G20 and Momentum of Transformation
Indonesia must therefore become a balancing influence between the group of advanced countries (G7) and the developing countries in the G20 grouping.
Good news for one country can be bad news for another. This situation is now imminent in the global economy.
Economic recovery in developed countries, such as the United States, is accompanied by an increase in inflation, which in turn will be followed by liquidity tightening. As a result, financial markets in developing countries can potentially become depressed.
Apart from a tendency to be uneven and marked by financial market instability, global recovery is also facing a situation of uncertainty.
Entering the end of the year, the World Health Organization (WHO) has again announced the emergence of a new variant of SARS-CoV-2 with the discovery of the Omicron strain in Africa. Many countries have again closed their borders and restricted community mobility.
As a result, the economy has again become sluggish and the prospects for 2022 growth are uncertain. Global oil prices have fallen sharply and financial markets have become volatile once again. Brent crude has declined from US$82 to around $70 per barrel.
Meanwhile, investors are starting to divest their shares in aviation, hotels and other sectors related to tourism.
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Logistics costs are also continuing to creep up, pushing up the prices of consumer goods.
The disruption to major global distribution channels has not only increased logistics costs, but also affected changes in global supply chains, which will in turn increase production costs.
The pandemic has accelerated the symptoms of protectionism that emerged in the Trump era. It seems that the economy of the future will be characterized by low growth with rising prices (stagflation), which will cause a decline in public welfare.
This is the situation Indonesia will confront during its presidency of the Group of Twenty (G20) in 2022. Various global challenges lie ahead, with various implications for G20 countries.
Indonesia must therefore become a balancing influence between the group of advanced countries (G7) and the developing countries in the G20 grouping.
Disparity
The emergence of the Omicron variant makes us aware of long-term health challenges. It is possible that successive variants, Pi, Rho, Sigma and others, will appear, while we are also aware that economic recovery will be possible only if the pandemic can be brought under control.
One of the obstacles to handling the global pandemic is unequal access to vaccines, and the G20 is one of the best forums for discussing more equitable vaccine distribution.
In addition, given that the virus continues to mutate, the best way to solving unequal distribution is to develop independent vaccines in every country that has the capacity to do so.
Waiving patents for the existing vaccines would, at least temporarily, encourage the development of more vaccines.
In addition to the vaccine issue, an uneven economic recovery has been caused by imbalance in fiscal stimulus.
One of the obstacles to handling the global pandemic is unequal access to vaccines, and the G20 is one of the best forums for discussing more equitable vaccine distribution.
A report from the World Economic Forum shows the extent of the inequity in fiscal stimulus among G20 countries.
In July 2020, the three countries with the largest fiscal stimulus packages were Japan at 21.1 percent of gross domestic product (GDP), Canada at 15 percent and US at 13.2 percent.
The three countries with the smallest fiscal stimulus were Mexico (0.7 percent), Saudi Arabia, and Russia (3.4 percent). Indonesia is in a middle position with a stimulus equivalent to 4.4 percent of GDP.
The fiscal stimulus determines how economic recovery can be stimulated. Even so, it also affects the structure of the global financial market, which can be a source of financial market instability if is not managed properly, especially for developing countries.
The G20 forum needs to discuss various in-depth scenarios and strategies for more sustainable economic recovery. The three G20 countries with the largest fiscal stimulus are those with the largest debts.
According to the records of the International Monetary Fund (IMF), by the end of this year, Japan will have a debt-to-GDP ratio of 256 percent, Canada 109 percent, and the US 133 percent.
These ratios are expected to remain in the same range until 2026. Meanwhile, Indonesia will be in the 35-40 percent range during the same period.
In developed countries, an increase in the debt burden is followed by a decrease in interest payments due to ultra-loose monetary policies.
That is why the monetary authorities in developed countries seem reluctant to raise their interest rates, because increasing interest will only add to the burden of paying the interest on government bonds, which is already high.
It seems that the regime of low interest rates in developed countries tend to be long-term, which also increases risk as a result of the large amount of liquidity, of which a portion flows to developing countries.
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Changes in monetary policy direction will have implications on both bond markets in developed countries and financial markets in developing countries.
An increase in the interest rates in developed countries will cause a bond market tantrum. It is therefore necessary to formulate an economic stimulus exit strategy, both fiscal and monetary, so as to avoid causing shocks, especially in developing countries.
Indonesia's role
The G20 represents more than 60 percent of the global population, 75 percent of world trade, and more than 80 percent of the world economy.
In its capacity of holding the G20 presidency, Indonesia has a responsibility to balance the group interests of both developed and developing countries that are also in alignment with their domestic agendas.
First, more equitable vaccine distribution will also speed up domestic recovery. Moreover, if efforts are made to relax vaccine patents during the pandemic, at least temporarily, this will certainly accelerate domestic vaccination programs.
The G20 presidency should also be used to encourage the transformation of the health sector (including pharmaceuticals) by leveraging the supply chains in G20 countries.
Second, Indonesia's digital economy potential is expected to be an important portfolio in negotiations with other G20 countries. The development of our digital sector shows promising prospects that can serve as a good bargaining chip in future development.
The regional study by Google, Temasek, and Bain & Company estimates that Indonesia's digital economy will generate sales value of $70 billion in 2021, which is a compound annual growth rate (CAGR) of 49 percent compared to 2020.
By 2025, Indonesia's digital economy is projected to reach $146 billion, and potentially even higher if digitalization can be expanded in various sectors, such as agriculture, marine and forestry.
Green economy
Third, as a country with the third largest tropical rainforest in the world, Indonesia has a strong bargaining position in discussions on climate finance.
Forests function as the lungs of the world, absorbing carbon (which many developed countries produce) and producing clean air. The forest development concept is manifest in the carbon sink principles as a measure on how much a country absorbs CO2 naturally, either through its forests or oceans.
However, the weight is on how these principles are set forth in accounting standards for financial reports so they can be capitalized. So far, the world accounting standards are regulated by the International Financial Reporting Standards (IFRS).
The IFRS recently announced plans to establish an International Sustainability Standards Board (ISSB) for issuing sustainability-oriented financial reporting standards.
The G20 can serve as a forum to influence the direction of environmentally oriented accounting principles and standards by adopting the carbon sink principles.
The G20 community can also be used to support the principles of managing debt securities to fund green bonds. Jeffrey Sach has proposed a more equitable funding scheme for green bonds.
Bonds issued by developing countries have so far tended to be expensive because they are considered high risk, while developed countries benefit from the issuance of bonds with very low yields that their citizens purchase. To strengthen the green economy in developing countries, it is necessary to encourage the development of green bonds by lowering yields.
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Rating agencies also have an important role, for example by designating forest areas as a basis for risk assessment. This approach also works as a disincentive for deforestation.
The greater a country’s efforts to conserve forests, the higher its guarantee and the lower the yield of government-issued green bonds.
The G20 presidency must be used to accelerate post-pandemic economic transformation, especially in the formulation of a digital industrialization strategy with an environmental orientation and a green financing system.
It is essential that the future economy leans towards the adoption of technologies that can lead to a low-carbon economic system. Appropriate industrial policies are needed so that economic productivity is also technology-based and environmentally oriented.
Factors that stimulate green productivity must be developed continuously, from human resource quality and capacity to capital and financing, as well as not taking natural resources for granted as production inputs.
Natural resources that have been overexploited so far must instead become the orientation of conservation efforts. In turn, a green supply chain will slowly gather pace, starting with initiatives through the G20 forum.
In light of the viral mutations that are likely to continue during the future era of Covid-19 as an epidemic, the global economy will likely to grow at a slower pace with relatively high inflation.
Attention will also have to be spared for the issue of environmental balance. Growth patterns will experience changes in the future, so it is necessary to have an industrial policy as well as a financing strategy oriented to a sustainable economy.
The G20 is one of the best incubators for developing innovation, transformation, and even disruption for a post-pandemic green economy.
Indonesia has assumed an important role in navigating the direction of economic recovery into sustainable and digital post-pandemic economy.
A Prasetyantoko, Rector of Atma Jaya Catholic University
This article was translated by Musthofid.