Praise and reproach: Indonesia before the 2018 IMF-WB Meeting

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Ichsanuddin Noorsy

IO – From mass media reporting and existing references, I managed to understand the situation in the IMF and World Bank Annual Meeting in Bali, 8-14 October 2018, themed “The Uncertainty and Recovery of the Global Economy”, as both a reproach and praise for the advocates of free market or open economy. A number of Western economists, such as Robert J. Shiller, the winner of the 2013 Nobel Prize in Economics, or Jeffrey D. Sachs, stated that the current global economy is the “West’s Decade of Despair” (28 Sept 2018).

For Indonesia, this really should have been a reproach. Since the 2015 OECD Meeting, we have been stating that Indonesia’s economic condition and development have been so amazing, that World Bank President and Director IMF have heaped praise on us. However, in fact the fall of our exchange rate this year was 11.9%-13.4% (the 2018 State Budget macro assumption is USD 1.00 = Rp 13,400.00, while 2019 State Budget macro assumption is USD 1.00 = Rp 14,400) with stagnant economic growth at 4.9%-5.2% (as I reported before Commission XI of DPR in 2015).

As of this writing, USD 1.00 = Rp 15,200.00. Our fiscal authorities respond to the continued precipitous drop of the exchange rate by stating that the Rupiah is heading towards a new point of equilibrium. This response is evidence that the praise showered on Indonesia’s economic controllers (fiscal authorities and monetary authorities) is misleading, if we do not wish to be blunt about it and call it “fraudulent”. The term “new equilibrium point” is just another way of obscuring their failure to fortify the structure of the domestic economy. In my previous articles, I described this as an outflow of national economy surplus to foreign countries. Various groups disputed this thesis and challenged me for more detailed proof.

Since Indonesia is structurally complying and obedient to the principles of the global economy, ownership of our economic resources, production and economic distribution network has gradually shifted into the hands of domestic and foreign businesses. Similarly, the “Nixon Shock” of July-August 1971 began with Saudi Arabia’s policy of using its supply of crude oil to the global market as a weapon, forcing prices to rise. As a direct result of this, the share of the US economy in the global one dropped to 27% from a previous 35%, as the USD depreciated.

However, this historical lesson – that the Western economic model is indeed fragile – is lost on Washington’s trusted officials in Jakarta, as they amass both economic and monetary power. In other words, the Bretton Woods policy, which was born in the US in 1944, has clearly failed. The integrity of the “open economy” system established by the World Bank, IMF, and General Agreement Trade and Tariff (GATT) (now the World Trade Organization (WTO) is neither fair nor resilient. This is caused by, among others, the rampant greed of investors, the dishonesty of the market, and the fact that human perception is the transaction reference base in both real and financial sectors.

A number of European countries have made efforts to decouple from the USD. However, Indonesian technocrats are convinced that the situation is merely a part of a normal economic or business cycle. Therefore, Indonesia has implemented a “deregulation and debureaucratization” policy, step-by-step since 1983. In fact, in November 1987, these technocrats, nicknamed the “Berkeley Mafia”, issued a “November Package” (Paket November – “PakNov”) policy that further liberalized our economy.

They took this action after several Western economists declared that Law No. 1/1967 was only a half-hearted liberalization, and that what Indonesia truly needed was liberalization of all sectors. A series of Rupiah devaluations transpired, in 1968, 1971, 1976, 1983, and 1986. We also issued the October 1988 policy package on the liberalization of banking, which became a starting point for the mass robbery of Indonesia’s overall economy through a series of economic reform policies – the “neo-liberalist policy”, following the Washington Consensus headed by the 40th US President, Ronald Reagan (1981-1989), and British Prime Minister Margaret Thatcher (1979-1990).

The Rupiah continued to cascade downward, finally forcing the issuance of a tight-money policy in 1991. The fluctuations of our domestic situation and economic condition were evidence of an uncertain economic climate. The Soviet Union implemented “glasnost” and “perestroika” under Premier Gorbachev, a strategy which Indonesian political and economic technocrats swallowed whole and spit back out as “democratization” and “openness” according to the fiats of Paul Wolfowitz, former US Ambassador for Indonesia (1986-1989) and US Vice Minister of Defense (2001-2006)/World Bank President (1 June 2005- May 2007) Donald Rumsfeld.

According to Paul Krugman’s analysis, the global economic climate is perpetually hounded by uncertainty. With the strong establishment of a free-floating exchange rate system, capitalists will always place their money for the sake of their own growth, with no care for who might be victimized. In the first decade of the 21st century, the United States itself became a victim, due to its trade imbalance with China, exacerbating since July 2008. This defeat blossomed into a financial crisis, which was marked by the bankruptcy of Lehman Brothers – despite the 168 years they had been established, and despite the fact that when they went bust in 2008 they had a payroll of 26,200.

The US Government then issued a panicky injection of USD 700 billion, set interest rates near 0%, and implemented a cheap money policy (known quaintly as “quantitative easing”). These policies tapered off nearing the change in the leadership of the US Central Bank (Federal Reserve) from Janet Yellen to Jerome Powell, on 5 February 2018. Trillions of US dollar had been disbursed, but the US crisis remained unresolved. When US 45th President, Donald Trump, declared a “trade war” and economic sanctions, the global economy swooned into a VUCA (Volatile, Uncertain, Complex, Ambiguous) state. Nobody on Earth – no matter how sharp their tendency analysis, behavioral analysis, or hybrid analysis (combining both) – is able to predict exactly how future conditions will turn out.

In view of this situation, President Joko Widodo’s speech before the participants of the IMF-World Bank Annual Meeting, emphasized that we should not pursue competition and rivalry, but rather get together in global cooperation. This speech garnered praise, because it contains implicit criticism of the free market economic system, whose principle is “with us or against us”, “beat me or join me”, and “survival of the fittest”. The speechwriter seems to be stating that the current global economic system is a mere skirmish in a prolonged economic battle.

But how can we reproach the current system if we implement it ourselves in our own country? Even if we champion a spirit of collaboration, why don’t we look to ourselves first, considering how to eliminate this fragile and exploitative system we are stuck with first? One thing for sure: such a suggestion would generate either of the following results:

  • First, new East and West blocks would form up, because countries will group together according to the values that they live by.
  • Second, all countries will unite if the global economy is oriented towards the building of human dignity as its main goal, instead of pursuing a “winner take all – loser gets nothing” system.

 

At the same time, this suggestion is faced off with a protectionist mood that reveals the ineffectiveness of the current multilateral economic system, as global economic leaders inevitably put the interests of their own nations above any regional or global system. Even if an “open system” is implemented, it would probably be a bilateral system instead of a regional one, such as Trump has concluded with the new NAFTA agreement between the US, Mexico, and Canada.

IMF and WB are naturally unhappy about this. However, pressure from the IMF, WB, and WTO on the USA have been proven to be equally ineffective, as clearly shown in the attitude shown by financial and banking leaders in the 2018 Annual Meeting, who demanded that the trade wars immediately cease and be resolved.

In view of the current situation and the free-floating exchange rate, the Rupiah will naturally seek new equilibrium points – all pointing downward. This is proven in my article entitled “The Crisis Path”, which was published widely on 5 September 2018. What do we do about the praise given to Indonesia, while the new equilibrium signifies continued depression of our economy? Whether we agree or not, whether we like it or not, the facts of current transaction deficit, payment equilibrium deficit, State Budget deficit, and primary equilibrium deficit show that Indonesia needs a huge volume of USD. As our dollars continue to fly outwards, we need more and more Rupiah to buy them back, while our buying power is crippled because Indonesia’s domestic economic structure is not dominated by any domestic economy. This is in stark contrast with Japan, whose economic growth is slow but steady.

Continued increase of USD demand in comparison to its finite supply finally forced the issue: Rupiah equilibrium points past Rp 15,000.00 per USD 1.00. In such a position, if we had Rp 1.5 million in 2017, that would be equal to USD 112.00 (rounded); however, such an amount would only give us USD 98.70 at this time. This means that there is a loss of USD 13.30 (USD 112.00 minus USD 98.70). The difference is equal to the excess in dollar holders, i.e. at USD 13.30.

Who is liable to enjoy the excess while we suffer from the loss? If we look back from 1968, when USD 1.00 = Rp 250.00, meaning Rp 1.5 million would be equal to USD 6,000.00, the same amount of Rupiah today can be exchanged for only USD 112.00. So, for the past 50 years, wealth has decreased (6,000 divided by 112), equal to 5,357.14%. Is this exchange rate decline the result of the reproach or praise of the economic policy that we choose to implement? The response is again in the positive, because there will be an investment of Rp 202 trillion and loans for reconstruction in Lombok and Southeast Sulawesi following the recent disaster, at Rp 15.2T (USD1.00 billion), plus grants that will be returned back to the givers at USD 5 million. Therefore, the fall of Rupiah halts for the moment, despite clear evidence that “There are no free lunches”.

With the relentless solidity of the system in this country, and with the useless Game of Thrones criticism levied due to ambiguous understanding, how should our people react to the praise of the “success” of Indonesia’s economic policy? Well, Readers, you decide.