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Bolstering manufacturing exports to cut inequality
Indonesian government should promote exports of highly competitive manufactured products. Why manufactured?
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Reach for the stars: The children of the Wana Posangke community show great passion for learning despite their ordeals in acquiring proper educations. (JP/Syafrizaldi)
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ince the beginning of 2018, the rupiah has weakened against the United States dollar to as low as Rp 14,200. Even though the currency recovered slightly after Bank Indonesia’s preemptive move to raise its policy rate by 50 basis points to 4.75 percent last month, the rupiah remains under pressure.
There are at least two fundamental factors influencing the movement of the rupiah. The first is the difference in inflation rates. The currency of a country with a relatively high inflation rate tends to weaken. This is related to the theory of Purchasing Power Parity (PPP), used to analyze the effect of inflation between two countries on foreign exchange rates using two variables; the spot exchange rate and the difference in inflation rate between two countries.
The theory concludes that the spot exchange rate of a currency changes in reaction to inflation. The logic is simple and intuitive. When inflation increases, the purchasing power parity will decrease. In other words, when the price of domestic products increases, people will tend to look for alternative offers from other countries offering lower prices.
The result of this is twofold. First, this country will import more products from other countries with lower prices, and second, the exports of this country will drop as trading partners switch their imports to other countries. As a result, the value of the domestic currency will weaken along with the surge in demand for foreign currency.
