Indonesia’s supply side narrative: A conundrum or an imperative

Writer :Gita Wiryawan – foprmer trade Minister/Business men
Publisher :The Jakarta Post
Updated :9.07.2014 00:00

The Jakarta Post
Around 60 million cell phone and smartphones, most produced in China under the various global brands, were imported into Indonesia last year.

On an average of US$200 per unit, $12 billion worth of cell phone and smartphone imports might seem little compared to Indonesias total imports last year of around $200 billion, and even more miniscule to an economy the size of $1 trillion.

Nonetheless, this presents both the opportunities and challenges of Indonesia in the mid and long term. The opportunities lie in the fact that Indonesia, with its high domestic consumption propensity by way of its seemingly perennial youthful demographics, will be needing lots more smartphones and other goods and services.

Assuming that this economy can grow at an average real rate of 5-6 percent per annum in the next 20 years, the accumulation of Indonesia’s gross domestic product (GDPs) (starting at $1 trillion GDP this year and growing to around $7 trillion within 20 years from today) sums up to staggering $60 trillion.

Assuming that 50-60 percent of Indonesia’s GDP will continue to be related to domestic consumption, the accumulation of domestic consumption for the next 20 years is then around $30-36 trillion.

That is the kind of enormity that has and is likely to inspire any producer around the world. Strangely enough, it hasn’t inspired many Indonesian producers, especially with respect to products that extensively involve the use of technology.

This has not been by way of lack of desire, but more likely by way of lack of the stakeholders taking a holistic view of the importance of the country’s moving up through the middle income trap.

The challenges lie in whether or not Indonesia will be able to produce most if not all of the goods and services needed going forward.

Indonesia’s total trade last year was around $400 billion, and runs on a 40-45 percent trade to GDP ratio, a paltry figure compared to some of our Southeast Asian neighboring countries (Singapore at 350 percent and Malaysia at 154 percent).

The larger ratios of these countries may reflect their open mindedness with international trade, but more fundamentally, their sheer intent to competitively produce as many goods and services that will be demanded by not only themselves, but also other countries.

This is a necessary DNA for any country to move up the value chain and pierce through the middle income trap, which is typically characterized by not only being stuck in the $5,000-7,000 GDP per capita range but also not being able to move from an extractive or trading to a productive paradigm.

The stakeholders here include the government (central and local), business community, and consumers. More importantly, the government must know and play the right instruments or roles.

To name a few, faster or easier permit issuance, facilitation or assistance in procuring land banks, clearly defined infrastructure development plan and better enforcement of rules and regulations.

The transition to the new government and leadership in the months ahead and early part of the term will be interesting.

Partly from a monetary perspective where the quantitative easing’s taper off by monetary policy makers in the US will continue and affect dollar liquidity in many parts of the world, including Indonesia.

Monetary tightening is likely an inevitability and there is a limit as to what interest rate increases can do to an economy. Henceforth, the need for a fiscal posture game changer.

Our budget posture hovers around the Rp 1,800 trillion ($154 billion) mark and hinges mostly on revenue generation that’s directly related to commodities (more of the value added components will take more time to come), and indirectly related to growth in countries that need those commodities, especially China and India.

Under current global and regional macroeconomic circumstances, Indonesia’s budgetary posture does not seem likely to augment, given stagnation of the traditional revenue generation.

Much less, any desire to reallocate some of the budgetary uses such as for the purpose of re-aligning or even eliminating the energy subsidy.

Nonetheless, with a tax ratio (ratio of tax revenue to the GDP) of still less than 15 percent, the country is faced with both challenges and opportunities.

The challenge of increasing the tax base, or the number of taxpayers, from around 25 million tax paying individuals and corporates to where it should be (estimates are around the 60 million figure) is merely daunting.

Game changing this requires undertaking a tax amnesty which not only requires a delicate definition of who qualifies and a properly crafted and executed communication strategy, but also a proper bridge of communication with legislators.

Opportunities abound. Should the future leadership of the country succeed in the above, their rhetoric of expanding the revenue base, using it for a much more expanded purpose, be it economic or social, stands an excellent chance of becoming an actuality.

This is not only going to be a Keynesian undertaking (that allows the government to be more proactive in building a lot more soft and hard infrastructure, providing much more expanded fiscal incentives for the business community who would help fulfill the nation’s aspiration to move up the value chain and also pierce through the middle income trap), but also a promising act of infusing greater liquidity into the financial system as the likely tax amnesty recipients will find a new home for their previously parked liquidity.

Of course, all is easier said than done. Therefore, not only optimism and hope, but sheer execution of the plan will be needed.

Only then will we perhaps see more smartphones made here in Indonesia.


The writer is a former trade minister.

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