Economic Policy for The Future
Anwar Nasution
The administration of Joko “Jokowi” Widodo and Ma\'ruf Amin is expected to create a powerful economic policy strategy and pick out competent personnel for the Cabinet. A powerful policy can immediately realize the ideals of the golden year of 2045 to make Indonesia an advanced industrial country.
There are two types of basic economic policy changes that need to be carried out. First, change the orientation of economic development toward exports by utilizing the global supply chain (GSC) and Indonesia\'s strategic cross position between two large oceans (Indian and Pacific) and two major continents (Asia and Australia). The GSC is a result of advances in transportation and telecommunications technology, which enable the production process to occur in various series and stages so that the production stages can be carried out in various countries.
Following Japan, Taiwan and South Korea, Deng Xiaoping changed China\'s self-reliant economic development strategy from Mao Zedong\'s self-reliant style to an export-oriented direction.
China\'s labor-intensive exports began with toothpick exports, cheap handicrafts and clothes that can be produced by many people. After mastering various technologies, China slowly began to export advanced technology products, including luxury bags and clothing, sophisticated G5 microchips, superfast trains and passenger airplanes.
Continuously for 40 years, since 1987, the Chinese economy has grown 7 percent to 10 percent per year, per capita income has risen rapidly, and the poverty ratio has decreased. Now, its gross domestic product (GDP) has surpassed Japan and is number two after the United States.
Several crucial issues
After 74 years of Indonesia\'s independence, the ratio of tax revenue to GDP is very disappointing, only 10 percent or half of the average level in other developing countries. The self-assessment system used to calculate tax liabilities since the 1983 tax reform has not been followed by a strict tax audit system and law enforcement for tax evasion.
Since we gained independence, state budget (APBN) financing has only depended on two sources, namely grants and foreign loans and printing money. To facilitate the transfer of money from Bank Indonesia (BI) to the Department of Finance (now the Finance Ministry), the government integrated in 1965 all state banks into Bank Indonesia. The integrated bank was called the Fighting Bank.
Large-scale money printing, which was carried out to cover the APBN deficit, caused inflation and damaged the foundations of the social and economic life of the people. The peak of inflation occurred in 1965 and 1966, reaching above 650 percent, thereby leading to the overthrowing of the government.
The financial industry that needs to be developed is a long-term financial institution called institutional investors. Because they can accept long-term deposits, institutional investors can buy government bonds (SUN) and long-term bonds to develop long-term investment projects, such as infrastructure.
Today, existing pension funds are simply limited to the state sector and a small group of large companies. BTN and BRI need to be returned to their original function in order to serve farmers, fishermen, cooperatives and low-income groups of people in all corners, up to the rural areas.
Meanwhile, the capabilities of all BUMNs and BUMDs, including four state banks (Mandiri, BNI, BRI, and BTN), must be improved so that they can become world players, at least at the ASEAN level.
Export-oriented development is expected to generate foreign exchange and allow the import of goods and services needed from abroad. Foreign exchange earnings can at the same time be used to pay off foreign debt and cultivate foreign exchange reserves. Foreign exchange reserves are needed to cover the current account deficit in the foreign balance of payments and to maintain the rupiah’s stability.
As a way to start saying the country’s foreign exchange and increase exports, the government, for example, can require Indonesians going on umrah (minor haj) and haj pilgrims to wear ihram (sacred state) clothes, veils, footwear, prayer beads and flasks made in Indonesia. With credit assistance from Dana Haji (Haj Funds), restaurants that provide Indonesian specialties, such as Padang food, Soto Kudus, and Soto Banjar, can be built in Jeddah, Mecca and Medina to serve Indonesians living or visiting there.
An export-oriented economy must include all levels of society in accordance with their respective capabilities or mastery of technologies. Before becoming mayor of Surakarta, Central Java, Jokowi gave an example with his woodworking business, the results of which were exported to Europe. Clothing for umrah and haj as well as calligraphy, snacks and food consumed in the Holy Land can be produced by workers with low levels of education. Calligraphy can be made by sculptors in Central Java and Bali. Opening Indonesian restaurants abroad can simultaneously increase exports and create jobs.
Thus far, there are 115 BUMNs engaged in various economic sectors. Each local government has its own BUMDs. Among the BUMNs, there are 84 companies in the form of Persero and 17 Persero Tbk and 84 public companies. The total assets of all BUMNs reached Rp 8.207 quadrillion (US$575 billion). BUMNs employ as many as 903,596 people, more than there are Indonesian Military (TNI) members. The socio-political role of BUMNs is also expanding because they disbursed funds for the micro-credit program (KUR) and Prosperous Family Economic Program valued at Rp 113.9 trillion in 2018.
Most of these BUMNs and BUMDs were ex-Dutch-and other foreign-owned companies that were nationalized during the Trikora 1956-1957 era. State companies call themselves agents of development, balancing the dominance of foreign capital and balancing the ownership of inter-racial economic assets.
Until now, the burden of BUMNs and BUMDs on state finances is still greater than their contribution.
BUMNs are apparently not allowed to go bankrupt so they will continue to be assisted by the government if they face financial difficulties. In April 1975, state oil and gas company Pertamina was unable to pay off $40 million in commercial debt, so it had to be taken over by the government.
The bankruptcy of BUMNs is prevented by injecting government equity capital into them. During the 1997-1998 economic crisis, more than two-thirds of Bank Indonesia’s Liquidity Assistance (BLBI) was used to strengthen the capital of state banks.
BUMNs and BUMDs can do little to expand exports to international markets. There have been no BUMNs or BUMDs that were able to catch up with the Salim and Sinar Mas groups, which have been able to export instant noodles, palm oil and paper to foreign countries. The ability of BUMNs and BUMDs is also limited in terms of processing raw materials, as well as in the use of technology in production, management and marketing. In fact, foreign plantations and miners are required to process their products in the country before being exported to foreign countries.
After the money printing, foreign aid and loans are the second main source of APBN funding since Indonesia\'s independence. The Armed Forces (ABRI) was strong before 1966 and various projects such as the Bung Karno Stadium, the Musi Bridge and Palangkayara city were built with Russian assistance. During the 32 years of the New Order era in 1966-1998, the state budget deficit was closed with grants and debts from the Consultative Group on Indonesia (IGGI). The state budget, whose deficit was covered by grants and loans from IGGI, was called “a balanced budget” by the New Order.
Before the 1998 reform, Indonesia was still receiving Official Development Aid (ODA) from IGGI. The ODA was long-term and soft-conditional with interest rates far below market interest rates. It was used to build road infrastructure, ports, airports, schools, health centers and social infrastructure.
ODA stopped after the reform due to two reasons. The first reason was because the level of income per capita of Indonesia increased from under $100 in 1966 to $857 (2000) and $3,932 (2018). The second reason was because of the massive corruption in the New Order era. Donor countries provided grants and loans to improve the economy of the poor and not to enrich a handful of leaders.
The existence of IGGI grants and loans replaced the financing of the state budget deficit through money printing. This curbed inflation drastically, with a drop to 10 percent at the beginning of Pelita I, April 1969. After money printing was no longer needed, in 1966, the Fighting Bank was dissolved. The position of independence and the duties of BI as the central bank was restored. BI Law prohibits it from buying SUN directly from the Finance Ministry. The organization and function of state banks as commercial banks were returned to normal.
During the New Order era, all foreign and domestic loans were tightly controlled by Professor Dr. Widjojo Nitisastro, coordinating economic minister and chairman of the National Development Planning Agency (BAPPENAS). Widjojo became a negotiator abroad and at the same time, directly controlled the amount of aid and loans, their origin, conditions and the direction of their use. Such control is starting to fade today because various technical departments as well as BUMNs can act on their own.
Domestic loans have not been popular since the war of independence because a large part of them that was not paid, cut or eroded was eaten up by inflation, sanering and the devaluation of the rupiah.
Selling SUN rupiah to commercial banks and to foreign investors is very dangerous. Selling SUN and commercial bank credits to build infrastructure is also very dangerous because commercial bank deposits are short-term. The sale of SUN like this also causes "overcrowding" in the money market because the government competes with the business world to obtain limited bank savings.
Overcrowding in the money market will increase interest rates. More than two-thirds of SUN rupiah that are sold on the Indonesia Stock Exchange (IDX) today is bought by foreign investors. This is very dangerous because foreign investors are very sensitive to the movement of the rupiah exchange rate and national political and economic upheaval.
The sale of SUN to commercial banks and foreign investors also occurs because of the limited ability of institutional investors to absorb it.
Reliable cabinet
The government’s programs can only work well if they are run by reliable Cabinet members who have sufficient education and experience, have integrity, are not corrupt, have leadership skills and have the same vision as the President.
In the past, president Sukarno was ousted from power because of political, social and economic conditions; the country was in chaos and faced a very high level of inflation. In fact, his finance minister, Mr. Sumarno, and BI governor Jusuf Muda Dalam, who came from his own party, the Indonesian National Party (PNI), were unable to carry out their duties.
President Soeharto was successful in the early days of his government because he had great assistants, including technocrats and economics professors from the University of California at Berkeley, one of the world\'s leading universities. At the end of his time in office, president Soeharto used his cronies and children, with very low qualifications, in the government. Soeharto was deposed by the people because the rate of economic growth contracted by 13 percent in 1998, inflation increased dramatically, the US dollar exchange rate against the rupiah jumped seven-fold and the banking industry collapsed.
Anwar Nasution, Professor of the School of Economics and Business of the University of Indonesia
