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t'€™s been three years since, for the first time, Indonesia began running current-account deficits, forcing Bank Indonesia (BI) to maintain tight monetary policies despite the inflation rate falling within the desired range and economic growth falling steadily below expectations.

Without stronger commodity prices, the only way to improve the external balance is to curb domestic spending.

However, only a few people realize that Indonesia'€™s twin deficits originated with the government'€™s unwise decision to pursue higher GDP growth through the massive influx of export revenues and the belief that foreign capital would trickle down into the rest of the economy.

During the commodity boom that began in early 2005 and ended in late 2011, huge commodity exports allowed for stronger domestic spending, which helped increase economic growth.

At the start of 2009, massive capital inflows triggered by the US Federal Reserve'€™s quantitative-easing policy caused foreign capital inflows to heat up GDP growth further. The commodity boom and inflows of foreign capital allowed Indonesians to consume more than what the economy was able to produce.

During the era of high export commodity prices, increased imports barely impacted the trade balance. But when the commodity boom ended in the last quarter of 2011, what was previously a trade-balance surplus quickly became a deficit.

Indonesia'€™s non-commodity exports, which should have become another pillar of the surplus, has been infected by the '€œDutch Disease'€ (the curse of the natural resources boom), an expression coined by The Economist magazine in 1977 to describe the Netherlands'€™ underperforming manufacturing sector after the discovery of abundant supplies of natural gas.

The Indonesian manufacturing sector had quietly lost competitiveness and its contribution to the economy during the commodity boom as well.

Soaring export revenues from commodities that were streaming into the economy caused the rupiah to appreciate, while growing profits and wages in the commodity-related sectors reduced the availability of cheap factors of production to develop capacity and technology in the manufacturing sector.

Expanding domestic demand also caused the service sector to flourish, which in turn delivered a second round of pain to the manufacturing sector.

The Indonesian economy thus became overly dependent on unsustainably high commodity prices.

BI realized the dangerous situation and tried to prevent excessive appreciation of the rupiah by absorbing some of the dollar inflows into its foreign reserves. Yet the absence of complete sterilization led to excessive liquidity in the economy.  

Later on, while excessive liquidity continued to stimulate higher domestic demand and increased imports, export growth slowed down dramatically with the end of the commodity boom. From late 2011 until today, the price of Newcastle coal has dropped 50 percent, while Malaysian crude palm oil (CPO) price has fallen 30 percent, resulting in the current deficit.

To prevent the '€œDutch Disease'€ from occurring, a country simply needs to redistribute the huge inflows gradually.

Most countries that are blessed with abundant natural resources use Sovereign Wealth Funds (SWF) to manage the huge inflows of commodity export revenues.

According to the SWF Institute, currently there are 115 SWF'€™s with total assets reaching US$6.7 trillion. Among them, is Norway'€™s Government Pension Fund, which holds assets amounting to $893 billion in 2013. It also has the reputation as the best SWF fund.

SWF'€™s role can be likened to a floodgate to control the flow of water. Some of the inflows coming from commodity exports should be channeled first through SWFs through an optimized taxation system. Most of the funds inside the SWF will be invested globally to gain desired periodical returns.

The funds will only gradually enter the economy to finance productive infrastructure development and to subsidize export-oriented manufacturing.

The funds can also be used as an emergency support system for the economy when commodity prices cycle downward. Simply put, the objective of SWFs is to maintain growth stability by keeping the pace of domestic spending and production as close as possible and also to prevent commodity domination in the economy by supporting the maintenance of a competitive manufacturing sector.

Indonesia actually established a SWF in 2006: the infamous Pusat Investasi Pemerintah (PIP). But its role is limited to financing infrastructure spending rather than acting as a growth stabilizer. PIP funds are a fraction of the government budget and are not provided with a direct proportion of revenues from commodity exports. To date, with some $300 million funds in hand, the PPI has invested in toll roads and electricity generators.

The government must be able to create a formula to determine the optimal tax rate for the commodity sector. The tax rate cannot be so low as to let excessive export revenues ruin growth stability but also not so high as to discourage new investment. In practice, such a policy also requires strict rules for deposits and withdrawals.

Moreover, good corporate governance and institutional transparency must be attached to the SWF to prevent mismanagement and corruption.

The industrialization map also needs to be prepared carefully. Adding value to raw commodities dependent on a mineral export ban is an ineffective strategy for escaping the '€œDutch Disease'€, since it will not facilitate deeper involvement in the global value chain. Abundant natural resources should not limit the variety of goods a country can produce.

Indonesia must create more complex products to generate a larger share of income from international trade. In order to accomplish this, besides expanding the capacity of the existing manufacturing sector, SWF funds must also finance investment in research and development.

With all of the above challenges, the paradigms driving Indonesian policymaking must be changed in a number of important ways.

Firstly, sustainable growth is far better than rapid growth. It is important for government to curb its desire to pursue fast, unsustainable growth.

Secondly, commodity booms can never be relied upon for sustainable economic growth.

Manufacturing must be the most valued sector so that it can cushion an underperforming commodity sector. Lastly, massive revenues from commodity exports during a boom should not lead to the '€œDutch Disease'€.

As long as major inflows are transformed into manageable streams, economic stability will prevail. In the end, life is a marathon, not a 100-meter sprint. Without improved stamina, any effort to run faster must be compensated by a slower pace at some point ahead.

Thus, improving stamina must precede speeding up.