The stark economic choices facing Jokowi-Kalla
Gustav F. Papanek
The Jakarta Post
The new government of president-elect Joko 'Jokowi' Widodo and vice President-elect Jusuf Kalla (JK) will face a tough and fundamental economic choice when they take office later this month.
The commodity boom from 2005 to 2011 masked the economy's underlying weaknesses. Now that the boom is over, Indonesia will have to find new sources of growth, employment and export and tax revenues to finance imports and government spending.
Fortunately, the end of the commodity boom coincides with another important trend in the global economy and one that will present Indonesia with a once-in-a-century opportunity to boost exports, jobs and national income. China, the world largest exporter of labor-intensive manufactured goods, is less competitive than it used to be.
Wages are rising and the renminbi, China's national currency, is beginning to appreciate against the dollar, euro and yen.
Over the next five years other countries, most of which are in Asia, will take a share of China's export markets for labor-intensive manufactured goods. Indonesia is in good position to benefit from rising costs in China because of a large and rapidly growing labor force.
In addition, millions of Indonesian workers are currently employed in low productivity occupations in agriculture or the informal sector.
Their incomes are low and unpredictable. They would benefit greatly from steady, formal-sector employment in manufacturing, where wages are double what they are in agriculture.
Creating jobs in labor-intensive manufacturing for these workers would not only increase their income it would also greatly add to national income by moving them from low or no productivity to higher productivity jobs. There is only one activity that can create millions of productive jobs: the export of labor-intensive manufactured goods. If Indonesia were to capture just 7 percent of China's export market for labor-intensive manufactures, economic growth would reach 10 percent during the first term of the Jokowi-Kalla administration. Equally important, there would be close to 20 million new productive jobs in industry.
A new book entitled The Economic Choices Facing the Next President, which Dr. Raden Pardede, Prof. Suahasil Nazara and I published last week, recommends policies to take advantage of the window of opportunity provided by rising costs in China. The book, published by the Center for Public Policy, Transformasi, is freely available at their website transformasi.org.
We estimate that Indonesia can increase manufactured exports by US$110 billion over the next five years. These additional manufactured goods, combined with the multiplier effect from higher domestic demand as workers spend their additional income, would create 21 million good, productive jobs by 2019.
Many of these jobs would be taken by lower-income workers with limited education who now earn low and unstable incomes in agriculture or the informal sector.
If it is to seize this opportunity, Indonesia must reduce costs in order to compete in the world market. A major factor in high costs is the inadequate infrastructure. Investment in roads, ports, airports, rail and power generation has been inadequate for years. We calculate that public investment in infrastructure will need to rise 10-fold. This will require an immediate, courageous decision to reduce the fuel subsidies to provide resources for public investment for the next two years. After that, another courageous decision on tax reform would be needed to generate additional revenues.
An example of urgent infrastructure needs is electric power, which must rise by 140 percent. The government will not be able to finance investment on this scale on its own. Creative methods of attracting private capital and expertise into infrastructure investments will be essential.
The government of Indonesia invented production sharing contracts to create incentives for private sector involvement in the publicly-controlled oil industry.
This model could be adapted to developing and operating public infrastructure projects. A matching grants program should give provinces, districts and subdistricts incentives to use less resources for administration and more for infrastructure.
The book also calls for devaluation of the rupiah to reduce labor and other domestic costs in terms of dollars, yen and euro.
The inflationary impact of currency depreciation can be reduced by stabilizing the prices of foods important to the poorest forty percent of the population.
The new government can also act decisively to reduce other costs of doing business. Reducing the discretion of bureaucrats and increasing transparency would help reduce the costs of corruption and of starting up new enterprises.
Many people ask us why Indonesia needs to export labor-intensive manufactures when the country has such a large domestic market. The answer is actually very simple: Indonesia needs to import some goods that it does not produce, or does not produce in sufficient quantities, like cotton, wheat and soybeans. Other goods Indonesia cannot produce at a reasonable price, like jet airliners. Indonesia needs to increase exports in order to pay for essential imports, the demand for which will rise with incomes.
The slightly more complicated answer is that the domestic market for the things that Indonesia does produce is not large enough to employ the millions of people who are now surplus labor and the two million new entrants into the labor force every year.
If the domestic market was large enough, 20 million workers would not be surplus now and millions of other workers would not be forced to go overseas as maids and other manual laborers.
The good news is that the global market for labor intensive manufactures is not only large enough, it is also growing fast enough to employ millions of Indonesians as well as millions of Vietnamese, Bangladeshi and Indian workers.
More reason for optimism can be found in Indonesia's recent history. In the 1980s, the government responded to the end of the oil boom with several major devaluations of the rupiah and a relaxation of controls on foreign investors and on the import of goods needed by exporters.
These policies set in motion an export boom that created millions of steady jobs and sharply reduced poverty and vulnerability.
The new government could improve the well-being of most Indonesians by similar policy reforms despite the end of the commodity boom.
The writer is emeritus professor of economics at Boston University and the president of the Boston Institute for Developing Economies. He has collaborated with Indonesian economists since 1962.
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