
The threat of short-termism
Reversing the Dutch disease is never an easy job for any government in the world. Not only does it involve broad structural reform but it is also difficult to be a patient and long-term minded government.
To take the path of reform is always arduous especially for a commodity addict like Indonesia. The negative income effect from lower commodity prices usually lingers for some time until the production capacity built during a previous commodity boom is downsized to meet weaker demand. The downward adjustment is usually longer and more harmful if the government represses consumers further to support massive infrastructure spending.
What President Joko “Jokowi” Widodo’s administration has been doing since 2014 shows that structural reforms can only be executed gradually. After four years, Indonesia’s infrastructure is still catching up after the nation’s lost decades. During the last global commodity boom from 2000 to 2014, infrastructure development was completely forgotten as most resources were devoted to the extractive industry. Improved infrastructure is critical to restoring the large contribution of export-oriented manufacturing to the economy.
The economy is now in transition, shifting progressively from commodity-led exports to export-led capital investment. The improvement in the Ease of Doing Business Index from 120 in 2014 to 72 in 2017 undeniably proves this. Yet to fund infrastructure spending, resources have been taken from somewhere else.
Despite the recent surge of commodity prices, exports still cannot provide all the resources needed to fuel capital investment growth. Moreover, precautions for the Dutch disease have been imposed by the government to safeguard the economy if the commodity boom cycle ever comes back. More regulations have been issued to prevent excessive exports of low value-added commodities, discouraging businesses from favoring the extractive industry over manufacturing.
Both domestic and foreign debt has been an alternative to finance government projects, but the dangerous trade-off with economic stability has made the government cautious on debt accumulation.
As a last resort, consumer purchasing power has quietly been squeezed to support the ongoing infrastructure projects. It is another blow for consumers after being hit by the commodity export slump since mid-2011. Not so long ago, we heard about the resurgence of Indonesia’s middle classes, but they are now being sacrificed.
Since late 2014, private consumption growth, which comprises 55 percent of the country’s GDP, has been persistently sluggish at 5 percent, impeded by the weakening of other elements that make up national GDP, starting in mid-2011 because of the low coal price. Management science professor at the University of Indonesia, Rhenald Kasali, said consumers are actually spending just fine. It is just the statistics that have not yet fully captured the shift to the digital economy. On the other side, the World Bank argued that the middle income trap is the main culprit of Indonesia’s slowing growth.
But more evidence has shown that consumption is being repressed by design through repressive economic policies. Consumer repression has taken place in many forms from tax intensification and extension to the reduction of non-productive subsidies. In short, consumers have been sacrificed to accelerate economic reform. Weaker purchasing power has apparently also been helpful in curbing import growth and domestic inflation, slashing the seemingly endless current account deficit.
Infrastructure progress has been fruitful since 2014 but it’s far from enough to lure reliable foreign investors, who are crucial to providing the necessary capital to produce more competitive goods and services. GDP wise, as exports are struggling to recover and private consumption is being constantly repressed, faster investment growth is unable to pick up sluggish output growth. Despite all the bitterness, the government must stay patient to guard the transition by maintaining economic policy.
Yet, the upcoming election could be a heavy disruption, forcing the government to be more impatient. The government feels it is necessary to be short-termist by giving more attention to repressed consumers, the voters in the upcoming 2019 election, through indulging in subsidies.
One example, given the higher Brent oil price at US$75 per barrel (Rp 8,800 per liter), the government is stubbornly maintaining the retail price of Premium gasoline at Rp 6,550 per liter, suggesting a higher subsidy. The government has also decided to give an additional Rp 1,500 per liter subsidy for diesel. The fact that Pertamina is paying most of the subsidy doesn’t change the real impact, that less resources are now available to support infrastructure projects, a mild sign of policy inconsistency.
Indeed, the completion of leading infrastructure projects could entertain voters but it is still not easy to win the hearts of repressed consumers, especially amid a provocative campaign from the opposition who have consistently played the antagonist. Weak purchasing power issues should be brought up persistently during the campaign by the challengers.
The success story of the oppositions conquering of Jakarta in the 2017 gubernatorial election must have added pressure to the incumbent to spoil voters.
Although the incumbent tops the latest electability polls, it is not impossible that the opposition will win the elections. And if a new short-termist administration somehow takes power, the temptation to reverse the halfway-reforms back to a commodity-based economy is high given rising commodity prices. Such a policy that immediately boosts export growth and household purchasing power should satisfy voters quicker than the current reform path.
But if the ongoing reforms are reversed, Indonesia will end up taking the same path as before: riding the wave of commodity booms and being infected by the Dutch Disease until the commodity bust crushes the economy. Even in the scenario that the incumbent wins the elections, the campaigns might delay the long-term goal as the government is tempted to lure consumers to ensure power.
The emergence of short-termists is threatening Indonesia’s dream to have a more sustainable growth engine with export-oriented manufacturing as the backbone. We only could hope that whoever runs the government next year must realize economic sustainability is far more important than just the speed of growth.
http://www.thejakartapost.com/news/2018/07/09/ri-economy-the-threat-short-termism.html