Statistics Indonesia (BPS) announced that Indonesia recorded a trade surplus of US$2.44 billion in September 2020.
By
ARI KUNCORO
·5 minutes read
Statistics Indonesia (BPS) announced that Indonesia recorded a trade surplus of US$2.44 billion in September 2020. Thus, Indonesia\'s trade balance has been in surplus for five consecutive months, which leads Bank Indonesia to predict a potential reversal of the quarterly current account, which has been in deficit for a decade, to a surplus. The trade surplus report also helped maintain the rupiah exchange rate in the range of Rp 14,700 per US dollar.
Similar to the previous four months, the surplus in September 2020 occurred because imports fell more sharply than exports amid the contraction of the economy due to the Covid-19 pandemic. Exports dropped 0.51 percent to $14.01 billion compared to September 2019. Meanwhile, imports fell 18.88 percent to $11.57 billion over the same one-year period.
Structural problems
The pandemic-induced trade surplus hides the characteristic feature of the Indonesian economy, in which, during normal growth, the current account tends to be in deficit. In the 1970s and 1980s, the trade surplus could still cover the deficit, because Indonesia was still a net exporter of oil and gas. The economic deregulation in the mid-1980s turned Indonesia into an exporter of products produced by labor-intensive manufacturing industries.
After the 1998 monetary crisis, the manufacturing sector could not continue its key role in exports, because the high-cost economy undermined its competitiveness. During the commodity bonanza period from the fourth quarter of 2004 to the end of 2013, commodity exports helped prevent a current account deficit, thereby taking over a role previously played by industrial exports. During that period, Indonesia\'s economic growth averaged 5.83 percent. In fact, it peaked at 6.36 percent in 2010-2012.
Since the commodity bonanza ended in 2014, the government has to find new sources of economic growth. This is not easy, because during the period when the trade surplus was abundant, the money was only used to develop property and malls in metropolitan cities and secondary cities. On the positive side, the middle class has grown to 141 million people.
In other countries, such as the United States, Japan and South Korea, the growing middle class is used to develop manufacturing industries to escape the middle-income trap. In Indonesia, the share of the non-oil and gas manufacturing sector in the gross domestic product (GDP) declined from 25.54 percent at the end of 2004 to 18.75 percent at the end of 2019. Meanwhile, the share of the trade, hotel and accommodation sector in the GDP increased from 15.96 percent to 18.40 percent. The growing middle class in Indonesia turns the country into a market rather than a production base. The average quarterly growth of the manufacturing sector in 2004-2014 was 5.83 percent annually, lower than 7.65 percent in the trade, hotel and restaurant sector.
Out-of-the box approach
Signs of change toward deglobalization began to appear in late 2017 following the United States-China trade conflict. As its impact, Indonesia\'s non-oil and gas export growth began to slow down. Indonesia’s trade balance, which recorded a surplus of $11.84 billion in 2017, suffered a deficit of $8.57 billion in 2018. The trend continued in 2019 with a deficit of $3.2 billion. This exacerbated the current account deficit, because it could be covered only by short-term portfolio investment, making the rupiah exchange rate vulnerable to capital outflows.
Since its inauguration in October 2019, the government of President Joko “Jokowi” Widodo-Ma\'ruf Amin has been faced with the necessity of reorienting the industrialization strategy. Globalization allows Indonesia to depend on the world commodity cycle. This makes the country more reliant on the macro stability to attract portfolio investment to cover the current account deficit. As long as the world economic order remains in the status quo, this strategy may be sustainable. However, the world has changed. Economic growth that is highly dependent on improving terms of trade seems to be no longer sustainable.
The potential for an escalation in the US-China conflict in 2020 is greater and may not be limited to a trade dispute. The consequences can already be seen from the shifting in world supply chains, such as the relocation of several factories from China to Vietnam. News of the prospect of the relocation of factories to northern Central Java suggests that Indonesia could benefit from the change.
The Covid-19 pandemic has not only accelerated the deglobalization process but also caused the decoupling of the world economy. In this situation, stimulus to accelerate economic growth carries the risk of increasing imports amid a slowdown in exports. So, a new approach is needed by using the domestic purchasing power and strengthening the industrial structure, which is fragmented and requires a large amount of foreign exchange.
The manufacturing sector, although producing for domestic needs, still relies on global supply chains. Imports are also needed, especially for export-oriented products. However, to increase the leverage and supply chains, it is necessary to increase connectivity between industries, cities and villages, between agglomerations and linkages among large, medium and micro-ultra-micro industries, as well as inter-island connectivity. Barriers make linkages among industries and supply chains artificial but remediable. This can be seen from indicators of Indonesia\'s competitiveness in the Global Competitiveness Report released by the World Economic Forum (WEF).
Industry seems more expensive than trading. For the cost to start a business, Indonesia ranked 67th out of 141 countries. Complicated licensing procedures reflect particularly in the time needed to start a business, an indicator in which Indonesia ranked 103rd.
One of the things considered positive was the skills of the workforce, for which Indonesia ranked 36th. However, Indonesia still ranked low for the labor market at the 110th position, as the market was considered too stiff. Apart from the pros and cons, the Job Creation Bill has the opportunity to prepare Indonesia to face a new world order that leads to deglobalization.
ARI KUNCORO, Rector of the University of Indonesia.