017, Indonesia\'s position rose from 41st to 36th. Indonesia\'s credit rating also increased to become an investment grade. The latest survey on logistic performance index (LPI) was only issued for 2016 so it would not be able to record the latest developments between the end of 2015 and 2016. Indonesia\'s position ranked 63rd. The best sub-indicators for Indonesia are timeliness or timing in logistics systems that cover infrastructure improvements and port activities.
The stability of the macro economy can be maintained with inflation of about 4 percent and the current account deficit below 2 percent and the growing potency of Indonesia\'s new middle class. It provides a bridge head for better sustainable economic growth in 2018-2019 and beyond.
Several things can result in uncertainties and need to be anticipated, such as the potential of trade wars between the US and China. It could pose pressure on the rupiah as portfolio investors will temporarily shift their investment in safe financial assets such as US dollar.
The quality of human resources (HR) must also be increased by improving the quality of education from elementary to university. Universities should be able to become centers of innovation and high-quality human resources. They should no longer rely on such things as linearity and rigid nomenclature program that cannot adapt to technological disruptions.
For some macroeconomic indicators, the turning point had begun to be seen in 2017. The gross investment growth (year on year) has overtaken GDP growth in the second quarter of 2017, and by the end of 2017, its growth reached 7.27percent yoy. This growth was dominated by machinery and equipment or capital goods which reached 22.3 percent yoy in the fourth quarter-2017. While export growth experienced a turning point in the first quarter, 2017 with the commodity price improvement. In the third quarter, 2017, the export growth reached about 17 percent yoy. Although at the end of 2017, it declined again to 8.5 percent, it is high enough to bring optimism on the economic growth in the coming years.
Ari Kuncoro, Dean and professor at the School of Economics and Business, the University of Indonesia