POLITICAL ECONOMY OF DEPENDENCE INDONESIA IN DEBT KEYNESIAN PERSPECTIVE

Prepared by: BAGUS ANDRIADI ( 115020107121004 )

FACULTY OF ECONOMICS AND BUSINESS UNIVERSITY OF BRAWIJAYA MALANG 2013

1.Introduction In writing this paper I will analyze on Indonesia's debt to the theory of political economy approach Keynesian. Indonesia debts which until this time in april 2013 increasing Rp 48 billion to Rp 2023.72 billion.actually in Indonesian debt in 2012 is Rp 1,975, 42 billion.as the result Indonesian debt in 2013, according to data april 2013 finance can be seen in the following table:

PINJAMAN Bilateral Multilateral Komersial Supplier Pinjaman dalam negeri

UTANG NEGARA Rp 329,46 triliun Rp 225,43 triliun Rp24,43 triliun Rp 340 miliar Rp 1,82 triliun

TAHUN 2000 2001 2002 2003 2004 2005 2006

UTANG NEGARA Rp 1.234,28 triliun Rp 1.273,18 triliun Rp 1.225,15 triliun Rp 1.232,5 triliun Rp 1.299,5 triliun Rp 1.313,5 triliun Rp 1.302,16 triliun

PDB (%) 89 77 67 61 57 47 39

2007 2008 2009 2010 2011 2012 2013

Rp 1.389,41 triliun Rp 1.636,74 triliun Rp 1.590,66 triliun Rp 1.676,15 triliun Rp 1.803,49 triliun Rp 1.975,42 triliun Rp 2.023,72 triliun

35 33 28 26 25 27,3 24

Sources: Detik Finance

From the table it can be assumed that Indonesia's debt continues to grow every year except in 2009 years ago, Indonesia's debt was reduced to Rp 4.6 billion in the following year and grow again until in the year 2013 in the month of April amounted to Rp 2023.72 billion.concede the point in 2000 years ago Indonesia have a great impact on the GDP (gross domestic product) that in 2000 the average 89%, but still go down every year. Of Indonesia's debt does not come from the IMF (international monetary fund) that have been paid off Indonesia in 2007 amounted to 430 billion U.S. dollars but comes from international institutions or from other countries that predominantly lend to 2013 in January, the following list:

PINJAMAN Islamic Development Bank (IDB) Asian Develpoment Bank (ADB) World Bank Jerman Prancis Jepang

UTANG Rp 5,05 triliun Rp 99,33 triliun Rp 123,15 triliun Rp 20,49 triliun Rp 21,66 triliun Rp 244,27 triliun

Sources:Detik Finance Of the various debts that have Indonesian, all originated from solution development policy of the Fund is to provide solutions to help Indonesia when Indonesia suffered severe pressure on the pre reform era in Indonesia 1998.where experiencing economic crisis plus high unemployment at 7.3 million society at itu.IMF at that time gave a solution whose solution is given IMF does not benefit the people of Indonesia. between given solution is deleting subsidies in Indonesia to provide results within a long run period.but at that time Indonesia was not wearing such a solution, due to the economic resilience of the Indonesian people need especially in high unemployment added.then finally on the 15 January 1998, the president of Indonesia, Mr. Suharto signed a Letter of Intent (LOI). while it was the beginning of Indonesia began to lose some of the role of government. The Government is required to make the Bank Indonesia Act autonomous, and eventually the government is to make laws in question. Thus was born the Act No. 23 of 1999 concerning Bank Indonesia. in chapter one of the IMF LOI (Arcticle V section 1) it is stated that the IMF

would only relate to the central bank of the country.and then brown Law No. 23 is certainly in line with the policy of the Constitution Act IMF.with Bank Indonesia is finally getting its autonomy which full, there is no one who can influence it (Article 4, paragraph 2), including the Government Indonesia.but ironically Bank Indonesia can not be separated from the influence of the IMF because the IMF should be subject to the LOI as stipulated, among others, in some instances the following articles:

Article V Section 1, states that the IMF is only associated with the central bank (or similar institution, but not the government) of the member states. Article IV, Section 2, states that as a member of the IMF Indonesia should follow the rules of the IMF in terms of their exchange rates, including the prohibition of using gold as the benchmark rate. Article IV Section 3.a., states that the Fund has the right to oversee the monetary policy pursued by the members, including overseeing compliance with the rules of the IMF's member countries. Article VIII Section 5, states that a member must always be reported to the IMF for matters relating to gold reserves, gold production, gold import export, international trade balance and other detailed matters. Of most grains LOI IMF influence on the policies of the Bank Indonesia would have a very broad impact on Indonesian banks because all banks in Indonesia is controlled by Bank Indonesia.the impact further because banks are also the backbone of the economy, then the economy can not escape Indonesia of controlling influence IMF. after this only adds to the long list of evidence that suggests that the loss of sovereignty economy of leaders of this country.

1. The government must make a change Act which repealed restrictions on foreign ownership of banks that go public. 2. The Government should increase the shares released to the public of the State Owned Enterprises. From the IMF LOI all investments and resources belong to the State as in control by foreigners or can be called imprialisme.ini who became Indonesia beginning bonded debt by the IMF and debt followed from international institutions as well as from other countries who are bound in cooperation between countries , but Indonesia could pay off the debt on the loan from the IMF amounted to 430 billion U.S. dollars in 2007 years ago, which was inaugurated by President Susilo Bambang Yudhiono and dissolution of the CGI (consultative Group in Indonesia). 2.Discussion: In this paper I use the theory of political economy approach Keynesian.where Keynesian theory is almost a little like neoclassic.begin theory developed as a result of the failure of the liberal concept of market mechanisms or can be called great depression.keynesian see that it was not for liberalism can overcome their market.not regulations made by the government have an impact on the monopoly market.so keynesians assume the role of the government in the need to regulate the market so there is no market failure, market failure due to an enhanced offer which is not accompanied by an increase in purchasing power of people.keynesian assume that the individual is the unity of the people who need to be protected by the state. The state should play a role in maintaining the stability of the market mechanism.when instability and failure then so is the role of the State in the need to be able to handle the instability and set back the market.when conditions return to normal market mechanisms do not

need anymore intervetion.government needs to ensure the welfare of the community , so that when the economic shocks that threaten prosperity of society, the government needs to do regulation.jika recession due to lower aggregate demand for the function of the State to prevent and fix interventions to stabilize the economy by the financial sector, stabilization of prices and take advantage of the governments fiscal policy. In this case, the Indonesian economy has a dark history that Indonesia had stuck in the economic crisis in 1998 years ago before the era of reform and bound in a given IMF policies that harm the State in the economy structural.but Indonesia could pay off its debts to the IMF in 2007. Interpretation Keynesian about crisis indonesia can be assume with fixed nominal exchange rate, as well as assuming that changes in the level of output are central for balance of payments adjustment.the rate of change of the real exchange rate behaves according to the following rule: (1) 0 < a < 1, >0

where e stands for real exchange rate, p for domestic price level, and ff are financial flows.For this and the other equations of the model, dots refer to changes in levels of the variables and asterisks for foreign variables. Thus, equation (1) states that the real exchange rate is an inverse function of the rate of inflation, and is positively related to financial flows. In turn, financial flows (ff) are postulated as dependent upon the degree of financial liberalization (FL) and on capacity utilization, to which they respond positively. In other words, real variables, and not just financial, might also affect the flows off capital. That is, (2) ; g<0, >0, 0<<1

where k is the capital stock, y is the level of output.the next step is the description of the domestic price level dynamics. Prices are determined as a markup over costs, which is represented as: (3) where w is the nominal wage, b is the inverse of labor productivity, p* is the price of imported goods, m is the import coefficient, and p is the share of profits in total income. Conflict over income distribution is represented by the behavior of firms, which increase prices whenever the share of profits fall below a certain level. This is represented as follows: (4) where p-bar is the target profit share desired by capitalists. From (2), (3), and (4), we can rewrite (1) as follows: (5) Income determination follows traditional Keynesian lines, and can be written as: (6) ; >0, m>0, x>0, <0

where x corresponds to exports, i the rate of interest, G government expenditure, and d private debt. Government expenditure depends on its taxing capacity (y) and on the cost to raise funds.

Figure Output and exchange rate dynamics Equations (5) and (6) form a dynamic system which determines the real exchange rate and the level of income of the economy, represented in Figure 1. Equation (2) suggests that an increase in capacity utilization tends to attract capital flows and leads to a real appreciation, which is represented by the negatively sloped e-dot schedule. Equation (6) simply suggests that exports respond positively to real exchange depreciations and lead to output increase, displayed in the positively sloped y-dot schedule. The solution of the dynamic system provides a stable node and allows for simple comparative static analysis. Lets assume that wages expand. This would translate into higher domestic prices and a more appreciated real exchange rate. This would be represented by an inward shift of the e-dot schedule and would reduce the level of output (since it would have a negative impact on exports), and through the super multiplier, would lead to a reduction in income. A financial crisis can be represented by a collapse of spending (say as a result of a fall in d, private debt or G, public spending), which would lead to an upward shift on the y-dot schedule.The fall in capacity utilization would lead to an outflow of capital and a depreciation of the currency typical of

currency crisis. The final effect of the combination of higher wages and a financial crisis on the real exchange rate would depend on the relative strength of both forces, but it would be unequivocally contractionary. Figure 8 shows a situation in which appreciation of the real exchange rate prevails, moving from E0 to E1. This represents the effects of the crisis in the deficit countries, where, in the absence of nominal exchange rate depreciation, the adjustment of the balance of payments must be carried by variations in the level of activity.

Figure Contraction and appreciation Although not explicitly modeled, it is presumed that contraction has a negative impact on tax revenue and requires an expansion of spending associated with the safety net to protect the unemployed. As a result, in the post Keynesian perspective, the fiscal crisis (the increase in deficits and domestic debt) is the result rather than the cause of the external crisis. The stylized crisis depicted in Figure 2 illustrates the Indonesia crisis in a post Keynesian framework. Higher unit labor costs in the peripheral countries (relative to core countries) led to loss of competitiveness and increasing external problems which, combined with the financial crisis, implied a collapse of output and a fiscal crisis. The inability to depreciate the nominal exchange

rate, and the absence of a supra-national fiscal authority who could transfer resources, implies that contraction is the solution for the external imbalances. Indonesia currently has a debt of USD 2023.72 billion with a percentage of 24% of gross domestic product this is not very harmful the state.should if there is an injection of funds could add at least a positive effect on PDB. This is could be the work of government which may be taken into consideration in future.but not all that debt affects negative.dan side it can be proved in the development of Indonesia economic growth as follows:

Figure Indonesia economic growth and GDP Indonesia

Based on the above data table and GDP versions of The Organisation for Economic Co-operation and Development (OECD) governments arguably is success.every year average percentage rise in 2009, Indonesian.depsite little affected by the global crisis which resulted in a decreased rate of growth in Indonesia, but eventually regrow and stabilize in Indonesia that could next time.this bit proud even though bound by debt but Indonesia could move on.in this case slightly inclined to the development of economic theory Harrod Domar and develops into dependency.Harrod Domar theory is a theory that focuses on capital and investment to facilitate continuity of development.In the case of Indonesia it borrows funds at an outside party, the beginning of the borrowed funds and foreign investment into the Indonesia and dependence of investment that can be seen in the following figure investment in Indonesia:

Figure PMA in Indonesia

The figure above can be a little high foreign investment FDI dominates describe circumstances. High investment should be at least given a distinct advantage for the state.the result can be seen as follows:

Figure Realization Indonesia PMA The actual results could be a little extra for the State in which the potential ultimate dominate FDI in foreign Indonesia.Invest in Indonesia is done in two forms, namely portfolio investment and direct investment. Portfolio investment through the capital market instrument securities such as stocks and bonds. While direct investment known as Foreign Direct Investment (FDI), in the form of investment in road building, purchase or acquire the company total. And According to the Law of the Republic of Indonesia Number 25 Year 2007 on Capital Investment, FDI is investment activity to conduct business in the territory of the Republic of

Indonesia by foreign investors, whether using foreign capital and a joint venture with investors in country. In broad outline is as follows: a. External funding sources that foreign capital can be utilized by developing countries as a basis for investment and accelerate economic growth. b.Increased economic growth needs to be followed by changes in the structure of production and trade. c. Foreign capital can play an important role in the mobilization of funds and structural transformation. d. The need for foreign capital be decreased immediately after the structural change is really happening (although foreign capital is more productive in the next period). Foreign capital has a positive effect on domestic savings and financing imports. Fraction of foreign capital has a positive effect on domestic savings and economic growth (Kuncoro, 1997). Regarding the Keynesian approach of the State debt, Keynesian have a Gap Analysis approach the gap between government savings that could be gathered through a variety of national income with the need to finance investment by both the private and foreign parties will require additional capital from both foreign countries advanced or international institutions to launch the cost.cost can be done through the policy emphasis in government spending so the savings will ride.If still not sufficient, Indonesia may be forced to borrow capital from outsiders and investment .keynesian see that the actual purpose of the foreign debt is for doing development and investment in the country could run .nothing debt, domestic investment would stop because there is no injection of funds.

From the data above PMA, Indonesia rely on aid foreign investment, while Indonesia also has saving.national national saving is saving the government that is used to help domestic.if national saving over investment in the upgrade will also benefit the Indonesian. 3.Solution: I think based on the case, do not be too dependent Indonesia with foreign debt had been able to describe the discussion.from Indonesia has the potential to at least repay the debt on the asing.dan Indonesia must increase national saving, national saving if higher then domestic growth will also be go up. would be better if the PMA reduced and than PMDN should be higher than PMA,this make more advantage for indonesia.versa with subsidies in Indonesia, it is time the government should cut subsidies gradually so that in the long term finance will be helped in future. Indonesia has abundant natural resources and qualified human resources, but the government must also consider the role of market.then in this era of globalization already in the market largely controlled by the foreign.products easily get in and get rid of the national product that also makes the society addicted to using foreign products. Government must to give national attention to the foreign products also have to raise taxes high for the Indonesia may raise taxes.could add to the potential inclusion of tax forgien product.Indonesia product has a beginning Pancasila economy called populist economic (in Indonesia language ekonomi kerakyatan) idea by M.Hatta time before Indonesia independence. Pancasila economy is currently not maximal into government now. current government is more suitable to wear this economic system and the social economy should start a foundation in advance or re-use populist economic .economy as well as the economic populist capitalist liberal communist or socialist economy, is character or economic order. social economy is a character or economic order

which, ownership of economic assets should be distributed to as many people. distribution of economic assets to as much in society that will ensure the distribution of goods and services to as many citizens fairly. in the ownership of economic assets that are not fair and equitable, then the market will always fail, it will not be able to achieve optimal efficiency in the economy, and there is no invisible hand that can regulate welfare and justice.government should not be put on the development of theory or economic system that does not society.because favor of Indonesian people still need the command role for the welfare of the people at this time.

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