Focus on Optimizing Growth Engines

The government and the House of Representatives' Commission XI have agreed to lower the economic growth target in the revised 2016 State Budget from 5.3 percent to 5.1 percent.

This correction is directly related to the economic growth achieved in the first quarter of 2016, which was only 4.9 percent, and to the economic growth in the second quarter, which shows no improvement thus far.

Even with the potential growth of household consumption in June because of Ramadhan, the momentum for growth is buried by the pressure of the price hikes of various staple foods. Furthermore, the fiscal stimulus contribution from the government is still terribly low and budget dispersal as of late May 2016 was only around 26 percent. A surplus was not caused by increasing exports but instead by a significant decrease of imports of raw materials and capital goods. The importation of consumption goods is also increasing.

The problem is, with a continuously corrected economic growth target, how can the state fulfill the growth target stipulated in the 2015-2019 Mid-Term Development Plan (RPJM)? In the RPJM, the government aims for an 8-percent economic growth in 2019, with the growth rate reaching 5.5 percent and 6.6 percent in 2015 and 2016, respectively. As such, up to 2016 the gap between the economic growth target and realization has reached 1.5 percent. In fact, the RPJM should serve as a road map.

If the economic growth realization continues to be lower than the target, it will put not only the government's credibility on the line, but also the aim of improving people's living standards.

The question is, was there something wrong with the economic policies in the last two years? The government committed to deregulate and de-bureaucratize economic policies. Ironically, even after the implementation of a dozen economic packages, economic growth is still below target. This could have been caused by the government's failure to focus. Many policy packages have been issued, but they did not resolve crucial problems faced by the business world. Therefore, the government must immediately evaluate their effectiveness.

Looking at the structure and posture of Indonesia's economy, resolving short-term problems should be a simple task. The main sources contributing to economic growth are household consumption (54 percent) and investment (34 percent). This is to say that, in order to immediately accelerate growth, the government should focus on driving these two sectors. Furthermore, with 80 percent of production orientated toward the domestic market, we can even narrow it down further so that the recovery of household consumption becomes the short-term growth engine.

The concrete step to recover household consumption is in fact simple, namely the management of expenses and incomes. First, household expenses would be held constant as long as the prices of energy and basic needs are stable - especially those of staple foods, as the low- to middle-income group spends 60 to 70 percent of its budget on food. This is to say that, with stable food prices, there would be adequate funds available for non-food needs. This is what in macro terms is called the increase of people's purchasing power that affects the growth of household consumption.

Second, on the side of income, more jobs are created that can serve as a source of income that allows people to consume. Therefore, the focus of the government's economic packages and incentives must be to push the realization of investment, especially in competitive and labor-intensive sectors. The most important thing is to increase investment realization, which can create jobs and add value.

Therefore, if the government's policies have been focused on these two things, household consumption will recover and grow above 5 percent as historically household consumption growth has always been between 5.4 and 5.5 percent. With household consumption growth of above 5 percent, it can be assured that economic growth will be above 5 percent as well.

by Enny Sri Hartati

source Kompas, Monday, June 13, 2016