It is observed that the government’s strategies and programmes aimed at achieving higher economic growth are primarily driven by the idea of boosting the demand side of the economy.
JAKARTA: The discussion around strategies for achieving high economic growth has intensified following President Prabowo Subianto’s declaration of an ambition to bring Indonesian economic growth to 8% per year by the end of 2029.
Concurrently, the government has introduced several initiatives to drive this growth, including the free nutritious meal programme, the development of three million housing units, the sovereign wealth fund Danantara, the food estate programme, the establishment of a bullion bank and the development of 80,000 Merah-Putih cooperatives.
It is observed that the government’s strategies and programmes aimed at achieving higher economic growth are primarily driven by the idea of boosting the demand side of the economy.
The most well-known macroeconomic formula to illustrate this is: Y = C+I+G+ (X-M), indicating that aggregate demand is the sum of household consumption (C), investment spending (I), government expenditure (G) and net exports (exports minus imports).
Thus, the essence of economic policy is to enhance C, I, G and (X-M) to attain higher economic growth.
However, it should be understood that the macroeconomic formula above serves as a tool for managing short-term economic growth throughout the business cycle.
For instance, if the economy is experiencing a slowdown, the government may employ financial policy to increase aggregate demand and stimulate economic growth by raising government spending.
In essence, the equation Y = C+I+G+(X-M) primarily represents the management of aggregate demand as an economic policy aimed at smoothing economic growth and avoiding significant economic fluctuations.
The economic policy of boosting aggregate demand is not perfectly fitting to boost economic growth for achieving 8%.
An expansive aggregate demand could create problems as the economy may overheat, indicated by high inflation and deep currency depreciation.
Note that each economy has its own capacity, so-called gross domestic product (GDP) potential, which should not be pushed higher than its capacity.
It is important to note that Indonesia’s economic growth has averaged around 5% over the past 20 years, with the exception of the Covid-19 period.
Achieving 8% growth will undoubtedly require a shift in the long-term economic growth trajectory.
Specifically, the economic capacity should be expanded to increase the potential GDP significantly beyond its current level.
Furthermore, technology adoption and economic productivity should be improved, given existing production capacity.
Another key macroeconomic equation when discussing economic growth concepts is the “Sollow growth theory”, which argues that g = a+b.k+c.l+.
Note that g is economic growth, k is growth of capital stock, l is growth of number of labour, a is the constant coefficient of technological progress and is an error term reflecting the increase of total factor productivity.
The objective of raising economic growth from 5% to 8% involves shifting the long-term economic growth trajectory by enlarging economic production capacity, enhancing technology adoption and improving labour and capital productivity.
These strategies for accelerating technological progress and boosting productivity have been overlooked in the government’s programmes aimed at achieving higher economic growth.
This is not merely about managing short-term aggregate demand, as overly expansive economic policies could pose risks.
To truly enhance the long-term economic growth path, a consistent effort is required to foster better technological accumulation and drive higher productivity.
In the short term, it is suggested that government policies should concentrate on optimising existing economic production capacity.
These policies should also aim to reduce business constraints that lead to inefficient production functions and a high-cost economy.
A clear example would be to eliminate extortion from preman (thugs), ormas (mass organisations) and government officials, which would contribute to improving the overall business climate.
Specifically, the reduction of illegal collection from public officials is often linked to complex bureaucracy, rules and regulations.
Therefore, deregulation is essential for minimising illegal payments to government officials.
Another practical policy to enlarge economic capacity and accelerate productivity in the short-term is to link and integrate the curricula of schools and universities with industry needs.
A beneficial approach is to invite industry leaders, such as managers and directors, to teach at schools and universities.
This collaboration would also involve defining the skill sets required for employees in their factories, ensuring that the education system aligns more closely with industry needs.
Formulating government policy for long-term strategies to expand economic production capacity, enhance technological progress and increase economic productivity is quite challenging. — The Jakarta Post/ANN
