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Challenges awaiting new finance minister

Before the industrial revolution of the late 19th century, agricultural products were dominating world trade

Kiki Verico (The Jakarta Post)
Tokyo
Tue, June 1, 2010

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Challenges awaiting new finance minister

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efore the industrial revolution of the late 19th century, agricultural products were dominating world trade. Workers were seen as the most important factor affecting production.

Presmithian economist Sir William Petty (1623-87) wrote: “Labor is the Father and Lands are the Mother”.

Richard Cantillon (1755) argued: “Land as the source of wealth, labor as the Power which produces it” and Sir James Stuart (1767) in his book titled Principles of Political Economy stated: “Labor was the only source of an increase in the supply”.

As the world underwent an industrial revolution along with enhancements in engine technology, the role of humans as instruments of production became more complex.

The economy became more competitive and production targets became very tight. Here in Indonesia, workers are considered to be instruments of production and as such should have certain skills, including the ability to operate equipment and technology.

The father of classical economics, Adam Smith, explained that a worker’s exchange value must be greater than their use value. In simple language, he argued that a worker’s skills should be able to be sold in the market.

He stated that all humans do trade: “Every man then becomes in some measure a merchant and the society itself grows to be what is properly a commercial society” (The Wealth of Nations).

Workers are actually selling their skills for money and then buying the goods they want. This is the beginning of the notion that workers’ productivity is associated with trade and industrial capitalism.

Nearly 100 years after Smith, Karl Marx wrote that “increased productivity involves a change in the technical composition of capital”.

From here we can note that productivity increases because of two things: first, capital and technology, and second, labor skills.

Both factors are important to increase economic growth while keeping infl ation rates low — noninflationary growth. Here, Marx’s arguments sometimes show that capitalists and socialists are not always opposed.

At certain points, both can achieve “meeting points”, such as in “labor productivity”. Marx and Engels called this intersection “Capitalist Communism” (Correspondence, p.243).

Based on this synthesis, economists believe that investment in production equipment must be accompanied by improvements in workers’ skills. This will increase productivity, create jobs and spurs nominal wages, while keeping inflation low, similar to short-run infl ationin times of excess demand.

When infl ation is low, increased nominal wages will increase real wages. This is why the average real wage in developed countries with advanced technology and skilled workers is higher than that in developing countries. Thus, Indonesia needs skilled labors.

The Human Development Index (HDI) shows that Indonesia’s rank declined from 102 in 2001 to 108 in 2006, lower than in neighboring countries Malaysia, Thailand and the Philippines.

In 2006, in the health sector, Indonesia’s health facilities were only sufficient to treat 34.1 percent of patients. The ratio of public health workers per 100,000 patients was for doctors, nurses and midwives, 13, 62 and 20, respectively. These figures were below those of Malaysia (70, 135 and 34) and the Philippines (58, 169 and 45).

In the education sector, the school enrollment rate was still about 68 percent, lower than in Malaysia (73 percent) and the Philippines (82 percent).

The proportion of educated workers who hold BA or diploma degrees was only 5.6 percent while around 54.4 percent were primary school graduates and the remaining 40 percent were junior and senior high school graduates.

Over the last 15 years, based on GDP, Indonesia is classifi ed as an industrial
country, but when judged on export competitiveness and worker distribution, Indonesia’s workers are still mainly in the agriculture and mining sectors and the informal sector.

Thus, this lack of productivity means the low value of the average real wage is unsurprising. It is no wonder that many Indonesians seek employment in neighboring countries, like Malaysia and Singapore.

Unfortunately, some of them lack sufficient education and training, which makes them vulnerable to “cheap-labor exploitation” abroad.

Indonesia has to improve its productivity. It requires production equipment and technology investment from the private sector and investment for public services (education and health) from the government in the form of APBNs, which are supervised by the Finance Ministry.

On the revenue side of APBN, the Finance Ministry is responsible for “forcing” all registered taxpayers to pay taxes. The minister should be able to prevent potential “conspiracies” between businessmen and the “tax mafi a” that result in reduced revenue due to unpaid taxes.

In addition, he should be able to keep development budget allocations corruption free. Tax felony and corruption are the most “serious crimes”. Both can destroy the “balance point” between capitalism and socialism that is needed to supply healthy and skilled workers.

The importance of preventing corruption is the main reason why many countries around the world appoint “reformist”-minded finance ministers like Indonesia’s previous one, Sri Mulyani Indrawati.

On the expenditure side, the finance minister has to be professional because fiscal policies are closely linked to the real sector.

For instance: First, tax rates affect private investment decisions even though investment coordination is under the BKPM’s authority. Second, import tariff rates greatly affect Indonesia’s trade competitiveness despite trade policies being under the Trade Ministry’s authority.

Besides, the finance minister should be able to maintain a fi scal balance that does not encourage excess expansion or contraction.

Excessive fiscal expansion can generate infl ation and increase nominal interest rates, which in turn creates a “crowding-out effect” for investments.

However, fiscal allocations should not be too tight because they can reduce economic multipliers. Thus, the finance minister and his staff, as guardians of the Treasury, should be able to decide which sectors to prioritize so that the economic multiplier for entrepreneurs (profit), labor (wages) and government (tax) can be optimized. It needs rational fiscal policies that benefi t all.

Since fiscal policies combine politics and economics, the finance minister should have strong political backing and support and protection from the President to assure that he can maintain his professionalism and not be dictated to by other parties.

However, the minister’s duties cover technical and budgeting functions and are therefore difficult to manage. Now the people of Indonesia, who have the greatest authority in this democracy, look to the new finance minister and his deputy to advance Indonesia’s economy in a professional manner.

The writer is a PhD student at GSAPS, Waseda University, Tokyo, and a researcher at LPEM- FEUI.

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