An Evaluation of Some Key Economic Policies

Abstract

For roughly the past three years, Indonesia’s growth has maintained its slight upward trend while inflation has been broadly on target. The budget deficit has been kept under control and government debt is low relative to that of many other countries. Nevertheless, this sound macroeconomic performance is now under threat because the government’s aversion to depreciation of the currency has led it to introduce unnecessary contractionary fiscal measures—including cutbacks of spending on infrastructure on which output growth depends. Along with many other currencies, the rupiah has depreciated significantly throughout much of 2018—despite the attempts of Bank Indonesia, the central bank, to prevent this—partly because of rapidly growing imports, but also because of a reversal of portfolio capital inflow. This reversal reflects various factors, including Bank Indonesia’s policy, until recently, of pushing interest rates down while global interest rates have been rising; fear that rapid depreciation in poorly managed economies such as Turkey and Argentina may prove contagious; market recognition that expansion of the current account deficit is likely to require depreciation beyond that desired by the central bank; and concern that the forthcoming presidential election creates conditions in which it will be difficult to pursue sound economic policies. This survey discusses the rather unexpected currency depreciation and associated selling pressure in the stock exchange in detail before going on to provide evaluations of, and suggestions in relation to, a range of microeconomic policies, including infrastructure development; the provision of subsidised loans to small businesses; the fiscal aspects of decentralisation; minimum wages; and management of the bureaucracy. To a large extent, most of these policies can be characterised as reflecting a distrust of market forces, including a reluctance to adopt market-mimicking processes in the public sector—specifically, in relation to the funding of local governments, and to the staffing of the bureaucracy. From another perspective, the adoption of a wide variety of objectives for economic policy reflects the absence of any consistent analytical framework, making it highly likely that policies will turn out to be mutually inconsistent and, in particular, that they will conflict with the ultimate economic objective of increasing living standards, especially those of the poor.