Survey of Recent Developments forBulletin of Indonesian Economic Studies Ross McLeod Indonesia Project, ANU 23 February 2011
Survey of Recent Developments Main Topics• Political developments• Macroeconomic developments• Export trends: a longer-term perspective• Rethinking city management• Financial Services Authority• The eruption of Mount Merapi
Political Developments• Government’s approval rating (LeSI) – High but falling (85% to 63% July 09 to December 10) – Corruption specific (84% to 51%)• Gayus saga confirms fears about lack of progress on corruption – Bribes to tax officials – Bribes to law enforcement officials – Bribes to prison officials – Bribes to immigration officials… – Higher officials remain untouchable?• Government ‘lies’ (i.e. gap between rhetoric and action) – Protection of citizens – Improved transparency/accountability – Reduction of corruption – Reduction of poverty – Damage to environment – Neo-liberal economics/foreign takeovers…
Macroeconomic Developments• But the good news is – Economy is in good shape – Growth rate has risen to almost 7%p.a. – Inflation around 7%p.a. • a little higher than targeted (4-6%), but under control • but food prices a concern – Stock market performed very well in 2010• More later if there is time…
Rethinking City Management• SBY’s proposals – New capital city – New administrative capital – Neither approach would solve problems of Jakarta and other big cities – News flash: Jakarta Governor ordered to solve the problem by 2020 (with demonstrable progress by 2014…)!• Reinterpreting the problem – Not just traffic congestion/inadequate public transport, but poor city management in general • poor water supply • groundwater pumping and subsidence • lack of sewerage and water-borne disease • flooding • broken roads • garbage problems …
Rethinking City Management• Fixing problems or replicating them? – We need to know: why don’t cities work well? – Nobody seems to offer a clear and persuasive analysis• A hypothesis for consideration – Prices of services and rates too low to cover cost of service provision – Almost a guarantee of inadequate, poor quality supply of services• Managing a city for profit – The case of Lippo Village, Karawaci – Can this approach be applied more widely?
Avoiding Banking Disasters• A new Financial Services Authority (OJK)? – AFC was original catalyst • Banking collapse in 1997-98 cost $50 billion – Decision in principle appeared in law on BI in 1999 – Supposed to be established by end 2002 – Deadline missed, then shifted to end 2010• Draft law 11 years, still under discussion – With no ‘champion’ the decision had been forgotten – Revived interest reflects 2008 Bank Century failure (cost $700 million) – Model is FSA in UK: but already found wanting by GFC!
Avoiding Banking Disasters• Internal inconsistency – Art 34 of BI Law: Bank supervision transferred from BI to OJK – Art 24 of BI Law: Bank supervision is carried out by BI – Inconsistency repeats in draft OJK law• Unclear objectives – What purpose is served by creating this new organisation? • Protect economy against serious destabilisation? • Protect customers of financial institutions against improper business conduct? – These are two very different objectives, perhaps best handled by different organisations• Unclear logic – Why should supervision be better than before? – Answer has to start from analysis of why supervision failed previously• Bottom line: policy decisions should be based on careful analysis, not knee-jerk reactions to events
Mount Merapi Eruption• New natural disasters in October/November, many fatalities – Wasior (flash flood, 300 dead); Mentawai islands (tsunami, 500 dead); Merapi (multiple eruptions, 400 dead)• Awan panas and lahars – Immediate and delayed damages/fatalities• Evacuation and support – Well planned; seems to have worked well – Evacuees want support, not just charity• Return or relocate?• Redesigning and rebuilding infrastructure – Merapi is a fact of life – Need to design infrastructure with this in mind – Urgent need to clean out Kali Code
Macroeconomic Developments in Detail• Growth• Unexpected surge to 6.9% p.a. in Q4 2010• Strong investment the main demand factor• Private consumption a slight concern• Manufacturing still lagging, but improving• Trade, hotels and restaurants very strong
Macroeconomic Developments• Inflation – Target exceeded slightly in 2010 – Monetary policy too loose • Money growth too fast/interest rates reduced • Recent increase in ‘policy rate’ means little or nothing• Food prices – Increasing rapidly – Climatic factor (too much rain) – Bureaucratic factor (delayed rice imports by Bulog)• Import tariffs temporarily removed
Macroeconomic Developments• Financial markets – Exchange rate against $US very stable • At great cost to BI – Stock market has been booming • But recent signs of nervousness
Macroeconomic Developments• The budget – Fuel subsidies limited by forcing private car owners to purchase Pertamax rather than Premium? – Subsidies continue for motor cycles (50 million votes vs 10 million car owners…)• Budget unlikely to have stimulatory impact in 2011
Macroeconomic Developments• Return of discretionary taxes – Special (discretionary) treatment for ‘pioneer’ industries • Strong linkages; high value added/externalities; new technology… (all operationally undefinable?)
Longer-term Export Trends• Changes in major component shares• Changes in sub-component shares• Changes in country destinations – Benefiting from Asia’s growth
Monetary Policy and Inflation (% p.a.)16141210 8 6 4 2 0-2 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 CPI inflation Currency in circulation SBI rate 6 month Real SBI rate