Kiki Verico: Anticipation in the Middle of Sluggish World Economy
Data for the last 50 years shows that global economic pressures have become more serious since the financial crisis in the world in 2008. There are two reasons why this financial crisis is serious. First, the crisis occurred at the center of gravity of the world economy because it involved developed countries with large economic sizes and incomes. The United States is the source of economic gravity of the American continent. While Western European countries are the source of economic gravity of the European continent, Africa and the Soviet Union’s fragments.
One reaction to the pressures of the global economic crisis is the trade war that occurred between the United States and China since March 2018. This trade war has a broad impact because China is one of the centers of gravity of the Asian economy along with Japan, South Korea and India.
The second reason is the end of the fixed exchange rate regime so that the trade war has the potential to turn into a currency war in order to keep export prices low after soaring trade barriers. This condition is increasingly dangerous for the global economy because the currency is one of the macroeconomic variables that is not stable.
The stability of the Rupiah against the United States currency is influenced by investment inflows and outflows. When the United States economy experienced contraction and US dollar interest rates fell, capital flows from developed countries into developing countries, including Indonesia. This will strengthen the Rupiah exchange rate against the US dollar.
Physical investment from abroad such as the establishment of factories and short-term investments in the form of purchasing shares and debt securities are needed to cover the gap between investment needs and the ability to save. As long as investment goes into Indonesia and the capital account balance is a surplus, the current account deficit will not reduce foreign exchange reserves.
However, economic dependence on capital flows when exports weaken will only make Indonesia’s economy vulnerable to the weakening of the world economy and trade war. The weakening of exports was triggered by falling prices of primary commodities such as oil and gas, coal, palm oil and rubber. On the other hand, Indonesia still relies on imports of raw materials, equipment and machinery used in the production process. As a result of this weakening, the current account deficit was US $ 1.5 billion from May to July 2019, while the national foreign exchange reserves actually rose by around US $ 6 billion.
Then, how can Indonesia reduce the impact of the weakening of the world economy next year?
First, increasing the role of small and medium businesses that are creative and innovative. Joseph Schumpeter, economist of Keynes’s contemporaries, proposed that the economy should be built from inclusiveness so that without having to have large capital everyone can start a business.
Schumpeter explained that the two main assets of business are entrepreneurship, which he initially referred to as ‘leadership’ and ‘creative destruction’ which later became known as creative disruption. Schumpeter wrote three books to support this idea. But his prestige lost to Keynes’s book entitled The General Theory of Employment, Interest and Money. For Keynes, big capital, multinational ventures, and global networks are key to macroeconomics. For decades Keynes’s thought ruled the world. In the event of a crisis, the government must carry out a policy of fiscal expansion (counter cyclical) and financial liquidity assistance (bailout).
Keynes’s thoughts were more popular than Schumpeter because at that time the world was just entering the 2.0 industrial revolution. The production process is carried out by large cross-country factories with the electrical machine automation method. However, after the world entered the 3.0 industrial revolution marked by the birth of the computer and the 4.0 industrial revolution marked by the internet and the digital economy, Schumpeter’s thinking began to prove true. The function of the government to distribute information and prevent unfair business competition can be resolved through market mechanisms in digital platforms.
Times have changed. Small scale businesses can also have a wide network of cooperation and markets as well as multinational scale businesses. Small businesses can be globally competitive, such as several examples of national micro-businesses that have successfully penetrated international markets. The key to success in the highly dynamic world of today’s economy is creativity and innovation, not capital. Building infrastructure, logistics systems and communication information networks is a very important government function for the industrial world including the digital industry and this function cannot be replaced by the private sector.
Second, optimize bilateral economic cooperation. The global economic negotiation strategy will shift from multilateral and regional to bilateral. Bilateral economic negotiations are more risky than multilateral or regional negotiations because in bilateral terms, a country must negotiate directly, head to head, with its partner countries. In the negotiation model that the authors build from 15 macroeconomic variables, it can be seen that bilateral cooperation will benefit Indonesia to attract foreign investment and develop the national export market. Until now all Indonesian bilateral cooperation, both those that have been carried out and those that have been negotiated and which will be ratified in parliament, has the potential to benefit Indonesia. The condition is that every Indonesian bilateral cooperation must be supported by empirical analysis so that all scenarios that will occur can be detected and anticipated early on.
In addition to the above two things, Indonesia has a record that must continue to be improved, especially if the world economy weakens long enough. First, the harmonization of economic policies from the highest hierarchy (laws) to the lowest (regional regulations). Indonesia must have a big picture and link analysis for each legal product produced. The big picture is needed so that legal products are consistent and complementary to achieve one goal rather than conflicting. Consistency and harmonization of policies is needed to ensure certainty and comfort for investors and entrepreneurs both domestic and foreign to do business in Indonesia.
Second, maintaining a healthy business climate. All factors that hamper Indonesia’s investment and international trade must continue to be clearly identified and evaluated. Not only obstacles, providing incentives for investors, exporters and importers, also must be done carefully. Carefulness is needed so that each incentive from the APBN is on target and in line with the needs of the business world.
Third, improve the quality of human resources. In the short term, what is needed is an increase in the quality of vocational education and in the long term is an increase in the quality of the elementary to high school curriculum and the quality of tertiary institutions. Improving the quality of human resources must be carried out consistently involving the role of government, entrepreneurs, academics, community organizations and the media.
To be able to survive amid the sluggish global economy, Indonesia must optimize its domestic economic strength. Household consumption needs which control 59% of the Gross Domestic Product (GDP) should ideally be met from within the country including through the use of the digital economy. This will encourage the domestic economy to grow to compensate for the global economic downturn. In the world market, Indonesia can optimize the benefits of trade and investment through strategic bilateral negotiations supported by empirical analysis.
Before having a strong financial market, Indonesia’s Micro, Small and Medium Enterprises (MSMEs) must first excel in the domestic market, national manufacturing excels in foreign markets, and local services begin to serve global demand. If this is achieved, Indonesia will automatically be more attractive to investors so that the money market is deeper, the exchange rate and the economy more stable.
Kiki Verico Head Deputy of LPEM UI and FEB UI Lecturer