View Point: Now we reap
what we sowed
Vincent Lingga, The Jakarta Post, Jakarta | Opinion | Sun, November 10 2013, 12:27 PM
The global economic slump certainly played its part in Indonesia’s growth falling to 5.6 percent in the third quarter, the lowest in the past four years.
However, we should blame ourselves for most of the strong headwinds currently hitting our economy. We are in fact reaping what we sowed during the rosy period of robust growth of more than 6 percent annually over the last three years.
Instead of riding on the strong momentum created by the gushing of cheap capital inflows from the US quantitative easing program and booming commodity markets between 2010 and the first half of this year, our policymakers and many politicians were lulled into hubris.
This complacency bred a series of distortive policies in mining and banking, protectionist measures in the trading sector and reawakened xenophobic sentiments amid the increasingly pervasive corruption in such key sectors as the law enforcement agencies and the strategic oil and gas industry.
These distortive policies, combined with the acute infrastructure deficit as well as the inefficient and corrupt bureaucracy already inherent within our economy, caused our economic engine to overheat easily even at an annual speed of just 6 percent, as we have experienced over the past three years, whereas, our potential growth is between 7 and 8 percent.
This is really quite unfortunate because based on our national incremental capital output ratio (ICOR); we need at least 7 percent growth to absorb the estimated 2.5 million new job seekers entering the labor market every year.
The ballooning current-account deficit, which set off a sudden reverse of capital flows between June and September, was caused largely by the widening trade deficit, which in turn was brought about by declining exports due to the global economic slowdown and rising imports.
Our imports increased sharply over the past three years to fulfill the rapidly expanding domestic market demand for consumer goods, basic materials and capital goods for new investment ventures.
The import of consumer products and industrial inputs should not have increased so sharply had our manufacturing industries built up adequate capacity and had our factories not depended so heavily on imported basic materials.
But again the slow development of the manufacturing capacity should be blamed on high logistics costs, which are in turn caused by the big infrastructure deficit, making our supply-chain management grossly inefficient.
Therefore, we can see how the acute lack of sense of urgency on the part of the government to develop infrastructure and reduce bureaucratic and regulatory barriers has created a vicious circle and made our economic engine prone to overheating.
When the US Federal Reserve hinted in May that it would begin to cut (tapering) its massive quantitative easing program, which pumps US$85 billion a month mainly into the global market, Indonesia therefore became the most vulnerable to capital outflows, compared to its Southeast Asian neighbors.
It was the overheating that forced Bank Indonesia (BI), the central bank, to put the brakes on growth, tightening its money policy by raising its benchmark interest rate.
We may console ourselves by considering the slower growth as a timely reality check to cool down the economic engine, thereby reducing imports and curbing trade and current-account deficit.
The government may be right in reiterating the importance of slowing down the pace of growth and focusing on economic stability, seeing an expansion of less than 6 percent as a new path of sustainable growth.
After all, an optimistic growth-rate estimate of 5.8 for this year, compared to the International Monetary Fund projection of 5.3 percent and World Bank’s 5.6 percent, would still be respectable and could be among the highest in the region, except for China and some other much smaller economies in the region.
The fact is that our economic growth could have been higher had we have been determined to do our homework, accelerating, instead of reversing, the pace of reforms to improve the overall efficiency and competitiveness of the economy.
The gross inefficiency of our economy, combined with the international perception of rampant corruption within our system, made Indonesia the hardest hit during the recent reverse of capital flows, making the rupiah one of worst performing currencies in Asia and the Jakarta stock price index suffer a sharp fall.
We should not overdo our concern over the slowdown, especially if we look into the long-term potentials of the economy.
But domestic consumption and capital expenditure, which have underpinned growth, are still expected to further slow in the coming months as households and companies feel the effects of higher borrowing costs.
The government needs to accelerate the pace of its bureaucratic and regulatory reforms to remove the “fats” that makes the economy grossly inefficient and susceptible to overheating.
But successful reforms require strong leadership and a sense of urgency when things are not as quiet and smooth as they appear. The Fed’s tapering policy still lingers on, threatening another wave of capital outflows.
We already experienced the extreme volatility in our financial and equity markets amid the mere hint of a reduction in Fed bond-buying last May.
The best way to brace ourselves for economic turbulence is by speeding up the pace of our bureaucratic and economic reforms.
Considering the elections next year, we are afraid that reforms will likely be the last thing on the minds of most politicians as the country’s economic management has been set on automatic pilot.
The writer is senior editor at The Jakarta Post.
However, we should blame ourselves for most of the strong headwinds currently hitting our economy. We are in fact reaping what we sowed during the rosy period of robust growth of more than 6 percent annually over the last three years.
Instead of riding on the strong momentum created by the gushing of cheap capital inflows from the US quantitative easing program and booming commodity markets between 2010 and the first half of this year, our policymakers and many politicians were lulled into hubris.
This complacency bred a series of distortive policies in mining and banking, protectionist measures in the trading sector and reawakened xenophobic sentiments amid the increasingly pervasive corruption in such key sectors as the law enforcement agencies and the strategic oil and gas industry.
These distortive policies, combined with the acute infrastructure deficit as well as the inefficient and corrupt bureaucracy already inherent within our economy, caused our economic engine to overheat easily even at an annual speed of just 6 percent, as we have experienced over the past three years, whereas, our potential growth is between 7 and 8 percent.
This is really quite unfortunate because based on our national incremental capital output ratio (ICOR); we need at least 7 percent growth to absorb the estimated 2.5 million new job seekers entering the labor market every year.
The ballooning current-account deficit, which set off a sudden reverse of capital flows between June and September, was caused largely by the widening trade deficit, which in turn was brought about by declining exports due to the global economic slowdown and rising imports.
Our imports increased sharply over the past three years to fulfill the rapidly expanding domestic market demand for consumer goods, basic materials and capital goods for new investment ventures.
The import of consumer products and industrial inputs should not have increased so sharply had our manufacturing industries built up adequate capacity and had our factories not depended so heavily on imported basic materials.
But again the slow development of the manufacturing capacity should be blamed on high logistics costs, which are in turn caused by the big infrastructure deficit, making our supply-chain management grossly inefficient.
Therefore, we can see how the acute lack of sense of urgency on the part of the government to develop infrastructure and reduce bureaucratic and regulatory barriers has created a vicious circle and made our economic engine prone to overheating.
When the US Federal Reserve hinted in May that it would begin to cut (tapering) its massive quantitative easing program, which pumps US$85 billion a month mainly into the global market, Indonesia therefore became the most vulnerable to capital outflows, compared to its Southeast Asian neighbors.
It was the overheating that forced Bank Indonesia (BI), the central bank, to put the brakes on growth, tightening its money policy by raising its benchmark interest rate.
We may console ourselves by considering the slower growth as a timely reality check to cool down the economic engine, thereby reducing imports and curbing trade and current-account deficit.
The government may be right in reiterating the importance of slowing down the pace of growth and focusing on economic stability, seeing an expansion of less than 6 percent as a new path of sustainable growth.
After all, an optimistic growth-rate estimate of 5.8 for this year, compared to the International Monetary Fund projection of 5.3 percent and World Bank’s 5.6 percent, would still be respectable and could be among the highest in the region, except for China and some other much smaller economies in the region.
The fact is that our economic growth could have been higher had we have been determined to do our homework, accelerating, instead of reversing, the pace of reforms to improve the overall efficiency and competitiveness of the economy.
The gross inefficiency of our economy, combined with the international perception of rampant corruption within our system, made Indonesia the hardest hit during the recent reverse of capital flows, making the rupiah one of worst performing currencies in Asia and the Jakarta stock price index suffer a sharp fall.
We should not overdo our concern over the slowdown, especially if we look into the long-term potentials of the economy.
But domestic consumption and capital expenditure, which have underpinned growth, are still expected to further slow in the coming months as households and companies feel the effects of higher borrowing costs.
The government needs to accelerate the pace of its bureaucratic and regulatory reforms to remove the “fats” that makes the economy grossly inefficient and susceptible to overheating.
But successful reforms require strong leadership and a sense of urgency when things are not as quiet and smooth as they appear. The Fed’s tapering policy still lingers on, threatening another wave of capital outflows.
We already experienced the extreme volatility in our financial and equity markets amid the mere hint of a reduction in Fed bond-buying last May.
The best way to brace ourselves for economic turbulence is by speeding up the pace of our bureaucratic and economic reforms.
Considering the elections next year, we are afraid that reforms will likely be the last thing on the minds of most politicians as the country’s economic management has been set on automatic pilot.
The writer is senior editor at The Jakarta Post.