After the London G20 Summit

Hadi Soesastro ,  Jakarta   |  Sat, 04/11/2009 1:43 PM  |  Opinion

Leaders of the G20 nations have erected a milestone in their efforts to restore global economic growth and reform of the international financial system. In less than five months they met for the second time in London on April 2 to come up with a plan for collective action to stabilize the world economy and secure recovery and jobs.

They had a very ambitious goal: averting an even more severe downturn and restoring growth in the short term, while at the same time reshaping the financial system, preserving the world trading system, and laying the foundations for a sustainable recovery.

The final communiqu* is far better than the earlier leaked drafts, but leaders fell short of agreeing on a coordinated plan for a global stimulus package. Recovery, therefore, will be slower than could be achieved, and the risk for a continuing downturn still looms large. It is perhaps unrealistic to expect that the summit could deliver on the ambitious goal. What has been the most significant outcome was a realization that nations cannot solve the problem on their own and that cooperation becomes a necessity.

It has also become clear that the G20 is becoming the critical forum to achieving it. Leaders of the G20 nations agreed to meet again before the end of the year. At that meeting they will assess the results of their agreements and will introduce further stimulus measures if these are shown to be necessary. That was the degree of cooperation, flexibility and compromise that the parties were able to forge.

In the meantime, what should Indonesia do?

A slow global economic recovery will exert greater pain for the Indonesian economy. Exports will stagnate and manufacturing employment will continue to decline. There is not much we can do in the short term. Improving access to trade financing will be helpful, taking efforts to increase competitiveness will be good, but exports cannot grow when global demand remains weak. Slackening demand happens not only in Indonesia's main trading partners. It is a global phenomenon.

The direct and immediate impact of the London Summit outcome for Indonesia will be limited as we may not want to access the additional, rather substantial financial resources that G20 leaders have agreed to mobilize and to be channeled mainly through the IMF. Mexico, a nation with sufficient nationalistic credentials, has immediately applied for IMF's new Flexible Credit Line (FCL), which was greeted favorably by the international markets. Indonesian leaders do not have such a confidence, especially in an election year.

Indonesia should consider expanding its stimulus package if global economic recovery proceeds only very slowly. Our fiscal stimulus at 1.4 percent of GDP is relatively small. We can only make limited use of the opportunities created by the London Summit outcome to enhance our fiscal space. We will have to seek for other sources of funding. But of equal importance is to speed up the use of the existing stimulus package.

The government must be given full discretionary authority to use the funds, in a flexible manner that would effectively respond to a rapidly changing environment. The House of Representatives (DPR) should refrain from involving and intervening in the implementation of the fiscal stimulus package. Any delay will only increase the cost of impact of the crisis on the Indonesian economy.

The priority agenda for Indonesia is to develop and "smartly" implement a stimulus package to maintain a sufficient level of economic growth (above 4 percent) through maintenance of domestic consumption and investment.

By the end of July 2009 the government must complete an assessment of the impact of its stimulus package and it should be prepared to make the necessary modifications, including expanding direct cash transfers to lower income households.

The London Summit made it clear that stimulus packages should not employ trade and financial protectionist measures. This applies to Indonesia as well, and President SBY's international credibility will depend on how firm he will oppose any protectionist pressure that more often than not originates from within the government itself.

These are serious issues and a tall order for a government in an election year. It may help the government to maintain its focus on the key issues resulting from the London Summit if it creates task forces that would deal with: (a) the implications for Indonesia of the planned actions to strengthen financial regulation and supervision, and capacity enhancement that needs to be introduced; (b) the monitoring of the implementation of its own and other countries' stimulus package; (c) the monitoring of its own and other countries' trade, investment and financial measures that could violate the leaders' pledge for a standstill until the end of 2010; (d) the development of ideas for a new international financial order. All these activities could benefit from closer cooperation with other East Asian G20 members, including Australia.

The writer is Senior fellow, the Centre for Strategic and International Studies (CSIS).

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