Tuesday, 17 September 2013

Will the fiscal stimulus work?

Arisyi Fariza Raz
The Jakarta Post
17 September 2013

Available at: http://www.thejakartapost.com/news/2013/09/17/will-fiscal-stimulus-work.html

The government recently announced a fiscal stimulus through four packages to deal with the deteriorating economy.

The first package deals with the current deficit account. This will be achieved by: promoting exports through tax deductions for value-added goods, reducing fuel imports and levying luxury taxes on imported brand-name goods. The second stimulus aims to nurture domestic purchasing power and economic growth through maintaining budget deficit and providing incentives for value-added industries. The third stimulus is to maintain price stability. This stimulus will be carried out through close cooperation with Bank Indonesia (the central bank) by prioritizing food prices.

The government also intends on improving bureaucracy efficiency to promote investment and business.

Unfortunately, analysts and industry players reacted to the announcement of these packages with scepticism. Supposedly, these policies are needed to boost economic growth. However, many believe that these policies should have been implemented when market conditions were better to improve structural conditions and not when the country is facing economic turbulence.

The main reservation behind these packages is their long-term orientation; they cannot solve Indonesia’s economic issues immediately. Theoretically, assuming Indonesia has an efficient bureaucracy, good infrastructure and negligible corruption issues, these packages may help boost the economy significantly after at least six months of being implemented.

However, considering today’s rampant corruption, perplexed bureaucracy and poor infrastructure, it might take years for these stimulus packages to have positive effects.

Therefore, instead of poorly applying textbook-oriented fiscal policy, the government should make bolder moves that could improve the economy immediately.

One of the most feasible policies is by promoting public spending through infrastructure investment. According to Keynesian economics, an economic school of thought, a government should boost its spending when its economy is facing a crisis. When a government does not have enough money to spend, then it can fund spending by obtaining debts. The logic is, at the onset of the crisis, the government should solve problems in the short run rather than waiting for market forces to do it in the long-run.

Admittedly, this policy may sound too risky since it involves public debts in promoting economic growth. Meanwhile, public debt has become a sensitive issue since the 1997 Asian Financial Crisis as it brought our country to the brink of bankruptcy.

However, it is necessary to understand that debt is not always bad, as long as it is not excessive. Indeed, over financing may result in fragile economic conditions, leaving it inflexible and exposed too many risks. However, debt is still necessary to finance an economy, particularly during a crisis.

As an example, fiscal austerity in Europe, which resulted in economic contraction, has become clear evidence of how sometimes debt is necessary to boost economic growth.

Looking at Indonesia’s case, currently the share of debt in terms of total gross domestic product (GDP) is still relatively low compared to its regional peers. Statistically speaking, data released by the International Monetary Fund (IMF) shows that Indonesia’s public debts only accounted for 24 percent of its GDP in 2012. Meanwhile, Thailand’s, Malaysia’s and Singapore’s figures were 46 percent, 56 percent and 108 percent, respectively.

In short, Indonesia’s low public debts position gives a lot of fiscal space for the government to manoeuvre. If the government obtains more public debts and invests in the right sector, i.e. infrastructure, then it will not harm the economy. In fact, infrastructure spending is very much needed in a country such as Indonesia where poor infrastructure has left the country with expensive production costs.

In the short-run, it will create new jobs and projects that will stimulate the economy through increased demand and higher purchasing power. Consequently, economic growth can be created. In addition, the impact of infrastructure spending will last in the long-run as completed infrastructure projects will lower production costs and increase the competitiveness of local products.

As for the debts, if infrastructure spending can foster economic growth faster than debt growth, then the size of public debts in terms of total GDP will shrink by itself in the long-run, even if the government does not pay it off. This method is suggested by Paul Krugman in his book End This Depression Now!

In conclusion, debt-financed infrastructure investments will create sustainable economic growth since the impact of the investments will last in the long-run and create multiplier effects in the economy.

The writer, a graduate of the University of Manchester, UK, is a research analyst at a multinational bank. The opinions expressed are his own.

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