Natural resources: From curse to blessing

Muhammad Fadli Hanafi and Berly Martawardaya, 
Jakarta | Opinion | Mon, October 12nd 2015, 4:41 PM


Indonesia is blessed with abundant natural resources. During the New Order period (1966-1998), primary school children were taught to think of natural resources as a source of development. 

Indonesia possesses the 2nd largest oil reserves in South East Asia with 3.6 billion barrels, the world’s 14th largest gas reserves with 103.3 trillion cubic tons and holds about 40 percent of the world’s geothermal reserves. 

Furthermore, it is the 8th largest gold producer in the world, producing about 100 tons/year according to the 2013 US Geological Survey, the 5th largest producer of copper and nickel, and the 2nd largest exporter of liquefied natural gas (LNG), after China.

 Questions remain. If Indonesia is so rich in natural resources, why then are there so many poor people in the country? 11.2 percent of the population live in poverty, according to BPS’ latest survey. Our level of development is far below resource-poor countries such as South Korea, Taiwan and Singapore. Some academics call this phenomenon the “natural resources curse”. 

This phenomenon shows a contradictory relationship between natural resource wealth and economic performance. 

Intuitively, a country with rich natural resources could provide better prosperity for its people. 

However, the opposite seems to be the case. The natural resource curse presents itself in four perspectives. 

The first is structuralist. This perspective explains how a primary commodity export boom causes the currency to appreciate, making exports uncompetitive and imports cheap. 

The second perspective concerns transaction costs. This perspective shows how the high volatility of primary commodities tends to increase transaction costs over periods of time. 

The third perspective explains how a shift from entrepreneurialism to a more complacent natural resource-based economy takes place. And the fourth perspective concerns institutional failure; how weak government becomes unable to manage the output of natural resources, and cannot funnel the benefits of natural resources to boost economic performance and improve other social indicators such as those listed in the human development index (HDI). 

The issue is strategic one globally, especially for Indonesia. Natural resources are not renewable, and therefore wisdom in usage is imperative. The academics and scholars Martawardaya, Basuki, and Hanafi investigated the role of a non-tax shared fund from natural resource extraction on economic performance and some social indicators. 

They divided 539 municipalities and regencies into five categories based on natural resource richness, indicated by the shared-fund of oil and gas from the central government. The results revealed that a higher share of natural resource fund has no impact on driving higher economic growth in the municipalities and regencies classified into the richest 20 percent in terms of natural resources. 

 Subsequently, it was also shown that the higher the shared-fund, the lower the probability of the local government to get a qualified (WDP) and unqualified (WTP) audit opinion from the Supreme Audit Agency (BPK). This fact strongly indicates that the natural resources curse is true for Indonesia, a curse that is exacerbated by institutional weakness. 

Several countries have been successful in getting out from under the curse or at least minimizing the negative impacts brought about by the curse. Dubai is the poster child for a country that managed to take a long term view before running out of oil. Dubai invested its natural resource wealth into its people and diversified the economy into services and finance.

 The government of Norway established the “Government Pension Fund Global” to stabilize the flow of oil revenues into the budget and invest it for future generations, managed by Norges Bank Investment Management. Similar to Norway, The United Arab Emirates also established the “Abu Dhabi Investment Authority” to manage natural resource revenues including surpluses from oil exports for the benefit of future generations. 

Moreover, Timor Leste also runs the “Petroleum Fund of Timor-Leste” to support its fiscal stability. 

These policies are well-known as “Natural Resource Funds” (NRFs). The funds from an NRF policy can be further used to cover budget deficits, to save for future generations, to earmark for country and regional-level projects, or to invest abroad to mitigate the risk of the so-called Dutch-Disease.

 Indonesia is no longer as rich in natural resources as we were taught to think. The oil reserves will last only for another ten to 15 years. But the situation is not irreversible. We still have time if we move quickly.

Local government expenditure has to be allocated mostly to education, health, social protection, as well as capital expenditures. 

As of 2013, the largest proportion of budget spending went to personnel expenditures (20.93 percent) followed by capital expenditures (15.97 percent), education and health expenditures at10.26 percent and 1.52 percent respectively. 

A local government blessed with high revenues from natural resources, especially in oil and gas, can afford to educate its people, hire the best minds to assist in diversifying its economy and strengthen local government services. 

The national government could offer a helping hand by sharing the knowledge and practices learned from local and international governments to prevent the fall into the curse of natural resources. 
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Muhammad Fadli Hanafi is a researcher at Article 33, a think-thank focusing on Indonesia’s environment and extractive sector. Berly Martawardaya is an economist at University of Indonesia and senior fellow at ANP Insight. 

Development Planning That Works

The Jakarta Post (original link)
Jakarta | Opinion | Tue, November 04 2014

President Joko “Jokowi” Widodo is in for considerable development challenges. Indonesian economic competitiveness has been declining due to overreliance on commodity exports, crumbling roads and bridges and an electricity supply shortage. 

Despite the need for huge infrastructure investment, more than a quarter of central government expenditures are allocated for the energy subsidy as consumption grows. 

Anne Booth from the University of London said that Indonesia’s development was a history of missed opportunities. Fail again and forget about becoming the next Asian Tiger. We will be in the same league as Vietnam and Myanmar instead. 

It was the right move by Jokowi to move the National Development Planning Board (Bappenas) from under the oversight of the coordinating economics minister; it will now directly report to the President. 

Development is more than economics and too important to be left just to economists. Thus, it is appropriate that the new national development planning minister, Andrinof Chaniago, has eclectic formal education with a Bachelors in political science, Masters in public policy and PhD in philosophy. He also has written a book entitled The Failure of in Indonesia Development. 

If Andrinof has been reading up Law No. 25/2004 on national development planning system and the subsequent Government Regulation (PP) No. 40/2006 on mechanism of development planning formulation, then he knows that the law only gives him less than two months to table out a draft Medium Term Development Plan (MTDP) for 2015-2019 to the Cabinet. 

The law also requires the draft be discussed in a National Medium Development Planning conference that includes major stakeholders and the legalization of the document in a Cabinet meeting before Christmas. 

So the schedule is tight. How do you make the best possible strategy for the next five years under such constraints? The MTDP is supposed to be a master document that all ministries and government institutions refer to and implement in accordance to its role.

Strategic management experts say that if you fail to plan then you are planning to fail. The cycle of planning, implementation and monitoring/evaluation need to be strengthened amid a scarcity of resources and high stakes. 

Andrinof does not have to start with a blank sheet of paper, though the outgoing government has prepared a technocratic draft for the new President and his Cabinet based on experience and evaluation of the last five years. 

Andrinof is a close confidante of President Jokowi and he is going to need all the support he can. In the best-case scenario, he would sit down with other ministries to put challenging yet feasible indicators for each ministry in the MTDP. 

The second round of meetings would be to tightly align strategic plans in each ministry with the MTDP. However, coordination of development planning with other national government institutions is the easy part.

 The major problem in Indonesian development planning after the launch of regional autonomy is the misalignment and insufficient coordination between national and local governments. 

Since local governments are locally elected and have a wide range of autonomy then there is not much that the national government can do if governors/regents or mayors prefer to pursue a different set of policies. 

But if we look at countries with federal systems with strong authority in local governments such as Germany, United States and Malaysia, it seems they are not underdeveloped nor do they have disorderly governments. How do they deal with different priorities and policy at various levels of government? 

There are two main strategies. The national government could have a national program that the local governments could opt to join. If they do, then it also means getting more transfer funds for their budget. 

This is what US President Barack Obama does with national health insurance since the federal government could not force the local government to join. 

The strategy is to set a goal (ex: secondary school enrolment rate) and reward local governments that reach it with additional transfer funds. To take into account differences in regions, a growth rate could be used instead of absolute number.

The current formula for general allocations of funds for regions only takes into account these factors: population, area, price level, human development and income per capita. No room for policy factor that can function as a carrot and stick. Changing the formula would strongly strengthen coordination and synergy between national and local governments. 

Making development planning work for the people is not easy task. But as former US president Ronald Reagan famously said in 1981, “If not us, who? If not now, when?”

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The writer is an economist and lecturer at the master of planning & public policy program at the University of Indonesia.

Toward fair competition, an end to political dynasty

Berly Martawardaya, Jakarta | Opinion | Mon, March 25 2013, 11:28 AM

Jakarta Post | Page: 6 - Original link

In the movie Spider-man, there is a stage in Peter Parker’s life where he earns money as a professional wrestler. Using his superpowers, he wins fights against many different types of opponents. Later, Parker realizes that it is not fair for someone with superhuman powers to fight head-to-head against an average person.

There has been a recent renewal of public interest in political dynasties. The 26-year-old regent of Bangkalan, Makmun Ibnu Fuad, is continuing his father’s reign. The mayor of Cimahi was elected to continue her husband’s term of office. 

Banten is a prominent example of a family having a strong presence in politics. Governor Ratu Atut Chosiyah’s sister, Ratu Tatu Chasanah, is the deputy regent of Serang, her stepbrother,Tb Haerul Jaman, is the mayor of Serang and her sister in-law, Airin Rachmi Diany, is the regent of South Tangerang. Numerous Banten councilors are also Atut’s blood relatives.

General director of Regional Autonomy Djohermansyah said that there were 57 local chief executives elected to continue the offices of blood relatives. Concerns about political dynasties has prompted the government to a submit revision of Law 32/2004 on local elections, which would prohibit direct blood relative of local chief executives running in an immediate local election to succeed the incumbent. 

Home Minister Gamawan Fauzi said the prohibition includes vertical relationships such as a father and child as well as horizontal blood relationships such as brother and sister.

Opponents of the policy say that the prohibition would go against human rights and equality before the law. They vow to challenge the bill at the Constitutional Court (MK), if it is passed into law. 

The fight against the excessive accumulation of power and the promotion of fair competition within a clear legal framework was the essence of the 1998 reformation. Among the reformation’s legacy is decentralization, which reduces the central government’s political power, presidential term limitations and the formation of the Commission for the Supervision of Business Competition (KPPU), which the curbs the excessive accumulation of economic power.

However, there is no commission that ensures fair political competition. Drawing from Aristotle’s distributive justice, there is an idea about treating equals equally and unequal’s unequally (Nicomachean Ethics, Book V, Chapter VI). 

During the New Order, there was a joke going around that the most important qualification for a president was having experience as a president. Since the only person with presidential experience was president Soeharto, he was re-elected without being challenged. The constitutional amendment after Soeharto’s downfall that limits presidential terms to a maximum of two is an acknowledgement that the right to run for office is not absolute. 

The term limit ensures the rise of new voices and fresh approaches at least once a decade. It also applies Aristotle’s concept that a two-term president would not compete on equal terms with any other person, thus needs to be treated unequally by being prohibited from running for a third term. 

The public and legal community has agreed on the validity of prohibiting the chief executive from a third term. The question is: Would prohibiting the candidacy of direct relatives be justifiable?

Having an incumbent’s direct relative as a candidate would also deter a highly qualified and competent person who is a nonrelative from running for the same office. Empirical data shows that regions with lower social mobility at top executive positions tend to display lower human development and governance quality.

In his study entitled “Populism, Dynasty and Consolidation of Parties”, Marcus Mietzener implies that Indonesia is still a society with a scent of feudalism at the democracy consolidation stage. Many shadows of Indonesia’s past looms close enough to pull it back from becoming a mature democracy that is able to provide welfare for its people. 

There is also a strong argument toward extending prohibition to nieces and cousins as in the traditional kingdom; they got full family support to become successors in the case that a child or brother did not display adequate leadership and competence.

Indonesia also faces the problem of the politicization of civil service. Formally, the civil service is neutral in elections. But there have been many instances where the re-election of an incumbent executive benefitted from the support of civil servants. 

When an incumbent’s relative runs for office, he or she would benefit from the incumbency by hook, respect and a speck of feudalism, or by crook, a blatant directive to support, without any additional scrutiny toward an incumbent. 

If we look abroad, there are political dynasties in many countries. In the US, there is the Bush family from which the father and son both served as president, in the Philippines there is the Macapagal family from which the father and daughter both served as president and in Singapore there is the Lee family from which both the father and son served as prime minister. There is one similarity between all the above mentioned pairs, which is that they were all not elected consecutively. There was at least one nonrelated person who served as chief executive between the father and child’s term. 

However, we should be careful in casting the net too wide. Prohibition should not be more than one term. If a majority of the people elects a blood relative after five years without the benefit of incumbency, then that is a display of real support that should be respected. Expanding prohibition between different levels and branches of the government would be too much too soon. We should take one step then observe the impact. 

Indonesia still has to address the problems of poverty, equality and service provision. The Regional Autonomy Law puts responsibility on the back of regents and mayors. Therefore, it is imperative that the regional head is a capable person and is elected on their merits, not on ascribe status and family relationships. As the Prophet Muhammad said, a country that does not put its most capable people in governing positions is waiting for its own destruction. 

Law No. 5/1999 on antimonopoly states that economic freedom and competition has its limits. It would be prudent to put some well-thought legal limit on political competition in the revision of Law 32/2004 on local government. As Peter Parker’s uncle would have said, “With great power, comes great responsibility” to regulate it. 

The writer is lecture in planning and public policy at the University of Indonesia, senior economist at INDEF and deputy chairman of the Nahdlatul Ulama Scholar Association (ISNU).

A year of respect for Indonesian women

Berly Martawardaya, Jakarta | Opinion | Fri, February 22 2013, 10:23 AM

Paper Edition | Page: 7. Jakarta Post (Original link)

Let us start with two recent cases of disrespect toward women. First, Garut Regent Aceng Fikri took a 17-year-old girl as his second wife in an unregistered marriage (siri) only to divorce her by SMS four days later, claiming she was not a virgin. He locked her in his home for days after the wedding day.

Second, judge Muhammad Daming Sunusi, the head of the Banjarmasin High Court, told House of Representatives’ members who grilled him during a selection of Supreme Court justices that “both the victim of rape and the rapist might have enjoyed their intercourse together, so we should think twice before handing down the death penalty”.

Deanna Ramsay (The Jakarta Post, Feb. 14) said the two cases marked a bad start to the year for women. I beg to differ.

To assess respect for women in current contestation of public policy discourse, we need to look back at the history of Indonesia, where women have often played a significant role.

Kartini’s intellectual awakening and the social change she ushered in by promoting formal education for women back in the 19th century led many to continue her deeds. On the war front, Aceh’s Cut Nyak Dien’s ferocious fight against the Dutch was an inspiration in the pre-independence movement.

The two names were prominent examples of the many heroines who have shed blood, sweat and tears for a free Indonesia.

Among the cultural royalty, including religious clerics, military leaders and educated professionals that made up 68 Indonesian members of the Preparatory Body for Indonesian Independence (BPUPKI), there were two female members: Siti Mangunpuspito who headed the women’s division at the Jakarta Office of Java Hokokai and Maria Ulfah, who was later appointed social services minister (1946-1947).

A historian and political scientist expressed surprise when he discovered the issue of women voting rights was unanimously passed without any prolonged debate back in 1945 despite strong patriarchic tendencies in many of Indonesia’s ethnic groups.

Founding president Sukarno appointed three more female ministers during his reign, who were SK Trimurti as manpower minister (1947-1948), Rusiah Sardjono as social services minister (1962-1966) and Artati M Sudirdjo as basic education and culture minister (1964-1966).

Such a journey was not as smooth in other countries. Unlike Indonesia, the US took 157 years after independence to install a female minister, when Frances Perkins was appointed secretary of labor under the progressive presidency of Franklin Delano Roosevelt in 1933. Women in the US then had to wait for another 44 years until two more women, Juanita M Krepps and Patricia R Harris, were appointed ministers during the Jimmy Carter presidency in 1977-1981.

Historically, the 56 delegates of the second Continental Congress that signed the US Declaration of Independence in 1776 were all white males and it took the Americans 144 years to grant voting rights to women in 1920. Even after 1945, seven state legislatures had yet to affirm the equal right, with Mississippi
being the last in 1984.

While its fair to argue that a progressive movement in the 20th century affected many countries in the world simultaneously, it is hard to state that respect for women in Indonesia was not an ingrained part of the independence movement here and, at least partially, was hardwired to national institutions and conventions. Nevertheless, we have to admit that the women’s movement in Indonesia has had its ups and downs along the way.

Islam, the religion of the majority of Indonesians, has sometimes been misused as justification for disrespectful acts against women. Many deliberately ignore numerous instances where the Koran and Hadiths clearly hold women in high regard. One of the latter being that the best Muslim men are those who treat women and wives the best (Hadith by Tirmidzi: 285).

Sometimes in public policy, the public backlash is more important and lasts longer than the act itself. In the cases of Aceng and Daming, the reaction was quick and harsh. Aceng faces imminent impeachment upon request of the Regional Legislative Council (DPRD), while Daming has to bury his dream of wearing a Supreme Court robe after receiving a “no” vote in the House.

In both cases, the offenders fell from grace in five nasty and brutish stages.

First, unflattering comments, jokes and photo-shopped images spread like wildfire through BlackBerry messenger groups, Twitter and other social media outlets.

Second, print and electronic media highlighted their misdeeds.

Third, prominent women activists and NGOs concerned for women turned up the volume of protest.

Fourth, leaders of state institutions with built-in tendencies to protect women such as the National Commission on Human Rights (Komnas HAM), the National Commission on Violence Against Women (Komnas Perempuan) and the Women’s Empowerment and Child Protection Ministry, all shared their concern and condemnation.

Fifth, a very public brouhaha convinced state and political party figures to deal the two men a deadly blow.

The boycotting power of women was also evident in the cases of Puspo Wardoyo, owner of Wong Solo restaurant chain and Muslim cleric Abdullah Gymnastiar who both practice polygamy.

Indeed, the rising power of women has a positive impact on politics. Any ambitious Indonesian should avoid disrespecting women in words and deeds.

However, the trend will be more beneficial for Indonesia if the wrath of women is also turned toward dealing with corruption, poverty and environmental degradation that inflict damage on the country and its people in the long run.

In her lyrics, American singer Aretha Franklin says women deserve just a little bit of respect. In Indonesia, 2013 is a year of increasing political respect for women and will pave the way for even better years ahead.

The writer, a lecturer in planning and public policy at the University of Indonesia is deputy chairman of the Nahdlatul Ulama Scholar Association (ISNU).

Indonesian people’s love affair with the motorcycle

Berly Martawardaya

Depok, West Java | Fri, 12/16/2011 10:03 AM

The Jakarta Post (original link)

Has anyone been surrounded by a swarm of bees?

At first, the buzzing sound comes suddenly. In a very short time, it surrounds you from every direction. You try to move slowly away while watching carefully. If somehow you escape the swarm without a sting, then a great sense of relief fills your heart.

Not many people have been in that situation, but almost everyone in Indonesia’s big cities has been in traffic encircled by motorcycles. Some that have been through both would testify that the two experiences have many similarities.

The sting of motorcycles hurt too. Of 6,387 traffic accidents in Jakarta from January to November this year, 94.8 percent were motorcycle-related incidents.

The proportion has risen from 93 percent of 8,059 traffic incidents in 2010. The Jakarta Police chief has stated that motorcycle accidents waste life and increase anxiety in society.

The year 2010 witnessed a 25.8 percent rise in motorcycle sales to 7.4 million. Sales from January to September 2011 reached 6.2 million units, projected to pass a total of 8 million for this year. About three-quarters of sales were in Greater Jakarta.

In total, from 2008 to September 2011, Indonesian roads have had to endure an additional 28.6 million new motorcycles. The chairman of the Indonesian Motorcycle Industry Association, Gunadi Sindhuwinata, is optimistic that Indonesian people will buy 10 million motorcycles in 2013.

Let’s first look at the supply side.

The CEO of Federal International Finance (FIF) explained that usually financing companies such as FIF provide 10 percent funding while the rest is covered by a bank. The interest charged is between 19-26 percent annually. Peak sales are at Ramadhan since many people want to have a new vehicle during Idul Fitri.

Banks with funds on deposit could choose to lend to entrepreneurs seeking to expand their business. To do so prudently and strategically, especially in the manufacturing sector, would increase Indonesia’s long-run productive capacity and growth.

But conducting thorough due diligence and credit analysis is tedious, costly and time-consuming.

Moreover, due to Indonesia’s weak law enforcement, it is very hard to seize assets of defaulting debtors. Too many times banks lose their cases in court.

Thus, it is very alluring for banks to channel more of their credit to the consumer side especially automotive loans. If a debtor fails to pay, then the bank can simply seize the vehicle, mostly without returning payments already made, and re-sell to other willing buyers. Heads I win, tails you lose.

Game theory, a sub-branch of economics that won John Nash a Nobel prize, has described the situation as a prisoner dilemma where every party takes decisions that benefit their self-interest but the overall impact is negative.

From the demand side, Indonesia’s rising middle class has stronger purchasing powers.

In the past, they were still in the lower-middle or even low-income category that had little choice but to use notoriously unreliable public buses in all of their varieties. You never knew when they would
show up, making it hard to schedule trips.

The only way to ensure arrival on time at the office was to leave very early from home and pray hard in uncomfortable seats.

Thus, when the rising middle class has a sufficient income stream to buy a motorcycle on credit extended by banks, they grasp it enthusiastically. If father, mother and kid make the motorcycle trip
together, they even save money compared to using public buses.

People who live near railway lines have a better option, as the journey is much shorter and the schedule is much less erratic with 10- to 15-minute intermittent delays still acceptable.

The increasing frequency of air-conditioned trains makes them even more interesting to middle classes that can not afford to arrive at the office all sweaty. But train coverage in Greater Jakarta is still very limited.

Part of the reason motorcycles are much faster than cars is that traffic laws are somehow applied more leniently to motorcyclists. Try to drive a car through red traffic lights or drive against the flow and you can be sure that a cop is soon on your trail. We see motorcycles do that every day while the police stand around.

The attack of the motorcycle swarm is a big worry, but it is not too late to prevent.

The first measure would be to make public transportation more attractive to the public. Although the Jakarta government actively promotes a yet-to-be built subway, the Lebak Bulus-Kota track is still too limited to make a significant impact on millions of Jakarta’s commuters.

If the government can spend lavishly to build new and elevated roads in Jakarta, then it also could build new train tracks to cover more areas. Trains do not have to wait for traffic lights, cost less than subways and reduce road congestion. The Transjakarta Busway is another means of transportation that also needs to increase its frequency and to put air con in the bus stops to woo commuters.

Some busway and train stations need to be strategically designed with large car parking areas so commuters can come by car from their homes and continue their journeys by public transportation where they could arrive faster and cheaper in a comfortable manner.

Bank Indonesia needs to implement more stringent criteria for motorcycle credit and get banks to channel more of their deposits to productive loans that promote Indonesian companies. Lastly, let’s impose heavy penalties on law-breaking motorcyclists and enforce road rules consistently.

Then maybe our love affair with the motorcycle could be ended for good. Like some affairs, it’s not meant to be permanent.

The writer is a lecturer at the School of Economics, the University of Indonesia, and senior economist at INDEF.

Reshuffling the Indonesian tax system

Berly Martawardaya,

The Jakarta Post (original link)
Depok, West Java | Thu, 10/27/2011 7:36 AM

The dust is beginning to settle on the Cabinet reshuffle frenzy and it’s time to get back to the arduous task of actually governing Indonesia. Finance Minister Agus Martowardojo is still in the Cabinet. Thus, the responsibility to raise revenue to finance Indonesian development is still on his shoulders.

Aside from tax, sources of revenue for the government are profit transfer from state-owned companies, sales of natural resources (still dominated by of oil and gas), plus other non-tax revenue in the forms of excise, fee and tariff.

In 2010, the tax revenue was Rp 723.4 trillion (US$81.7442 billion), which made up 72.9 percent of total government revenue. In the 2012 proposed budget, the value goes up to Rp 1,019.3 trillion which made up 78.8 percent of total revenue. The increase of the target compared to 2011 is 16 percent in terms of value.

The target above is not easy but still achievable. Especially since Indonesia’s tax ratio compared to GDP for 2012 would be only 12.66 percent, which is lower than in 2008 when there was a similar ratio of 13.3 percent. Furthermore, the tax ratio of most of the more developed members of ASEAN is higher than 15 percent.

Aside from increasing taxes, what can Indonesia do to increase tax revenue?

A nation’s tax system is often a reflection of its common values and/or the values of those in power. It is often said that one common value of Indonesia is gotong royong which was translated by Paul Michael Taylor & Lorraine V. Aragon, curators of Asian Ethnology at the Smithsonian National Museum of Natural History, as cooperation among many people to attain a shared goal.

American Congress is currently considering a new tax rate that will generate revenue by levying a 5.6 percent surtax on a taxpayer’s modified adjusted gross income in excess of US$1 million. The revenue will be mostly used to finance improvement in infrastructure, education and increasing research capacity.

US President Barack Obama often remarks in his speech that everyone is his brother’s keeper. Everyone is tied to one another; it’s what allows Americans to pursue individual dreams, yet still come together as a single American family. “E pluribus unum.” Out of many, one. Not everyone for himself.

Thus, he proposed that the more fortunate among Americans contribute more during an economic downturn. The same people with high income and skills are best places to benefit more from an economic upturn should one come.

The official number, which is likely to be underreported, shows Indonesia to be more unequal than Japan, Australia and most of European countries. The rich in Indonesia are notoriously known to have many privileges in business and legal matters. Thus it is only fair that they contribute more to the improvement of their fellow citizens.

The top tax rate for personal income has been decreased from 35 percent to 30 percent for incomes of more than Rp 500 million as part of a stimulus measure dating back to the sub-prime mortgage crisis of 2009. If President Yudhoyono wants to prove that he is decisive and serious about increasing people’s welfare, a 35 percent tax rate for personal income above Rp 1 billion would remove any doubts.

The second measure we need to do is evaluate Value Added Tax (VAT). Adam Smith stated in his masterpiece, Wealth of Nation (1776), that a tax system should be designed to ensure equality, certainty, convenience in payment and ease of collection.

Value added tax (VAT) supposedly avoids multiple taxation problems in sales tax by taxing only the value added at each stage of production. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction.

The seller charges VAT to the buyer, and the seller pays this VAT to the government. To work well, VAT needs sophisticated documentation and credible tax administrators.

Richard Bird (2005) in his comprehensive article entitled “VAT in Developing and Transitional Countries” stated tone major problem with VAT is the existence of a fundamental gap between the institutional requirements for good VAT administration and the real fiscal institutions in place in a country. Since few developing and transitional countries can meet these criteria, attempts to use VAT “incentives” seem unlikely to yield good results.

The third measure involves altering our basic tenets of decentralization. It is true that when the Regional Autonomy Law No. 22 and 25 was enacted in 1999, a number of provinces with rich endowments in natural resources were screaming, even threatening independence, over a larger share of revenue from natural resources.

Nevertheless, it’s not an optimal economic arrangement. The current system encourages regions to extract as much natural resources, especially energy producing commodities, as fast as possible.

It is better if one region knows that a new technology will come out in a few years that will improve mining procedure to be more environmentally sound. But the longer it waits then the later the mine will operate and less money it will receive. Worse, it the stream of revenue might only start after the regent or mayor’s term ended.

To increase a region’s revenue, it is a common practice to impose numerous kinds of excise and local tax that are often harmful from the national point of view since they increase the cost of doing business with few benefits provided. The region has no stake in overall sustainability and profitability of a company.

A better system would encourage regions to provide better investment and business climates. If a region receives some share of national personal and corporate tax then it will compete to attract profitable and high net value person to reside in their region. There will be interspatial competition to ease business instead of race to put obstacles.

A comprehensive strategy to increase tax would also need stronger rule of law and harsher punishment for tax evasion as well as tax collector acting criminally. There have been a number of high-profile tax fraud and money laundry cases that should not be allowed to happen again.

Improving the Indonesian tax system is a long and grueling journey. But as one of America’s best presidents, Franklin D. Roosevelt, once said, “after all, are dues that we pay for the privilege of membership in an organized society.”

The writer is an economic lecturer at University of Indonesia and senior economist at INDEF.

The US debt crisis: Lower US credit rating and its discontent

The Jakarta Post (original link)

Berly Martawardaya, Jakarta | Wed, 08/24/2011 8:30 PM

For the first time in 70 years, the US Treasury bond (T-Bill) is no longer rated AAA by all rating agencies. On Aug. 5, it was downgraded one notch by Standard & Poor’s (S&P) to AA+.

For decades, the interest rate on the T-Bill has been known as the “risk-free rate”, because a US default was as close to impossible as anyone in financial markets could imagine, and all other bonds were priced relative to the US.

The US is likely to face higher interest rates on borrowing. The score given, from highest AAA to lowest D usually corresponds to the interest rate that the issuer needs to pay when borrowing money.

According to The New York Times, the average bond yield of a country debt with an AAA rating is about 3 percent.

The average yield of the bonds of the countries in the next three categories, which is where the US will be, is 4.15 percent. Thus, a debt-ridden America will have to pay more to borrow, which could lead to the country becoming trapped in a tangled web of deficit and recession.

However, it’s not all doom and gloom for the US. The other two major rating agencies, Moody’s and Fitch, maintain AAA ratings of the US Treasury’s debt. There will also be periodic reassessments by S&P of its downgrade.

Furthermore, major financial institutions still express confidence in US debt. “The US Treasury remains the benchmark for global yields and is also a key source of funding and collateral in money markets.

“The treasury market also remains the deepest and most liquid fixed income market in the world,” said Bob Lynch, global head of G10 currency strategy at HSBC in New York.

Global collaboration and show of support surely can’t hurt. Financial officials from the Group of 20 major economies reportedly held an emergency conference call on Aug. 7 to discuss the debt crises in the US and Europe following several days of market panic and a downgrade of the US credit rating.

What are the impacts of the US credit downgrade for Indonesia?

First, there is a potential influx of short-term capital to Indonesia. There’s likely to be fewer buyers of T-Bills due to risk perceptions.

Even worse, as most pension funds and money market funds, (current holdings are 338 billion), need to hold a certain proportion of AAA rated bonds, there will be massive selling in the near future.

Both events mean less capital entering the US economy, with investors looking for other sites for their money. Some will enter Indonesian stocks and bonds market, which, if left unattended and unguarded, could fuel an economic bubble and/or a shortage of capital if investments are suddenly moved to another country.

The Bank of Indonesia will need to tighten the rules for a foreign short-term capital influx to avoid the aforementioned problems.

Second, there will likely be an increase of Indonesia’s exchange rate to the dollar. The same short-term capital influx will result in the sale of the dollar and purchase of rupiah. If there is no volume increase in the opposite direction, selling rupiah and buying dollars, then the rupiah’s relative value to the dollar will appreciate.

Third, Indonesian exports will weaken. A weak US economy will consume less. US consumption has been the driving force of Asian economic exports including Indonesia. A higher exchange rate for rupiah will increase the prices of our exports and lower our competitiveness.

The Trade Ministry needs to actively look for further diversification of our exports to other countries and reduce our export reliance on the US market.

More importantly, Indonesia needs to diversify the means of exchange other than the dollar when conducting international trade.

Fourth, our reserves should be realigned. The dollar comprises a 60.7 percent share of global reserves. Being the currency of global transactions enables the US to print debt and sell it abroad while avoiding the risk of currency fluctuations.

The downgrade will lead central banks to reevaluate the safety of their reserve policies and reduce dollars while increasing their stocks of other currencies.

Over the last month, the dollar plummeted 6 percent against the Swiss franc and about 4 percent against the yen. China’s renminbi is getting stronger and the Chinese government is actively promoting its currency.

Bank Indonesia needs to realign the combination of currencies it holds in its reserves to reflect current international conditions and reduce risk.

Fifth, there could be a shift in economic dominance to East Asia, especially China. This could be a tipping point for the shift of global dominance from the US to its great rival China, where its central bank holds an estimated $1.1 trillion in US debt.

The Chinese state-run Xinhua News Agency recently declared: “China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets.

“To cure its addiction to debts, the United States has to reestablish the common sense principle that one should live within its means.

“It should also stop its old practice of letting its domestic electoral politics hold the global economy hostage and rely on the deep pockets of major surplus countries to make up for its perennial deficits.”

Indonesia enjoys good relations within East Asia in groupings such as the East Asian Economic Caucus, ASEAN+3 and CAFTA (China-ASEAN Free Trade Agreement). We should make the most of this opportunity to increase exports and use non-dollar currencies in trading with other regional states.

One of the most astute observers of the US said, “American infrastructure used to be the best, but the lead has slipped.

“South Korean homes now have greater Internet access than we do. Countries in Europe and Russia invest more in their roads and railways than we do. China is building faster trains and newer airports. Meanwhile, when our own engineers graded our nation’s infrastructure, they gave us a ‘D’.”

His name is Barack Obama and the quote is from his 2011 State of the Union address to the American people.

If America does not move fast to improve its economic, financial and political infrastructure, the D grade might be coming soon.

Indonesia needs to carefully adjust our economic policies to avoid being dragged down.

The writer is a lecturer at the School of Economics, University of Indonesia, and senior economist at the Institute for Development of Economics and Finance (INDEF).

Where has all the brotherly love gone?

Jakarta Post (original link)

Berly Martawardaya and Achmad Adhitya , Jakarta | Tue, 09/29/2009 1:14 PM | Opinion

Why we are where we are now?

Malaysian and Indonesian history is so intertwined and our future is so closely linked that we are either hang together or hang separately.

Weren't we both part of the glorious kingdom of Sriwijaya in Sumatra and the Majapahit kingdom in Java? Wasn't the founder of the Malacca Sultanate, Pramesyara, a runaway prince from Palembang?

Wasn't it Dipati Unus from Jepara that lead a sizable number of troops ready to sacrifice their lives to get rid of Portuguese from Malacca, not once but twice? Weren't members of past royal families intermarried too many times to count?

Weren't we quick to get over the tedious Konfrontasi era and start building the Association of Southeast Asian Nations (ASEAN) together?

Didn't Indonesian professors leave the comfort of their homes to teach in classrooms in Malaysia a couple of decades ago? Aren't Indonesian students these days filling Malaysian Universities and Indonesian singers filling their airwaves? Isn't the economic prosperity of Malaysia directly benefiting from Indonesian workers because of our proximity and cultural and linguistic links?

Not only are our languages from the same roots and only slightly differentiable, our aspirations are one as well.

We are brothers and will always be brothers. However, we can choose to live with brotherly love or without it. Some say that family feuds are the worst kind, but it doesn't have to be that way.

Family members don't hurt each other. Searching without warrants should be ceased and let's return the entire jurisdiction over illegal immigrants to police and immigration officers.

Indonesia should make utmost efforts to control forest fires whose smoke reaches Malaysia, and Malaysia should tighten its Kalimantan/Borneo border to prevent illegal logging in Indonesia.

Let Indonesian workers in Malaysia have the right to organize themselves in labor unions. Despite all the good will of the Malaysian government, many companies are bound to be overeager in their quests for profits and unions are one of the best ways to provide workers with protection.

Let us revise our labor MoU and no longer allow companies to keep workers passports.

Our long shared history and ancient royal links sometimes make it hard to distinguish the origin of culturally related products.

Maybe we shouldn't even try to differentiate them. Let's put a hold on patenting any of cultural products and establish a joint commission to study the true origin of any particular cultural products before going to patent offices.

And let's discuss revenue sharing as well as joint promotion efforts or a joint patent when it is more appropriate.

Let us sincerely ask the question that the Roman leader Cicero conveyed. Cui bono? Who will benefit from a degrading relationship between us? Certainly not Indonesian workers in Malaysia nor Malaysian medical students in Indonesia. Not the stability and prosperity of Southeast Asian.

While some people easily feel offended and have short horizons, let's hope that cooler heads and long-term views prevail.

Berly Martawardaya is PhD candidate at the University of Siena, Italy. Adhitya is a PhD candidate at the University of Leiden, the Netherlands, and board member of the International Association of Indonesian Scientists.

Experiencing presidential election abroad

http://www.thejakartapost.com/news/2009/07/15/experiencing-presidential-election-abroad.html

Berly Martawardaya , The Hague , The Netherlands | Wed, 07/15/2009 11:55 AM | Opinion

I was walking in the artistic surrounds of the diplomatic area in Jacob Catslaaan, where numerous embassies are located, after getting off from a short tram ride to The Hague train station when a middle-aged woman and a teenager approached us. The teenager asked in fluent Dutch whether we knew the direction to the Indonesian embassy.

At first, we thought they were one of the many Indonesian descendants in the Netherlands that had already gained local citizenship and wanted to apply for visa to visit their forefather's country. To our surprise, the teenager asked for directions to the Indonesian embassy as he wanted to vote. We immediately switched to talking in the Indonesian language and walked together toward Tobias Asserlaan, the location of the Indonesian embassy.

As we arrived, there was already a crowd gathered in front of the building. Most of them were Indonesian students studying in the Netherlands.

We were ushered gently toward a line where the embassy staff checked our passports and our fingers; any stains on our little fingers would have been a sign of voting a day earlier and would have disqualified us from voting a second time.

As is the norm when Indonesians meet in the same place, there was a lot of introductions and small chat. I was introduced to some embassy staff and met some old friends and made some new friends as well. It was an event that strengthened the solidarity of Indonesians abroad.

We queued to take our number and waited less than five minutes, as there were not too many people in the room, to get our election card and vote for the next president of Indonesia. Although the quick count from survey institutes already showed that one pair of candidates were leading the pack, it didn't diminish our sense of responsibility and excitement.

The time slot for Indonesians abroad to vote was the last hour of the election. In the case of the Netherlands, it was between 7-8 p.m. as many still had to go to school or work. Not long after my little finger was dipped in blue ink, the counting started. We took pictures with our stained little fingers as a memento.

The last minute decision by the Constitutional Court certainly broadened participation. There were many people like me that were registered in their respective hometowns in Indonesia, but could not get back to vote for many reasons; and were able to vote at the nearest embassy abroad. We just needed to show our passport and if the voting card was still available in the last hour of the election then we could vote.

This process was so logical that it should have always been part of voting policy. Why bother with the voter registration in the first place. The US is firm with registration requirements and they achieved around 60 percent of voting participation. Many countries make enrollment automatic unless stated otherwise. There is also the option of voting by letter that while might diminishing secrecy, is very convenient for people with scheduled activities on voting day.

One could argue that voting with ID cards or passports only would enable fraud and multiple voting. While there could be some way to dilute the ink on the little finger for Indonesian abroad, it would have been very costly to travel to another country just to vote twice.

The requirement to vote in the last hour of voting day is a practical arrangement to prevent that. It would have been easier to vote more than once in Indonesia, but if people are assigned to the nearest voting booth of their official address and the ink is made to be thicker and harder to wash off, then most troubles are avoided.

As I had just finished attending the meeting that agreed to establish the International Association of Indonesian Scientists (I4), where the high mobility of scientists and ties with Indonesian scientists in Indonesia is critical, it was very welcoming to know that no matter where we are, Indonesians are not deprived of their right to vote.

The writer is a PhD candidate in economics at the University of Siena-Italy.

A better deal for those in public office

Jakarta Post (original link)


Berly Martawardaya , Jakarta | Mon, 06/08/2009 9:56 AM | Opinion

Finally Indonesia is seeing an open debate on businessmen and family business in politics.

During the New Order period, the public turned a blind eye to public officials and their family businesses, since business was considered an acceptable means to compensate their low official salaries. Favoritism was sometimes so blatant that in one case the IMF had to include a special clause in its letter of intent, to revoke Tommy Soeharto’s license to produce cars.

Since the beginning of the Reformasi era, such practices have adopted a lower profile, but have not been outlawed and are still socially accepted. Law No. 28/1999 on good governance only broadly forbids any action that puts family or crony interests ahead of the interests of the state or society.

Incumbent President Susilo Bambang Yudhoyono has stated that Indonesia needs leadership that does not mix national interests with family business, and he picked Boediono as his running mate to emphasize this point. On a separate occasion Boediono said ideally public officials should have no business activity whatsoever.

The SBY-Boediono pair is clearly attempting to tap into the public uneasiness with Jusuf Kalla’s and Aburizal Bakrie’s businesses. Both Kalla and Bakrie are members of the Golkar Party. In 2007, Aburizal Bakrie ranked as the richest man in Indonesia according to a Forbes survey, with Kalla at number 33.

Kalla demanded proof to justify comments that his family business had got special treatment, and said it would be discriminatory to forbid public officials and their families from having businesses.

Megawati joined the fray and expressed support for family business regulation, but without banning them.

This seems to be a dilemma. On the one hand it is the legal right of every citizen to be involved in legal business activity. And on the other, the elusive quest for good governance is a very important policy objective – especially in a developing and consolidating democracy like Indonesia. Money cannot buy health and happiness, but it can get a lot of things. Political campaigns can be very costly and thick bank accounts can give parties a much-needed edge to win seats.

In the past, business tycoons were satisfied supporting political candidates that shared their policy views. But the world has recently seen some very rich businessmen climbing into political offices and affecting public policy on their own.

Unsurprisingly, such media tycoons have done quite well in politics since the media plays a pivotal role in political campaigns. Italy’s Silvio Berlusconi got elected three times as prime minister in Italy, while it took a military coup to oust Thaksin Shinawatra in Thailand. They both are the richest men in their respective countries and both own major TV stations.

Ross Perot, a rich oil businessman, almost defeated Clinton and became the president of the United States. Meanwhile, multi-millionaire Michael Bloomberg, the incumbent mayor of New York and owner of a massive media enterprise, is thought to be safely on his way to being reelected for the third time. Ministers of finance in the US have often come from Wall Street’s major investment firms.

Most countries allow people to run campaigns using their own money, but after becoming public officials there needs to be a separation between personal and public interests.

While it is very hard to separate a businessman from his business past – as difficult, perhaps, as it would be to separate a famous movie star-turned-politician from their glamorous past – there is a way to ensure public interests are not compromised once they are elected into office.

Whatever share or stake in a company a public office-holder has, this should be sold and the money should be put either into a fixed deposit or into the custody of a blind trust institution whose function is to manage funds but that is legally forbidden to disclose where the money is invested.

This would avoid conflicts of interest between politicians and any policies that may arise while they are in office. After the person steps down, the control over the resource would be returned to its rightful owners.

Thailand, the Philippines and South Africa, for example, even take one step further and choose to err on the precautionary side with constitutional clauses especially for politicians, their family businesses and their wealth.

In too many cases, countries’ resources and opportunities have been squandered by families of the political elite in their forays into business. While transparency and anti-corruption have had a boost in Indonesia lately, it is too early to let our guard down and be complacent.

If a businessman decides to serve the people and hold public office, a mandatory, but temporary, divestment of his wealth should be a small price to pay for such a noble pursuit.

The writer is a lecturer at the School of Economics, University of Indonesia and a PhD candidate in economics at the University of Siena-Italy.

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.