Are we facing another ‘new normal’?

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J. Soedradjad Djiwandono
Emeritus Professor of Economics, University of Indonesia and Professor of International Economics, S. Rajaratnam School of International Studies (RSIS), Nanyang Technological University (NTU), Singapore.

IO – For the years following the cata­strophic Global Financial Crisis (GFC) of 2008, when the world economy fell into a prolonged recession, economists coined the term ‘The Great Recession’. With the deleterious effects of this pe­riod lingering longer than usual, the features of the world economy char­acterizing this period have now been nicknamed ‘The New Normal’, and include phenomena such as subdued economic growth, rampant unem­ployment and low inflation (or even deflation). In its 2011 Annual Report, The World Economic Forum posited five clusters of risks – economic, en­vironmental, societal, geopolitical and technological – that the world would face, in an atmosphere of high uncer­tainty. And still afterwards these were exacerbated by ramifications of Vul­nerability, Complexity and Ambiguity, or “VUCA”, a term raised to the status of “buzzword” in the world of finance, one signifying the common challeng­es all economies are forced to face. I wrote a column for the Jakarta Post, “Facing the new normal” (14/08/2015) discussing a number of these issues.

However, even before a common understanding of these phenome­na was agreed upon, there emerged new developments, which I intend to elaborate on here. In his bold writ­ings appearing in the New York Times (03/04/2019) and Times of India (20/08/2019), Ruchir Sharma of Morgan Stanley recently argued that we should say “Goodbye!” to post-WW II miracle years. Further, “Politicians shouldn’t fight slow global growth: they should explain why it’s not so bad”. Assessing the current state of the Indian economy, he wrote about “the new definition of success: for emerging countries like India 5% is the new 7%, the reasonable standard for growth”.

He further argued that what has been developing is bigger and more profound than simply a trade war be­tween the US and China. More specif­ically, according to Mr. Sharma, “… the world economy has struggled to grow against the headwinds posed by ‘Four Ds, i.e., deglobalization of trade, depopulation as labour forces shrink, declining productivity, and a debt bur­den as high now as it was in the brink of the crisis.”

Indeed, a “new normal” seems to be in the making.

How to define a “new normal”?
For sure, it is not necessary to come to a complete agreement about the above assessment of current world economic conditions. However, many experts continue to argue about them, failing to agree, at least partial­ly, on issues such as the tendency for countries to harbor suspicions of the merits of globalization and resort to a protectionist stance in conducting their trade relations. This tendency became apparent immediately after the GFC and gained great momentum with the ascent of Donald J. Trump as President of the USA. We all wit­nessed, in his inaugural address of 2016, President Trump’s announce­ment of an “America First” policy, which would amount not simply to a rejection of President Obama’s course of action, but rather signify a rever­sal of the tenets of post-war economic policy, first emerging from the Bretton Woods agreements of 1944. In years since, it was underlined by the trade war against China, now escalating to I.T. and currency wars, as the US has labelled China a “currency manipu­lator”.

The second factor, a trend toward depopulation, is becoming evident, even though it has been less prom­inently discussed publicly. When people talk about the challenge of an aging population, they usually refer to such a trend in Japan, not realizing that some 40 countries display such a downturn, including Germany, Rus­sia and even China. This also implies a shrinking work force; as numbers decline, economies will naturally experience slower growth. This be­comes even more pronounced when a trend toward depopulation goes hand-in-hand with declining labour productivity. The high GDP growth rates of “Asian miracle” countries in the 1980s and 1990s, coupled with China’s double-digit growth over de­cades, derived from a combination of a high level of investment expendi­tures, steady population growth and increasing productivity. When those phenomena subsided, then the story of a “double-digit China” or 5 to 6 per cent in developed economies also be­came a thing of the past, one not likely to reappear.

The final characteristic is levels of debt, which continue to surge in most countries. High growth rates in the past were paralleled by rising national debt: statistics show that the average level soared from 100 per cent of GDP in the 1980s to 300 per cent by 2008. This phenomenon exhibits no signs of a slowdown in subsequent years. Of course, for each country the challenges implied by rising debt lev­els are unique, according to whether debt is incurred by the private sector, households or governments, or a com­bination of these, as well as the nature of the lender, whether domestic or ex­ternal, and also the structure and size of the population.

Notes
To clarify these issues, a more in-depth analysis, supported by a com­prehensive narration, is required. Suf­fice it here to state that such trends appear to have generally been devel­opments of the past, ones which are unlikely to repeat in the future. We thus face new challenges, and thus another “new normal”.

The question is, how relevant are such developments for Indonesia? Let me begin with the issue of most urgent public concern, namely, ris­ing national debt. Has Indonesia in­deed been sufficiently prudent in its accumulation of national debt? Gov­ernment officials are usually quick to claim that our national debt level re­mains on the safe side, as Indonesia’s debt-to-GDP ratio is much lower than that of many other countries, especial­ly in comparison to developed econo­mies like Japan and the EU. This is correct, as far as it goes. Nevertheless, one should bear in mind that the most important yardstick in borrowing is the ability to repay debt-plus-interest, along with other conditions customar­ily attached to them. Here, the statis­tics on debt-to-GDP ratio only provide a rough approximation of the capabil­ity to repay, and thus in determining the safety and degree of prudence in borrowing. Other criteria, such as the composition and structure of borrow­ing – private vs. government, domestic vs. foreign, short- vs. Long-term – and the destination of borrowed funds are important factors influencing judg­ment, even if the above ratio assures us we are still in a safe and prudent zone. Continuing to mount an argu­ment that our debt-to-GDP ratio is better than that of Japanese or EU economies is really not relevant.

The next issue regards depopula­tion and its implication, most notably a smaller pool of labour. Indonesia is for sure not in any position to have to face such a problem at present or in the near future. In fact, we are still benefiting from a demographic divi­dend, which some estimate will only peak in twelve years. A declining size in our labour force is still far in the future; thus, the impaired growth that usually accompanies this issue is not our immediate concern. How­ever, if one looks the issue in relation to labour productivity, then it is not difficult to see that we still face a huge challenge. Even if productivity is not on a downtrend, Indonesia still faces a major challenge: the fact is that Indo­nesia’s relative position – even within ASEAN – is dismal, as our labour pro­ductivity is one of the poorest. Thus the real opportunity lies only in our ingenuity in terms of optimizing ben­efits arising from the population div­idend. Have we been serious enough in exploiting this?

Finally, I cannot help expressing a note of concern regarding the trade war, which as of this writing (Septem­ber 1) is entering a more serious stage: the US is implementing a final rate in­crease, involving USD 300 billion of US imports from China, moving from 10% to 15% in retaliation for China’s decision to impose its own tariff rate increase a few days previously. Ths is in fact more serious, since in essence the decision confirms that both the US and China are willing to continue escalation of the tariff war, implying a heating up of competition to dom­inate future industries, global trade, economics and relations. As experts and pundits debate these issues, the question is whether the two super­powers will be able to evade the “Thu­cydides’ Trap”.

Readers may recall that on nu­merous occasions General Prabowo Subianto, in his speeches during the last Presidential campaign, cited this Greek historian numerous times: Thucydides, in describing relations among nations, observed “The strong do what they can and the weak suf­fer what they must”. In terms of the relations between the US and Chi­na, the analysis goes more deeply, to question whether the inevitable result will be a war, irrespective of their full understanding that an actu­al shooting war would hurt and even destroy all, including themselves. This is what is known as the Thucydides’ Trap, named after a Greek (Athenian) general and historian of the Fifth Cen­tury BC, who wrote a history of the war between Sparta and Athens. In his analysis of competitive relations between the two powerful states, one long established (Sparta) against a newly-emerging and powerful Ath­ens, relations deteriorated into a war that ended up destroying both. The contention comes from the supposi­tion that the one already established feels threatened by the new power, while the new one demands respect from the already established one and treatment as an equal. The relation between the US and China was an­alyzed by Graham Allison of Harvard University, presenting this concept in his book Destined for War; Can Amer­ica and China Escape Thucydides’ Trap?

I may discuss this topic in a com­ing column. At this point I simply wish to share my concern that in the ten­sion that seems to endure and even escalate, Indonesia, as well as other emerging Asian economies, must move wisely to avoid any adverse impacts that may result from these tensions and wars, as well as taking advantage of any opportunity that might arise.

I am deeply concerned by the ob­servation that the current Indonesian Administration seems to see China as our savior, the one who will rescue the Republic from its manifold economic and financial ills – even to the extent of resolving current mounting deficits in the social insurance administration system (or BPJS): a Cabinet Minister unbelievably stated that a PRC in­surance company would come to our rescue. While during the Great Reces­sion it is true that China’s star growth performance saved many emerging economies of Asia, including that of Indonesia, from further suffering from adverse impacts of the global financial crisis, such a rescue must not be tak­en for granted, considering that China itself is far from immune to the “Four Ds” I mentioned above. With regard to levels of national debt, I am afraid many are not aware (or do not care) that the PRC also exhibits an alarm­ing Debt-to-GDP ratio: according to the Institute of International Finance (IFF) as of last July the figure stood at 310%, representing more than 15% of all global debt.

This reality cannot be ignored or dismissed by countries eternally re­lying on China as a source of easy.