The Urgency After the Inauguration
President mentioned the urgency of developing new systems and values in facing a risky, dynamic and competitive world.
“We cannot solve our problems with the same level of thinking that created them.” This piece of advice from Albert Einstein is very relevant for President Joko “Jokowi” Widodo and Vice President Ma\'ruf Amin, who have just been officially inaugurated.
In his speech, the President mentioned the urgency of developing new systems and values in facing a risky, dynamic and competitive world. Although the global environment is full of challenges, President Jokowi is optimistic that Indonesia will be able to become a developed country by 2045, with a gross domestic product of US$7 trillion.
Indonesia’s is the fifth largest country in the world and the average income of its people will reach Rp 320 million ($22,705) per capita per year or Rp 27 million per capita per month. Is it possible? A similar projection was made by PriceWaterhouseCoopers (PwC) in a periodical report titled “The Long View: How Will the Global Economic Order Change by 2050?” In this report, Indonesia is projected to become the fourth largest country after China, India and the United States by 2050.
A similar review was made by the McKinsey Global Institute in September 2012 in a report titled “The Archipelago Economy: Unleashing Indonesia’s Potential”. Then-president Susilo Bambang Yudhoyono attended the release of the report projecting that Indonesia in 2030 would become the world\'s seventh largest country. As the projection uses the extrapolation method, the calculation always contains assumptions. In this dynamic situation, assumptions can change quickly.
Permanent change
During the past two years, the global economy has changed so fast and is full of surprises. In the quarterly report of the International Monetary Fund (IMF) and the October edition of the World Economic Outlook, the global economic growth is projected to decline to 3 percent. This year alone, there have been four revisions, showing how uncertain the situation is.
The decline in manufacturing performance and the trade war are cited as the root of the problem.
In comparison, the peak of global growth occurred in 2017 at 3.8 percent. After that, economic growth continued to decline. According to the IMF report, the global slowdown occurred almost all the world. At the end of this year, China is estimated to grow only 6.1 percent and next year 5.8 percent, the lowest rate in the last 30 years. The decline in manufacturing performance and the trade war are cited as the root of the problem.
The World Bank in a publication titled “Weathering Growing Risks, October 2019”, also showed that the East Asia and Pacific region in the first half of 2019 only grew 6 percent, whereas in the same period in 2018, it grew by 6.5 percent.
The two main causes are a decrease in global demand and an increase in trade barriers. This global challenge has various effects on each region, but the end result is consistent, namely the slowing growth cycle.
For developing countries like Indonesia, the slowing global growth hits export revenues, accompanied by a decrease in the ability to pay obligations in foreign currencies. As a result, the possibility for a recession also appears, although not as big as in developed countries. In other words, the global slowdown is also followed by an increase in risks, which has consistently occurred in almost all countries.
For the President and new Cabinet, the global challenges are real and the implications for the domestic economy cannot be underestimated. The possibility that growth a fall below 5 percent this year is a big problem. The first task of the new government is to formulate a counter-cycle policy in order to counteract the slowdown.
First, intensifying fiscal policies to ensure that even though there is a decline in fiscal space, the state budget is still able to provide stimulus for the economy. Effective budget utilization is one of the keys to supporting the economy’s fiscal capability. One obstacle is that tax revenues are still far from the target. Thus, if the budget is projected expansive, it must increase the portion of debt. That is, the risk profile increases.
Second is to increase investment, both foreign and domestic. The realization of the Omnibus Law in the field of job creation or empowerment of micro, small and medium enterprises needs to be accelerated so that it can immediately encourage new investments
The Economist magazine (12-18 / 10/2019) raised a special report titled “The World Economy’s Strange New Rules”. There have been many anomalies since the 2007-2009 economic crisis. One of them is the invalid relationship between inflation and unemployment. So far, the principle known as the Phillips Curve validly shows that if inflation is low, unemployment is high and vice versa. Now, in the United States, the 3.5 percent unemployment rate is at its lowest since 1969, but inflation is also low at 1.4 percent.
Inflation is an indicator of economic growth; if it\'s low, it means there aren\'t many job opportunities. Meanwhile, to encourage growth, monetary stimulus (lower interest rates) and fiscal (tax incentives) are needed. Unfortunately, both can no longer be applied because interest rates are almost zero, while the government debt has increased. This situation, on the other hand, increases the chances of a recession. There are two important causes for this situation, namely the increasingly intensive role of technology in the economy and changes in the global supply chain. Both have made important contributions to the changing map of the global economy.
One of the key questions for the next five years is whether we can capitalize on this changing global supply chain and adopt the technology to improve efficiency in the domestic economy. The recent completion of the Palapa Ring project could be an important asset to improve connectivity to support economic activity.
However, the main key actually lies in our ability to reform bureaucracy to be more efficient and create adequate institutions for investments in the form of progressive simplification of licensing.
The consolidation of ministries and institutions related to investment and the implementation of regulations that relaxes licensing could be the initial breakthrough of a new government.
The current work will determine the fate of the Indonesian Golden Period (2045) or 100 years of independence. Pak Jokowi and team, happy working for Indonesia!
A PRASETYANTOKO, Lecturer at Atma Jaya Catholic University Jakarta