The fall of old wisdoms and the rise of ‘Chindonesia’

The Jakarta Post (original link)

Berly Martawardaya , JAKARTA | Sun, 04/26/2009 11:48 AM | Opinion

Truth may be the first casualty of war, but truth can also emerge after a crisis. And in this context, let us talk about “Chindonesia”, a shorthand for China, India and Indonesia, because these three Asian countries could become the backbone of Asia’s economic revival.

Companies have relocated to Chindonesia for obvious reasons; not because we produce high-tech products with sophisticated methods but mainly because we do things cheaper.

The banking and financial sectors are less developed in Chindonesia. There is not too much financial engineering and sophisticated instruments. India and China also still maintain a degree of capital control that shields them from financial volatility. All three countries have based their economies on the real sector. Agriculture and mining in Indonesia, manufacturing goods in China and IT services in India are the backbones of these economies.

Let us use the downturn of foreign companies to build our own industrial capacity and human capital while cutting the red tape. Chindonesia could not have achieved what it has today without the significant expansion of education, R&D and entrepreneurship. Thus we could emerge from the crisis stronger and more prepared than ever.

The global financial crisis has brought down not only old economic institutions but also the old economic mindset. What used to be conventional wisdoms in economic growth have been exposed to have only weak foundations and be ill- suited to explain current circumstances.

The global economy will have negative growth and contract by one half to 1 percent in 2009, before staging a modest recovery in 2010. OECD countries will suffer significantly with minus 2-3 percent growth, Japan being the hardest hit.

But three major economies have escaped this predicament and are predicting positive growth. While 9 percent growth has been the norm for China over the past decade, achieving 6.5-7 percent in 2009 will not be that bad. India also shines with 4-5 percent projected growth.

Overall, developing economic growth projections without China and India is near zero percent. The third is Indonesia, predicting around 3.5 percent expansion in 2009.

On the other hand, our neighbors in the Association of Southeast Asian Nations (ASEAN) are not doing so well. Malaysia, Singapore and Thailand are all predicting negative growth in 2009. The Ministry of Trade and Industry (MTI) of Singapore has revealed that Singapore’s economy contracted by 19.7 percent for the January to March period.

Malaysian exports have declined for five months in a row, but the decline in February 2009 (-15.9 percent) has narrowed from -27.8 percent in January 2009. For Thailand, let’s just say that they are doing better than we did after financial crisis last decade. The mix between political and economic crises has proven to be very a combustible potion and not conducive to growth.

What lessons can we draw from this?

First, the crisis has exposed the vulnerability export-based economies. The virtue of export promotion as a development strategy has been extolled over import substitution. Carving out a market niche in the global market was seen as the surefire recipe to prosperity. But the sword cuts both ways.

As the global demand subsided, the down swing was particularly felt by countries with a high degree of exposure and income from exports. Thailand suffered an extra mile with the loss of tourists, once a major source of income, as they were scared off by political confrontations.

Second, the low side of high-tech exports. Not all exports are equal. The high-tech sector, with a high degree of value added, used to be where countries were aiming to be. Cars, cell phones, computers and microchip technology with other electronic products are the 4Cs said to bring in foreign currency.

But the high-tech products are also the first consumers cut down on in an economic downturn. It may be a less merry and glitzy life, but they realize that that they could live without these things.

Japan, the world’s second-largest economy, posted their sharpest-ever decline in February – down by 49.4 percent – as global demand for Japanese cars and electronics evaporated.

Lastly, finance is no longer king. New York, London, Singapore and Hong Kong used to be the center of the robust financial world. Exotic financial instruments have brought untold wealth to industry leaders.

While there has been no systematic effort to reduce exports, the exports in all three countries’ economies range around one third of the GDP, leaving domestic consumption, investment and government expenditure strong enough to cushion the shock of the crisis and provide a decent rate of growth. Large populations are a plus in this case.

In 2006 PricewaterhouseCoopers (PWC) coined the term the “Emerging Seven” (E-7), namely China, India, Brazil, Russia, Indonesia, Mexico and Turkey – that its says will replace the G-7 (the United States, Japan, Germany, UK, France, Italy and Canada) as the global economic powerhouse and will be around 50 percent larger than the G-7 by 2050.

Looking at how things turning out, this may be a realistic projection.

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.

A district-based system: More efficient, accountable

The Jakarta Post (original link)

Berly Martawardaya , JAKARTA | Wed, 04/15/2009 10:20 AM | Opinion

The legislative elections passed relatively peacefully, so now what?

We could all sit down and argue hypothetically about the exquisite courting dance between political parties forming coalitions for the upcoming presidential race.

But ultimately, the reality will be more heart wrenching than Dancing with the Stars or Indonesian Idol.

We should definitely investigate irregularities in registrations and election conduct, impose stiff penalties for offenders, and reschedule elections where necessary.

We need election results to be legitimate and final. Don’t let Indonesia’s political system inch any closer toward Thailand, where the legitimacy of the election system is undermined and those elected face massive street protests.

Or we could ponder the major problems in our current system, and start preparing solutions. Arguably, political parties and election candidates were not well prepared when the Constitutional Court (MK) announced its decision to make the legislative elections candidate-centered instead of party-centered.

Campaign advertising was not geared toward coherent and compelling personal stories of candidates, but remained heavy with party symbols and figures and messages.

Even when candidates learn to do it right under the prevailing system, and assuming the elected legislature and incoming government do not mess with the Constitutional Court ruling, it will still be very costly to get elected as a legislator, either at national or regional level.

Lee Kuan Yew, the longtime successful prime minister of Singapore who still holds sway in government, came out with a simple and powerful law in his memoirs. The higher the cost of being elected to public office, the less clean the government will be.

We can talk all we want about having competent and genuine candidates, but even the competent and pure of heart need money to win.

The current system is very costly and forces candidates to spend massively.

The conundrum is whether to borrow and hope to recoup after winning, or to solicit campaign
contributions from wealthy donors and remain beholden to their interests.

We need to decrease the size of electorates (dapil) so candidates can focus their campaigns more effectively and provide more bangs for their bucks.

The current system, a multiple seat constituency, needs to change to single seat constituency – a district system.

Now is a rare moment where political parties’ needs coincide with public interest. Election candidates want to reduce their campaign costs and the public wants more accountability.

In district system, a political party only fields one candidate in each district, thus escaping bloody and costly feuds where candidates from the same party fight each other for votes.

The accountability side will also be well served. With only one legislator, the electorate knows who they can hold responsible for policies in parliament and whether to punish or re-elect candidates accordingly.

What about claims that a district system would weaken parties?

Maybe this question should be reframed to “what kind of election system is best for Indonesia?” We adopted the proportional system from the Dutch.

In such a small country, it is safe to assume that regional differences do not really matter, thus whoever becomes a member of parliament within one party has little consequence.

But Indonesia is much larger than the Netherlands, with real regional differences. Our diversity should be a strength instead of being glossed-over and ignored.

Having a Jakarta native with a fancy degree masquerading as a local to get a seat in the national legislature will just not do anymore.

This approach has already done too much damage. Indonesia needs more local people with local wisdom and real knowledge of local problems in the national scene.

Having a system of party primaries could enforce party discipline. No longer could someone be assigned to be candidate in one area just because of proximity – or worse, financial contributions to the party chairman.

That person must prove their mettle in an intra-party election. Thus representing the view of local party members in the corresponding district. Whoever emerges as the winner could then run as the party candidate.

If a party thinks, through surveys or other means, that it is not competitive in one area, it could opt to not run a candidate but support another party’s candidate in that area. A political pact should be made before the election and become the foundation of a permanent alliance in governing.

Thus the people would have a better idea of what is to be expected if the party or alliances of parties go on to win the election.

Indonesia’s complex tapestry of geography, ethnicity, religions and history is likely to have room for more than two national parties.

Malaysia and India have relatively permanent coalitions of parties representing different society groups, either governing or waiting in the wing as loyal oppositions.

There are also some studies that point out that having a combination of direct presidential elections and district legislative elections is the most stable system because party discipline in weaker and possible to form temporary issue and geographical alliances.

A district system would reduce campaign costs, increase accountability and produce a more stable government. What are we waiting for?

The writer is a lecturer at School of Economics, University of Indonesia

G20 summit: A global new deal?

The Jakarta Post (original link)



Berly Martawardaya , JAKARTA | Wed, 04/08/2009 11:07 AM | Opinion

UK Prime Minister, Gordon Brown, called the G20 Summit in London a Global New Deal and solution to the current financial crisis. The twenty participant countries make up 85 percent of global gross national product, 80 percent of world trade and two-thirds of the world population.

The G20 Summit needs to be complemented and praised for the role it has played. It used to be the order of the day that the mainly white rich nations’ club of the G8 decided what was good for the world.

The G20 was inaugurated in 1999 and has had annual meetings since then, but only since the financial crisis unfolded in 2008 has it became a major forum to find global solutions. Enlarging the committee to save the world has increased the sense of global ownership, so we can take together the hard steps that need to be taken.

It is no longer the task of the developing countries to implement the pre-cooked solution prepared by smarter and richer countries. Now we are in it from the start, hammering out solutions together.

The other break with the past is in the character of solutions offered. No country was foolhardy enough to propose raising interest rates, cutting spending or eliminating subsidies for the poor as often previously required by the IMF and imposed on countries in crisis through IMF structural adjustment programs (SAPs).

Instead the summit offered a refreshing break from the previous Washington Consensus with its market fundamentalism. The communiqué of the meeting is filled with references to ease monetary policies and promote fiscal stimulus. The world is truly Keynesian now.
But to be judged successful, the summit needs to have accomplished three things.

First, to do no harm. The Hippocratic principle was executed seamlessly. It’s not as easy as it sounds; there were many contentious issues between US and Europe as well as between West and the Rest. Playing them down also has consequences.

Credible assurances of commitment to free trade and against protectionism were badly needed. Stock markets in Europe rose by one percent on average, while in Asia we had 4-5 percent increases in the Nikkei and Hang Seng indexes.

Second, it needed to agree on policies to minimize the economic downturn, accelerate recovery and support long-term growth. Obama called for fiscal stimulus of at least two percent of each country’s GDP. While Angela Merkel was exceedingly worried about Germany’s history of hyperinflation, inclining her not to accept this proposal, the final language stated that collectively G20 countries agreed to spend US$1.1 trillion dollars to boost the world economy.

The basic principles of Keynesian economics are very simple. Put money in the hands of people that are more likely to spend it the soonest. The more luxurious the goods and services purchased, usually, the lower the impact for the whole economy. The increase in demand will utilize the idle capacity, end the waiting game and get the economy moving again. That’s why the commonly recommended policies are tax-cuts, subsidies and direct cash transfers to the poor. Government have to run deficits as they are the only economic agents taking a long term view and having credibility.

In the global context, stimulus means putting money in the hands of low-income countries. The G20 agreed to spend $100 billion to assist international development banks in lending to poor countries. Additional resources of $6 billion from agreed IMF gold sales will also be made available for lending especially for the poorest countries.

Among the loans that banks freeze in the name of caution after a crisis unfolds are trade credits. Producers from developing countries commonly use trade credit facilities and Letter of Credit (L/Cs) from developed country banks due to lack of domestic financing. With the negative impact of the credit crunch, developing countries then cannot export their products anymore, due to lack of trade finance.

The G20 committed $250billion of support for trade finance over the next two years through export credit and investment agencies, as well as through multilateral development banks. This is a very welcome relief that gets right to the root of the problem.

Third, the summit also needed to strengthen institutional arrangements to prevent that a similar crisis should occur again.

While stopping short of erecting a wall between the consulting, auditing and banking industries on similar lines to those before the repeal of the 1933 Glass-Steagall act in 1999, the summit made very clear pronouncements in the direction of transparency. The shadowy banking world of the hedge fund is about to come into the light of day and to be regulated, while list of countries that protect tax havens will also be announced shortly.

International accounting standards will be set and credit rating agencies will be regulated in order to remove conflicts of interest. A newly established Financial Stability Board (FSB) will supervise and provide early warning systems to enable steps to be taken before a problem grows into a full-scale crisis.

But the IMF still presents a dilemma. Countries need to have sufficient capital to fend off speculative attacks, but association with the IMF was even more politically toxic than exposure to sub-prime mortgage losses for past victims of the 1998 Asian banking crisis. Furthermore, the current composition of voting weight within the IMF is still over-representing the G8 countries.

Thus, the costlier but preferred path is to pool reserves and set up regional agreements to help each other through such unfortunate events. The G8 countries seem oblivious that simply increasing IMF capital will do little to ease these concerns.

The leaders of the G20 put on a great show, let see if they can walk the talk.


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.

Learning our lesson from another dam failure

The Jakarta Post (original link)

Berly Martawardaya , JAKARTA | Wed, 04/01/2009 11:08 AM | Opinion

In the still of the early morning last Friday, gushing water from what was the Situ Gintung dam swept away the community living beneath it. As of this writing, close to 100 people in the Cireundeu area have been found dead and more than another hundred are still missing. Indonesia is grief stricken.

How could this happen? This is the age of the Internet and instant communication. Current technology could alert us to an asteroid approaching Earth from a million kilometers away. But this tragedy occurred in Jakarta, not some faraway, hard to reach area.

Unlike the Aceh tsunami, we cannot blame God for this — only ourselves.

While there has been a movement to reform the legal legacy of the Dutch colonial administration, there has been little attention paid to conserving its physical legacy, except for when potential tourist dollars are at stake.

Realizing the potential and peril of the Pesanggarahan River; in 1932 the Dutch built a dam to hold 2.1 million cubic meters of water in a 23-hectare area. Since then, many trees have been cut down and floods are more frequent; it seems that the Indonesian government has not done much to improve the dam.

We could not help but be saddened by reports that the foundations of the dam were weakened as surrounding communities salvaged building materials. This proved to be a very costly act of vandalism indeed.

Nevertheless, the government is not off the hook, ultimate responsibly for maintenance and preservations of public facilities lies with them. The all too frequent sinking of passenger ships and crumbling of bridges should be seen in same light; insufficient maintenance is to blame.
So what needs to be done?

First, the government needs to allocate funds from the Rp 17 trillion (US$1.5 billion) budget intended for infrastructure repair as part of a recent stimulus package for a comprehensive assessment of the country’s infrastructure. Bridges, dams and ships should be the priority, as they have the greatest potential for casualties.

The assessment of existing facilities, preferably by independent specialists, will not be as exciting and glamorous as establishing new ones is. No public ribbon cutting ceremonies with glitzy media coverage (not to mention, there would be less of a chance to embezzle funds) - just the nuts and bolts of governing for the people.

The rebuilding and rehabilitation of public infrastructure would be a massive, labor-intensive undertaking that would channel money to low-income people. High-income groups would too benefit from the high impact improved infrastructure would have on the national economy. We could also reallocate some Rp 56.3 trillion in tax-cuts of the stimulus to strengthen existing infrastructure.

Second, we need a thorough assessment of buildings located nearby rivers and other natural reserves. Bodies of water need clean areas around them to properly absorb water, and building on these areas can have disastrous consequences.

The harder part will be to assess the impact of legal but environmentally damaging construction. Teams of experts should follow rivers and other flood-prone areas to determine whether the establishment of water reservoirs is necessary. Don’t let the poor suffer to satisfy a few people’s greed.

New measures to transform the few remaining lakes and swamps into urban real estate should be resisted. Mother Nature is hurting and its time we listened to her.

The third measure should be an intensive public education campaign. The people should be made aware that the weakening of public facilities can endanger everyone’s life.

As direct beneficiaries, nearby communities should be fervent protectors. A clear line of reporting needs to be established, so the people know what to do if a crack or splinter in public infrastructure is spotted.

Some form of reward and encouragement for this potentially life saving measure needs to be established. Meanwhile, we need stern punishment for the vandals .

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