For the Indonesian economy, which relies heavily on domestic consumption, the people’s purchasing power is the key. In 2018, the proportion of household spending to the economy or gross domestic product (GDP) was 55.74 percent, down from 56.14 percent in the previous year.
In general, from year to year, our economy is dominated by domestic consumption. As a result, we are stuck in a moderate growth pattern. Given the structural condition of the Indonesian economy, there are two big agendas that must receive serious attention. First, in the short term, the people’s purchasing power should be under control through a low inflation rate policy. Second, in the medium and long term, the people’s incomes and purchasing power should also be strengthened through an increase in investment.
Only by raising the investment, multiplier effects can be created, namely an increase in income, purchasing power and consumption. If consumption rises, production will increase. It is the essence of economic structural change from a consumption-based economy to a production base.
China\'s experience in driving the economy through investment can be used as a reference, even though it must be realized that there are many differences in context. China managed to overhaul the domestic economy through a sharp increase in foreign investment.
The surge in the foreign investment accelerated the increase in people\'s income, so that when the economy began to slow down as it is doing now, people already have a better income level than in the previous 20 years.
The people’s income
What is the purpose of all economic reform efforts? Nothing else but to increase the people\'s income. Without an increase in people\'s income, the economy will be stagnant like the trend we are experiencing now. The question is how to propel our economy to be more advanced and to achieve higher growth so that people\'s income will increase.
Expanding the economy will be difficult amid a global economic slowdown. It is not easy to get out from these sluggish economic conditions. An unusual method is required to get out of the 5 percent growth trap, such as by focusing on efforts to boost investments.
In the short term, policies must focus on maintaining price stability through controlled inflation. Thus, even though the people\'s income is stagnant, their financial burden will not increase. This policy is necessary even though it is not sufficient. The ability to keep inflation relatively low is one of the government\'s achievements in the past four years and it needs to be continued in the next five years.
In April, inflation rose 0.44 percent, up from 0.11 percent in the previous month. The inflation rate in April was largely influenced by the scarcity of several commodities, such as garlic and shallots, which had
led to a sharp increase in their prices. The price increase will likely continue to occur until the Idul Fitri holiday in early June.
If not addressed immediately, the increase in prices will negatively affect our economy in the coming months. For our economy, inflation is mainly caused by increases in prices of food and energy. Since the fall in oil prices and the removal of government subsidies, there is no more sharp fluctuation in energy prices. Therefore, the food price factor becomes dominant, which is determined by two factors, namely the availability of goods and their distribution.
To ensure the availability of goods, the government should be able to accurately calculate domestic production and the amount that has to be imported. In general, this year\'s inflation target of 3.5 percent can be achieved. However, an increase in the price of several main commodities recently indicates that management of the supply of basic commodities still needs an improvement.
In addition to the price issue, there are several other factors that need attention, such as consumer confidence and the people\'s consumption capacity. Bank Indonesia’s (BI) Consumer Confidence Index (IKK) fell 0.6 points in March to 124.5 from the previous month’s level. Although it was still considered good (still above 100), expectations for future economic conditions were not as good as before.
The decline in the Consumer Confidence Index was followed by a decline in public expenditure for consumption from 68.3 percent in February to 68.1 percent in March 2019. In general, people tended to reduce consumption and chose to save.
This trend can be seen from an increase in average savings to 20.1 percent in March, up from 19.1 percent in February.
Consumers’ expectations
Such a situation is in line with consumers’ expectations about future economic conditions – which are considered uncertain and tend to deteriorate.
If such an expectation comes true, there will be a multiplier effect that will result in a slowdown of economic growth. If this situation occurs, there should be a policy to push up consumption so that it will not decline further through a monetary policy such as by lowering the interest rate or by a taxation policy.
Policy navigation needs to be strengthened so that the price and consumption cycle is under control. However, the bigger agenda is to increase the people\'s purchasing power through an increase in income. Our economy needs basic structural reforms so that it will not be further held hostage by short-term economic problems.
Increasing the people\'s purchasing power is the key to our economy, in which domestic spending is quite large. China succeeded in carrying out a structural transformation through the opening of access to foreign investment, but with the obligation to transfer technology to encourage domestic investment.
Inviting foreign investment and at the same time increasing domestic investment is a strategy that needs to be adapted so that the domestic production base can grow significantly.
A. PRASETYANTOKO, Lecturer at Atma Jaya Catholic University Jakarta