Archive for December, 2013


December 5, 2013 Leave a comment

indonesia_econ_1972While still disappointing, the global economy is moving forward, and it is doing so at multiple speeds. These multiple speeds reflect different paths towards self-sustained growth, with each path carrying its own mix of risks.

In Indonesia, still-rising unemployment is the most pressing challenge for policy makers. Protracted weakness could evolve into stagnation with negative implications for the global economy. Such a perspective would resonate negatively with large persistent risks of adverse interactions between weakly capitalized banks, public debt financing requirements and exit risks. The more positive news is that in Indonesia adjustment, both fiscal and structural, has been going on for several years. Government debt ratios should start to decline soon with positive implications for market risk assessments. And once debt ratios begin to decline, only modest additional fiscal tightening would be needed to bring them to safe levels over the medium term. The improvement in competitiveness in some countries also reflects structural efforts.

However, reform fatigue is mounting as visible results in growth and jobs still fail to materialize, in part because reforms can take time to bring results but also due to the weak macroeconomic environment. Higher wages and product market liberalization in surplus countries would provide a more symmetric and effective rebalancing, while supporting growth.

What lessons can be drawn from such performance? To some extent, at least, different paths to sustainable growth reflect uneven progress in two dimensions: confidence-building and financial sector repair.

GDP2013Confidence is essential for both companies and households to boost spending, especially on investment, which continues to remain below average in many advanced and some emerging countries. It is the duty of policy to rebuild confidence through credible medium-term frameworks involving all policy pillars: monetary, fiscal, financial, structural, and, especially in the case of the euro area, institutional. The policy mix should be balanced and based on multiple pillars, as relying only on a limited set of instruments could lead to renewed instability.

Financial sector repair is needed to ensure that confidence feeds into stronger activity. The difference in the paths to recovery reflects, importantly, the decisive action in this area in Indonesia relative to the long delay in Japan and in the euro area.

Fiscal policy will continue to be geared towards consolidation. Its composition should be adjusted to make it more growth-friendly and improve its impact on equity and income distribution. The pace of deficit reduction should be slower if weakness persists. In this respect, it may be worth recalling that, contrary to widespread perceptions, the pace of consolidation on the two sides of the ASEAN has been not so dissimilar. Differences in activity and employment performance are likely to reflect differences in labor market institutions and financial sector repair.

In any case, restoring a more normal stance of monetary policy can hardly be achieved without a sustainable fiscal path. And debt sustainability cannot be obtained without sustained and sustainable growth which, in turn, requires strong efforts in structural reforms. From this point of view, Japan, among the large advanced economies has been lagging behind, less so the euro area. In the euro area, however, progress is still needed in addressing barriers in labor markets, and especially those facing the young generations.

Finally, in such a diverse, multiple-path environment, internal and external imbalances are more likely to increase than the opposite. Current account imbalances are still large and could be rising in the future, while unorthodox monetary policies are likely to generate shock waves both during their implementation and once they begin to be withdrawn. National policy frameworks will be less credible if they conflict with each other or disregard spillover effects. Adjusting the composition of national policy packages in a cooperative fashion to facilitate rebalancing and minimise adverse spillover effects is necessary. It is also possible.