O

ne of the biggest puzzles shrouding the world economy is why its growth remains abysmal and unable to get back to its historic trend since the Great Recession of 2008, despite massive monetary easing by central banks all over the world.

Interest rates have been cut to almost zero — and have been negative in some countries — and billions of dollars have been injected by central banks into financial markets to prop up investments, but the real economy did not seem to respond.

Several economists have tried to analyze this unique phenomenon, although with varying degrees of depth.

Kenneth Rogoff pointed out the existence of “debt overhang”, an excessive debt buildup followed by deleveraging in the aftermath of crisis.

Ben Bernanke has emphasized the idea of a “saving glut” emanating from the cash thrown off by emerging markets and Paul Krugman has his theories of a “liquidity trap”.

Lawrence H. Summers, former US secretary of the treasury and president emeritus at Harvard University, wrote in Foreign Affairs that the economies of the industrial world are suffering from “secular stagnation” that is an imbalance resulting from an increasing propensity to save and a decreasing propensity to invest.

The result is that excessive saving acts as a drag on demand, reducing growth and inflation and the imbalance between savings and investment pulls down real interest rates.

But the question is, what caused the imbalance between saving and investment? Economists tend to agree on the answer to this question. There are four factors that were often cited as the causes of the long term low economic growth.

The first factor is demographics. Ruchir Sharma in his book The Rise and the Fall of Nations wrote that Western countries have seen a decline in their fertility rates.

Families are smaller and fewer workers are entering the labor force and the ranks of retirees swell by the year. People feel more uncertain about the length of their retirement and the availability of benefits.

By saving more and spending less, they feel more secure. More income that flows to the top 10 percent income group, which is a result of widening inequality, is being saved more than spent. This has a negative impact on economic growth.

The second reason is technology. Apple and Google, the two largest US companies are still eager to push the frontiers of technology forward and are still awash in cash.

Uber, a ride-hailing app company, with its business and its effort to make driverless cars possible, would have a great impact on the demand for automobiles.

And think of Amazon’s impact on the construction of bookstores and malls, or the more general impact of information technology on the demand for copiers, printers and office space.

In a period of rapid technological change, it makes sense for the businesses to defer investment, lest the new technology soon make the old obsolete.

The third reason relates to globalization. Globalization is now pervasive and entrenched and the markets in the West are, broadly speaking, the most open in the world. While the effect of increased global trade is positive for economies as a whole, specific sectors get battered and large swaths of unskilled and semi-skilled workers find themselves unemployed or underemployed.

The fourth reason is fiscal. Almost every Western country faces a large fiscal burden. The net debt-to-gross domestic product (GDP) ratio in the EU in 2015 was 67 percent. In the US it was 81 percent and it was 129 percent in Japan.

These numbers are not crippling, but they do place constraints on the ability of the governments to spur economic growth. Debt has to be financed but these would be used mostly for spending on the rising pensions and healthcare needs for their aging population.

Consequently, expenditure needed for investment in infrastructure, education, science, and technology would lag behind. The other question is how long this weak and slow global economic growth would stay with us.

According to Summers, long-term interest rates in US, Germany and Japan have been remarkably low with 10-year government bond rates at about 2 percent in the US, 0.5 percent in Germany and 0.2 percent in Japan.

Such low long-term rates suggest that markets currently expect both low inflation and low interest rates to continue for many years. Implicitly the markets are not expecting there would be a spurt in economic growth any time soon.

Given the unfavorable external conditions, it would be difficult for President Joko “Jokowi” Widodo to achieve his target of 7 percent growth in 2019.

The weak global growth environment would not lift commodity prices and the demand for Indonesian exports.

Fiscal challenges have not been supportive for growth either. One-third of government expenditure is spent for social welfare. Another one-third is transferred to the regions.

The rest is divided between capital expenditure, subsidies, salaries and interest on debt.

This pattern of spending by itself would not guarantee an optimal economic growth.

So regardless the strength of global growth, the main force for Indonesian growth would have to come from private sector investment. Pushing for the acceleration of private investment has to be the main focus of President Jokowi’s economic programs.

The President has issued a record of seven economic reforms to improve the investment climate and in the global ranking of ease of doing business Indonesia has moved up 15 places and is now ranked 91 this year according to the World Bank.

This was good news, but media reports indicate that business players are still facing the same, old problems: difficulties in getting licenses, dealing with conflicting regulations at national and regional levels and paying bribes and illegal levies.

A wide gap still exists between the aims of the reforms and the realities in the field. If this gap could not be eliminated, then it would be difficult for the Indonesian economy to escape the trap of slow global growth.
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The writer is a commissioner in a publicly listed oil and gas service company.