Ari Kuncoro: Trade Balance Surplus

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Ari Kuncoro: Trade Balance Surplus

Nino Eka Putra ~ PR of FEB UI

DEPOK – Tuesday (20/10/2020), Professor Ari Kuncoro, Rector of Universitas Indonesia, released his article published by Kompas Daily, in the Economic Analysis rubric, titled ¬†¬†¬†¬†¬†“Trade Balance Surplus”. Following is the article¬†¬†¬†¬† .

“Trade Balance Surplus”

The Central Bureau of Statistics announced that Indonesia’s trade balance experienced a surplus of 2.44 billion US dollars in September 2020. As Indonesia’s trade balance has been in surplus for five consecutive months, Bank Indonesia predicts a potential reversal of the quarterly current account, which has been in deficit for a decade, towards a surplus. The positive impact, this also supports the rupiah exchange rate within the range of Rp 14,700 per US dollar.

Similar to the previous four months, the surplus in September 2020 occurred because imports fell more sharply than the decline in exports when the economy contracted due to the Covid-19 pandemic. The export value decreased 0.51 percent to 14.01 billion US dollars compared to September 2019. Meanwhile, imports fell 18.88 percent to 11.57 billion US dollars.

Structural problems

The pandemic’s carry-on surplus hides the characteristic feature of the Indonesian economy, that during normal growth, the current account tends to be in deficit. In the 1970s and 1980s, the trade balance could still cover this weakness because Indonesia was still a net exporter of oil and gas. Economic deregulation in the mid-1980s made Indonesia an exporter of labor-intensive manufactured products.

After the 1998 monetary crisis, the manufacturing sector could not continue its role because the high cost economy undermined its competitiveness. During the commodity bonanza period from Q4 / 2004 to the end of 2013, the role of trade balance in supporting the current account and preventing¬† it from becoming too deficit was replaced by commodity exports. During that period, Indonesia’s economic growth averaged 5.83 percent. In fact, it had reached 6.36 percent at its peak, in 2010-2012.

Since the commodity bonanza ended in 2014, the government’s need to find new sources of economic growth. This was¬† not easy because during the period when the trade balance surplus was abundant, it was only utilized in the form of property and malls in metropolitan cities and secondary cities. On the positive side, the number of the middle class has increased to 141 million people.

In other countries, such as the United States, Japan and South Korea, the growing middle class is used to build manufacturing industries to escape the trap of middle-income countries. In Indonesia, the share of the non-oil and gas manufacturing sector to gross domestic product (GDP) actually declined, from 25.54 percent at the end of 2004 to 18.75 percent at the end of 2019. Meanwhile, the share of the trade     , hotel and accommodation sectors to GDP increased from 15.96 percent to 18.40 percent. The growing number of the middle class in Indonesia only makes this country a market, not a production base. The average quarterly growth of the manufacturing sector in 2004-2014 was 5.83 percent annually, lower than the trade     , hotel and restaurant sectors, which was 7.65 percent.

Out of the box approach

Signs of changing times towards de-globalization began to appear in late 2017 following the US-China trade conflict. Indonesia’s non-oil and gas export growth has begun to slow down. In 2017, the trade balance was a surplus of 11.84 billion US dollars, and turned into a deficit of 8.57 billion US dollars in 2018. This trend continued in 2019 with a deficit of 3.2 billion US dollars. This exacerbated the current account deficit, which was covered by short-term portfolio capital, making the rupiah exchange rate vulnerable to capital flows reversal.

Since being inaugurated in October 2019, the government of President Joko Widodo-Ma’ruf Amin has been faced with the necessity of reorienting the industrialization strategy. Globalization allows Indonesia to depend on the world‚Äôs commodity cycle by relying on macro stability to attract portfolio capital to finance the current account deficit. As long as the world economic order remains the status quo, this strategy may be sustainable. However, the world has changed. Economic growth, which is highly dependent on improving terms of trade, seems unsustainable for too long.

The potential for escalation of the US-China conflict in 2020 is enormous and may not be limited to a trade dispute. The consequences can already be seen from a shift in world supply chains, such as the relocation of several factories from China to Vietnam. News of the prospect of relocating several factories to northern Central Java suggests Indonesia could benefit from this change.

The Covid-19 pandemic has made not only the de-globalization process stronger, but also the de-coupling of the world economy. In this situation, the acceleration of the stimulus for economic growth carries the risk of increasing imports amid a slowdown in exports, so a new approach is needed to use domestic purchasing power and strengthen the structure of the industry-trade which is fragmented and wasteful of foreign exchange.

The manufacturing sector, although producing domestically, has a large part of its supply chain from imports. Imports are still needed, especially for export-oriented products. However, to increase leverage and supply chains, it is necessary to increase inter-industrial linkages and connectivity, urban-rural connectivity, inter-agglomeration connectivity and large, medium and micro-ultra micro industrial links, as well as inter-island connectivity. Barriers make linkages between industries and supply chains artificial and remediable. This can be seen from the indicators of Indonesia’s competitiveness in the Global Competitiveness Report released by the World Economic Forum (WEF).

Industrialization  seems more expensive than trading. The cost of starting a business in Indonesia was ranked 67th out of 141 countries. The complicated licensing procedures are reflected from the time of starting a business which was ranked 103rd. One of the things that is considered positive is the skills of the workforce, which is ranked 36th and can still be improved. However, this was corrected downward because the labor market was underestimated as being too stiff. This resulted in the Indonesian labor market position at 119th. Apart from the pros and cons, the Job Creation Bill has the opportunity to prepare Indonesia to face a new world order that leads to de-globalization. (hjtp)

Source: Kompas Daily. Edition: Tuesday, October 20, 2020. Economic Analysis Rubric. Page 1 continues to Page 15.

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