By: Insukindro1
In August, two dates turned out to be very important and interesting to the general public: the first, 17 August 2014. It marked 69th anniversary of Indonesia’s proclamation of Independence, as well as marked by the issuing of New Unitary Republic of Indonesia currency. Second, August 21 2014, marked the issuing of the decision by the constitutional court which in effect signaled approval and recognition of the newly elected President and Vice President (Joko Widodo and Jusuf Kala). The issuing of NKRI currency is not only a manifestation of the implementation of Act No.7/2011 on currency, but also marks an important change in the concept of money in Indonesia from Bank Indonesia currency to the NKRI currency (UNKRI). Bank Indonesia currency (UBI) –which has served as a medium of exchange, medium of payment, and unit of measurement for a long time—BI legal tender, constitutes the obligation/liability of the monetary authority (BI) to society. In other words, Bank Indonesia as merely an independent state institution, is vested with enormous authority. On the other hand, the coming to the fore of NKRI (UNKRI) currency means that the monetary obligation has been shifted to the state, the Unitary Republic of Indonesia (NKRI) represented by the government (Minister of Finance)and Bank Indonesia. UNKRI is not only legal tender but also represents the existence of the state in all elements and sections of life and economic activities of society living in the Unitary Republic of Indonesia. Indeed, the issuing of UNKRI may indicate a decrease in authority and an independence of Bank Indonesia after the establishment of the financial services authority inflation target setting by the government (Insukindro, 2009). However, such a step is important and must be done to ensure that it is not only Bank Indonesia that has the knowledge about the cost and the quantity of currency that is minted, but also the government and representatives of the general public in the national legislative assembly. In the future, it would be better if the quantity of NKRI currency that is minted and circulated is linked well to the government development plan as entailed in the national medium term development plan and the draft of national revenue and expenditure proposals. The last two issues mentioned, will definitely be reflected in the internal balance such as inflation, economic growth, employment opportunities, financial system stability, and external balance, such as balance of payments. Needless to say, realizing all the foregoing will require institution changes in the Bank Indonesia Act.
The decision issued by the constitutional court on August 21, 2014, gave new hope, because it cleared way for Indonesian population to have a new President and Vice President, as well as most importantly, a host of new policy packages that are encapsulated in the “nawa cita” (nine priority programs). Programs which the new government has earmarked as its priority that include smart and healthy Indonesia, subsidies for villages and rural areas. As such will be originated from the macroeconomic sense that constitutes forms of fiscal stimuli which is expected to the promote the enhancement of work force quality, productivity, and economic growth. Nevertheless, the challenges which the government will face are not easy. The most noticeable is the fact that the draft of the 2015 government revenue and expenditure proposals was compiled by the cabinet of the incumbent President Bambang Yudhoyono. Doubtless Indeed, the programs that are considered priority for the soon outgoing government are different from those of the newly elected President and Vice President. Besides, other problems need urgent attention such as fuel and electricity subsidies, foreign debt, and source of financing for the draft government revenue and expenditure proposals.
Reducing fuel subsidies, for example, can be done using two approaches: that is quantity approach, which entails restricting the sale of subsidized (which is a policy that the government has implemented lately) and the price approach, which requires raising prices of fuel. The two approaches will in turn induce an increase in price of fuel whether indirectly (the first approach), and directly (the first approach). Using the new macroeconomic consensus approach (MKB)2, it is possible to analyze the impact of fiscal stimulus and raising prices of fuel on macroeconomic variables, for instance: interest rate, inflation, and economic fluctuation (recession or economic expansion). Fiscal stimulus will have impact on the expansion of output (expansion), but will also push up inflation. The question is: should interest rate be raised? There are two answers to the question. First, raising interest rate with the expectation that inflation will decrease3. Second, interest rate is not raised and output grows registers faster growth (sustained economic expansion) but characterized by a rise in inflation in the short term.
The increase in fuel prices will in the short term induce an increase in cost of production, prices or inflation. The question is: should the increase in fuel prices go hand in hand with an increase in interest rate by Bank Indonesia? There are two answers to the above question. First, interest rate can be raised with the expectation that inflation will decrease, but is likely to send the economy into a slowdown or economic recession, and secondly, interest rate is raised, and the economy does not plummet into a recession, but suffer from inflation in the short term.
Based on the two examples above, there are two choices we can follow. They are the standard neoclassic approach, which seems to be the source of reference in Indonesia, or the new macroeconomics such as new macroeconomic consensus. If our decision is to follow the new macroeconomic approach, then we must have some policy options and attendant consequences as well as the possibility that we avert the inflation syndrome and become more inclined toward supporting the real sector or aggregate supply. Of course, there is a need to intensify coordination among the government, BI, OJK and so on, of which it is no an easy feat.
In a study by Insukindro and Makhfatih (2013), results lent support for the need for coordination between the government and Bank Indonesia in the management of money in circulation, by which it should facilitate economic growth. The issuing of unitary Republic of Indonesia currency as the new legal tender should make such coordination possible. The new government should improve the governance of production and marketing of oil and gas as well as subsidies and related tax revenues. It is known that government expenditure will be sufficient to induce an increase in aggregate demand, but it can help in promoting production or aggregate supply, that in turn it will help mitigate the syndrome of high interest rate and inflation. Crisis from abroad and the increasingly open Indonesian economy are two issues that require urgent attention. The study highlighted the impact of the two factors aforementioned on Indonesian economy. The expectation is that by late 2014, the US and European Union economies will return to be a strong and a robust economic growth.
Yogyakarta, August 24, 2014
Bibliography
Arestis, P and M.C. Sawyer (2008), A Critical Reconsideration of Foundation of Monetary Policy in the New Consensus Macroeconomics Framework, Cambridge Journal of Economics, 31(5): 761-779.
Blanchard, O., G. Dell’Ariccia and P. Mauro (2010), Rethinking Macroeconomic Policy, IMF Staff Position Note, SPN/10/03, February 12
Goodfriend, M. and R.G. King (1997), The New Neoclassical Synthesis and the Role of Monetary Policy, NBER Macroeconomics Annual: 971-987.
Hubbard, R.G., A.P. O’Brien and M. Rafferty (2012), Macroeconomics, Pearson Education, Inc.
Insukindro (2009), Bank Indonesia Masa Depan, Kompas, 22 Juli
Insukindro (2013), Makroekonomika Baru: Pendekatan IS-MP-MNKPC dan Sintesa Neoklasik Baru, Materi Ceramah di PRES BI, 30-31 Juli
Insukindro dan A. Makhfatih (2013), Kajian Analisis Ekonomi dan Pembiayaan Pembangunan, Laporan Akhir, Konsultan Tim Kajian Staf Ahli Meneg PPN/Ketua Bappenas, Jakarta
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1 Lecture of economics at Faculty of Economic and Business UGM
2 The new macroeconomic approach, such as (New Neoclassical Synthesis) which was developed by Goodfriend and King (1997) and /or New Consensus Macroeconomics) (see for example : Arestis and Sawyer, 2008), and later combined by Hubbard et al (2012: Ch.9-13, 15), makes it possible to use IS-MP-MNKPC approach in analyzing economic phenomena above (see also : Insukindro, 2013)
3 This policy is often the preference of economists who follow the neoclassical school of thought, which had been received criticism from many sources (see for example: Blanchard e al, 2010)