A Useless War
President Joko Widodo conveyed a strong moral message to the world at the 2018 Annual Meetings of the International Monetary Fund (IMF) and World Bank (WB) Group in Nusa Dua, Bali.
President Joko “Jokowi” Widodo successfully conveyed a strong moral message to the world at the 2018 Annual Meetings of the International Monetary Fund (IMF) and World Bank (WB) Group in Nusa Dua, Bali, on Oct. 8-14.
At the forum attended by 36,339 delegates from 189 countries, President Jokowi creatively used the popular TV movie series Game of Thrones as an analogy to describe the current condition of the world economy.
Even though he did not specifically mention countries, President Jokowi reminded attendees that the trade war would merely lead to vanity. The trade war is useless because it will cause suffering not only to those who lose but also to the winner. All parties will suffer. Both will lose and languish. Simulations conducted by economists show that trade wars cause world economic growth to shrink by 1 percent.
The United States is now enjoying its best performance, with 4.2 percent economic growth in the second quarter, 2018, and with inflation of 2.3 percent annually, and unemployment 3.7 percent. However, the former governor of the US central bank (the Fed), Janet Yellen, reminds that the low unemployment rate is not real because many workers only work part time, not full time. So, actually the unemployment rate is biased.
The major problems that are still experienced by the US are the trade deficit and the current account deficit. Despite taking the initiative to conduct a trade war, the US trade deficit continues to increase. During January-September 2018, the US trade deficit with China reached US$225 billion or $30 billion higher than last year. This is caused by the decline in US exports due to the strengthening of the US dollar against almost all world currencies, including the yuan. Throughout 2017, the US trade deficit with China reached a total of $375 billion.
The US is actually experiencing a dilemma and paradox. On one hand, from the monetary side, the Fed is trying to normalize interest rates. Why do the interest rates need to be raised? Because, if the low interest rate regime continues, the US will face the problem of overheating. Public spending will be too aggressive, which can push up inflation.
To reduce inflation, a correction is needed by pushing up interest rates to "new normal" levels. However, the increase in interest rates causes the US dollar exchange rate to strengthen against currencies around the world. This leads to the worsening of the US trade balance as the deficit continues to increase. In other words, the trade war launched by President Donald Trump would be useless and counterproductive.
When world economic growth decreases 1 percent, the impact can reduce demand for US goods. Furthermore, US economic growth will also weaken. The US will suffer from its own policy. In a situation like this, both the US and other countries will suffer.
In this paradoxical situation, the US is also worried. The Fed\'s governor plans to continue his plan to raise benchmark interest rates, while President Trump wants the interest rates not to rise. However, the Fed is an independent institution so President Trump cannot intervene.
Meanwhile, the Belt and Road Initiative was also an interesting topic discussed in Bali. The initiative to create connectivity (the construction of a railway from China to Central Asia and Europe) was unveiled by China when President Xi Jinping visited Kazakhstan and Indonesia in 2013.
The biggest problem that concerns the countries passed the "silk route" is that they have to raise more debt. How can they pay it? Is China willing to help them?
Malaysia has also canceled the Kuala Lumpur-Singapore high-speed rail line because its debts have exceeded 60 percent of its gross domestic product (GDP). The Belt and Road Initiative was launched by China as an effort to reduce transportation costs so that the trade will become more efficient. However, this will be useless if the US continues its trade war because its trade deficit is already too high.
This is the problem President Joko Widodo wants to remind people of. It needs to be addressed in a wiser manner. Do the countries in the world need a rivalry and fierce competition more than cooperation and collaboration? This was the most important message conveyed to participants of the Bali meetings.
President Jokowi used an analogy that if we cannot manage to solve the problem properly, we will soon face a chilly winter (winter is coming). In the Game of Thrones series, the Evil Winter is described as a common enemy who can destroy everything.
The annual meetings in Bali were not only able to attract many delegates from all over the world, but also investment commitments worth $13.5 billion (Rp 202.5 trillion) to Indonesia. Equally important, Indonesia managed to convey a moral message about the common enemy of the world economy today, namely protectionism, trade wars and various other policies designed to benefit a few powerful countries.
The spirit of collectivism in the context of multilateralism should be reassembled through the momentum of IMF and World Bank events. Indonesia has cleverly utilized the opportunity to start this discourse. Hopefully this can become a snowball that awakens big countries to hold back and act wisely. All countries must be united together to avoid the onslaught of the snowstorms in a chilly winter. (A TONY PRASETIANTONO, Head of the Center for Economics and Public Policy Studies, Gadjah Mada University)
