Winning Hopes of Nation
The global and national economic landscapes have undergone rapid changes over the last two decades.
On the one hand, changes in technology and information make the economy increasingly spread out and connected. Production, distribution, consumption and investment move in new ways. The economy balloons increasingly easily. On the other hand, a variety of inappropriate economic ways of governance in the past has blocked economic expansion. Therefore, practically within the past decade the world economy has only been busy doing mitigation to get out of the trap of an economic slowdown, including Indonesia. Global and national economic growth is heading for a downward slope, which for many countries is very difficult to avoid. China is an economic giant that has suffered the most in terms of the reduction in growth. The good news is that since 2016 we have managed to break the curse of the decline in growth.
Expansion of economic capacity
The 1997/1998 economic crisis provided the lesson that the centralization of the economy, the concentration of market structures in monopolies and oligopolies and investments based on natural resource extraction, in addition to other factors, would drown the national economy. That is why the demand for the application of economic decentralization is so appealing. Formally, since 2001 regional autonomy and economic decentralization have been adopted rapidly. Economic reform also produces important institutions to regulate a healthy business climate, namely the Business Competition Supervisory Commission (KPPU). An unhealthy business climate has caused the national economy to be inefficient and not competitive, besides causing severe injustice in the form of inequality. Therefore, the KPPU institution carries out a very strategic mission so its existence must be maintained and strengthened.
Later, the 2008 economic crisis contributed further valuable lessons: The economy easily falls out if it has no power in the food and energy sector. At that time prices of food and oil on the international market skyrocketed, just as Indonesia had become an importer of those commodities. Prices of other goods rose as a result of the increase of oil and food prices so that inflation rose steeply. In 2008 inflation was recorded to touch 11.06 percent. Before the problem was resolved, there came another earthquake from the United States.
Bad housing loans exploded and became the axis of a global economic mega-crisis: subprime mortgages. The US, the pump of the world economy, weakened and it could be easily predicted it would soon spread to other countries because of intense international economic interactions. The economies of China, Japan, Europe and Indonesia entered a grim season. This event immediately sent a message: The agenda for the resilience and independence of the domestic economy could no longer be compromised. The experience provided knowledge that the national economy needed a two-footed basis to get out of the winding problem, while at the same time filtering future expectations, namely pumping demand-side economics and expanding supply-side economics.
On the demand side, for almost five years the government has developed a foundation that is strong enough in the form of fiscal politics that it is friendly to social protection, asset policies and access for the lower-middle class and upholds an inclusive economy as a major theme of development. From many angles, demand-side economics is also designed to raise the power of weak economic actors so that the design of justice can be established. The issue of justice had become a weak point of the national economy in the past so that it should not be allowed to worsen because it would certainly be a critical crater in the long run.
On the other hand, the expansion of economic capacity is supported by infrastructure development, deregulation and the strengthening of human resources. Infrastructure becomes the economic lubricating oil because it increases access to production activities (farming, irrigation, dams, electricity), reduces logistics costs (roads/toll roads, docks/ports, airports) and also reduces disparity in development justice (among regions, sectors and community groups).
The leverage of these three supply-side economic variables is the success story of many countries for lifting their economies because it has the ability to add weight to economic capacity.
Deregulation undermines transaction costs that hinder investment, especially in the licensing aspects. Meanwhile, strengthening human quality is focused on increasing productivity through improved access to health and education, increasingly relevant curricula and intensive cooperation with economic actors. The leverage of these three supply-side economic variables is the success story of many countries for lifting their economies because it has the ability to add weight to economic capacity.
Fiscal reform
The world economic situation in the next five years is seen as not yet giving a signal of enthusiasm so that domestic supports must be strengthened. One that must be well made is the fiscal support. The President has provided a fiscal reform policy framework that relies on three pillars, namely (i) budget politics that focus on increasing economic productivity and social/macro protection, (ii) budgetary allocations that are disciplined in supporting superior programs (money follow program/MFP/meso) and (iii) performance-based indicators from each budget/micro budget item.
The three state budget reforms have been carried out by ministries/institutions for five years with different levels of achievement. On each occasion the points have often been conveyed by the President to be a joint guideline, not only for the ministries/institutions, but also for fiscal governance of regional governments (provinces, regencies and cities).
The next five years can only maintain and sharpen the programs in accordance with the new targets that are to be set.
Budget politics that focus on supporting economic productivity, strengthening human quality and social protection are the most important success stories. The infrastructure development budget rose nearly 200 percent compared to in the previous period. Similarly, the budget allocation for economic functions doubled. The health budget for the first time touched 5 percent of the total state budget (according to the mandate of Law No. 36/2009 on health), where previously the highest was 3 percent. Meanwhile, the social protection budget rose sharply (about 11 times) from the previous period. Budget allocation was very focused according to development priorities and the results were easily tracked in the field. This new budget posture must be recognized as a strong board for surfing amid the big waves of the global economy. The next five years can only maintain and sharpen the programs in accordance with the new targets that are to be set.
Work that is still quite substantial is optimizing fiscal reform at the meso and micro levels, namely MFP and performance-based indicators. The ministries/institutions have tried to follow up on the new management system, but it has not been fully executed. The budget allocation in the work units (echelon I-III) has not been given priority so that in some parts it still shows the character of "for the average" to enable all work units to have programs and budgets. Furthermore, at the micro level, not all program successes have been measured by impact/outcome, but only the output that has been achieved. For example, the number of training sessions being held or physical buildings (such as markets) being built. Data related to improving the quality of trainees and traders who benefit from market development is not widely examined. Such a model is still a common practice so that these two challenges must be taken care of in the future.
Apart from that, of course what must be pulled is fiscal policy from the revenue side, especially to boost the tax ratio gradually. High non-tax revenues (PNBP) growth should be welcomed (the last growth was 49.04 percent in 2018). However, the reality also shows that the previous period had a lot of potential revenue to evaporate so that it did not become a fiscal resource. Efforts to boost PNBP need to be an agenda in increasing fiscal capacity.
Meanwhile, tax revenues are a steep challenge because of the economic situation that has not been favorable. If the tax rate of the agency is to be gradually reduced, the calculation of revenues as a whole must be done. Similarly, the arrangement of schemes for the range of personal tax rates also needs to be observed. Thus far the 30 percent tax rate (the highest) applies to revenues above Rp 500 million. Observing the current developments, it seems that the adjustment of the 30 percent tax imposition can be applied – of course, based on a thorough study.
Initiation of policy changes
Economic changes have been going pretty fast. However, there is one systemic problem that has not been resolved convincingly, namely the deficits of the trade balance and current account. The ability of non-oil and gas exports is still weak, both because of the problem of the global economic slowdown and the transformation of the domestic economy that has not been fully expanded.
The trade balance surplus for the 2015 to 2017 period (the 2012 to 2014 deficit era) cannot be maintained in 2018. Likewise, the current account deficit in 2018 was close to the 3 percent limit on GDP (to be exact 2.8 percent). Oil and gas imports could not yet be fully curbed so that the non-oil and gas surplus was unable to cover the oil and gas trade deficit. This situation requires the government to prioritize the problem as a vital agenda item for the next five years.
A part of the two sectors\' ecosystems has been prepared so that its acceleration is very possible.
This momentum can be used at the same time to strengthen the goal of enlarging economic capacity (whose facilities have been prepared) and realize the wisdom of the 2008 crisis, namely economic security and independence. Five economic sectors can be boosted: maritime, tourism, creative/digital economy, food, and energy (in the framework of re-industrialization). The tourism sector and creative economy grow more than 6 percent per year, surpassing national economic growth. A part of the two sectors\' ecosystems has been prepared so that its acceleration is very possible.
The maritime sector is being utilized to sustain the strategies of industrialization, trade and services (including transportation). Food and energy need a more credible new approach so that the available potential can be realized. New and renewable energy generation options must be added to reduce the pressure of environmental issues, while ensuring the sustainability of development.
Realizing the various great things is clearly not simple; it is even complicated. Three coherent and solid instruments are needed, namely the initiation of policy changes, complete institutional design (rules of the game) and the availability of budgetary resources. On the issue of energy and food, for example, the initiation of policy changes that can be studied, one of which is related to the scheme of fertilizer subsidy models (seeds and others) and energy subsidies (electricity, gas, and oil). The policy scenario is stretched and analyzed according to the objectives and targets to be realized. Likewise with regard to the import of agricultural/food commodities, the quota policy model and appropriate tariffs are juxtaposed so that optimal options can be chosen for the interests of the country’s economy. The same applies to debt schemes, state enterprise governance and other strategic issues that need to be put on the negotiating altar as the subject matter.
If the initiation of policy changes has been determined, detailed institutional arrangements become the next battle. The idiom “the devil is in the details” is actually attached to the institutional affairs. Institutions must be prepared with the lowest transaction costs, ensuring certainty and clear division of authority/tasks. New government programs, such as pre-employment cards, will certainly face these institutional obstacles if they want to be effectively executed. The rest is simply to provide budget support and other resources to back up its implementation. Through a variety of past lessons, development capital has been invested (in recent years), systematic improvement strategies are made and policy changes initiated; the condition of the global economic slowdown can be more easily mitigated and the most basic foundation of the domestic economy can be strengthened to win the hopes of the nation in the future.
Ahmad Erani Yustika, Special Staff of the President; Professor of the School of Economics and Business, Brawijaya University