The Credibility of BPS and the Nation

KOMPAS/M PASCHALIA JUDITH J

Statistics Indonesia (BPS) head Suhariyanto (left) speaks at a press conference on Friday (15/11/2019) in Jakarta, explaining Indonesia\'s October 2019 balance of trade.

After Statistics Indonesia (BPS) released its data on Indonesia\'s gross domestic product (GDP) in the third quarter of 2019, we were immediately hit by "Why we don\'t trust Indonesia\'s GDP data", a critical analysis authored by senior economist Gareth Leather of Capital Economics.

Leather has doubts about Indonesia\'s data on its GDP in recent years. According to him, our GDP figures have been illogical since 2014, because they have been flat and have not followed the fluctuations in the world economy. He was unsurprised by the 2019 Q3 economic growth of 5.02 percent, because Indonesia’s economic growth has remained near 5 percent since 2014, between 4.7 and 5.3 percent. He suspected that 2019 Q3 growth was below 5 percent because of indications of slowing economic activity and the depressed and weakened global economy. The BPS estimate was believed higher than it actual growth (overestimation), and did not reflect the weakening condition of the real sector.

If the BPS were to manipulate its data, this is tantamount to disgracing the nation.

I am an economist and statistician who still believes in the capability and credibility of the BPS. The BPS is must maintain/defend its prestige and dignity with honesty and high integrity. If the BPS were to manipulate its data, this is tantamount to disgracing the nation.

It would prompt the government and Bank Indonesia to go in the wrong policy direction because they are referring to incorrect data. The economy can flounder and go into limbo, which will then confuse entrepreneurs and investors in their plans. I truly hope that this is not a case of "garbage in, garbage out", because the negative impacts will be extremely dangerous to the existence and identity of this nation.

Therefore, let\'s look for and explore possible underlying causes, without prejudice. Why has the Indonesian economy not adhered to the real business cycle theory for the last five years? The economy has maintained a flat trend, without any visible waves. Indonesia\'s economy has been immune, undisrupted by the global turmoil and slowdown in the world economy. Is it true that the domestic economy is robust and resilient against external shocks? Or is the Indonesian economy headed towards a closed economy and not an open one that is sensitive to the dynamics of global economic change?

Possible explanations

There are several possible explanations as to why Indonesia\'s economic growth has stabilized at 5 percent over the last few years. First, since the end of the 2011 commodities bonanza, the role of primary commodity exports has diminished in Indonesia\'s economic growth. This is clearly visible from the continued decline in economic growth from 6.17 percent (2011) to 6.03 percent (2012), and then to 5.56 percent (2013). It then stabilized at 5 percent in 2014 until the present.

In 2014-2019, our economy was practically reliant solely on growth in household consumption, which contributed 55 percent to GDP, and was no longer dependent on primary commodity exports.

Therefore, it makes sense that Indonesia\'s economic growth was maintained at around 5 percent, because it was supported by 4.9-5.1 percent growth in household consumption.

Second, the government has managed to keep inflation relatively low and stable to maintain high purchasing power, although there are indications that it is starting to weaken. Annual inflation averaged 4.4 percent in 2014-2019, far below 6.0 percent in 2008-2013. In addition, inflation in 2014-2019 was also relatively stable compared to the previous five years. We can use data dispersion/spread, which is the standard deviation and variance coefficient (KV), to show data fluctuations or stability. I use the KV here because the extent of this dispersion is far better than the standard deviation and variance.

The potential growth of household consumption has begun to weaken and erode.

From a statistical measure, the KV very clearly shows that price fluctuations have declined amidst increasing control. The KV dropped significantly from 43.4 percent in 2008-2013 to 37.6 percent in 2014-2019. It is natural that growth in household consumption remained stable at around 4.9-5.1 percent amid the low and stable inflation. Will it remain flat and stable over the next few years? This would be difficult if Indonesia does not immediately carry out structural transformation. The potential growth of household consumption has begun to weaken and erode.

This means that Leather\'s suspicion over the flat growth of household consumption is unfounded. Household consumption has enjoyed stable growth to date because the people have been able to manage their consumption by using their savings. Moreover, the culture of gotong royong (mutual assistance) has sustained the practice of helping out relatives or close friends in times of financial difficulty. Therefore, someone who has suddenly experienced a decline in or loss income can still maintain their “regular” spending for some time. This is one of the unique patterns of consumption in our society. The gotong royong culture is unique to Indonesia and not common in developed countries, although it has begun to erode.

Third, in terms of the financial market, Indonesia has indeed become increasingly immune to external shocks. In the foreign exchange market, the volatility of the rupiah against the US dollar has been declining. KV statistics only recorded 6.4 percent in 2014-2019, lower than 9.2 percent in the previous five years. In the bond market, Indonesia’s 10-year bonds have maintained relatively stable yields. The KV dropped from 26.9 percent to 17.9 percent in 2014-2019. The stock market showed the same thing: the KV statistics for stock price fluctuations also declined from 31.7 percent to 11.6 percent in 2014-2019.

KOMPAS/PRIYOMBODO

Finance Minister Sri Mulyani Indrawati delivers a statement on the state budget’s performance on 21 June 2019 at the Finance Ministry, Central Jakarta. Her portrait is superimposed with images of monitors displaying data for the June 2019 APBN KiTa (state budget performance and facts) in this multiple exposure photograph.

Fourth, I suspect that Indonesia has fewer ties and involvement in the global value chain (manufacturing) compared to countries like Vietnam. Indonesia\'s manufacturing industry apparently has difficulty competing with products from other countries, primarily because manufacturing’s contribution to the national economy has declined. Indonesia\'s weak connection to the global value chain is also evident in that none of the 33 investments from China has come to Indonesia.

We are unable to compete with Vietnam, where 23 of these investments from China recently entered. The lower ties between Indonesia\'s economy and that of other countries is also correlated by the KV statistics. The correlation of economic growth between Indonesia and Europe was 0.6 in 2008-2013, which fell significantly to 0.0 in 2014-2019. Similarly, the correlation with Japan fell to 0.0 in 2014-2019 from 0.3 in 2008-2013.

What is even more interesting is the correlation to the US and China, which has been negative. The correlation of the Indonesian economy to the US economy was minus 0.2, falling from 0.3 in 2008-2013.

The correlation to China was minus 0.3, falling from 0.3 in the previous period. This condition is to our advantage amid the fluctuating and weakened global economy.

However, we should realize this is not good, because Indonesia does not contribute greatly to the global value chain. When the world economy recovers or experiences accelerated growth, Indonesia will not enjoy the sweet wine of world economic activities.

Read more : Safeguard the Domestic Market

KOMPAS/PRIYOMBODO

A worker finishes the production of a gas stove at PT Selaras Citra Nusantara Perkasa in Cileungsi, Bogor regency, West Java, Thursday (10/10/2019). In the midst of the American-Chinese trade war, PT Selaras Citra Nusantara Perkasa has taken the advantage of the opportunity by sending its first export of electric air purifiers to the United States.

Follow international rules

Based on these four explanations, it is reasonable that we continue to believe that the BPS remains credible and independent. its GDP calculation has followed international rules in terms of expenditure (aggregate demand/AD) and production (aggregate supply/AS). The difference between the two approaches is accommodated in the statistical discrepancy.

An interesting phenomenon of the Indonesian economy at this time is that growth in the service sector has skyrocketed, even though it still contributes little to GDP. With a growing service sector, it would be better if GDP is also calculate in terms of income and not just in terms of AD and AS to paint a more complete picture of the economy. If BPS can map and incorporate the service sector into its calculations, it is not impossible that economic growth will be higher than the current data, which would answer Leather\'s analysis.

The essence of all these explanations is that the BPS’s data products must truly reflect the real economic condition as a basis of policymaking. Responses to criticisms of the BPS should not be reactionary; just take the lessons home. Projection methods, the scope of observation and sampling techniques may need to be developed and refined further so that the BPS data is more accurate, valid and credible.

Anton Hendranata, Economist at PT Bank Rakyat Indonesia.