Economic Team has Lots on Its Plate

KOMPAS/HERU SRI KUMORO

A Prasetyantoko

What is the biggest sin of our economy? University of California Berkeley economist Barry Eichengreen popularized the term "original sin" in the economy, namely the inability of the state to finance development with its own currency, despite the issuance of domestic debt. In other words, the economy depends on foreign financing.

Our economy is in that category. Our dependence on foreign parties is not limited to financing but extends to other production factors, especially raw materials. In 2018, we had a current account deficit of 3 percent of gross domestic product (GDP), the biggest since 2014.

Based on this fact, the most important task of the next Cabinet’s economic team is to maximize the domestic potential without increasing external risks. The solution is by accelerating investment in export-oriented productive industries and other activities that increase foreign exchange. Another challenge lies in the unfriendly global dynamics. The question is where do we have to start? The expertise of the economic team is the key.

KOMPAS/ALIF ICHWAN

Finance Minister Sri Mulyani (second right) speaks into a microphone on Monday (8/7/2019) during a hearing with the House of Representatives (DPR) Budget Committee (Banggar) at the Senayan legislative complex in Jakarta. National Development Planning Minister/Head of National Development Planning Agency (Bappenas) Bambang Brodjonegoro (right) and Bank Indonesia Governor Perry Warjiyo (second left) also attended the preliminary hearing to deliberate the draft state budget (RAPBN) and the Government Work Plan for 2020, during which working committee reports were also submitted for verification.

Utilizing the opportunities

The global situation has changed dramatically since mid-2018, triggered by US-Chinese tension. World trade flows have slumped, followed by weakening investment in the productive sector, which has affected global economic growth. Prices of production factors like machinery and equipment, which had dropped dramatically since the 1990s because of globalization, look set to rise in the future. The world will no longer be as easy as it has been.

Geopolitical changes have led to a fragmentation of trade, investment and economic growth. For ASEAN countries, there is an opportunity to attract manufacturers relocating from China. The role of China in global trade, which has thus far been so dominant, will decline.

Since the trade war, the flow of goods from China to the US has dropped dramatically. In March 2019, imports from China fell to only 15 percent, the lowest in the past six years. Many companies left China to continue exporting to the US without a tariff increase.

KOMPAS/WAWAN H PRABOWO

Seamstresses work 30 April 2019 at a shoe factory in Cikupa, Tangerang, Banten. The factory employs about 150,000 workers.

Geographically, Vietnam is benefitting from being a logistics supplier for China-produced goods. The recent geopolitical changes are an opportunity for Vietnam. Its role in global trade has increased from 0.5 percent in 2010 to 1.5 percent in 2015. Indonesia for the past 20 years has stagnated at 0.5 percent.

Actually, over the past three years, we have also carried out a lot of deregulation and debureaucratization through economic policy packages aimed to facilitate investment. However, their impact has not met the expectations. The next Cabinet team has the challenge of continuing the policy packages by focusing more on sectors that have a high impact on increasing domestic investment.

At least two things can be done immediately. First, a labor market reform. There are three aspects to this, namely wages, productivity and flexibility of rules. The minimum wage in Indonesia is US$103-$258 per month, while in Vietnam it is $120-$173.

KOMPAS/IRMA TAMBUNAN

Workers unload and sort bunches of oil palm fruit on Saturday (6/7/2019) at an Astra Agro Lestari subsidiary in Merangin regency, Jambi. Deliveries of raw materials to the factory have declined over the past six months as independent processing factories have been established in the area.

In several regions, minimum wages in Indonesia are still competitive compared to wages in Vietnam. When it comes to productivity growth, Vietnam is more aggressive, with an increase of 5.6 percent in 2019, while Indonesia’s is 3.8 percent. From a regulatory standpoint, our Manpower Law is considered one of the most rigid, which makes it unattractive to investors.

Second, corporate tax reform. In Vietnam, the corporate tax is 20 percent at most, while in Indonesia, it is around 25 percent. We need to talk about tax cuts. However, any relaxation must be accompanied by institutional and regulatory reforms that support the business world.

The next Cabinet’s economic team must formulate a policy narrative and look for opportunities to attract investment. The World Bank\'s June 2019 quarterly report on Indonesia, "Oceans of Opportunity", explains that our domestic economic potential is large, especially in the maritime sector. In the next five years, the maritime sector could to become the key to building national industrial competitiveness.

AFP/BRENDAN SMIALOWSKI

Chinese President Xi Jinping (right) shakes hands with US President Donald Trump on 28 June 2019 before a bilateral meeting on the sidelines of the G20 Summit in Osaka. US-China trade negotiations are now headed in a positive direction following a meeting between the leaders of the world’s two largest economies, a top White House aide said on 2 July 2019. But trade advisor Peter Navarro said Chinese telecoms giant Huawei remained blocked from participating in the development of 5G wireless networks in the US, even though Washington had softened its stance towards the company.

The maritime sector holds enormous potential for fisheries, in addition to tourism that brings in foreign exchange. The maritime industry gives Indonesia an advantage over other countries.

Its potential can be exploited to solve the fundamental problem of our economy, namely dependence on foreign parties, both for funding and raw materials. It is necessary to find a Cabinet team that understands well the potential of our maritime sector.

A  PRASETYANTOKO, Lecturer at Atma Jaya Catholic University Jakarta