Opinion

The power of nature and
Indonesia’s economy

Nature gives life two essences: randomness and relativity. Randomness makes all events that will occur seem only expected. Relativity has two meanings: (1) nothing is absolute in this world, everything has a time limit, what goes up must come down, including authoritarian regimes and (2) differences are destiny. Therefore, more or less like winning and losing, success and failure or even rich and poor are facts of life.

Theories that cover either one or both of these essences are hard to be denied, such as the theory of relativity by Einstein. As for social sciences, take the examples of two interesting books written by Nassim Taleb titled Fooled by Randomness and the Black Swan, which discuss about randomness and relativity in human’s life.

The economic system is also subjected to the natural laws of random chance and relative. Economists have realized this since the early birth of economics.

Adam Smith, father of classical economics, wrote that the economy is governed by “an invisible hand” and not by humans.

Even before Smith’s era, philosophers like Francis Quesnay argued that the economy is ruled by nature and Sir William Petty wrote that the economic mechanism is similar to blood circulation and gravity which are absolutely beyond human’s control.

The relationships between economists and economic crises are just like the relationship to geologists and natural disasters. They can explain what is going on and how big the impact is but they are unable to predict when the exact time those will occur.

Earthquakes and tsunami disasters are seen as random events that no one can predict when and when they will take place as what struck the northern coast of Japan on March 11, 2011.

As Japan contributes a big share to the world’s economy especially in manufacturing, this affected both Japan and the global economy. Disruption in the manufacturing industry influences the industry’s backward linkages in primary sectors (agriculture and mining) and forward linkages in tertiary sectors (trade, transportation, banking and other financial services). This probably could affect Japan’s production networks in the world, including Southeast Asia.

For Indonesia’s economy in the short-run, the effect would be in the consumption or trading side as the JBIC FY2010 survey (22nd Annual Survey Report) found that in 2009, Indonesia has the highest satisfaction level in net sales and profits for the Japanese companies.

A minor effect is expected in the production side because Indonesia has not been integrated enough into regional production networks due to: (1) high cost service links in shipping, port services, insurance, custom clearance, loading-unloading and other administration procedures and (2) local currency volatility, in particular after the 1998 financial crisis. A study conducted by Kiyota and Urata in 2004 found that local currency volatility has a negative impact on the long-term investment (FDI) decision of Japanese companies.

Yet in the medium-run, Indonesia is expected to become one of the most attractive countries for the Japanese overseas production base. The “rebirth of Japan” will certainly benefit Indonesia.

Starting at the end of 2010 at least eight countries in the Middle East and North Africa (MENA) experienced political upheaval. Two of them, Tunisia and Egypt even experienced a change in their head of state. Demand for a democracy does not only imply that freedom exists at individual level but also indicates relativity, the diminishing return of human’s power towards time.

Political transition in these countries could affect the world’s crude oil production. Total production of the seven out of eight countries: Libya, Egypt, Algeria, Syria, Tunisia, Yemen and Bahrain reaches 6 percent of the world’s total oil production. This puts them on a level with the big four world crude oil producers: Russia, Saudi Arabia and US.

Mundi Index data indicates that the world energy price index which includes crude oil, natural gas and coal, continued to increase since December 2010 to January 2011 (5.8 percent), January to February (7.8 percent) and February to March (17.2 percent).

Compare these to the same period last year: The increase of current price index is obviously higher than that of last year. The average index in January to March 2010 was only about 1.3 percent while in January to March 2011 achieved 12.5 percent.

The data show that the increase in world energy price index in this first quarter of 2011 was triggered by the rising crude oil price. The price of natural gas has actually been declining since January 2011 but the increasing price of crude oil in February to March 2011 that reached 20.32 percent — higher than that of total energy price index — made the world energy price continue to rise. This will increase cost of production in manufacturing sector, gasoline subsidies and at the end, raising the inflation rate.

The other main effect that Indonesia needs to concern about is potential decreasing demand from MENA’s domestic market to Indonesia’s export.

In fact, MENA is not Indonesia’s main export destination. Share of Indonesia’s export to MENA on total Indonesia’s export to the world is around 4 percent, much less than to ASEAN (23 percent), North America (16 percent), EU (16 percent) and Japan (15 percent). But at this moment Indonesia is intensively expanding its export to MENA as part of the government’s new market development program.

The economy follows the power of nature in randomness and relativity as what Smith, Quesnay and Petty had argued over four centuries ago. Unexpected disasters prove that life event is random.

Therefore a diversification strategy in the economy such as spreading investment and target markets are always relevant to lessen the risks of uncertainty.

Human lives in relativity therefore “high risk high return” become a common principle in economics. Any country including Indonesia has to keep reflecting and learning because there is always loosening after the hardship.

The writer is a doctoral student at Waseda University, Tokyo, and a researcher at the Institute for Economic and Social Research, University of Indonesia.

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