Challenges for Jokowi’s Second Term

President Jokowi will soon begin his second term in office.

His first term began in the years following the commodities bonanza of producing countries. Indonesia had to find new sources to maintain domestic economic growth. Meanwhile, his second term will begin amid the rising prospects of a recession in the United States, which has the potential to bring the world to the brink of a global recession, which thus requires a countercyclical fiscal policy.

Disruption to policy environment

Changes in the policy environment at both home and abroad, such as shifting world alliances, the trade war, demographic changes and the behavior of economic agents, will be the biggest challenges. Policy can no longer rely simply on conventional theory without adjustments.

The first example from Uncle Sam is the lowering of the US Federal Reserve’s interest rates when disagreements still abound regarding the timing of the recession. This opinion is based on the argument that the coming recession is being caused by humans due to the trade war between the two locomotives of the world economy, the US and China. Moreover, the unemployment rate still shows that employment is growing in the US, even though the financial data indicates that the country is headed towards a recession in the middle or the end of 2020.

Another example is the behavior of investors in the US towards changes in the US Fed’s interest rate policy. Lowering the Fed’s interest rates to stimulate the economy has instead made investors more worried that the recession is approaching, so they are moving their funds to prospective Asian countries. These things have invited some criticism against the kinds of thinking that influence fiscal policy, for example the investment savings-liquidity preference money supply (IS-LM) model for short-term macroeconomic management.

One of the country’s difficulties is in analyzing the behavior of the general public and businesspeople. There is a difference between expectations and economic data. The consumer confidence index (CCI) for September weakened from 123.1 the previous month to 121.8, continuing the declining trend since July. Nevertheless, real data shows the opposite.

Kompas

Workers are assembling \'smart lights\' made by PT Santinilestari Energi Indonesia, on Thursday (07/25/2019), in Pasuruan, East Java. The smart lights can be turned on and off via cellphones. The renewable energy manufacturing company, is a domestic company that has developed products with intelligent technology, the work of domestic human resources since 2012.

Public consumption grew 5.17 percent year-on-year (yoy) in the second quarter of 2019, a significant increase compared to 5.05 percent yoy in the first quarter. When exploring further, health and education spending grew faster at 6.63 percent yoy, up significantly from 5.71 percent in the previous quarter.

Meanwhile, the second highest expenditure was in hotel and restaurants at 5.82 percent yoy, up from 5.37 percent. It seems that transportation expenditure was the sacrifice, falling two consecutive quarters from 6.14 percent in Q4 2018 and 5.93 percent in Q1 2019. This pattern was influenced by the new school year that started in August/September. This pattern was also seen in 2015, 2016 and 2017, but did not emerge in 2018.

This picture is contributed by the machinery and equipment industry, which recorded negative growth of 3.96 percent.

From a business perspective, after reaching its weakest point since 2017 in March 2019, Indonesia’s Business Tendency Index (BTI) has continued to improve. In August, the BTI was 108.1 compared to 102.1 in the Q1 2019. This picture contradicts the data on Indonesia\'s GDP. Investment growth did not move much from just over 5 percent yoy, both in Q1 and Q2. This picture is contributed by the machinery and equipment industry, which recorded negative growth of 3.96 percent.

This shift in spending patterns amid the news of the trade war and global recession seems to explain why people are avoiding spending on durable goods, but still maintaining spending in education and health as well as on travel and dining. This is reflected in the transportation industry’s negative growth over the last two consecutive quarters, respectively minus 6.63 and minus 3.73 percent yoy. The same thing occurred in the electronics and computer products industry, which experienced negative growth of 2.52 percent in Q1 2019.

Expectation is apparently not the same as behavior in the field, especially when looking at the micro data, which better reflects the individual behavior of economic actors. The inconsistent data between the macro and micro appears to be due to technological disruption. The development of information technology has diversified information sources so that drawing conclusions has become the personal affair of each economic actor.

Even though it is undetected in the CCI survey, the wait-and-see attitude ahead of President Jokowi\'s Cabinet appointments for his second term has also influenced the behaviors of the public and businesspeople. The digital revolution has raised the need to examine the potential reactions of the people who will be exposed to a variety of policies in Jokowi’s second term. The government will face a public that is increasingly critical of its performance during Jokowi’s second term. This calls to mind the time inconsistency, credibility and reputation model that was developed in the 1990s by Alesina, Roubini and Cohen (1997) and by Kydland and Prescott (1982).

This model suggests that negative news, regardless of whether it is true or not, will be accepted as truth if no alternative information is available. In contrast, positive news will be verified repeatedly before it begins to influence public behavior. The government and the public will evaluate each other before interacting in the long term to establish mutual trust (intertemporal game).

KOMPAS/ANGGER PUTRANTO

A number of Xpress Air passengers received a welcome in the inaugural flight to Banyuwangi Airport, on Saturday (10/08/2019). Express Air opens a new Banyuwangi-Banjarmasin route to go home, which means giving birth to a new entrance to Banyuwangi from Kalimantan Island.

What must be strengthened

Therefore, several things can be strengthened. The first is to guide the people\'s expectations by issuing strong signals on the policy direction for the second term. The government has done this on various occasions, for example during the President\'s speech at Sentul and on introducing financial notes some time ago, emphasizing human resource development and clarifying the derivative policies at all levels of education, including vocational institutions and universities.

The World Economic Forum (WEF) report, which states that Indonesia has fallen from 45th to 50th, does not need to cause panic, but should instead be taken to mean that the policy priorities for the second term are on the right track. Indonesia\'s score has not changed much, down only 0.3 points, and is still above several Southeast Asian countries like Vietnam and the Philippines. This is mainly because of indicators related to human resources.

Second is the emphasis on sustainability to continue from what was achieved in the first term (continuous improvement). Backbone infrastructure development is being followed by the construction of supporting infrastructure to connect remote areas with key areas of population and industry agglomeration.

This is being done to channel the purchasing power of the middle class from urban areas to rural/border areas and to improve the rural population’s access to urban areas for trade, finance and labor mobility towards inclusive growth.

Third is to improve the quality of policies. In accordance with the predictions of the reputation and credibility model that uses the game theory approach, the relationship between policymakers and the public must become a two-way interaction in which the two parties evaluate each other.

High performance computing (HPC), with analytical data across various state institutions, including Statistics Indonesia (BPS), can evaluate what the public needs and coordinate interministerial activities using historical or real-time data. This evaluative capability can be bargaining power (leverage) for the offices of coordinating ministers to develop synergy among the ministries within their scope of work. HPC can also facilitate the harmonization of overlapping regulations at both the central and regional levels that hinder investment.

Licensing with central-regional overlap can be harmonized through the relevant coordinating minister with the help of HPC.

Fourth is to include business intelligence units at Indonesia’s overseas missions. It is not enough to simply hold trade exhibitions to introduce Indonesia. This must be followed up with brochures that present information on how to invest in Indonesia and on manufacturing site, accompanied by assistants and lobbyists, so that new businesses as well as those seeking to relocate can make decisions more easily. Licensing with central-regional overlap can be harmonized through the relevant coordinating minister with the help of HPC.

In order to implement these at regional investment destinations, the government can use its leverage through central-regional funding, especially through special fund allocations and in determining the locations targeted for infrastructure development, as other countries with vast territories and large population have done, such as the US, Brazil and India.

KOMPAS/AGUS SUSANTO

Ari Kuncoro

In closing, the policy ecosystem – including the economic structure, demographic structure, societal behavior, technology and international alliances – has indeed changed. In terms of the bureaucrats’ individual skills, what is needed is the ability to solve complex problems, think abstractly (helicopter view), be creative and to execute in order to produce solutions. From an organizational perspective, a flat structure is needed without too many tiers, so it can be flexible and agile in facing the dynamics of change in the policy environment.

Ari Kuncoro, Professor and Dean, School of Economics and Business, University of Indonesia