Economic Prospects

Kompas/Heru Sri Kumoro

A. Prasetyantoko

The perception of economic prospects is no longer based on statistics on production or capital market performance, and is based more on political identity, as The New York Times reported in describing the current situation in the United States.

Faced with the same statistical facts, US President Donald Trump’s supporters and his political opponents have come to totally different conclusions. Perhaps, such a tendency is the current trend in many parts of the world.

In our country, the 2019 presidential election officially begun last Friday, with the announcement of presidential candidate pairs Joko “Jokowi” Widodo-KH Ma\'ruf Amin facing Prabowo Subianto-Sandiaga S. Uno.

The question now is, which pair can better manage the economy? The urgency of economic issues cannot be denied, because external pressures are increasing while domestic issues are no less complicated.

Lately, the elections of state leaders in many parts of the world have been haunted by symptoms of strengthening right-wing (nationalist) voters who are oriented more towards domestic interests. In the US, the movement to prioritize domestic interests ("America First") was the decisive factor in Trump’s victory. The pressure to accommodate particular interest groups has also appeared in our country.

Elections everywhere are a political process loaded with compromises. Perhaps many people were disappointed that Joko Widodo did not pick a vice president from the business community, but instead a religious figure. Of course, this is a compromise. Accommodating faith-based groups is necessary to ensure sociopolitical stability so that the government can carry out their working program smoothly, especially with regard to the economy.

However, this argument will only hold water if the cabinet to be formed consists of work-oriented professionals. If the formation of the cabinet leans toward accommodating the coalition parties’ interests, the government will not be able to maximize its performance. Nevertheless, whoever wins will face a difficult economic situation.

First, the global situation will not stabilize in the next few years. Almost all indicators in the US economy are improving, but many analysts doubt their sustainability. The center of attention is no longer the monetary policy of the Federal Reserve (the Fed), but also the trade war, especially with China, which can affect global trade. And at the end, global economic growth will also be corrected both for the medium and longer terms.

J Bradford Delong, a leading economics professor at the University of California Berkeley, in his article published on the Project Syndicate website, “The Ahistorical Federal Reserve” (Aug. 8, 2018), said that the Fed\'s latest policies tended to ignore history and were not based on long-term prospects. He was referring to the Fed’s plan to gradually increase interest rates this year and next year to cope with the above 2 percent increase in inflation.

To many analysts, the indicators are not sufficient enough to ensure strong and sustainable economic growth. If the interest rate is increased too quickly, it might instead impact the prospects of economic recovery.

Secondly, the global uncertainty will continue the slowdown in our domestic economy. Unlike our neighboring economies, such as Malaysia and Thailand, our economy is very sensitive to global turmoil, given our fragile fundamentals. The economic turmoil in Turkey provides the valuable lesson that if the domestic economic issues are not handled properly (politically), the impact could be fatal.

Economic fragility

The fragility of the domestic economy can be seen from the paradoxical symptoms we experienced in the second quarter of 2018. The gross domestic product (GDP) grew 5.27 percent year-on-year (yoy) in the second quarter, higher than the projection of many economists and the highest in the last five years. However, weakening current account transactions marred the improvement in growth. The growth was driven mainly by domestic consumption, most of which were imports.

In the second quarter, imports grew 15.17 yoy, the highest since 2014, while exports only grew 7.7 percent. The current account deficit rose to 3 percent of GDP in the second quarter. The dilemma is that if we increased current account transactions, growth would decline. Conversely, if we pushed up growth, current account transactions would worsen.

This situation has occurred because we are still dependent on external sources of growth. In order to encourage growth, we need more foreign resources. Our main economic agenda is to grow domestic resources so that higher economic growth can be maintained.

First, the export-oriented production sector must be driven massively in order to generate more foreign exchange. At present, economic activity is still driven by household consumption. The usual efforts to improve production, as indicated by increased investment, are yet to meet expectations.

The problems have increased because our main exports, which are mostly still commodity-based, are starting to decline due to sluggish global demand. The main challenge for our economy in the future is to increase export-oriented investment through improving manufacturing industries.

Second, strengthen funding sources in the domestic economy. This task is not easy as, besides the very limited funding sources, the inclusion rate remains relatively low. Efforts to mobilize domestic funding can be carried out through financial inclusion strategies. Of course there are many technical-technocratic calculations that must be made so that whoever wins the 2019 election will not have the luxury to compromise in forming their cabinet.

The advantage for the presidential candidates who have made a compromise in choosing their running mates is that they will have more room to form a technocratic government. However, in politics, nothing is certain. The strengthening or weakening power of interest groups will continue to be a determining factor.

A. Prasetyantoko, Lecturer, Atma Jaya Catholic University, Jakarta