Muhamad Chatib Basri: Avoid the Curse of the Second Period
“We all know what to do, we just don’t know how to be re-elected after we do that.” So said European Commission President Jean-Claude Juncker.
Those who explore policy issues know how true those words are. Juncker might be too cynical, but the description is straightforward. He did not talk about Indonesia, but his remarks seemed relevant to the challenges for the new Indonesia Advanced Cabinet. Why?
I once wrote in this newspaper, that amid the threat of global recession, the fiscal and monetary policy space is relatively limited. Indeed, Bank Indonesia still has little room to reduce interest rates. But this policy will not necessarily be effective in increasing growth.
Why? If purchasing power weakens, the business world will not expand. Why add production, if there is no demand. For that, we need a counter-cycle policy in fiscal terms.
If purchasing power weakens, the business world will not expand. Why add production, if there is no demand. For that, we need a counter-cycle policy in fiscal terms.
Unfortunately the decline in commodity and energy prices has hit tax revenues. The result: a budget deficit will increase. So the space for fiscal expansion also decreases.
State budget deficit and primary balance. Source: Ministry of Finance
The implication is that economic growth can only be encouraged if we carry out structural reforms. How? In the short term the government can focus on first generation reforms such as deregulation, bureaucratization, revising the Labor Law, attracting Foreign Investment (PMA), improving the quality of spending through more budget allocations for spending outside of salaries and subsidies.
Unfortunately, this is not easy. Implementing structural reform is an art, a combination of technocratic abilities, creativity and the ability to manage political support.
Therefore many economic reforms have failed. If it fails, usually economists will blame political or institutional constraints. In my opinion, this is the wrong way of thinking. Structural reform is not in a vacuum. He must consider the electability impact of policy makers. If the political costs of reform are too large, politicians will not support it. In slowing economic conditions, for example, it is not easy to carry out economic reforms.
If the political costs of reform are too large, politicians will not support it. In slowing economic conditions, for example, it is not easy to carry out economic reforms.
In Chile, large-scale demonstrations were triggered because of the government’s decision to increase metro tariffs “only” by 3 percent; in France the demonstration was triggered by a fuel tax increase. We also see a wave of protests sweeping through Hong Kong. The root of the problem is worsening economic conditions and economic inequality. This is the dilemma. On the one hand we must carry out structural reforms, on the other hand it is not popular.
Images taken from the air show riot police spraying water at demonstrators in Santiago, Chile, Wednesday (10/23/2010), on the sixth day of violence on the streets erupted due to rising prices for subway tickets. A four-year-old boy was killed in the latest protest over economic inequality in Chile, increasing the death toll by 18 people.
Need public support
So what to do? Maybe there are some things that need attention. First, President Jokowi has publicly stated: he is willing to carry out drastic and unpopular reforms, because he will not be elected again in 2024.
I think we should give appreciation for this attitude. There is great hope: a fundamental change will occur. But as expected, in a multiparty presidential system, the cabinet formed was a rainbow coalition.
A compromise, in which political interests must be accommodated. The question is, will politicians fully support the reforms promised by President Jokowi? It is true that 2024 Jokowi can no longer be president, but we know that political parties will compete with their respective candidates in 2024.
President Joko Widodo and Vice President Ma’ruf Amin take a picture with the ministers on the front page of the Merdeka Palace, Jakarta, Wednesday (10/23/2019).
This means that political parties still want to be popular and elected. Therefore, they will not necessarily support unpopular policies. Imagine, if the government wanted to revise the Manpower Act or had to raise fuel prices close to the 2024 election, I’m not sure the party would support this idea. The implication: the space for President Jokowi to carry out unpopular economic reforms is very short.
Imagine, if the government wanted to revise the Manpower Act or had to raise fuel prices close to the 2024 election, I’m not sure the party would support this idea.
Institutional development
Third, history teaches, first generation reforms such as simplification of permits, investment liberalization and so on, must be followed by institutional development such as bureaucratic reform, improving public services, maintaining the quality of human resources, improving governance and fighting corruption.
Look at the case of Indonesia: the banking deregulation of the 1988s that was not followed by institutional development led to a banking crisis that eventually led us to the 1998 Asian financial crisis. Corruption, collusion and nepotism in the financial sector, especially where credit was given without proper risk analysis, made banking become a fragile house of cards.
Institutional development
Third, history teaches, first generation reforms such as simplification of permits, investment liberalization and so on, must be followed by institutional development such as bureaucratic reform, improving public services, maintaining the quality of human resources, improving governance and fighting corruption.
Look at the case of Indonesia: the banking deregulation of the 1988s that was not followed by institutional development led to a banking crisis that eventually led us to the 1998 Asian financial crisis. Corruption, collusion and nepotism in the financial sector, especially where credit was given without proper risk analysis, made banking become a fragile house of cards.