This is the best time to rebuild the industrial strategy through downstreaming, which is supported by high investment rates for a more equitable (inclusive) social welfare.
By
A Prasetyantoko
·6 minutes read
SALOMO TOBING
A Prasetyantoko
Recent developments in the global economy are both dynamic and challenging. Good news came from the United States when December inflation receded to 6.5 percent from 7.1 percent in November and 9.1 percent in June 2022. The decline in inflation means the interest rate of the US Federal Reserve will be less aggressive. The risk of recession is also softened.
Even so, the outlook for the global economy is bleaker than previously forecast. The latest World Economic Prospect report, published by the World Bank in January, estimates that the global economy will only grow 1.7 percent this year. The US and European Union economies will grow 0.5 percent, Japan 0 percent and China 4.3 percent. The Indonesian economy is estimated to grow 4.8 percent.
It seems that while the global recession will be milder, its impact will be more widespread and possibly longer. Our economic performance is convincing, but not entirely immune from the effects of the global crisis, especially if the recession lasts a long time.
This report also shows how a global recession would transmit to a slowdown in investment, trade and economic productivity, which in turn results in a drop in the level of people's welfare. Per capita income growth in all regions is smaller than during the Covid-19 pandemic.
By the end of 2024, developing country economies will shrink by 6 percent compared with the start of the pandemic. Investment is estimated to only grow 3.5 percent for the next two years, half of the investment growth before the pandemic.
The World Bank is again pushing for incentives for investment, especially in developing countries. In order to keep the economy growing, productivity increasing and income per capita rising, industrial policies are needed to induce structural changes and to increase investment. Fiscal and monetary policies are needed to create economic stability so that growth with poverty reduction occurs.
The economic landscape is changing
The economic slowdown coupled with high inflation, rising interest rates, geopolitical risks and climate change challenges have changed the landscape of the global economy. The principle of efficiency that has been the basis for ongoing economic activity has shifted toward resilience. It is this context that increases the urgency and relevance of the existing industrial policy again. So far, industrial policies have been considered antimarket when in fact almost all countries practice them these days.
In August 2022, the US government approved its US$433 billion Inflation Reduction Act proposed by President Joe Biden. The essence of this regulation was to reduce the fiscal deficit and inflation through investment in renewable energy and health. Concretely, the government will subsidize companies in both sectors. The target is to reduce energy and health costs.
The EU strongly protested this policy. Apparently, many European companies in the energy and pharmaceutical sectors prefer to invest in the US because of these incentives. Furthermore, several EU countries are preparing to launch a similar policy, namely providing subsidies to certain sectors in order to encourage investment interest. The pandemic that followed the recession has been a fertile breeding ground for a return to industrial policy.
Yet protective behavior had begun increasing long before the pandemic. US-China tensions that peaked under president Donald Trump were the signal of weakening globalization.
The pandemic has only accelerated that trend. Tension after tension continues. Mid-last year the US also passed the CHIPS Act worth $280 billion to subsidize semiconductor manufacturers in order to limit China's semiconductor domination.
A similar trend occurred in Indonesia. Law No. 4 of 2009 concerning mineral and coal mining (Minerba) imposes the requirement to process and refine mining products domestically. Its implementation has been hampered by many things, starting from the readiness of the processing and refining industry, the smelters, in the country and short-term profit-and-loss calculations, to the resistance of the international community.
The issuance of Law No. 3 of 2020 as a revision to the previous Minerba Law, which stated that no later than three years after its promulgation, all mineral and coal products must be processed domestically. Accelerated developments of infrastructure, energy supply and policies that support the development of the domestic processing industry have been carried out. It seemed that this time is the right opportunity.
The government’s nickel export ban policy, although it was sued by EU countries and lost in a trial at the World Trade Organization (WTO), has not changed. The government will also ban the export of other raw materials, such as copper, tin, bauxite and iron ore, in June 2023 according to the law.
Now is the right time to carry out reindustrialization through downstreaming and increasing investment through a set of industrial policies. The issuance of Government Regulation in Lieu of Law (Perppu) No. 2 of 2022 concerning job creation may be an integral part of the government's efforts to take advantage of the momentum to accelerate domestic investment.
Even so, it is necessary to mitigate some potential risks. First, domestic resistance to the issuance of the Perppu on job creation needs to be mitigated so that it will not, instead, cause doubts for investors, especially since next year there will be a presidential change. If the polemic continues, it could actually be counterproductive to the regulation goal, which is to increase investment interest.
Second, even though the global trend shows a protective attitude, it is necessary to realize that economic recovery with all its challenges, including health problems and climate change, actually requires more intensive coordination.
Considering that the geopolitical map is changing, foresight to build cooperation among countries is the key. The success of the Group of 20 presidency, which was continued with the chairmanship of ASEAN, be strong capital in building global and regional coordination, while ensuring that domestic interests are accommodated. This is the best time to rebuild the industrial strategy through downstreaming, which is supported by high investment rates for a more equitable (inclusive) social welfare.
A PRASETYANTOKO, rector of Atma Jaya Catholic University
