Dilemma of Negative Investment List
The 16th economic policy package has been launched in the month leading up to the 2019 general election. It is unsurprising that controversy has ensued, especially with regard to the negative investment list for micro, small and medium enterprises sectors.
The 16th economic policy package has been launched in the month leading up to the 2019 general election. It is unsurprising that controversy has ensued, especially with regard to the negative investment list (DNI) for micro, small and medium enterprises (MSME) sectors. It can be said that the list is no longer based (fully) on technocratic considerations but on political ones.
Is this wrong? A public policy does not know right or wrong, only correct or incorrect. This happens all over the world, not just in our monopoly. Moreover, the global political landscape has been changing of late so that economic (technocratic) policies must adapt to the increasingly changing context.
Nevertheless, an understanding of the objectives of its roadmap is still necessary to prevent the policy from getting lost in the wilderness of political interests. First, the global constellation has changed drastically, especially for trade and investment, since Donald Trump gained the US presidency. Second, the domestic economy has a chronic “congenital disease” in the current account deficit. Of course, an economic policy has to be designed to anticipate structural challenges at both global and domestic levels, even though its contextual timing remains important.
At the recent 2018 Bank Indonesia (BI) annual meeting, President Joko Widodo appreciated the central bank’s courage to raise its benchmark interest rate by 25 basis points to 6 percent. Actually, to quote the President, only three of 31 economists surveyed by Bloomberg recommended the rate hike. And moreover, the exchange rate was falling towards the Rp 14,500 level after peaking at Rp 15,200 per US dollar.
Why does BI continue to raise its benchmark interest rate? The answer is: to mitigate the problem of the current account deficit that widened in the third quarter to US$8.8 billion, equivalent to 3.37 percent of gross domestic product (GDP). The critical question is, why is the monetary policy burdened with structural problems? Is there no other policy that can narrow the current account deficit?
Government response
The global economy is experiencing a difficult phase marked by slowdowns, an unbalanced situation and many uncertainties. The International Monetary Fund (IMF) has lowered its 2019 world economic growth projection to 3.70 percent, down from 3.73 percent. It is very possible that the global projection will be lowered again in line with the sharp downturn in global trade due to the trade war.
Aside from a slowdown, the global economy is growing in an unbalanced way as each country and region is tending to look inwardly. The final result is a future full of uncertainties. In addition to financial implications, global uncertainties will also impact the commodity market so that both the financial and commodity markets will fluctuate sharply.
Faced with this turbulent situation, some are of the opinion that the government appears to no longer be swift in its response. Its policies rely increasingly on short-term instruments, such as interest rates, but long-term policies, such as fiscal and industrial (structural) policies, have not been maximized. The 16th economic policy package launched on Nov. 16 actually shows something else. The government has also responded to the situation with the fiscal instruments of an expanded tax holiday, an obligation to place export revenues (DHE) in domestic accounts and the elimination of 54 business sectors from the DNI.
With regard to this policy package, almost all groups, especially business owners, agree on the tax holiday and DHE, but the DNI issue has sparked controversy. These entrepreneurs have complained that no discussions were held to determine which sectors should be opened to foreign ownership, particularly regarding Cluster A that comprises four business sectors: internet cafes, knitted fabrics, root crops and printed fabrics. The government has been deemed to be not pro-MSMEs by rolling out the red carpet of 100 percent ownership to foreign investors. Certainly, the policy direction has a political dimension, or its timing is wrong.
Despite the tug-of war and polemic, the 16th policy package is not irrelevant. First, foreign direct investment (FDI) is declining towards a future slowdown. The Investment Coordinating Board’s (BKPM) data shows that foreign investment has continued to decline over the last three quarters: it was Rp 108.9 trillion in the first quarter, falling about 12 percent to Rp 95.7 trillion in the second quarter, and falling further to Rp 89.1 trillion in the third quarter.
Second, the US-China trade war will change the global trade landscape. The supply chain of the global economy will also experience significant changes.
Based on the “Macro Note” (Nov. 28, 2018 edition) published by Bank UOB’s global economics and market research division, the trade war has impacted China more than the US, as it has greater exports. In the medium term, the trade war will change the supply chain landscape because many companies will relocate their factories from China to other countries so they can continue to supply their goods to the US market. In this context, the ASEAN region will see an abundance of benefits: the more intensive the trade war, the more Chinese investment will relocate to ASEAN. The question is, to which countries?
Based on Bank UOB’s "records", banks in Thailand, Taiwan and Vietnam saw increased investment as the trade war intensified. This situation is the exact opposite of our investment trend. The conclusion is simple: Indonesia is not among those countries seeing inflows of investments relocating from China.
There are at least three main reasons why ASEAN countries are attractive as destinations for relocating investments: relatively low labor costs, tax facilities (tax holidays) and market access.
The Finance Ministry believes that the government can still protect MSMEs by limiting investments to a minimum Rp 10 billion, so the DNI policy will therefore not disrupt MSMEs.
Economic transformation
Are the responses of Bank Indonesia and the government sufficient to face the changes to the global landscape? The monetary policy is like a febrifuge and serves only to relieve pressure, but does not heal the actual disease. The 16th policy package is like a cocktail of drugs believed to cure the various diseases that afflict our economy. Sometimes, though, too many drugs actually lead to drug resistance, and they will not cure anything.
It is time to diagnose the diseases properly and reorganize deregulation as an integrated whole to transform the domestic economy amid changes to the global landscape. Besides the changing political-economic landscape, the role of technology will also increase, so an appropriate response is needed.
Economic historian Adam Tooze of Columbia University explained in Chased: How a Decade of Financial Crisis Changed the World (August 2018) that the 2008 global financial crisis was inseparable from declining US (political) hegemony, so resolving the crisis involved a "new balance” in the global power constellation. Thus, expect this phase of uncertainties to be prolonged and do not expect the global order to return to its pre-Trump alignment.
One of the countries that have shown strong economic performance is Vietnam. Based on World Bank data, its trade-to-GDP ratio jumped more than 30 percent in less than 10 years, from 134 percent in 2010 to around 200 percent in 2017. Meanwhile, Indonesia’s trade-to-GDP ratio actually declined during the same period, from 45 percent in 2010 to 39 percent in 2017. In the early 1990s, the proportion of Vietnam\'s trade-to-GDP ratio remained around 57 percent.
Of course, we cannot simply compare Indonesia with Vietnam. However, there are lessons that can be taken away, namely that Vietnam\'s increased trade is inseparable from its success in attracting investments to shift from China. Learning from this experience, the 16th policy package is actually correct in its framework to encourage FDI entry, especially in the export-oriented and basic materials sectors to encourage the domestic value chain.
Looking at the mostly commodity-based domestic industry, inviting foreign involvement in developing the manufacturing industry is the key. The dream of building a strong manufacturing industry will never be realized without foreign investment. Nevertheless, encouraging collaboration with domestic partners, especially MSMEs, is also key. This is where the dilemma over the DNI policy lays. Unfortunately, economic policies are indeed never ideal, always involving a trade-off that creates a dilemma.
Soon after the 2019 general election, we must hurry to compile an industry map – including a consolidated policy (packages) – that will have a real impact on sectorial growth. There is no easy or quick way to develop a domestic industry.
We have relied on the commodity sector for far too long, so transforming the economy will be a long-term job. At least we are on the right track, so now we need acceleration.
A. Prasetyantoko, Lecturer, Atma Jaya Catholic University