Trade deficit a new reality?

By webadmin on 12:41 pm Jul 23, 2012
Category Archive

Wijayanto

At the beginning of the global economic crisis several years ago, most economists and policymakers believed that Indonesia could weather the global economic storm well. In part, this was due to the low reliance on international trade.

In addition to the low proportion of exports to GDP, commodities – which tend to enjoy relative stable demand and prices – account for almost half of Indonesia’s exports. This provided a reliable buffer to absorb the impact of the economic crisis.

This situation seems in question today. Indonesia’s exports have fallen while at the same time imports have shown a stable trend, translating into a trade deficit of $640 million in April. This has made people nervous despite the fact that in the first four months of 2012, Indonesia still booked a trade surplus of more than $2 billion. The nerves are perfectly understandable, since for decades the country has always experienced a trade surplus, making most Indonesians allergic to the words “trade deficit.”

For commodity net exporters such as Indonesia, 2012 and the years ahead will be rather uneasy. The economy and exports are influenced by global commodity demand and prices. Consequently, the gradual decrease in prices will impact the government’s fiscal position, corporate profits and household incomes.

Falling demand

The Organization for Economic Cooperation and Development (OECD) forecasts that the economies of the EU, the US, India and China will grow at 1.6%, 2.4%, 7.3% and 8.2% respectively this year, much lower than the pre-crisis level. Other studies by the International Monetary Fund and the World Bank also indicate the same pattern. This relatively low growth in the world’s major economies means that consumers are the root of the commodity price decline. 

Unfortunately, the EU faces structural and domestic political issues in handling its crisis properly.  It may take years for it to recover, potentially disturbing the recovery process in the US and possibly lowering GDP growth in India and China.

Over the past year, the price index of Indonesia’s major commodities – coal, natural gas, palm oil, copper, coffee and cocoa – have decreased significantly. Only gold and tea have moved in a different direction. If the forecasts for the EU and the US economies materialize, commodity prices will not bounce back in the near future.

Meanwhile in Indonesia lower exports are not accompanied by lower imports. The growing number of Indonesia’s middle-income class is one of the key factors behind the stable or increasing imports, especially for products like gadgets, computers, electronics, home appliances and vehicles. From the purchasing power perspective, this is a good development since those who purchase imported products will also purchase various domestically produced goods. However, from the international trade point of view, it is a challenge.    
 
What Indonesia can do

Commodity prices from 1960–2011 indicate two trends. First, commodity prices tend to be more volatile. Second, the correlation among commodity prices tends to be higher. Prices move in tandem, with the oil price taking the lead. In the past, a decrease in the price of some commodities can be offset by the increase in the price of others.

In the current economic setting, producing various commodities is not a good portfolio. In short, economies that rely too much on commodities will tend to be volatile. They will move up and down in line with global commodity prices.  

This is a warning sign for Indonesia to reduce its reliance on commodity exports. This is not only volatile, but also has low economic value-added.  In the long run, Indonesia should transform itself into a more high-tech goods producer. With limited natural resources and its huge population, Indonesia can not achieve a high GDP per capita by digging more coal, pumping more natural gas, planting more palm oil trees and cutting more forest. There is a limit to it.

In the short term the government should make the commodity industry more fair, transparent and accountable through proper regulation and law enforcement. Reducing red tape in the mining industry and improving security in commodities-producing areas are two very crucial actions the government should take. It could improve industry efficiency and corporate income, increase government tax revenues and create employment for the general public.

In addition, promoting policy certainty is also a priority. The decrease in commodity exports is in part also attributable to the difficulties faced by commodity producers in making a business plan due to policy uncertainty. The proposed high export tax for coal, CPO and other commodities, which have finally been cancelled, was one of several examples of improper pro-cyclical policy.

The regulation that obliges mining companies such as gold, copper, aluminum, nickel and tin producers to build smelter facilities in Indonesia before 2014 is one illustration of unrealistic policies. In addition to the huge investment needed and the short time-frame, it is also unmanageable due to the lack of electricity. Making policy is cheap, especially low-quality ones; the cost of wrong policy is massive.

Nothing is new about the above ideas. They have been discussed for years or even decades. However, we hope the global trend will make us realize the importance of sound public policy, and more importantly, the consistency to implement policies accordingly. Improving exports is not an easy task and is beyond the responsibility of one or two ministries. It takes a collective effort by all stakeholders in the industry.

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