Indonesian Economy: destructive magiconomics

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Anthony Budiawan Managing Director, Political Economy and Policy Studies (PEPS)

IO – The suffix “-nomics” is used to refer to the economic policies of a country’s leader. Reaganomics refers to US President Ronald Reagan’s economic policies when he was in office, from 1980-1988. At that time, the US economy was hit by stagflation, an economic condition where the inflation rate and unemployment are both high, coupled with stagnant demand from consumers. Stagflation is an anomaly that occurs outside the context of economic theory in general.

In theory, if the unemployment rate is high then consumption demand will fall, keeping inflation low and stalling economic growth. Thus slowing economic growth moderates inflation.

Inflation in the US in the 1970s was very high, jumping from 3.5 percent (1969) to 11 percent (1974) and 13.5 percent (1980). The unemployment rate also jumped, from 3.5 percent (1969) to 4.9 percent (1973), 8.2 percent (1975) and 10.8 percent (1982).

Reaganomics, also referred to as the “Supply-side Economy”, succeeded in depressing inflation to 5.3 percent by the end of Reagan’s term. Simultaneously, the unemployment rate fell to 5.3 percent in 1988.

“Putinomics” refers to the economic policies of President Vladimir Putin, who has been in office in Russia since 1999 (as Prime Minister). Putinomics is credited with saving the Russian economy after the implosion of the Soviet Union, and dramatically increasing Russia’s economic performance. Exports rose from 85 billion US dollars in 1999 to 520 billion US dollars in 2008. Although commodity prices have fallen sharply since 2013, 2018 Russian exports were still able to reach 510 billion US dollars. Russia’s trade balance also showed spectacular performance, from a surplus of 30 billion US dollars in 1999 to a surplus of 157 billion US dollars in 2008. The trade balance in 2018 posted a surplus of 164 billion US dollars. An increase in exports and a trade balance surplus allowed Russia’s foreign exchange reserves to jump sharply, from 81 billion US dollars in 1999 to 523 billion US dollars in 2008.

“Abenomics” refers to Japanese Prime Minister Shinzo Abe’s economic policy from the time he was in office, starting at the end of December 2012; his intention to revive the performance of the Japanese economy through aggressive monetary and fiscal policies.

Monetary policy was implemented through what was known as “quantitative easing” by flooding the money supply with 60 trillion yen (around IDR 7,500 trillion) to 80 trillion yen (around IDR 10,000 trillion) at the end of 2014. As a result, the Yen exchange rate fell by around 25 percent in quarter II-2013 compared to the same period the previous year. Inflation also increased to 1.67 percent (2013) and 2.36 percent (2014), ending an era of prolonged deflation extending over the previous fifteen years.

The “-nomics” outlined above are just a few examples of economic policies embraced by world leaders in the effort to boost economic performance, covering economic growth, exports, trade balance, currency exchange rates, and so on. Some other “-nomics” that are quite well known are Clintonomics and Thatchernomics.

Indonesia also has its “-nomics”. Indonesia’s economic policies in recent years transgress prevailing economic theory, especially the theory of exchange rates, which usually depends on the relationship between the trade balance and the current account balance. In theory, the exchange rate will weaken if the balance sheet is in deficit. However, this theory does not apply to Indonesia, especially in 2019.

Indonesia’s trade balance until November 2019 has a deficit of 3.1 billion US dollars. And the current account balance until the end of September 2019 also experienced a deficit of 22.5 billion US dollars. With these conditions, according to economic theory, the rupiah exchange rate should weaken, so that prices for domestic goods and services become cheaper, which in turn makes exports rise, imports decrease, and investment rises. In other words, the weakening of the rupiah is expected to turn the trade balance deficit into a surplus.

However, the rupiah exchange rate throughout 2019 was strengthened. Because what seems impossible can be made possible, and as if real. Though only an illusion. The mode is for the government to issue as much state debt as possible to cover the current account deficit and to make a balance of payment (BoP) surplus.

During the 2015-2019 period (November), the government had issued state debt of around IDR 165 trillion, specifically to juggle the BoP from a deficit into a surplus, thereby making the rupiah exchange rate stronger. Whose impact is, of course, negative on the Indonesian economy. That is, Magiconomic Indonesia makes the Indonesian economy increasingly uncompetitive, due to the strengthening rupiah exchange rate, and swelling government debt: of course with a relatively very high-interest rate.