The Jakarta Post (original link)
Berly Martawardaya , Jakarta | Sun, 03/22/2009 2:02 PM | Opinion
Never let a serious crisis go to waste, said Barack Obama's chief of staff Rahm Emanuel, as he directed the multi trillion dollar stimulus bill and budget, not only to get America out of the recession, but also to alter its fundamental structure.
Although America is the richest country in the world, it is also the world's largest polluter, whose population has one of the lowest levels of education and access to healthcare in the developed world. Obama and his team are pulling all the levers available to change this. Now, the world can look forward to a greener America, with healthier and more educated citizens.
Charles Krauthammer, a neoconservative and Washington Post columnist, said Obama was planning to remake the American social contract.
What about Indonesia? What would a Rp 73.3 trillion stimulus package do to this country?
It depends. Looking at the way the current stimulus approved by parliament is structured, much less than we think.
During economic downturns, both consumers and producers increase their preference for liquidity. Consumers prefer to hold cash in case things get worse, while producers are reluctant to invest since the near future is bleak.
But the productive capacity is still there. The factories and workers are ready to produce. If only the demand was there.
That's where government comes in, to break John Maynard Keynes' paradox of thrift.
According to Keynes, the government is the only agent during a depression with the long-term vision to jump-start the economy. It can afford to run a deficit in the form of counter cyclical economic policy. When the economy grows again, the surplus is used to pay accumulated debt.
But not all economic stimuli are created equal. Larry Summer, Obama's chief economic advisor, stated that a good stimulus should be timely, targeted and temporary.
To spare the economy from severe V- or U-shaped downturn, the stimulus needs to be implemented almost immediately. As income and spending power are inversely related, the main part of the stimulus needs to be targeted toward low-income earners. Since the downturn is temporary, the remedy also needs to be temporary so as to avoid high inflation in the near future.
In order to convince Republicans, who always insist on tax cuts, to endorse his plan, Obama designed a stimulus package made up of 40 percent tax cuts and the rest in government spending.
Top-notch economists and Nobel Prize winners Paul Krugman and Joseph Stiglitz have previously pointed out that policies based on tax cuts are ineffective, as during a recession, people tend to save a higher proportion of their income. The richer a person is, the higher the savings and vice versa.
As for Indonesia, 76 percent of its stimulus package comes from tax cuts, mostly permanent.
The Rp 56.3 trillion tax-cut is a combination of personal income tax, corporate tax, sales tax as well as import tariff cuts. While import tariff cuts could have a higher effect if properly targeted to support exporting firms, empirical studies have shown that the other types of cuts have a relatively low impact.
Bearing in mind Indonesia's small personal tax base, with only 5 percent of the population, or 12.7 million registered tax payers, most of the tax cuts end up lining the coffers of large corporations.
Yes, it is true that our stimulus contains Rp 17 trillion directed to infrastructure spending. Many parts of Indonesia certainly need better roads and buildings to improve commerce. And yes, the 2009 budget also includes salary increases for state employees, teachers and cash transfers (BLT).
But our stimulus program is more notable for what it lacks, rather than what it contains.
It lacks a coherent vision to remake the Indonesian social contract. It surely does not address our oil dependency and deficient public health system. It's quite puzzling that a government facing a near election is not taking advantage of this opportunity.
This is the worst of times, yet the best of times too.
With multinational firms in retreat, now is the chance to strengthen our domestic companies. While imports are getting more expensive, our products are becoming more competitive to export. Now that dinosaur corporations with old business models are facing extinction, it is time to cut government red tape and support entrepreneurship.
And what about skills training?
The Finance Ministry needs to work with other technical departments to increase the proportion of government spending. A monitoring and evaluation framework, with the participation of civil society, needs to be put firmly in place to ensure the money goes where it should and the impact can be carefully calculated for future programs.
One of the key components of economic recovery that has not been addressed is monetary policy. There is room to lower interest rates more aggressively, due to the deflationary trend in commodity and energy prices.
But the declining effectiveness of the transmission mechanism must be taken seriously. It is useless to have more money in banks if it is not lent, or if it is lent at a punitive rate. If major banks cannot be persuaded to lower their lending rates, Bank Indonesia needs to be creative and find ways to increase the lending rate quickly or directly.
On the international side, Indonesia should join hands with other developing countries in pressuring developed countries to abolish their agricultural subsidies that have been a hindrance to our exports.
Indonesia still has time to revise its stimulus or could end up wasting it.
The writer is a lecturer at FEUI and PhD candidate in Economics at the University of Siena-Italy and a member of the NU Professional Circle
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