Sri Mulyani: Indonesia Needs to Focus on the Quality of Growth
Oct 22, 2012 01:32 PDT
Sri Mulyani: Indonesia Needs to Focus on the Quality of Growth
October 22, 2012
The Jakarta Post
Indonesia should pay more attention on how to improve the quality of
life of its people to avoid the widening of economic disparity and
inequality, World Bank managing director Sri Mulyani Indrawati said
recently. The former Indonesian finance minister discussed the issue
during an interview with The Jakarta Post’s Raras Cahyafitri on the
sidelines of the International Monetary Fund (IMF)-World Bank meeting
in Tokyo recently. Below are excerpts from the interview.
Question: What will be the impact of the possible fiscal cliff in the
United States on Indonesia?
Answer: The economic risks are actually not only the fiscal cliff in
the US. Perhaps, the more dominant risk and one that has already
happened is the European crisis, which has entered the second or third
year and has not ended yet. Due to its uncertainty, the crisis shadows
the world’s economic prospects.
For Indonesia, the biggest impact will be related to the slowdown in
the economic growth of emerging markets, particularly China.
The immediate impact on Indonesia will be related to trade. The global
economic slowdown has affected many countries, such as China, India or
Latin American countries, whose exports have weakened sharply and some
have even experienced negative growth.
Indonesia has felt the pinch of the global economic slowdown as
indicated by the decline in the growth if its exports, particularly to
China, Europe and the United States. However, Indonesia’s strong
domestic consumption and investment demand have been able to
compensate for the decline in exports.
How long will domestic demand endure this crisis and other risks?
It is not like we have a cup of coffee, which will run out because we
drink it. The economy is an ongoing activity. So, the problem is not
how long we can rely on domestic demand. The more important thing is
how to make economic growth strategy sustainable for the long term,
not only for the short term as a response to external conditions.
If a domestic-demand-driven economy is not followed by other policies,
excesses will emerge, including overheating, imbalances in the macro
economy side, such as on the balance of payments, on the monetary side
with inflation or deficits in state budgets as well as debt
There are several important areas in which policies should be
implemented so that domestic demand can last long. First, of course,
is to maintain inflation at a low level. A high inflation rate will
reduce the purchasing power of the people.
Second, is to make sure that domestic demand will improve productivity
structurally. So, the government should be able to direct economic
activities to non-consumptive matters.
Productive enhancements are necessary. The government’s policies on
education and infrastructure development are important because they
will affect the productivity of the overall economy.
Third, and the most important, we have to be cautious that the
domestic-driven economy does not result in the widening of the social
gap. Domestic-driven economies usually rely on urban people, and are
driven by the upper class. Inequality will be a big risk. The
government has to make sure that domestic demand won’t cause a
widening gap between the rich and the poor. It is important to have
policies to maintain the purchasing power of the poor, whether in the
form of direct support, subsidies, cash transfers or by empowering
Excessive subsidies remain a big problem for Indonesia. How can the
government escape the trap?
Many countries face a similar problem. Actually, the problem that must
be thought of seriously is how you are going to use the resources, the
government resources, in this case the state budget, to be directed to
the weakest groups and to improve the productivity of the overall
system and the whole economy. Therefore, the implication is whether
there will be government spending to be adjusted.
Indonesia, with a sizeable state budget, actually has the opportunity
to focus on equality and inclusiveness of growth. Subsidies don’t
strengthen people because they are not only intended for the poor.
Indonesia’s problem is actually relatively easier compared to those
of other countries, who have no money. It would be difficult for
countries in a position like Greece. Indonesia has the money. The
problem is how to spend it better.
Are there any programs from the World Bank to increase access to the
economy and to avoid inequality and income disparity?
That has become one of our focuses now. Not a program, but more about
how we can learn from other countries’ experiences, both those that
have succeeded and failed. The World Bank is now providing solutions;
meaning information and experience from countries across the world
that have experienced problems like Indonesia’s.
Indonesia’s problem is not unique. I’ve travelled to more than 43
countries in the last two years. All countries have problems; some are
more complicated than Indonesia’s.
It’s very good for Indonesia, as an open and democratic country, to
learn from other experiences so that we can prepare ourselves to have
better policy options.
The World Bank can support these efforts, learning from anywhere
around the world. If Indonesia wants to learn from fellow emerging
markets, there are Brazil, Mexico, Turkey, South Korea, India and
The World Bank provides that kind of cross-country exchange and
experience through our staff and database that we have uploaded.
Indonesia’s inflation is at a manageable level. Does it need to
reduce the central bank’s interest rate?
I think the important thing for Indonesia is to maintain its policy
framework, the balance between maintaining stability and policy, which
truly addresses structural problems. That is the biggest challenge.
Lower inflation will provide room for macro-economic policy. However,
that is not Indonesia’s only challenge.
We, including those in the mass media, are not supposed to only talk
about the macro-economic situation, but the quality of spending and
the quality of policy, because Indonesia has been grouped together
with middle-income countries. For a middle-income country, the
question is more about how we can improve the quality of life, how we
can improve the quality of growth or how we create jobs with decent
Indonesia now is challenged to address more structural issues. It
doesn’t mean that the macro- economy is unimportant. The
macro-economy has to be managed well so that we are no longer talking
only about the level of inflation, but who gets the benefit of growth,
whether the growth is quite good, whether we can grow by 6 percent
with only a few policies, whether we can grow faster but without
inequality worsening. Those are questions Indonesia must answer.
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