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Though
global instability and shadows from the recession still lurk everywhere,
specific challenges might differ from country to country. For Indonesia, noticeable
threats come from fiscal deficit and current account deficit due to greater
imports than exports.
These challenges are exacerbated by an increase in domestic fuel prices and structural weaknesses where the economy depends on short-term foreign capital to finance current account deficit.
Indeed, reducing domestic fuel price subsidies has important implications, not only to keep the 2013 fiscal deficit manageable, but also to redirect spending toward more productive spending, such as on infrastructure.
The increase in fuel prices, however, has clearly dragged down the aggregate output. In such a situation, the quality of the policy mix between the mutually reinforcing fiscal and monetary sides is essential to withstand a sharp fall in the aggregate output.
On the fiscal side, a temporary direct financial assistance (BLSM) to poor households may prevent such a sharp fall, though it will cause an increase in the aggregate consumption. Unfortunately, Bank Indonesia (BI) has no other choice but to withstand inflation, not to mention the threat from short-term foreign capital outflows that depreciate the rupiah’s exchange rate against the US dollar.
Inflation and the rupiah’s depreciation have thus forced the BI rate to increase by 0.25 percent to 6 percent. This level might be higher in the near future, since Bank of Japan also has announced it will implement a quantitative easing of US$1.4 trillion by 2014 that will depreciate the Japanese yen, rendering the US dollar stronger.
Eventually, given Indonesia’s interconnectedness with other countries, our focus on setting up policies that overcome domestic issues will become easily distracted by the short-run dynamics of the external environment. A long-run policy horizon, however, is crucial to enable Indonesia to grow at a much higher rate in the long run.
Since an increase in the domestic fuel prices has provided opportunities to redirect spending to boost long-run growth, it is now the right moment to reinforce long-run objectives while managing short-run fluctuations.
To grow much more over a long time period, a country needs capital stock accumulation and technological progress.
China has consistently achieved an astonishingly high growth rate, averaging nearly 10 percent per year since the 1980s. It is the role of capital stock investment to sustain growth over such a long time period. For comparison, the ratio of capital stock investment to output for China has been around 48 percent during the last decade, much higher than Indonesia’s capital stock investment, which has recently been around 33 percent.
A high growth rate in China relative to other countries can be further explained by the high rate of China’s technological progress, which is around 8.2 percent.
In Indonesia, the government, through the Medium-term Development Plan and the 2011-2015 Master Plan for Acceleration and Expansion of Economic Development, has acknowledged the need for infrastructure investment that determines capital stock investment and, thus, capital stock accumulation.
Capital stock accumulation, however, only enables the country to grow at a sustainable rate in the long run. Meanwhile, the role of technological progress, which enables the country to grow at a much higher rate over a long time period, is somehow missing from our attention.
China has two main channels to develop its technological progress. First, China has been able to transfer low productivity labor from the countryside to the higher productivity industrial and service sectors in the cities.
Moreover, China has encouraged foreign direct investment (FDI). FDI, however, should be in the form of joint ventures, especially in certain restricted sectors (e.g. licensed onshore manufacturing).
FDI has boosted not only technological progress, but also human capital development in China. Foreign firms with better technologies have been encouraged to ensure that technology can be transferred to Chinese firms through joint-venture mechanisms. Joint ventures have also embraced China’s education sector, as the Chinese government opened up its education market to the world upon joining the World Trade Organization (WTO) in 2001.
However, compulsory education (elementary and junior secondary) and specific education programs (e.g. military, police, religious and political education) remain restricted from foreign investors. Hence, technological spillovers in China are not only transferred by foreign firms to local firms, but are also widely spread through education.
As long-run growth trajectory is determined by capital stock accumulation and technological progress, enhancing capital stock accumulation through infrastructure investment indeed remains a priority at the first stage to ensure that Indonesia can grow at a sustainable rate in the long run.
In order to grow at a much higher rate over a long time period, however, encouraging FDI through joint-venture mechanisms is necessary. This will not only boost the technological progress that enables a much higher growth rate, but it will also shift our dependence on short-term foreign capital inflows to finance current account deficit. ●
These challenges are exacerbated by an increase in domestic fuel prices and structural weaknesses where the economy depends on short-term foreign capital to finance current account deficit.
Indeed, reducing domestic fuel price subsidies has important implications, not only to keep the 2013 fiscal deficit manageable, but also to redirect spending toward more productive spending, such as on infrastructure.
The increase in fuel prices, however, has clearly dragged down the aggregate output. In such a situation, the quality of the policy mix between the mutually reinforcing fiscal and monetary sides is essential to withstand a sharp fall in the aggregate output.
On the fiscal side, a temporary direct financial assistance (BLSM) to poor households may prevent such a sharp fall, though it will cause an increase in the aggregate consumption. Unfortunately, Bank Indonesia (BI) has no other choice but to withstand inflation, not to mention the threat from short-term foreign capital outflows that depreciate the rupiah’s exchange rate against the US dollar.
Inflation and the rupiah’s depreciation have thus forced the BI rate to increase by 0.25 percent to 6 percent. This level might be higher in the near future, since Bank of Japan also has announced it will implement a quantitative easing of US$1.4 trillion by 2014 that will depreciate the Japanese yen, rendering the US dollar stronger.
Eventually, given Indonesia’s interconnectedness with other countries, our focus on setting up policies that overcome domestic issues will become easily distracted by the short-run dynamics of the external environment. A long-run policy horizon, however, is crucial to enable Indonesia to grow at a much higher rate in the long run.
Since an increase in the domestic fuel prices has provided opportunities to redirect spending to boost long-run growth, it is now the right moment to reinforce long-run objectives while managing short-run fluctuations.
To grow much more over a long time period, a country needs capital stock accumulation and technological progress.
China has consistently achieved an astonishingly high growth rate, averaging nearly 10 percent per year since the 1980s. It is the role of capital stock investment to sustain growth over such a long time period. For comparison, the ratio of capital stock investment to output for China has been around 48 percent during the last decade, much higher than Indonesia’s capital stock investment, which has recently been around 33 percent.
A high growth rate in China relative to other countries can be further explained by the high rate of China’s technological progress, which is around 8.2 percent.
In Indonesia, the government, through the Medium-term Development Plan and the 2011-2015 Master Plan for Acceleration and Expansion of Economic Development, has acknowledged the need for infrastructure investment that determines capital stock investment and, thus, capital stock accumulation.
Capital stock accumulation, however, only enables the country to grow at a sustainable rate in the long run. Meanwhile, the role of technological progress, which enables the country to grow at a much higher rate over a long time period, is somehow missing from our attention.
China has two main channels to develop its technological progress. First, China has been able to transfer low productivity labor from the countryside to the higher productivity industrial and service sectors in the cities.
Moreover, China has encouraged foreign direct investment (FDI). FDI, however, should be in the form of joint ventures, especially in certain restricted sectors (e.g. licensed onshore manufacturing).
FDI has boosted not only technological progress, but also human capital development in China. Foreign firms with better technologies have been encouraged to ensure that technology can be transferred to Chinese firms through joint-venture mechanisms. Joint ventures have also embraced China’s education sector, as the Chinese government opened up its education market to the world upon joining the World Trade Organization (WTO) in 2001.
However, compulsory education (elementary and junior secondary) and specific education programs (e.g. military, police, religious and political education) remain restricted from foreign investors. Hence, technological spillovers in China are not only transferred by foreign firms to local firms, but are also widely spread through education.
As long-run growth trajectory is determined by capital stock accumulation and technological progress, enhancing capital stock accumulation through infrastructure investment indeed remains a priority at the first stage to ensure that Indonesia can grow at a sustainable rate in the long run.
In order to grow at a much higher rate over a long time period, however, encouraging FDI through joint-venture mechanisms is necessary. This will not only boost the technological progress that enables a much higher growth rate, but it will also shift our dependence on short-term foreign capital inflows to finance current account deficit. ●
There are more agricultural policies decided in offices rather than on farms. A good agricultural supply chain requires more field understanding and knowledge by government officials. Reports should not be written to satisfy leaders but to reflect real conditions on farms. Dualism in input prices should be removed and replaced by a more pro-poor policy. These will result in a more efficient agricultural supply chain.
In the short- and mid-terms, the government needs to allocate foreign direct investment in laying more rail tracks instead of toll roads to support the cheaper movement of people and goods. Rail is faster and can transport larger volumes per acreage of land therefore reducing energy and land usage. The current policy that tends to favor the automotive industry deteriorates air quality and burns too much subsidized energy.
Public transportation should focus on two aspects: mass rapid movement as well as inputs and goods. The development of better public transportation in turn will reduce subsidies in energy or at least use it more efficiently.
Birth control is an important part of the strategic measures to increase food security. If the Indonesian population growth rate is stable, the country will have 273 million people within 15 years and 358 million people in 2050, in which 70 percent will be on the dense island of Java. This number is quite daunting given the country’s capacity to provide food, energy and water supplies.
A middle way should be sought to produce effective birth control in Indonesia through continuous campaigns and education while imposing consequences, such as no subsidies or setting monetary conditions for the third and subsequent children.
Whoever wins next year’s election should not turn a blind eye to these challenges. The new government should build a strong Indonesia, which is reflected in its endeavors to achieve food security. ●
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