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Time for a domestic focus

By webadmin on 2:07 pm November 6, 2011.
Category Archive

Wijayanto

Recently, the International Monetary Fund reduced its forecast of global economic growth for 2011 and 2012. Other institutions, like the World Bank and several investment banks, have done the same, indicating their bearish view on the prospects for the global economy.

Clearly, the crisis of 2011 is more serious than most economists first thought.

The shock probably will not be as terrible as it was in 2008. However, it could take a longer time to recover. This year we are witnessing a deteriorating financial situation in major economies, both at state, corporate as well as household level. This three combined provide a perfect recipe for a lengthy economic crisis.

In 2008, governments had the capacity to provide various economic stimuli. This luxury is not in the picture at the moment due to very limited government fiscal room for maneuvering. In fact, due to the worsening fiscal position, nowadays many governments are part of the problem.

The EU is a valid indicator of the global situation. After more than two years of struggle, the Greek economy remains still gloomy. It is on the brink of sovereign debt default if there is no bail-out from other EU members. Several major banks that have strong business links with Greece, such as Societe Generale and Bank Dexia, are in technical bankruptcy.
Saving Greece, even though it only represents 3% of the EU economy, is crucial to avoid a domino effect. Unfortunately, the Greek domestic economic structure makes this effort challenging.

The situation in the US is not much different. Despite multi-trillion bail-outs, industrial output has not shown encouraging performance and the unemployment rate is still high. With a presidential election in the pipeline political polarization is worsening, making it difficult for the government to take action quickly.  

Decreasing global demand

The above stories depict the delicacy of the economic situation in the EU and the US. Despite Asia’s strong economic position at the moment, it is just a mater of time before the crisis arrives.

Nowadays, China is playing a significant role in delaying the crisis from reaching Asia. It provides demand for neighboring countries’ products. However, China is not the ultimate consumer of these products, but the US and EU. If the story in the EU and the US continues, China’s export-driven economy will deteriorate, passing the problem on to its trading partners in Asia. 

International trade has shown signs of a decrease in terms of volume and value. Countries like Malaysia and Singapore have felt the impact. Indonesia, whose main exports are commodities, will feel the impact soon. After reaching a peak in mid-2011, commodity prices have decreased gradually. We should not expect the decrease to be a short-term phenomenon.

Being an export-driven economy is often the only choice for small countries like Singapore and Malaysia, whose exports account for more than 100% of GDP. Singapore would never have reached GDP per-capita of more than $10,000 without reliance on exports. However, when global crises happen, such a country will feel very severe pain.
 
Indonesia’s situation is different. It is a huge country with enormous natural resources and more than 200 million people. It has more choices to improve prosperity. Export markets are a bonus; the domestic market is the main pillar.

A friend of mine, an economist for a Washington DC-based think-thank, visited Indonesia some time ago. He went to several small towns in Java and was surprised to see the vibrancy of the economy in these towns.

Traditional markets were full of people buying and selling fruit, vegetables and clothing. The streets were full of cars, motorcycles and bicycles, and people kept moving. The footpaths were occupied by street sellers – I call them “street level entrepreneurs – selling a range of products, from toys to food.

These activities occur with very minimal interaction with the international markets, and probably account for more than half of Indonesia’s economy. Promoting these activities is promoting Indonesia’s economic growth.

Interestingly, the strategy is not as sophisticated as the strategy to win the international market. It doesn’t need people in formal black suits with nice neck ties and perfect English, attending meetings in five-star hotels for months to negotiate a trade treaty line by line.

It doesn’t take complex financial engineering and a sizeable capital market to create an efficient financing scheme or to hide risk. It doesn’t take world-class expertise on tax to recommend a special-purpose vehicle in a tax haven.

What it takes is a more simple range of actions such as improving the condition of the roads to enable people and goods to move from one place to another simply and safely; affordable electricity and gasoline supply; policemen to maintain security; local banks to provide financing for the market trader, farmer and manufacturer; and simpler procedures and bureaucracy to enable small entrepreneurs to grow their business. The same effort needs to be taken at the national level to enable the domestic market to grow and grow.
      
When there is a jewel in our home, why do we neglect it and spend too much energy and attention fighting for the jewel abroad?

Wijayanto is a vice rector at Paramadina University. He is also the co-founder and managing director of Paramadina Public Policy Institute. He can be reached at wijayanto@paramadina.ac.id

Email This Page

Time for a domestic focus

By webadmin on 2:07 pm November 6, 2011.
Category Archive

Wijayanto

Recently, the International Monetary Fund reduced its forecast of global economic growth for 2011 and 2012. Other institutions, like the World Bank and several investment banks, have done the same, indicating their bearish view on the prospects for the global economy.

Clearly, the crisis of 2011 is more serious than most economists first thought.

The shock probably will not be as terrible as it was in 2008. However, it could take a longer time to recover. This year we are witnessing a deteriorating financial situation in major economies, both at state, corporate as well as household level. This three combined provide a perfect recipe for a lengthy economic crisis.

In 2008, governments had the capacity to provide various economic stimuli. This luxury is not in the picture at the moment due to very limited government fiscal room for maneuvering. In fact, due to the worsening fiscal position, nowadays many governments are part of the problem.

The EU is a valid indicator of the global situation. After more than two years of struggle, the Greek economy remains still gloomy. It is on the brink of sovereign debt default if there is no bail-out from other EU members. Several major banks that have strong business links with Greece, such as Societe Generale and Bank Dexia, are in technical bankruptcy.
Saving Greece, even though it only represents 3% of the EU economy, is crucial to avoid a domino effect. Unfortunately, the Greek domestic economic structure makes this effort challenging.

The situation in the US is not much different. Despite multi-trillion bail-outs, industrial output has not shown encouraging performance and the unemployment rate is still high. With a presidential election in the pipeline political polarization is worsening, making it difficult for the government to take action quickly.  

Decreasing global demand

The above stories depict the delicacy of the economic situation in the EU and the US. Despite Asia’s strong economic position at the moment, it is just a mater of time before the crisis arrives.

Nowadays, China is playing a significant role in delaying the crisis from reaching Asia. It provides demand for neighboring countries’ products. However, China is not the ultimate consumer of these products, but the US and EU. If the story in the EU and the US continues, China’s export-driven economy will deteriorate, passing the problem on to its trading partners in Asia. 

International trade has shown signs of a decrease in terms of volume and value. Countries like Malaysia and Singapore have felt the impact. Indonesia, whose main exports are commodities, will feel the impact soon. After reaching a peak in mid-2011, commodity prices have decreased gradually. We should not expect the decrease to be a short-term phenomenon.

Being an export-driven economy is often the only choice for small countries like Singapore and Malaysia, whose exports account for more than 100% of GDP. Singapore would never have reached GDP per-capita of more than $10,000 without reliance on exports. However, when global crises happen, such a country will feel very severe pain.
 
Indonesia’s situation is different. It is a huge country with enormous natural resources and more than 200 million people. It has more choices to improve prosperity. Export markets are a bonus; the domestic market is the main pillar.

A friend of mine, an economist for a Washington DC-based think-thank, visited Indonesia some time ago. He went to several small towns in Java and was surprised to see the vibrancy of the economy in these towns.

Traditional markets were full of people buying and selling fruit, vegetables and clothing. The streets were full of cars, motorcycles and bicycles, and people kept moving. The footpaths were occupied by street sellers – I call them “street level entrepreneurs – selling a range of products, from toys to food.

These activities occur with very minimal interaction with the international markets, and probably account for more than half of Indonesia’s economy. Promoting these activities is promoting Indonesia’s economic growth.

Interestingly, the strategy is not as sophisticated as the strategy to win the international market. It doesn’t need people in formal black suits with nice neck ties and perfect English, attending meetings in five-star hotels for months to negotiate a trade treaty line by line.

It doesn’t take complex financial engineering and a sizeable capital market to create an efficient financing scheme or to hide risk. It doesn’t take world-class expertise on tax to recommend a special-purpose vehicle in a tax haven.

What it takes is a more simple range of actions such as improving the condition of the roads to enable people and goods to move from one place to another simply and safely; affordable electricity and gasoline supply; policemen to maintain security; local banks to provide financing for the market trader, farmer and manufacturer; and simpler procedures and bureaucracy to enable small entrepreneurs to grow their business. The same effort needs to be taken at the national level to enable the domestic market to grow and grow.
      
When there is a jewel in our home, why do we neglect it and spend too much energy and attention fighting for the jewel abroad?

Wijayanto is a vice rector at Paramadina University. He is also the co-founder and managing director of Paramadina Public Policy Institute. He can be reached at wijayanto@paramadina.ac.id

Email This Page