Kiki Verico: Global Economy 2020 and Indonesian Tactics
After going on for about 14 months since July 2018, the trade war between the United States and China began to show signs of abating. This development began in September 2019 and became clearer on January 15 when the two countries pressed for an agreement called the First Phase.
This phase includes the Chinese agreement to buy about US $ 200 billion of goods and services from the United States in two years and the suspension of import tariffs for US $ 162 billion of Chinese products. The global economy is likely to begin to improve along with the decline in trade war tension between the two poles of the world economy, America and China. Developing countries, including Indonesia, must be able to take positive benefits from this new year’s prize. How is the tactic?
In the short term, Indonesia must increase exports to the main destination countries that have strong economic networks with America and China. My estimation with the composite index model shows that potential countries include Japan, South Korea, India, Australia, Pakistan, Chile, United Arab Emirates, European Union members (Netherlands, Germany, Spain, Italy and Belgium), and ASEAN members (Singapore, Malaysia, Thailand, Philippines and Vietnam).
Efforts to increase exports to the main export destination countries are no longer a matter of market access, but rather strengthening domestic competitiveness. For the medium term and beyond, Indonesian exports must increase in non-main export markets, such as Africa, South America, the Soviet Union, and the Pacific islands. For non-main destination countries, efforts to increase exports are focused on mastering Indonesia’s access to information on the domestic markets of destination countries.
Efforts to increase the country’s foreign exchange actually not only through exports, but also imports and physical investment, both in and out. The ability to get access to import goods that are cheaper but still quality will reduce the burden of imports and save foreign exchange. In terms of physical investment, not a few people think that incoming investment will bring foreign exchange, while investing out will reduce foreign exchange.
Data shows that physical investment abroad initially did reduce foreign exchange, but in some time this investment actually provided investment income, created jobs for Indonesians abroad, and increased national exports. Not only bringing foreign exchange, all of these components also help Indonesia to reduce the current account deficit and maintain the rupiah exchange rate.
The combination of the calculation of the revealed comparative advantage (RCA) index and the constant market share analysis (CMSA) based on the type of product is able to explain that the ideal conditions of bilateral economic relations between Indonesia and partner countries. The RCA index shows a provisional proportion of CMSA indicating export growth. This combination is able to explain the four industrial conditions in all countries. Great conditions when RCA is greater than one and CMSA is positive, sunrise when RCA is smaller than one and CMSA is positive, sunset if RCA is greater than one and CMSA is negative, and suffer when RCA is smaller than one and CMSA is negative.
If the condition of Indonesia’s industry is the same as that of the partner country’s industry, ideally cooperation is trade: export or import. However, if Indonesia’s industrial conditions differ from partner countries, the ideal bilateral cooperation is investment. If Indonesian industry is better than partner industry, Indonesia can invest in the country and vice versa.
In the end, efforts to increase the country’s foreign exchange from the real sector are not only related to international trade tactics but also strategies to increase domestic productivity which is influenced by physical investment from and to foreign countries.
When calculating the composite index combined with the combination of the RCA and CMSA indexes, we can see that Indonesia’s tactics for physical investment not only receive but also invest physical investment abroad. Trade and investment are two very important macro variables because, apart from being the main source of economic growth, these two variables strengthen one another. Indonesia needs tactics to increase exports through physical investment, entry and exit, and the availability of local and imported industrial raw materials.
The better the global economic conditions, the better Indonesia’s trade and investment as long as the tactics are applied appropriately. The tactics for each partner country must be right because country conditions vary depending on the comparison of the macroeconomic index and the country’s trade competitiveness with Indonesia.
Deputy Head of LPEM FEB UI and Lecturer of FEB UI
Source: Tempo 27 January 2020