Reorganization of the Growth Machine

KOMPAS/WAWAN H PRABOWO

President Joko Widodo (third left, front row) and Vice President Ma\'ruf Amin (third right, front row) pose with newly appointed Cabinet ministers on the front steps of Merdeka Palace on Wednesday (23/10/2019) in Jakarta. The President announced his new “Indonesia Onward Cabinet” that day, and instructed his ministers to avoid corruption and to close systemic loopholes that permitted corruption.

The Cabinet structure of President Joko Widodo\'s administration for the second term with 34 ministers and 12 deputy ministers is a reorganization that reminds about the battle group structure in the military. This structure enables the creation of a team with special tasks that use the resources of the parent forces in the allocated time.

For example, the deputy foreign minister, who has the task of securing the sustainability of the domestic palm oil industry amid the threat of a European Union boycott, is directly under the President through the coordinating economic minister and the coordinating maritime and investment minister.

The word investment describes the intension to reorganize the engine of economic growth, which in recent years has been supported by consumer spending. With a share of 59 percent of gross domestic product (GDP), from 2015 to the first quarter of 2019, spending grew 4.8-5.27 percent annually. Meanwhile, investment contributed about 32 percent of GDP to grow by 4.24 to 7.94 percent on an annual basis.

This figure, when compared to other countries amid slowing global economic growth, is actually quite good, especially if coupled with inflation of around 3 percent per year which keeps people\'s purchasing power.

With export growth, which is steadily declining as a result of the end of the commodity bonanza and trade war, the combination of consumer spending and investment has produced growth of around 5 percent per year. This figure, when compared to other countries amid slowing global economic growth, is actually quite good, especially if coupled with inflation of around 3 percent per year which keeps people\'s purchasing power. However, a question arises as to whether we can be better because there is aspirations to get out of the middle income trap as soon as possible.

To see this, a simple simulation is carried out to calculate the estimated investment growth needed to make economic growth. The last figure in second quarter of 2019, investment growth was 5.01 percent. Assuming a consumption percentage of 59 percent of GDP and growing at an average of 5 percent per year, as well as an investment portion of 32 percent of GDP and a gap between investment and production for 2 years, investment growth needs to be at least 10 percent to achieve economic growth of 6 percent per year.

This figure seems reasonable, but it is a difficult task because the highest investment growth since 2013 was 7.94 percent on an annual basis, namely in the third quarter of 2018. If a more realistic economic growth target is taken, for example 5.5 percent per year, the investment growth being needed ranges from 8-9 percent per year. Investment growth of 8 percent in the conventional way is already heavy so it needs to reorganize the growth engine out of the box.

KOMPAS/PRIYOMBODO

Workers assemble steam irons on Thursday (10/10/2019) at the factory of PT Selaras Citra Nusantara Perkasa in Cileungsi, Bogor regency, West Java. The company, an original equipment manufacturer (OEM) of several household electronics brands that also produces its own Turbo brand, has seized the opportunity created by the United States -Chinese trade war to export its first shipment of air purifiers to the US. The Cileungsi factory has an annual production capacity of 4 million appliances.

Investment behavior

By using the Granger Causality method, a fundamental difference is seen between investment behavior before and after the 1998 monetary crisis. Before the crisis, investment was more determining economic growth. In other words, entrepreneurs were more anticipatory. After the crisis, what happens is on the opposite, where economic growth determines investment. In other words, entrepreneurs will only invest if economic growth is really good.

The thing that differentiated the two periods was the great economic reforms of the mid-1980s and 1990s, that safeguarded the long-term economic outlook. After 2000 several reforms were carried out, including, regional autonomy, which was only realized later that it leads to the side effects of increasing business uncertainty. The main sources of problems are excessive regulations and conflicting central and regional regulations. This is evident from the report of the World Economic Forum which ranks Indonesia 103rd out of 140 countries for complicated licensing procedures.

Free trade area agreements (FTAs) with any party risk making Indonesia only a market.

With the principle of comparative costs in Ricardo (1817) traditional international trade theory, a high cost economy due to human actions will place Indonesia as a country that has a false comparative advantage, only becomes as a producer of raw materials and not suitable for business activities that have high added value. Free trade area agreements (FTAs) with any party risk making Indonesia only a market. In fact, the Industry 4.0 provides an opportunity for Indonesia to enter the modern manufacturing and service industries by reorganizing production, distribution and marketing that include technological content and innovation in the products being produced.

Pragmatism

There is nothing wrong with the import of input goods and industrial capital goods, especially for export-oriented industries. However, the high cost economy makes it difficult for the industries producing raw materials, semi-finished goods, and auxiliary goods to be located in Indonesia. This can be seen from the import of raw/auxiliary materials which is about 75 percent of the import value. As a result, economic growth driven by investment growth has the potential to be wasteful for imports.

That happens especially if the condition of the export market is not good, for example, due to a trade war. The trade balance will be under pressure, like now. Annual manufacturing industry survey data shows, in 2006-2015 the percentage of production which was exported fell from 12.6 percent to 10.4 percent. At the same time, however, imported industry inputs increased from 8.3 percent to 10 percent.

KOMPAS/SYAHNAN RANGKUTI

A worker loads freshly harvested palm fruit onto a wheelbarrow on Wednesday (2/10/2019) at a PT Ramajaya Pramukti oil palm plantation in Siak regency, Riau. Older palms produce larger bunches of fruit, which can weigh up to 50 kilograms.

Like the philosophy of the above-mentioned task forces, in some countries, such as Vietnam and Bangladesh -- which have an Ease of Business rating below Indonesia -- a pragmatic solution to the problem of high cost economies is by developing port-based industrial zones, such as the ports of Haiphong (Vietnam) and Chittagong ( Bangladesh). This area can be connected with industrial pockets scattered in several regions to optimize network effects, especially with railroad lines that are practically free from illegal levies.

Kompas

Ari Kuncoro

Potential bureaucratic obstacles can be minimized using online tracking technology to facilitate supervision. An impromptu inspection can be done to add a deterrent effect. Prevention is preferred because if it is left up the red-handed arrest, bureaucratic impasse has already occurred. Meanwhile, investor complaints have gone viral everywhere, which will be recorded as a negative perception. Based on this experience, to attract investors need a complete combo package, ranging from Indonesian representative offices abroad to escort up to the destination of the industrial areas.

ARI KUNCORO, Rector of University of Indonesia