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em>Indonesia should pay more attention on how to improve the quality of life of its people to avoid the widening of economic disparity and inequality, World Bank managing director Sri Mulyani Indrawati said recently. The former Indonesian finance minister discussed the issue during an interview with The Jakarta Post’s Raras Cahyafitri on the sidelines of the International Monetary Fund (IMF)-World Bank meeting in Tokyo recently. Below are excerpts from the interview.

Question: What will be the impact of the possible fiscal cliff in the United States on Indonesia?

Answer: The economic risks are actually not only the fiscal cliff in the US. Perhaps, the more dominant risk and one that has already happened is the European crisis, which has entered the second or third year and has not ended yet. Due to its uncertainty, the crisis shadows the world’s economic prospects.

For Indonesia, the biggest impact will be related to the slowdown in the economic growth of emerging markets, particularly China.

The immediate impact on Indonesia will be related to trade. The global economic slowdown has affected many countries, such as China, India or Latin American countries, whose exports have weakened sharply and some have even experienced negative growth.

Indonesia has felt the pinch of the global economic slowdown as indicated by the decline in the growth if its exports, particularly to China, Europe and the United States. However, Indonesia’s strong domestic consumption and investment demand have been able to compensate for the decline in exports.

How long will domestic demand endure this crisis and other risks?

It is not like we have a cup of coffee, which will run out because we drink it. The economy is an ongoing activity. So, the problem is not how long we can rely on domestic demand. The more important thing is how to make economic growth strategy sustainable for the long term, not only for the short term as a response to external conditions.

If a domestic-demand-driven economy is not followed by other policies, excesses will emerge, including overheating, imbalances in the macro economy side, such as on the balance of payments, on the monetary side with inflation or deficits in state budgets as well as debt accumulation.

There are several important areas in which policies should be implemented so that domestic demand can last long. First, of course, is to maintain inflation at a low level. A high inflation rate will reduce the purchasing power of the people.

Second, is to make sure that domestic demand will improve productivity structurally. So, the government should be able to direct economic activities to non-consumptive matters.

Productive enhancements are necessary. The government’s policies on education and infrastructure development are important because they will affect the productivity of the overall economy.

Third, and the most important, we have to be cautious that the domestic-driven economy does not result in the widening of the social gap. Domestic-driven economies usually rely on urban people, and are driven by the upper class. Inequality will be a big risk. The government has to make sure that domestic demand won’t cause a widening gap between the rich and the poor. It is important to have policies to maintain the purchasing power of the poor, whether in the form of direct support, subsidies, cash transfers or by empowering them.

Excessive subsidies remain a big problem for Indonesia. How can the government escape the trap?

Many countries face a similar problem. Actually, the problem that must be thought of seriously is how you are going to use the resources, the government resources, in this case the state budget, to be directed to the weakest groups and to improve the productivity of the overall system and the whole economy. Therefore, the implication is whether there will be government spending to be adjusted.

Indonesia, with a sizeable state budget, actually has the opportunity to focus on equality and inclusiveness of growth. Subsidies don’t strengthen people because they are not only intended for the poor.

Indonesia’s problem is actually relatively easier compared to those of other countries, who have no money. It would be difficult for countries in a position like Greece. Indonesia has the money. The problem is how to spend it better.

Are there any programs from the World Bank to increase access to the economy and to avoid inequality and income disparity?

That has become one of our focuses now. Not a program, but more about how we can learn from other countries’ experiences, both those that have succeeded and failed. The World Bank is now providing solutions; meaning information and experience from countries across the world that have experienced problems like Indonesia’s.

Indonesia’s problem is not unique. I’ve travelled to more than 43 countries in the last two years. All countries have problems; some are more complicated than Indonesia’s.

It’s very good for Indonesia, as an open and democratic country, to learn from other experiences so that we can prepare ourselves to have better policy options.

The World Bank can support these efforts, learning from anywhere around the world. If Indonesia wants to learn from fellow emerging markets, there are Brazil, Mexico, Turkey, South Korea, India and China.  

The World Bank provides that kind of cross-country exchange and experience through our staff and database that we have uploaded.

Indonesia’s inflation is at a manageable level. Does it need to reduce the central bank’s interest rate?

I think the important thing for Indonesia is to maintain its policy framework, the balance between maintaining stability and policy, which truly addresses structural problems. That is the biggest challenge.

Lower inflation will provide room for macro-economic policy. However, that is not Indonesia’s only challenge.

We, including those in the mass media, are not supposed to only talk about the macro-economic situation, but the quality of spending and the quality of policy, because Indonesia has been grouped together with middle-income countries. For a middle-income country, the question is more about how we can improve the quality of life, how we can improve the quality of growth or how we create jobs with decent salaries.

Indonesia now is challenged to address more structural issues. It doesn’t mean that the macro-
economy is unimportant. The macro-economy has to be managed well so that we are no longer talking only about the level of inflation, but who gets the benefit of growth, whether the growth is quite good, whether we can grow by 6 percent with only a few policies, whether we can grow faster but without inequality worsening. Those are questions Indonesia must answer.