When US President Barack Obama left Washington for a visit to Asia and Indonesia, this week, he must not have been in the best mood.
Americans angry with high unemployment and the weak US economic recovery had delivered their verdict in the mid-term election by condemning the Democratic party and ousting them from their former majority position in Congress.
The bitter fight on the health insurance bill early this year contributed to the continued enmity between Democrats and Republicans, throwing the prospect of a real US economic recovery into greater uncertainty.
The battle to pass the health insurance bill in Congress has consumed much of Obama’s energy and political capital, and has distracted his attention from the American people’s number one concern: the economy. It was also one reason Obama canceled his planned visit to Indonesia last June.
The US economy needs fiscal stimulus to jump start growth and lift itself out of the doldrums. But the Republicans insist on reducing fiscal deficits, which are already huge and unsustainable in the long term.
The US hopes that increasing exports could boost the economy, but this means asking its trade partners to increase their imports from the US by appreciating their currencies against US dollar.
The possibility that America’s trading partners would be willing to appreciate their currencies is slim, because they also have problems with their own economies.
The Federal Reserve has just made a risky gamble with its decision to purchase US$600 billion worth of government securities.
The main goal of this decision, known popularly as quantitative easing, or QE, is to revive the US economic recovery by pushing long-term interest rates lower.
For Obama, the hope for a stronger economic recovery and a reduction in unemployment rates could come from the success of the Fed QE.
This is because fiscal stimulus, another policy option that could stimulate growth, would have little chance of passing in the new Congress where the Republican majority is adamant about reducing the fiscal deficit.
This is the second time the Fed has used this policy instrument. The first QE, introduced in March 2009, was worth more than twice the QE2 but still failed to accelerate recovery and reduce unemployment.
Markets have begun voicing their skepticism over whether the QE2 would deliver the expected results this time.
Obama also realized that QE2 would produce undesirable effects for emerging economies, including Indonesia. Quantitative easing means that the Fed will pump money into the US economy.
As liquidity expands, long-term interest rates would go down, and the resulting interest rate differentials would drive investors to move their money to emerging economies, including Indonesia, where returns are still more attractive.
The flood of capital into emerging economies would drive up asset prices, and if this is not managed properly it could produce an asset price bubble that could eventually plunge the economy into recession.
An expanded US dollar supply would drive its value down, making the currencies of its trading partners appreciate against the US dollar. If governments in emerging economies do not respond, their
exports would lose their competitive strength and imports would unduly rise, throwing the economy into disarray.
Emerging economies are then faced with unpleasant choices, either to impose capital controls or
to engage in competitive currency devaluation.
Obama’s visit to Indonesia is taking place when the Indonesian economy is decoupling itself from the influence of the US economy. The ability of the Indonesian economy to weather the disastrous impacts of the global economic crisis last year was testimony to its low exposure to the US economy.
As the Indonesian economy becomes more integrated with its Asian neighbors, there has been shift in its relationship with the US economy. Indonesia trades more with and receives more investment from the Asian region.
The direct role of the US economy in the Indonesian economy is receding, but is still significant.
This year Americans bought 10.5 percent of Indonesia’s exports, down from 12.3 percent in 2007, before the global crisis.
Over the same period, the Chinese bought the same amount of Indonesian exports, but up from 7.3 percent in 2007.
Despite the weak recovery in the US and the rupiah appreciation this year, Indonesian exports to the US rose by 30 percent. This compares with the 56 percent export jump to China.
This year the US supplied only 9 percent of Indonesia’s imports, a figure unchanged from 2007. Excluding oil and gas, US investment in Indonesia is minor compared with investment from other countries.
In 2007, investment by US companies in Indonesia totaled $13 billion, one third of the total foreign investment.
As Indonesia has increasingly shifted its foreign debt to multilateral agencies, the amount bilateral debt from the US has become insignificant.
The amount outstanding is now $1.3 billion, a mere 2.2 percent of total Indonesian foreign debt. One of the issues that should be raised during Obama’s visit is the US commitment to provide $1 billion fund to help emerging economies fight climate change. Indonesia has expressed interest in these funds to fight deforestation and reduce greenhouse gas emissions.
As Indonesia is one of four countries that Obama will be visiting, it seems that there is no special meaning attached to the Indonesian visit.
India, the first country Obama is visiting, has more substantive and strategic issues with the US compared to Indonesia.
India is growing restless with what is happening in Pakistan and Afghanistan, and the US needs India as a partner to deal with instability in the region.
Indonesia has been looking forward to Obama’s visit, and is ready to extend its warmest welcome, as if to welcome back a family member who has been away for so long.
Indonesia is a place where Obama spent four years of his childhood and where he first started his education. Indonesians are proud that
one of the most popular US presidents in history has a close cultural affinity with Indonesia, and has acquired Asian, and especially Muslim, sensibilities.
Obama’s visit to Indonesia, the largest Muslim-majority nation in the world, would acquire a symbolic meaning for his overture in bridging the great divide between the West and Islam. It is also symbolic for his ever-present Indonesian family.
The writer is an economist.
