24 January 2020 (closed)
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Given a variety of recent events, Indonesia has seemingly entered a liminal phase in its development trajectory, suggesting that its economic vulnerability will be tested in new ways. The present circumstances should be understood as a particular test for the ability of policy initiatives to temper the effects of perturbing exogenous factors and demand shocks to the overall economy.
While the topic of waning global aggregate demand is at the forefront of discussion, presentations of (and responses to) domestic demand perturbations should be considered equally paramount. Taking a holistic view of both the socio-political and economic landscapes, it is clear that domestic factors exogenous to economic analysis play a consequential role in macroeconomic fluctuations and are augmenting existing realities in the global economy. However, this view also furthers the idea that the state retains robust potential to effectively mitigate economic woes through active policy integration.
Degrees of Exposure Through Historical Context
Indonesia’s post-Reformasi macro-policy apparatus has been adequately positioned to mitigate the effects of sudden changes in aggregate demand. There has been notable leeway for robust fiscal policy adjustments to offset unfavorable trends in the global economy. While these adjustments have not always been made effectively, it is clear that the potential has largely existed. The econometric evidence provided by Siregar and Ward (2010) complements such an assertion. Their analysis shows aggregate demand shocks produce more robust fluctuations in Indonesia’s macro-economy, but also that fiscal policy response can be seen as especially effective in stabilizing such fluctuations.[i] This still leaves the potential malleability of macroeconomic fluctuations due to domestic demand perturbations open to further speculation. Today, such considerations are paramount. The economic vulnerably of Indonesia to its own socio-political landscape is again increasingly relevant, as the economy has faltered in the face of political tension.
Considering conventional indicators, the current inflation rate in Indonesia is stable around 3.4 percent and well below its targeted upper-threshold of 4.5 percent as designated by Bank Indonesia (BI). Furthermore, unemployment remains at a modest 5 percent, although this matter is complicated by the persistence of the informal sector and a burgeoning working-age demographic. Nevertheless, the state experienced disappointing second quarter GDP growth, reverting to 5.05 percent, while national aggregate demand remains sluggish. BI data shows waning consumer confidence, as there was a notable 5-point drop in the CPI between May and August of 2019. Although the recent decline in export demand has had a marked effect on economic growth, it is unlikely that it is the sole culprit. Considering this, the trouble facing Indonesia’s economy is likely its high degree of adverse exposure to both global and domestic variables that affect demand in both arenas.
It is important to note that Post-Suharto Indonesia has ranked low in indexed measures of developing states’ economic resilience—in a 2009 study, Indonesia ranked 78th amongst developing nations.[ii] This suggests that the exposure of the overall economy to adverse shocks in the global arena has been (and continues to be) high and that such events have the ability to further induce robust fluctuations across the realms of general productivity and resource exportation. This position is not unique, nor does it counter the work of Siregar and Ward (2010), as their analysis identified that aggregate demand shocks disproportionately affect macroeconomic trends and that there has been potential (still largely untapped) to effectively respond. In this line, it has been fitting to characterize Indonesia’s economy as relatively ‘vulnerable’ compared with other developing states.
Without even considering domestic factors, the situation of Indonesia as a still relatively extractive-oriented regime places it in an already precarious situation amid continuing global deceleration in demand. Such a position can be further verified by simply looking at how exposed the state’s GDP growth rate has been to recent fluctuations in global demand, noting the persistence of particular fiscal policies that anchor state revenue to external independent markets, such as the tax policy on palm oil exportation. Yet in echoing existing research, there is robust potential for both macro and public policy initiatives to resituate the state’s precarious position by facilitating a climate that both de-emphasizes extractive, export-based industry and further encourages domestic production and consumption. A historic trend moving toward such a paradigm is evident over discrete periods. Yet, while global exposure has been studied extensively, questions relating to the economy’s exposure to various domestic factors remain. The reality, however, is that such questions are complicated by Indonesia’s previous political regime typologies.
Historically, domestic social factors with the potential for adverse economic consequences have been malleable—often they have been subjected to active influence by the state. Both Sukarno and Suharto used policy initiatives and heavy-handed legislative action to temper or guide public opinion and subsequent social and political developments that appeared to threaten the state’s economic development trajectory. The structuring of Pancasila ideology along pluralist lines in 1945, for example, was a direct decision of Sukarno’s post-colonial elite, as they maintained religious pluralism was necessary for nation-state development. The forced consolidation of Islamic political parties in 1960 reflected a similar objective.
Under Suharto’s ‘New Order’, the development of numerous state apparatuses served to quell mounting ‘Islamization’ challenges (or perceived challenges) to economic development trajectories. The establishment of the Indonesian Council of Ulama (MUI) in 1976 and the later Indonesian Council of Muslim Intellectuals (ICMI) in 1990 are clear examples of this, as Suharto worked to absorb popular challenges or initiatives that strayed from the regime’s development vision. It is also clear that Suharto took marked steps to marginalize the historical influence of ethnic-Chinese business-elites and their relative domination of the economy by channeling the development of a pribumi (‘native’) Muslim business-class though capital liberalizations and the positioning of many close relatives and acquaintances in leadership positions of state-backed enterprise.[iii]
With all this in mind, the relative ability of policy-makers acting within a regime of legitimate party democracy to mitigate the consequences of over-exposure to exogenous domestic factors with tailored policy initiatives has not been considered sufficiently. Historical instances of social unrest or public discontent have been largely dealt with using mechanisms only available to authoritarian-style political regimes, as leadership figures were often able to actively temper volatile activity in order to maintain economic growth. This historical trend has perhaps propagated a view that Indonesia is less exposed to exogenous domestic developments than it actually is.
Volatility in Public Opinion and Domestic Demand
From numerous exogenous factors, it is the emergent variable of volatility and uncertainty in public opinion that now appears most relevant. Public opinion precedes and underpins political ideology, but it is more transient, characterizing a function of aggregated individual sentiment over perceptions of future political conflict across varying levels of society. The current volatility in public opinion has served to augment already-waning global demand and growing speculation that a global recession is imminent.
In further narrowing the focus, one key indicator at the heart of this current economic paradigm was the reality of waning consumer confidence. Consumer sentiment is an important measure of economic climate, and it often changes in conjunction with conventional variables associated with traditional economic analysis. However, confidence is also undeniably linked to perceptions of social and political stability and to basic levels of trust in the government.
The recent decline in confidence began after a highpoint in May 2019 and steadily fell through August. This decline unfolded against only inconsequential fluctuations in the overall inflation rate, but against disappointing overall second-quarter growth. However, the degree of decline in export demand is not enough to have solely propagated such a change in the perceptions of domestic consumers. Instead, exogenous factors have also served as the catalysts for relative domestic ‘demand shocks’. It is clear that these catalysts reached numerous critical points, first manifesting in May, and were likely linked to both to anxieties over the heated presidential election—the results of which Prabowo Subianto immediately contested—and to subsequent uncertainties over whether President Joko Widodo would renew and actively pursue his commitments to improve the state’s infrastructure, labor-market, and corruption problems. Oppositional actors had claimed Widodo previously fell short on his commitments in all three areas.
Overall, the 2019 campaign period produced a marked level of socio-political volatility in Indonesia. Supporting this, a recent article in The Jakarta Post notes that ‘consumer confidence in political stability’ dropped by 8 percentage points between April and June (from 34 to 26 percent)—the same period over which general consumer confidence declined. Concerns may have been mitigated with time— especially in the wake of the 2020 budget announcement, but tensions continued to mount across sections of society due to the nature of continued socio-political conflict. Political society, for example, has seen contradictory political alignments and mounting tensions between Widodo’s coalition and Subianto’s opposition—a dichotomy that has now been bridged with Subianto’s appointment as Defense Minister.
The overall uncertainty driven by numerous social and political conflicts has complicated overall deceleration in economic growth. Renewed conflict in West Papua and the ensuing problematic nature of the state’s response; violent post-election protests; the apparent reinvigoration of violent jihadi organizations and their links to transnational militant groups; and finally, the recent emergence of widespread protest due to confusing, transformative adjustments to the state’s criminal code have certainly all rendered consumers more cautious. However, there is hope for tempering volatility, especially if concerns over the current regime’s intentions are assuaged by a necessary turn toward ‘good governance’ through policy initiatives that integrate differing socio-economic classes and ethno-cultural groups. President Widodo has long championed such initiatives in rhetoric, and he now appears to be building political coalitions in support of this. Indeed, while concerns over illiberal transitions toward populist-style authoritarianism should certainly be heeded, they may actually be missing the true nature of the current paradigm.
While authoritarian-style populist politics, which had intertwined with Islamic conservatism, have deescalated in the aftermath of the recent presidential election, concerns remain over both President Widodo’s intentions and the overall composition of the legislative body and cabinet. Subsequently, comparisons have been drawn to current political trends across the West. Some have noted a declining role in meritocracy’s relevance, which has been augmented by perceptions of political dynasticism’s re-emergence in light of Megawati Sukarnoputri’s recent ascendance as speaker of the house. The state, some claim, seems to be consolidating power, suspiciously moving toward authoritarian-style governance. In considering these developments, a populist current can appear as present within political society and/or within the central state itself. Such proclamations, however, would remain largely as mischaracterizations.
It must be understood that ‘populism’ is inherently tied to mass public sentiment and its aggregation around charismatic leadership—a mainstream populist discourse underlies populism’s political project. Considering this, Indonesia is not yet succumbing to the emergent trend of populism observable in the West. One could take both the recent mass student protests and waning confidence in the political stability as empirical evidence for this position.
However, while characterizations of populism may be misguided, one should certainly not discount the idea of the state as diverging from ‘good governance’. Changes will have to be made, as both government policy initiatives and executive leadership rhetoric must reinforce the reality that a populist authoritarian turn is far from imminent. President Widodo seems eager to pursue such integrating policy directions moving into his second term, championing labor-market improvement and social policy development. Yet, the paramount challenge here will be reconciling the various demands of differing segments in society. Subsequently, a careful and continued consideration of political rhetoric and emerging policy proposals is integral to tracking the success of such an endeavor and forming a long-term macroeconomic outlook.
Toward Constructing an Outlook
Broadly, the state is faced with questions over the potential malleability of domestic aggregate demand perturbations, which have been propagated by entropy in public opinion. This entropy has likely been induced by perceptions of a declining ‘quality of governance’ marked by continued corruption, increased social cleavages, and seemingly erratic or contradictory policy initiatives. While these troubling factors persist, the central government is still largely equipped to effectively respond to both social grievances and the dampening effects of adverse exposure to both domestic and global aggregate demand perturbations.
Due to the ongoing trade-war between the U.S. and China; the reality of decreasing Chinese consumption (Indonesia’s largest export destination); and finally, the increasing popularity of ‘isolationist’ economic policies across the West; it is clear that global aggregate demand is unlikely to renew in the near-intermediate future. consequently, Indonesia must look to national aggregate demand as a key to furthering its economy, and policy initiatives must facilitate this.
Given that stable interest rates continue in the face of economic growth deceleration, there is considerable leeway for robust macroeconomic and public policy measures to stymie the further effects of (1) declining global aggregate demand for exported commodities, which has hurt domestic producers; and (2) entropy in public opinion due to domestic socio-political conflict, which has created a sentiment of uncertainty amongst consumers who feel less positive over political stability. However, in many ways the state has already committed itself to numerous potentially mitigating policy initiatives—state-sponsored health insurance (JKN) continues to expand alongside renewed commitments to broad infrastructure improvements, and beneficial labor legislation remains intact and politically sound. President Widodo recently voiced his intention to reinvigorate foreign direct investment through the introduction of ‘omnibus laws’, specifically identifying manufacturing industry growth as a target. Moreover, BI has shown its initiative to leverage monetary policy changes in response to demand fluctuations, as it has now cut policy rates over three consecutive months and actively indicated its willingness to provide further-tailored adjustments.
The question of labor-market improvement must be addressed actively through both substantial improvements in infrastructure spending and macro-policy initiatives aimed at spurring investment in both the manufacturing and services industries. This must happen while moving concentration away from extractive industry. One should expect further infrastructure developments through allocation in the now-official 2020 budget, and the aforementioned remarks by Widodo after revealing his cabinet suggest that sweeping legislative action may well restructure investment incentives.
While the state seems willing and able to utilize fiscal policy measures, it must also further public policy that addresses socio-economic and socio-political grievances, which underlie entropy in public opinion and dampen domestic consumption. If anything, the suspiciously rapid amendments to the existing criminal code are a nod to ultra conservative factions of society, but they do not support an image of the state as in tune with this idea. However, political leadership responses to student protests have indicated willingness to compromise, while the state appears to be actively pursuing a dynamic of dialogue and concessionary measures with Islamic social movements.
As supported by the observable effects of (1) decreasing global demand; and (2) socio-political conflicts propagating a deregulation in public sentiment on Indonesia’s recent GDP growth rate, it is certainly reasonable to re-characterize Indonesia as relatively ‘economically vulnerable’ to both global and domestic variables. This reality is undoubtedly observable now, as disappointing economic fluctuations manifest in response to widespread adversity. Yet, in line with previous studies of Indonesia’s macro-economy, adverse exposure to demand perturbations may be more conducive to mitigating policy measures than is acknowledged in the mainstream. This places Indonesia in a promising position. Actively engaging its ability to reinvigorate confidence by tempering volatility in public opinion through integrating policy measures is one clear way for the state to leverage such a position. If policy-makers rise to this present challenge by addressing the aforementioned areas of concern, the future economic ‘vulnerability’ of Indonesia could be reduced, with the state relying more effectively on improved or stabilized domestic consumption and employment trends. In this way, the ‘developing state’ could transcend to a new level of economic maturity and independence.
[i] Briguglio, Lino et al. (2009). “Economic Vulnerability and Resilience: Concepts and Measurements”. Oxford Development Studies.
[ii] Siregar, Hermanto and Bert Ward (2010). “Were Aggregate Demand Shocks Important in Explaining Indonesian Macroeconomic Fluctuations?”. Journal of the Asia Pacific Economy.
[iii] Sidel, John. (2008). “The Social Origins of Democracy Revisited: Colonial State and Chinese Immigrant in The Making of Modern Southeast Asia.” Comparative Politics.
Charles Baker recently graduated from Yale University with B.A. in Political Science, focusing primarily on Indonesia and the MENA region. He is currently finishing his MSc. in Political Sociology at The London School of Economics, where he devotes his time to studying Islamic politics, economic sociology, and the emerging global trend of populism. He also speaks Bahasa Indonesia.