Shortcut to 7 Percent Growth

An economic policy should ideally focus on maintaining the continuity of development, not on pursuing short-term economic growth targets.

The Joko "Jokowi" Widodo government has started its term with an economic growth target of 7 percent by 2017, as stated in the National Mid-Term Development Plan (RPJMN). Construction of large-scale infrastructure is being used as the backbone to reach such a target.

One-and-a-half years after Jokowi's "Kabinet Kerja" (Working Cabinet) was formed, rising momentum for infrastructure development can increasingly be seen. However, the Central Statistics Agency (BPS) recorded that the economy grew only 4.9 percent in the first quarter of this year, along with the relatively weak purchasing power and growth of private investment. This figure was even lower than the assumed 5.3 percent as mentioned in the 2016 State Budget.

Reasonable growth

The mishitting economic performance has created a feeling of disappointment for various levels of the government. The policy makers now must think harder and find "breakthrough" ideas to boost the economy.

Such a reaction is quite reasonable. Every year, the number of Indonesian people entering the labor force is 2 to 3 million. Weak economic growth affects job creation in the formal sector (licensed businesses having permanent workers), which potentially can raise the unemployment rate.

Nevertheless, it is also better for us to understand the condition of the world economy, which is currently sluggish, and the risks if domestic policy is forced to pursue short-term targets. Hence, several factors should be kept in mind before forming an expectation of Indonesia's economic performance.

First, Indonesia is currently facing shrinking exports of its raw commodities. From January to April, commodity exports such as coal, oil palm and rubber shrank by 15 to 30 percent compared to the previous year. For the whole of this year, the amount of foreign exchange that could be lost from these commodities could reach US$7 billion, or equivalent to Rp 95 trillion. Such a revenue loss could spread like a virus to other supporting sectors, such as industries providing heavy equipment, transport and banking services.

Second, even though the state budget allocation for energy subsidies had already diverted to infrastructure from 2014, government spending has not yet shown significant increases. This is due to the falling revenues from natural resources and trade taxes. Even last year, government spending (not including the burden of debt interests) did not increase when compared to 2014. Only this year has there been an increase, specifically as of May with about Rp 67 trillion compared to the previous year. However, this too is financed by additional debt, so the government should be cautious in not surpassing the state budget's deficit limit.

Third, many sectors still have excessive production capacities. Do not forget that Indonesia received its peak of foreign investment flows in 2011 to 2013. In that period new factories were built, thereby raising the capacity of various industries, starting from food and beverage, iron, to automotive and machinery.

Subsequently, entering 2014, exports fell, the rupiah weakened and sales growth in various sectors started to decline. The turnover of public companies weakened after previously growing at 10 to 15 percent per annum, has now tumbled to at most 5 percent down to zero growth. As a result, when previously 30-percent capacity could be utilized in 2 to 3 years, it now takes twice as long.

It is better for us to ask again what kind of economic growth is ideal for Indonesia? With the Chinese economy weakening, the heyday era of raw commodity exports for Indonesia appears to have passed. Domestic economic growth can no longer rely on household consumption, but has to be based on exports of manufacturing and services. This is why infrastructure development is so important.

However, do not forget that infrastructure investment started from a relatively low level, which was about Rp 200 trillion in 2015. It is very small compared to household consumption which reaches approximately Rp 6.5 quadrillion or 55 percent of the total national economy. So, even if infrastructure investment increases by 50 percent, the immediate impact is still smaller than if consumption rises only by 5 percent. Therefore, if indeed we now focus on building infrastructure, economic growth in the range of 4.9 percent is actually still very reasonable.

Immediate policies directed at boosting short-term economic growth, such as intervention in a particular industry, have to be really thought out in regard to their impact. The reduction of interest rates and any monetary easing cannot necessarily be relied upon as a panacea. Credit growth will not increase if its need has not really recovered and particular industries are still experiencing contractions. When those who are encouraged to receive credit are the non-productive or speculative sectors, we must be vigilant to the danger of a bubble and bad debts at a later date.

Patience and consistence

Conceptually, major factors which could contribute to sustainable economic growth are knowledge and competitiveness. Therefore, the focus of the policies should be on structural problems such as infrastructure development and human resources, as well as the revamping of regulations that inhibit business competition. Many initiatives for the last one-and-a-half years are already on target, but patience is required as the benefits will only be felt three, five or even 10 years later.

In relation to declining short-term employment growth, here, additional social mitigations are needed aside from "breakthrough" ideas if they are available. If the employment growth of the formal sector is not adequate to accommodate the workforce, growth in the informal sector has to be facilitated and even be assisted to improve its productivity, for example, by encouraging the use of information technology (the informal sector here has a positive connotation, referring to the urban transport sector, retail trade, etc.).

Amid the uncertain condition of the world economy, there seems to be no shortcuts to prosperity. What exists is just a long way that must be passed in order for development to be sustainable and not intermittently be in crisis. We have been on the right track but we just have to be patient and consistent.

by Helmi Amran

source Kompas, Wednesday, June 29, 2016