Second round of presidential debates short of great ideas

Vincent Lingga

The Jakarta Post

Jakarta   /   Tue, February 19, 2019   /   08:47 am

Warm ending: Presidential candidate Joko “Jokowi” Widodo (left) embraces his contender, Prabowo Subianto, after the 2019 presidential candidate debate at Hotel Sultan in Jakarta on Sunday. The debate was focused on energy and food, natural resources and environment as well as infrastructure. (JP/Donny Fernando)

The second round of presidential debates on Sunday evening was livelier than the first one last month, with the exchanges of views flowing smoothly. But the debates miserably failed to generate a battle for great ideas because of the inadequate time allotted for discussing five important topics and the poorly designed structure of the debates.

Yet more unfortunate, many of the questions prepared by the eight panelists, especially on energy and food, were not relevant to Indonesia’s most pressing problems within the next five to 10 years.

The panelists miserably failed to force the candidates to state their visions and missions, views, stances and commitments in regard to the five topics of discussion: food, energy, natural resources, the environment and infrastructure.

But then again, given that the candidates were each only given a three-minute introduction, how could they adequately explain their visions and missions in such important sectors?

Certainly, Joko “Jokowi” Widodo, who has the benefits of incumbency, immediately moved to show off his achievements over the past four years. As the challenger, Prabowo Subianto could only state his dream: to achieve self-sufficiency in energy and food and lower their prices and improve the terms of trade for farmers.

So important are energy and food to a nation that they could make or break the political and economic stability of a country like Indonesia, which has a population of 270 million spread out in the world’s largest archipelago.

Yet the first question raised by the panelists on these two issues was: “How can the fourth industrial revolution [Industry 4.0] impact energy and food development?”

Even though Industry 4.0 has reached Indonesia, the issue is not the most urgent problem for the country’s energy policy now and for the next 10 years.

They should have asked the candidates about their commitment to cutting the huge amount of wasteful spending on fuel subsidies and developing renewable energy: geothermal, solar, wind, biomass, biofuel and hydropower.

Citing only the increased use of palm oil-based biodiesel as an example of successful renewable development is simplifying the whole spectrum of renewable energy development.

The general public eagerly wanted to know the stance of each candidate on the fuel subsidy, which had held hostage all previous presidents as they had always been torn between their wish to embrace market pricing for fuels and their desire to remain in power.

Jokowi made a nationally and internationally commended bold move to slash fuel subsidies at the outset of his administration in late 2014, only because international prices had collapsed to below US$40 per barrel.

He pledged to float domestic fuel prices on international oil prices as Indonesia is already dependent on imports for almost 60 percent of its needs. The managed fuel price-floating system Jokowi introduced in 2015 was still tied to fixed price floors and ceilings, whereby the government could still intervene in retail fuel prices if fuels overshot the price ceiling.

As the range of the price floors and ceilings set for the managed floating was designed to be close to the fuel economic costs, the policy also was effective at least to prevent subsidies from ballooning out of control.

Such a system would also allow a gradual incremental rise in fuel prices and would free the government from being held hostage by a wildly volatile international oil market.

But Jokowi is no different from his predecessors. Last year, he reneged on this commitment when oil prices rose to between $70 and $80, a policy he defended as most imperative to prevent inflationary pressures and to protect the purchasing power of the people.

But the blunt fact is that the drawbacks of fuel subsidies and government-regulated fuel prices have been well-documented: They are known to benefit the rich disproportionately, as they consume much more energy and they lead to wasteful consumption and environmental degradation by disincentivizing energy efficiency, conservation and the development of renewable energy.

Subsidies also distort the price signals that normally balance the supply and demand in a market, foster smuggling of cheaper fuel to higher-paying markets and tie up government funds that could be better used in areas such as infrastructure, education and health care.

Energy subsidies increased from Rp 93 trillion ($6.8 billion) in 2016 to Rp 98 trillion in 2017 and totaled Rp 165 trillion in 2018 as the oil price rose to as high as $70 from $48 as set in the budget. For this year, they are targeted at Rp 158 trillion with an average oil price of $70.

Likewise, one of the basic questions that should have been raised on the food issue is: How do the candidates define the meaning of food security or food self-sufficiency, set against the gradual shifts in the patterns of food consumption? And what is their strategy for increasing the production of such staple food as rice, corn, potato, soybean and horticulture, whose imports tend to increase annually during the Ramadan fasting month and Idul Fitri festivities?

Past experiences have shown that food self-sufficiency does not fully address the core elements of food security because of the vulnerability of crops to weather anomalies and pest attacks.

Moreover, income growth, demographic and other lifestyle changes have been causing structural shifts in the patterns of domestic food consumption and expenditure, especially in urban areas that now account for around 50 percent of the population.

Read full post »

Reinvigorate manufacturing or remain trapped in 5 percent growth

Vincent Lingga
Senior editor at The Jakarta Post

Jakarta   /   Wed, February 13, 2019   /   09:06 am

Illustration of economic growth (Shutterstock/Number1411)

Even under the most optimistic projections, Indonesia’s economic growth in the next five years is unlikely to exceed 6 percent. In fact, potential growth will most probably be at 5.68 percent, according to a joint study by the Asian Development Bank and the National Development Planning Ministry.

Hence, we can simply ignore it as an empty promise if any of the presidential candidates claim they can boost growth to 7 percent or more from an average of 5 percent over the past four years.

Without a broader manufacturing base to produce high-value exports, balance of payments disparities will continue to hinder high economic growth.

The study, conducted to design comprehensive policies for the 2020-2024 period to reinvigorate manufacturing, cited continued dependence on commodities, premature deindustrialization, utterly low labor productivity and a shrinking demographic dividend as the main barriers to higher growth.

The conclusion and policy recommendations of the study for reviving the manufacturing sector are stipulated in a 310-page book entitled Policies to Support the Development of Indonesia’s Manufacturing Sector During 2020-2024, which was released by National Development Planning Minister Bambang Brodjonegoro last week.

The report essentially warned that Indonesia would never rise from a lower-middle to high income country if it failed to increase growth to at least 7 percent.

High growth can be achieved only with a stronger manufacturing base that utilizes more complex technology, which produces widely diversified high-value goods with high income elasticities of demand.

Indonesia’s manufacturing sector indeed has declined steadily after the 1998 economic crisis. The sector’s growth has always been lower than national growth and its contribution to gross domestic product consequently fell from 27 percent in 1997 to about 20 percent in 2018, according to Statistics Indonesia.

High-tech manufactured exports such as office, computer and communications equipment have declined sharply while commodities such as coal, rubber and low-tech and medium-tech products such as palm oil, tires and automotive components and cars with very low income elasticities of demand have now become the bulk of exports. No wonder, more than 65 percent of the country’s exports are commodities or commodity-related.

One of the main factors behind the decline in manufacturing was the commodity boom for almost 10 years between 2003 and 2012 that lulled the government into complacency.

Most of the other barriers to manufacturing cited by the report have by and large been diagnosed by earlier reports on Indonesia’s manufacturing sector by the World Bank and Organization for Economic Cooperation and Development research development center. But the analysis and evidence-based policy recommendations provided by the book seem to be the most comprehensive so far.

We have been too familiar with such problems as inadequate and poor infrastructure, regulatory and bureaucratic barriers, excessively high logistics costs and acutely low labor productivity. Most of these problems have been and are being addressed by the government through accelerated infrastructure development and 16 reform packages on expediting business licensing and deregulation to cut red tape.

But the progress has been way below expectations because of the acute lack of finance, difficulties in getting reforms implemented in the era of regional autonomy and poor inter-ministerial coordination and low institutional capacity.

Other policy recommendations in the report that have been implemented by the government, but unfortunately at a very slow pace, are the development of industrial estates and special economic zones outside Java that focus on particular industries with a promising future.

The government is recommended to follow the business models of such successful manufacturing countries as China, Taiwan and South Korea, whereby the governments heavily intervened in selecting the kinds of industries to be developed as the champions.

During the iron-fist Soeharto administration, Indonesia had partly implemented such a strategy but it failed miserably because the selection process was neither transparent nor based on clearly defined performance criteria and favored particular vested interest groups.

The process of selecting industries to be developed as the champions should involve the private sector and focus on the country’s strengths and comparative advantages. The strongest candidates could be the few promising product segments such as fabricated metals, electrical equipment, machinery and equipment, chemicals and synthetic fibers.

One of the boldest recommendations is to attract large foreign manufacturers to make Indonesia their production base but with strong, clear cut rules requiring them to transfer technology and expertise in product design, engineering and development within a fixed period of time.

Indonesia’s rules on local content for foreign companies and joint ventures have never been as strong and consistent as China. In fact it has been the strong regulations on the transfer of technology that turned China into the world’s manufacturing powerhouse.

True, China has been able to enforce such strong transfer of technology requirements because of its strong bargaining power given its huge domestic market. With a population of over 260 million and rich in natural resources, Indonesia can follow suit though at a smaller scale.

But to bear fruit, the industrial development strategy should be supported with a consistent and long-term policy, longer than the five-year political cycle.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.

Read full post »