Time For Domestic Focus

The world economy is becoming more integrated and more volatile at the same time, meaning that crisis in one country could spread almost instantly. Countries, including Indonesia, should strengthen iteir domestic economies to provide buffer from global volatility. A stronger domestic focus is an alternative route to be able to navigate in an uncertain world.THE WORLD ECONOMY IS EXPERIENCING A VARIETY OF? problems. Started with oil crises, due to the combination of Iraq war and the growing demand of oil from China and India, oil and other energy price jump and reach a historical high.

Some countries response this trend by converting food commodity, such as corn, sugarcane and CPO, into bio-fuel and it has created food inflation.The problem continues. Sub-prime mortgage case has troubled the economy of the US and some countries in the world. Cautious investors shift their investment from hard currency to commodities including mineral, food and energy, under the assumption that commodities provide excellent hedge against US Dollar fluctuation. This shift has triggered a significant jump in commodity index. This has created tremendous negative impact in food net importing countries, especially poor countries in Africa and Asia.

One the global economic stage, the leadership of US is in question so does US Dollar role as a global currency in the long term and some countries has shifted a portion of their foreign reserve into Euro. This has created another uncertainty.? In this integrated world, any opportunity will spread out to the world almost instantly, so does problem. When new opportunity comes, developed nations are more ready to take advantage. In contrast, when problem occur, the developing nations — including Indonesia — are in a more vulnerable position.

Greater Domestic Focus
GREATER BECOMING AN INTEGRAL PART OF THE GLOBAL ECONOMY is a force of nature. However, a country with too much reliance on international market for investment and trade, such as Indonesia, will not be immune from any volatility in the global market.

In the export market, Indonesia faces though competition. For instance, our electronic products can not compete with electronic from China and Taiwan. Our agriculture products are less competitive than the product of Thailand and Vietnam. Our textile industries face serious threat from China, India and Vietnam.

In the import market, we import too much product that actually we could produce it at home. We import, refined oil, meat, sugar, rice, corn, soybean, steel, iron ore, orange, and much other stuff. Even as a country with one of the longest shore line and located in tropical area, we still importing salt from Australia.

When our resources are limited the best strategy is to be defensive rather than offensive. Rather than trying to win the tough battle abroad, we should focus on the battle at home. We need to improve efficiency to strengthen our domestic economy.

Cut Government Subsidies
SUBSIDIES, BY NATURE, ARE A TEMPORARY ECONOMIC POLICY, IF it is being implemented permanently, problem will arise. Subsidy creates resources misallocation, en route to economic inefficiency. It triggers market illusion in which market give misleading signal. On other words, price doesn??t indicate the true value of a product. This would hinder economic players from producing goods in which they have the best competitive edge.

In addition, subsidy is only proper for government with significant financial resources that can be used as buffer when the markets price fluctuates. Otherwise, price fluctuation could affect government budget.

Often, due to the political sensitivity of removing subsidy, government reallocate budget from less politically sensitive but crucial sector, such as education, health and infrastructure, to support the subsidies. Recently, government subsidies have become unpopular. Using oil subsidies as a reference and based on a GTZ survey in 2004, 32? subsidies.

In two years this number decline to 21 out of 171 countries. Interestingly, almost all countries that provide oil subsidy are oil exporting and non democratic countries, except Indonesia. Indonesia should follow the above encouraging global trend by reducing subsidy gradually before lift it up totally in the future.

Speed up Infrastructure Development
AN INEFFICIENT DISTRIBUTION SYSTEM IS ALSO AN INSTRUMENTAL challenge. Driving from one province to another in Sumatera and Java — not to mention Kalimantan, Sulawesi and Papua — will give us first hand information on how inefficient the ground transportation system and infrastructure is. Crossing the strait from Java to Bali or to Sumatera and seeing the long queue of trucks indicate how serious the bottle neck in our distribution system is.

Those inefficiency is the reason why it is cheaper and faster to buy orange from Pakistan or China rather than from Medan, to buy sugar from Australia rather than from Sulawesi, to buy banana from the Philippines rather than from South Sumatera. Infrastructure problem has unable local economies to interlink and create mutual symbiosis for economic growth.

Speeding up road network development is easier said than done. It is a capital intensive program and is long term in nature; so that, it is not so sexy from investors point of view.

The government should become the driving force by providing stimuli. One possible option is to use the saving from the reduction of oils subsidy and channel it to finance infrastructure development.

We could also consider the implementation of oil tax as possible sources of infrastructure fund. Experiences from several developing countries indicate that a tax of 10 US cent per-liter gasoline will be sufficient to finance the maintenance of existing network road, and an addition tax of 3-5 US cent per-liter will be enough for urban road and public transports financing.

A Reflection
INDONESIA SHOULD BE GRATEFUL FOR THE RICH NATURAL resources, the fertile land and the friendly climate we have. The 240 million populations, in which most of them are in productive age, are very potential market as well as potential workforce.

If we manage all the potencies appropriately, it is not a distant reality that Indonesia will have a strong domestic economy and will be able to confidently navigate the world that full of uncertainty.

Wijayanto is a deputy rector at Paramadina University. He is also a Fulbright fellow and a former investment banker. He can be reached at wija.dc@gmail.com