Avoiding the Curse of the Second Period
Indeed, Bank Indonesia still has little room to lower interest rates. However, this policy will not necessarily be effective in increasing growth. Why?
“We all know what to do, we just don’t know how to get re-elected after we’ve done it.” That is what Jean-Claude Juncker, the president of the European Commission, said.
Those who explore policy issues know how true those words are. Juncker might be too cynical, but the description is straightforward. Indeed, he did not talk about Indonesia, but his remarks seemed relevant to the challenges for the new Indonesia Onward Cabinet. Why?
I once wrote in this newspaper, that amid the threat of global recession, the fiscal and monetary policy space is relatively limited. Indeed, Bank Indonesia still has little room to lower interest rates. However, this policy will not necessarily be effective in increasing growth. Why? If purchasing power weakens, the business world will not expand. Why production is raised, if there is no demand. For that, we need a counter-cycle policy in fiscal terms.
Unfortunately the decline in commodity and energy prices has hit tax revenues. The result: the budget deficit increases so that the space for fiscal expansion also decreases. Its implication is that economic growth can only be encouraged if we carry out structural reforms. How? In the short term the government can focus on the first generation reform such as deregulation, bureaucratization, revision of the Labor Law, attracting the foreign investment, improvement in the quality of spending through more budget allocations outside of salaries and subsidies.
Unfortunately, this is not easy. Implementing structural reform is an art, a combination of technocratic abilities, creativity, and the ability to manage political support. Therefore, many economic reforms have failed. If they fail, economists usually blame political or institutional constraints. In my opinion, this is the wrong way of thinking.
Structural reform is not in a vacuum. He must consider the electability impact of the policy makers. If the political costs of reform are too large, politicians will not support it. In a slowing economic condition, for example, it is not easy to carry out economic reforms.
In Chile, large-scale demonstrations were triggered by the government\'s decision to raise metro fares "only" by 3 percent; in France a demonstration was triggered by a fuel tax increase. We also see a wave of protests sweeping across Hong Kong. The root of the problem is worsening economic conditions and economic inequality. This is the dilemma. On the one hand we must carry out structural reforms, on the other hand it is not popular.
Public support is needed
So what to do? Possibly there are several things that need attention. First, President Jokowi has publicly stated: he is willing to carry out drastic and unpopular reforms because he will not be re-elected in 2024 anyway. I think we should give an appreciation for such an attitude. There is a great hope: a fundamental change will occur. However, as predicted, in a multiparty presidential system, the cabinet being formed is a rainbow coalition.
A compromise, where political interests must be accommodated. The question is, will politicians support the reform promised by President Jokowi? It is true that after 2024 Jokowi can no longer be president, but political parties will compete with their respective candidates in 2024. It means that political parties still want to be popular and elected. Therefore, they do not necessarily support the unpopular policies. Imagine, if the government wants to revise the Manpower Law or has to raise fuel prices near the 2024 election, I am not sure the parties would support this idea. The implication: the space for President Jokowi to carry out unpopular economic reforms is very short.
This is not only unique in Indonesia. In the US the is the term second-term curse. The bottom line: the economic performance of the president in the second period is actually not as good as the first period. I do not fully believe that concept. However, the data shows: only three of the 11 presidents in the US produced better economic performance in the second term than in the first term of office.
In the short term, political support in the House of Representatives can be very strong. However, a few years from now political parties may be busy with their respective candidates. They don\'t want to have political risks for unpopular policies. Under these conditions, political support for Jokowi must come from the public, from civil society. Without it economic reform will be difficult. Unfortunately, this is also not easy because we see how criticism and protest have emerged so strongly against the revision of the Corruption Eradication Commission (KPK) Law and also the Criminal Code Bill. The government finally even decided to postpone the Criminal Code Bill and several other bills, including the revision of the Manpower Law. Without public support, the second-term curse can occur.
Political capital
Second, the success of a reform will depend on political capital and space for reform. We need to remember: political resources and time are limited. That is why priorities are important. The "big bang" (drastic) reform can only be done if we have very strong political capital. A policymaker, such as a technocrat or professional in the cabinet, does not always have the support from politicians. They also do not always have the luxury of time span because of the political cycle. Therefore, they must work within existing constraints. The implication: reform must be carried out in a relatively short span of time with political constraints and limited political capital.
This process can be repeated, starting from the simplest reform, the simple targets, continuing to increase to more complicated and difficult targets. In this way, the reform process is endogenous or has internal support.
How? My study, Reform in an Imperfect World: the case of Indonesia (2017), shows, if political capital is limited and there are political and institutional constraints, economic reform should start from something easy. For example, by creating quick wins that can be felt immediately by the community. If people begin to feel the positive impact of the policy, the credibility of policymakers increases so that they have support to carry out more complex reforms. Public support will be an incentive for political leaders to support policymakers in continuing the reform. This process can be repeated, starting from the simplest reform, the simple targets, continuing to increase to more complicated and difficult targets. In this way, the reform process is endogenous or has internal support.
Third, history teaches that first generation of reforms such as simplification of licenses, investment liberalization, etc. must be followed by institutional development such as bureaucratic reform, improving public services, maintaining the quality of human resources, improving governance, and fighting corruption. Look at the case of Indonesia: the banking deregulation of the 1988s that was not followed by institutional development had pushed the expansion of the crisis to the 1998 Asian financial crisis. Corruption, collusion and nepotism in the financial sector, especially where credit was provided without proper risk analysis, made banking a breakable house of cards.
Acemoglu and Robinson (2012) show that extractive institutions, where decisions are controlled by oligarchs, lead to economic collapse. The Nobel laureate of economics, Amartya Sen, once wrote: the authoritarian government system in China is responsible for the death of millions of people because criticism against food policy mistakes becomes impossible in an authoritarian system. Therefore, criticism is important.
Inclusive growth
Fourth, structural reform must be accompanied by efforts to provide protection to those who lost due to competition. This is what is known as an inclusive growth strategy. Provide protection for the poor, for example through the family hope (PKH) program, cash-intensive, direct assistance; labor-intensive training (cash for training or pre-employment cards). It is true that this program is only temporary. However, it is needed to help overcome the negative effects of economic reform.
Challenges for this new cabinet challenge are not easy. The economic slowdown has begun to be felt and will continue in 2020. We might still be able to grow 5 percent or a little under 5 percent. And, it needs to be appreciated. However, to grow higher, structural reforms are needed. The problem is: it is not politically easy. The government is faced with a difficult position. Good economic policy is frequently bitter and lack of applause, but it will keep us from the curse of the second period. A government is remembered because of its legacy of useful policies long after it ends. It is not remembered for a momentary popularity. Just like the final verse of Frost\'s poem:
The woods are lovely, dark, and deep,
But I have promises to keep,
And miles to go before I sleep,
And miles to go before I sleep.
Muhamad Chatib Basri, Lecturer of the School of Economics and Business, University of Indonesia