The Second Parchment

On Economics, Finance, Politics and Music

Category: Indonesia’s Politics & Economy

Sovereign Credit Rating Service: A Public Good?


It is inevitable that credit rating agencies partially catalyzed the credit crunch the financial system experienced in 2008. Some have attributed the recession to the way Moody’s, S&P, and Fitch Ratings rated fixed income products; one of whom is Annette Heuser of the Bertelsman Foundation. I recently stumbled on her TED talk, and got interested. In her talk, she made a bold statement: “credit rating services, especially sovereign credit ratings, should be a public good.” Watch her TED talk here.

In other words, she wants sovereign credit rating services to be free and transparent for everybody: clients, investors, non-clients, and non-investors. As an effort to realize this, she and her team have been working on a “forward-looking” credit-rating model that they name INCRA. She doesn’t want it to be a business, so operations under the project have been done under the non-profit umbrella and financing of the project has been based on endowments made voluntarily by outside contributors. Read her latest update on INCRA here.

During the talk, she justifies her decision to develop a free sovereign credit-rating model on several fundamental beliefs: i. The downgrading of sovereign credit ratings increases the cost of borrowing for governments–usually emerging countries–that are dependent on the international credit market for their infrastructure financing; ii. The market of credit rating is imperfect–it is an oligopoly–with three key players in it (Moody’s, S&P, Fitch ratings); iii. There is a ‘moral hazard’ in the credit rating business: she believes that credit rating agencies tend to deliberately overestimate the creditworthiness of a particular institution, because that institution is the one paying for the credit rating service. Since fixed-income investors might not know about this, they would trust whatever the credit rating agencies publish on their reports.

I find some of her reasons a little bit too bold. One has something to do with the assumption Ms. Heuser is making on how credit rating agencies always rate in their clients’ favor–the institutions/countries hiring them to rate their institutions/countries (refer to point iv). This might be true in the context of what happened in the 2008 mortgage-backed securities fiasco, but I don’t think the case can be extrapolated to sovereign credit ratings. I still couldn’t find any relevant studies, so here’s a question: do governments pay credit-rating agencies annually, thus making them having a voice when upgrades/downgrades of their countries ratings are being discussed? I know governments hire sell-side/buy-side financial analysts for capital restructuring reasons (i.e. Greece hired BlackRock), but do they also hire credit rating agencies?

Another point is the following (refer to point i): while it is true that a central bank’s policy to increase a country’s interest rates will directly affect the cost of borrowing, there is insufficient evidence demonstrating that the downgrading of a country’s credit rating would do the same. I cannot intuitively see any direct correlation between credit upgrades/downgrades with the central bank’s choice of interest rates. I haven’t done any research on this yet, but I believe that the argument on the correlation between credit rating upgrades and the increase in interest rates is still a matter of academic debate. In the end, American investors invest in Indonesian bonds based on what Bank Indonesia wants Indonesia’s short-term or long-term treasury bonds to be. Indonesia determines its own cost of borrowing–Moody’s, S&P, and Fitch might (potentially) just contribute to an insignificant premium of the bond rates in secondary capital markets.

Ms. Heuser is probably referring to foreign direct investments (FDIs), which are correlated with sovereign credit ratings. Investors would demand higher equity (not bond?) returns when investing in the emerging markets, or countries with ratings just slightly above the investment grade. If this is the case, it makes sense, but then again, the amount of FDI inflow has little correlation with how much the government should allocate its budget for foreign debt payments. Additionally, the central bank also has power to influence FDI. Again, take the case of Indonesia. Ever since former Federal Reserve Chairman Ben Bernanke announced its tapering off of quantitative easing, investors have been pulling out their investments out of Jakarta (Early August 2013). Weeks and months afterwards, Bank Indonesia, increased interest rates by hundreds of basis points (Late August 2013). Since local currency is used to finance local investments, a good proxy for FDI inflows/outflows would be this year’s $-Rupiah exchange rates, which can be seen here. Also since investments are made in equities, the Jakarta Composite Index serves as a good indicator, which can be viewed here. Look at the significant increase and decrease of the rate/index over August-September. This shows that ratings might alter the the outflows/inflows of direct investments, but not foreign investors’ preferences in purchasing government debt. Unless the ratings are incorporated to the calculation of the probability of sovereign debt defaults.

So far, INCRA has produced a total of 6 reports, which can be downloaded here. Most of them are produced by political scientists and economists within the academic field. While I doubt that INCRA’s presence will change the landscape of the credit-rating business, I’m still interested in where this project is going.


On Indonesian Funds: Hedging A Fall


A few weeks ago I wrote about how the Indonesian government, through its macroprudential laws, prohibits any shorting activities in the Indonesian stock market. Given this restriction, I was wondering what would Indonesian small and second-level investors (like me) do to partake in potential profit-making situations when the market goes bear.

Just hours ago, a friend of mine (Ilya) recommended to long Exchange Traded Funds (ETFs) or Index Funds whose yields negatively correlate with the Jakarta Composite Index: inverse-exposure stocks/portfolios. So when the market goes down, the fund goes up, vice versa. This is one good idea, but unfortunately, such fund is not commercially sold unless an investor directly manages his/her own portfolio by either: i) being an active trader at the Jakarta Stock Exchange, ii) appointing a broker and actively managing the portfolio, ensuring that its beta coefficient is negative, iii) hiring a personal asset manager at an asset management firm.

I went to a mutual fund yesterday to confirm this. (Yes–the day after I visited the mutual fund to talk about the issue and to open a mutual fund account, Ilya messaged me on Facebook about the exact same issue. What a coincidence). After opening my first mutual fund account (an early birthday present!), I talked to one of the marketing officer about the strategy. As expected, those ETFs don’t exist. The investor needs to construct a replicating portfolio by his or herself, accompanied by an asset manager. I then asked about publicly available Indonesian funds out there, and he gave me a broad list:

  • LQ45: An index consisting 45 blue-chip equities, updated every 6 months, based on the companies’ liquidity levels and market capitalization.
  • Sectoral: A portfolio which comprises companies from 10 different sectors in Indonesia: agriculture, mining, consumption goods, properties, infrastructure, etc.
  • Jakarta Islamic: 30 companies whose stocks fulfill the Sharia criteria. Weightings in the portfolio depends on liquidity levels.
  • Bisnis-27: This one is pretty new–a daily newspaper named Bisnis Indonesia partnered with the stock exchange to list 27 top-performing Indonesian companies (based on fundamental analyses).

Curious about their performance, I tried Bloomberg-ing them against the Jakarta Composite Index. Unfortunately only the LQ45 is listed. But I’m pretty sure the others’ annual performance is similar:


Guessing from its general form, the fund moves together with the Jakarta Composite Index. No way that a trader can use this to bet against a dwindling market. Again, this is only LQ45–but I’m very sure that the others are the same. So what should people like me do?

Several options available:

  • Form your own bear portfolio by pooling stocks with negative betas. The thing is, it might be challenging to find a platform to get such list of stocks (not sure, once one have a trading account I think it’s readily available). However, I’m still pessimistic about the liquidity level of these equities considering Indonesia’s top 45 liquid & fundamentally sound stocks have positive betas.
  • Invest in derivatives: buy put options or sell call options. This idea is viable–we do trade options in Indonesia, despite the fact that there’s a policy of automatic exercise. In Indonesia, options will be automatically exercised once prices are below or above the threshold (strike price) by 10%.
  • Work hard and smart and get that first $20,000 to be eligible to short here.
  • Learn Cantonese and go to Hongkong. Alright I’m kidding about this one.

Relevant side note: The efficient market hypothesis doesn’t really apply here in Indonesia. Mutual funds do beat the market, though of course not always. [Paper in Bahasa Indonesia].

Irrelevant side note: In response to a significant Rupiah depreciation and an increasing trend in inflation and capital outflows, our interest rate was raised by 50 basis points just two days ago. My floor at the Central Bank of Indonesia was full of people midnight before the governor announced it. It was amazing to be in the same floor with the economists and central bankers who actually contributed to making the decision. [Article in English].

The Warriors of Tolerance


This is what this country needs. Read this. And this. I feel very happy to have been given the opportunity to join the team. The 10 young Indonesians in this photo will one day lead the movement of cultural, religious, and gender tolerance in Indonesia.

Indonesia’s Fuel Hike: Eliminating Arbitrage?

The discussion about the impending rise of fuel price as the government schedules on removing subsidies for fuel has turned into a fiery political debate in every part of Indonesia. Despite President Yudhoyono’s coalition not unanimously approving of this proposed policy (I saw supporters of Partai Keadilan Sejahtara demonstrating earlier this afternoon), the probability of it happening is so high that markets have reacted, adjusting to expectations. Just today, Rupiah significantly depreciated against the USD. The price of a dollar reached more than Rp. 10,000, which happened for the first time since 2009 as the world slowly recovers from the 2008 financial meltdown.

Our recently-appointed Finance Minister, Dr. Chatib Basri, commented that the government’s decision to revoke the subsidy will bring about a positive outcome. Most people and economists supporting the government base their support on a classic argument: they argue that subsidies should be channeled towards productive long-run sectors (technology, health, education). But Dr. Basri takes a different angle. Quoting from an interview by the Jakarta Globe, Dr. Basri commented that:

“The biggest deficit in our trade balance is from oil and gas imports,” Chatib said at the State Palace on Wednesday. “If the price increases, the price disparity between the domestic and international fuel price will narrow.”

To elaborate further, Dr. Basri, as paraphrased by the interviewer, said that “the government’s plan to raise the price of subsidized fuel would cut the amount of oil and gas smuggled out of the country.” In the article, the Ministry of Energy and Mineral Resources confirms that Indonesia has indeed been a recurrent victim of rampant fuel smuggling. Subsidized fuel is comparatively less expensive in Indonesia compared to other Southeast Asian countries that those knowing how to circumvent the procedures of Indonesia’s customs have taken advantage of such significant disparity in price. Buy low in Indonesia, sell high overseas. Assuming that all types of transportation costs are removed, this act of fuel smuggling is a form of arbitrage in the fuel market.

However, I believe that price differences between Indonesia’s and foreign fuel markets shouldn’t be a problem if there exists a strong and strict regulative framework within Indonesia’s customs. The argument that the government should let the price of fuel increase so as to eliminate arbitrage opportunities isn’t compelling enough. While it’s very clear that Dr. Basri, one of Indonesia’s esteemed economists, is not advocating for this argument, some important government officials actually are. A solution to Indonesia’s problem in catching profit-making arbitrageurs shouldn’t be raising the cost of fuel. It should be anything other than that i.e. stronger enforcement of export-import laws, better oversight and controlling or cargos.

Regardless, the price of fuel is rising soon. Like it or not, it’s happening, and any Indonesian consumer irrespective of their level of wealth, in the short run, wouldn’t be happy with things getting more expensive. While I believe that taxpayers’ money should be directed at productive sectors (just like most people do), it still somewhat saddens me that an hour ago I was asked to pay for an extra 20% to buy a bottle of a drink I’m currently addicted to. Oh well—what can you do.

Gender Equality in Indonesia’s Military Academy


37 years after the United States Military Academy at West Point started admitting female cadets as their students, The Republic of Indonesia’s Military Academy at Magelang recently announced that it will start accepting female cadets–known as tarunis–for this year’s applicants (equivalent to members of the Class of 2017).

Priorities are given to high school students with previous background or experience in military and semi-military trainings, such as graduates of my high school, Taruna Nusantara SHS, and former members of Indonesia’s national flag hoisting team.

Unlike the case at West Point whereby the decision was mainly based on the passage of the Equal Right Amendments in 1972, there seems to be no particular recent regulatory reform in Indonesia that preceded this historical decision. It was formalized after members affiliated with the Indonesian military consensually deemed the promotion of gender equality within the military academy as important. Quoting a paraphrase from Major General Istu Hari Subagio regarding the decision, “the acceptance of female cadets [to the academy] is a realization of the Indonesia’s military’s effort to achieve gender equality. They will be educated together with the male cadets (tarunas), at the same place, with the same academic courses.”

Irrelevant side note: the U.S. is also currently dealing with an issue related to equality—marriage equality. Listen to the SCOTUS’ oral argument of Windsor v. United States here. Download the transcript of the hearing here.

Falling to Pieces


Jakarta Globe opines that Indonesia’s ruling party is crumbling. The Democratic Party (Partai Demokrat), the political platform that drove President Yudhoyono to his seat of presidency, is no longer perceived as a party characterized by its corruption-free members and robust internal structure. The once-esteemed Chairman Urbaningrum recently stepped down as he allegedly partook in corrupt Hambalang activities, party member Edhie Yudhoyono (President Yudhoyono’s son) resigned from his house of representative seat to focus on mending the party’s internal affairs, former treasurer Nazaruddin was sentenced to seven years of imprisonment on account of a corruption case, Yudhoyono’s right hand, former Minister Malarangeng, devolved his ministerial power to the self-professed tech expert Roy Suryo. There are numerous corruption cases pertaining to the Democratic Party not mentioned in this post. Too many. Dozens of them over the past six months.

President Yudhoyono, in an effort to rescue the party he established, visited Mecca to seek spiritual guidance. “I have been asking God for help and assistance so that our beloved party can be immediately released from the difficult tests we have been facing these days.” He further added, “I hope you follow my lead in praying to God so that He can immediately find a solution that is proper, wise and dignified.”

With all of these happening, undecided Indonesian voters who lean towards the Democratic Party might shift their focus on other emerging parties involved in the upcoming elections. Members of Partai Demokrat should take concrete actions to restore the party’s public image.

Indonesia’s Economy: Short Update

Indonesia’s economy is growing at a rapid rate, as predicted by IMF’s, World Bank’s, and McKinsey’s reports. Last year it expanded by 6.23%. Unlike other economies in South East Asia, Indonesia’s economy is not export-driven; exports only account for approximately a quarter of the country’s total income. The growth was mainly attributable to strong and robust domestic consumption.

Indonesia dan Ideologi Partai Politik


Di negara-negara yang memiliki sistem multi partai tetapi terdapat dua partai yang mendominasi, seperti Amerika (Republik & Demokrat) atau Inggris (Buruh & Konservatif), setiap partai memiliki ideologi yang kontras satu dengan yang lain. Sebagai contohnya, dalam menanggapi masalah-masalah sosial, Partai Republik di Amerika bergantung pada ideologi konservatifnya, sementara Partai Demokrat merujuk pada ideologi yang lebih liberal. Di bidang ekonomi, konstituen-konstituen dan politisi-politisi yang terafiliasi dengan Partai Republik mendukung ekonomi yang lebih berpusat pada sektor privat dan bebas (laizzez-fair), sementara anggota Partai Demokrat percaya bahwa pemerintah memiliki peran besar dalam manajemen kapital. Mahasiswa Amerika yang suka politik (setidaknya yang saya kenal), jika ditanya mengenai preferensi partai mereka, akan dengan mudahnya menyebut buku filosofi yang membuat mereka mendukung partai tertentu. Kategorisasi berikut sangat baku dan restriktif, tapi tidak salah berargumen bahwa para Republicans menyukai Ayn Rand, Friedrich Hayek, J.S. Mills, sementara para Democrats terinspirasi oleh tulisan-tulisan John Rawls atau John M. Keynes.

Di Indonesia, perbedaan ideologi antar partai tidak terlalu terlihat. Beberapa partai utama memegang teguh ideologi pancasila, namun berdasarkan visi-misi partai yang saya baca di internet interpretasi Pancasila sangatlah luas dan umum; sulit untuk mencari perbedaan utama Partai Demokrat dan Golongan Karya, sebagai contoh. Atau antara Partai Gerindra dan Hanura. Perbedaan ideologi yang sangat jelas hanya terlihat pada partai yang secara publik mendeklarasikan bahwa mereka mengusung ideologi agama, seperti Partai Keadilan Sejahtera dan Partai Kebangkitan Bangsa (Islam) atau Partai Katolik (Katolik). PDI-P juga cukup khusus, karena ideologinya merangkul semangat Marhaenisme, yang setelah saya pelajari secara tidak mendalam, condong pada kemasyarakatan, pro-proletariat (menggunakan istilah Marx), dan gotong-royong. Hanya partai-partai yang berbasis pancasila yang menurut saya sedikit ambigu. Saya sendiri belum pernah belajar langsung mengenai politik Indonesia (saya belajar politik Indonesia secara tidak langsung ketika di bangku SMA Taruna Nusantara), tetapi menurut saya pribadi, ambiguitas makna ideologi Pancasila dari banyaknya partai di Indonesia ini memiliki kelebihan dan kekurangannya sendiri.

Kelebihannya, politisi memiliki insentif kuat untuk masuk di ranah politik bukan berdasarkan ideologi, tetapi pada kebijakan publik. Dengan demikian, masyarakat akan memilih wakil rakyatnya berdasarkan praktikalitas proposal kebijakan publik para calon wakil rakyatnya. Dalam situasi ini, tidak ada konstituen yang benar-benar loyal pada satu partai karena ideologinya sama dengan ideologi partai yang ia dukung (kecuali kalau di Indonesia, loyalitas ke sebuah partai bukan berbasis ideologi, tetapi tergantung pada tradisi keluarga. Sebagai contoh, banyak teman saya yang mendukung Golkar karena mendukung Golkar merupakan tradisi keluarga besarnya). Dengan kata lain, ambiguitas makna ‘Pancasila’ akan memancing banyak swing votersyang pada akhirnya, mungkin, memilih suatu kandidat figur publik berdasarkan kualitas proposal kebijakan publik kandidat tersebut. Bukan berdasarkan kepercayaan atau ideologi semata.*

Satu kelebihan lagi, menurut saya: pemerintah yang partainya berideologi Pancasila memiliki fleksibilitas mengenai kebijakan apa yang sebaiknya mereka ambil, selama tolak ukur keputusannya masih dalam naungan Pancasila. Tidak akan ada oposisi yang menyerang ideologi pemerintah tersebut; dan time inconsistency dihadapan publik tidak akan menjadi masalah yang besar. Pengambilan kebijakan ekonomi-nya situasional (tergantung pada keadaan kini, dan efeknya nanti), bukan ideologis (i.e. bukan kewenangan pemerintah untuk membantu mengeluarkan Indonesia dari resesi ekonomi dengan meningkatkan anggaran pengeluaran pemerintah; lebih baik memotong pajak). Ekonom-ekonom yang masuk ranah politik Indonesia, kemungkinan besar, adalah ekonom-ekonom non-partisan.

Bagaimana dengan kekurangannya? Sejauh ini, kekurangan yang bisa saya pikirkan ada dua. Pertama, disisi politisi. Menurut saya, percaya pada sebuah filosofi politik dan mengapresiasi filosofi politik lainnya adalah karakteristik penting yang seorang politisi Indonesia harus miliki. Politisi yang mendukung ideologi Pancasila (yang menurut saya adalah ideologi yang harus kita banggakan, sebagai anak didik Soekarno-Hatta), karena tidak memiliki ideologi yang bertentangan atau sangat berbeda, cenderung untuk tidak memahami bagaimana filsuf-filsuf politik membentuk pandangan politik yang sekarang dipegang teguh oleh bangsa atau orang lain. Ketidakpekaan terhadap ideologi politik yang diusung oleh masyarakan lain di belahan dunia lain adalah suatu kelemahan–di sebuah kompetisi debat, seorang debater yang baik tidak hanya menguasai materinya (ideologinya), tapi juga mampu untuk menganalisa dan mendeskripsikan kelemahan materi (ideologi) orang yang ia debat. Untuk mengilustrasikan lebih lanjut, bayangkan seorang wakil rakyat yang memiliki kekuatan dalam mengambil keputusan. Ketika menjelaskan mengapa ia mengambil keputusan tersebut kepada konstituennya, ia bukan hanya harus menjelaskan mengapa keputusan tersebut berbasis pada hasil pemikiran filosofi politis yang baik, tetapi ia juga harus mampu mendeskripsikan kenapa pemikiran filosofi yang ia tentang tidak baik.**

Kedua, disisi pemilih. Kebanyakan pemilih pemula, termasuk saya, memiliki kesulitan dalam menganalisa karakteristik partai yang sesuai dengan pandangan politik dan ekonomi mereka. Mungkin ini juga berlaku pada kaum tua non-loyalis, yang tidak memiliki partai favorit tertentu dalam pemilu. Pancasila merupakan landasan dasar, tetapi seperti yang dideskripsikan sebelumnya, interpretasi Pancasila tidak homogen, dan setiap partai yang memiliki ideologi Pancasila tidak menjelaskan ideologi atau visi misinya secara mendetil; banyak partai yang menjabarkan Pancasila secara umum. Bahkan, banyak situs partai yang tidak menjabarkan secara langsung apa makna Pancasila bagi mereka. Pada akhirnya, pemilih memilih bukan berdasarkan ideologi calon wakil rakyat, melainkan berdasarkan kualitas figur calon wakil rakyat tersebut (apakah ia jujur, berpendidikan, rendah hati). Ini mungkin alasan kenapa banyak teman-teman muda yang saya kenal banyak mendukung calon wakil rakyat yang tidak memiliki afiliasi dengan sebuah partai (calon independen); karena filosofi politik yang diadopsi para calon wakil rakyat ini tidak terlalu tegas dan jelas.

Bukan berarti ini kelemahan. Saya sendiri mendukung analisis figur. Permasalahannya, banyak politisi yang Machiavellianyang berpura-pura memiliki karakteristik baik hanya demi mendapatkan suara. Seorang politisi yang berani mengungkapkan ideologi politiknya atau menjabarkan secara tegas apa ideologi Pancasilanya kepada publik memiliki kencenderungan kecil untuk bersifat Machiavellian. Rakyat dan pemilih akan tahu ideologi apa yang calon wakil rakyat percayai dan mengapa, dan calon wakil rakyat tersebut dapat secara transparan dan jujur dalam memberikan alasan kenapa ia ingin melakukan aksi A, bukan B, ketika ia menjadi wakil rakyat nanti.

Mana yang lebih baik, sistem politik dimana ideologi politik memiliki peranan dominan dalam dunia politik, atau sistem politik dimana fokus utama adalah figur dan proposal kebijakan publik? Butuh penelahaan lebih lanjut untuk menjawab pertanyaan ini. Atau, mungkin saja, semua bergantung pada preferensi.

*Argumen ini dibentuk diatas premis dimana masyarakat melakukan riset sebelum pemilu, dan  politisi-politisi Indonesia tidak masuk ke dunia politik hanya demi kekuasaan dan meningkatkan kesempatan korupsi, tetapi karena ingin meningkatkan kesejahteraan masyarakat atau mematahkan leher birokrat-birokrat korup. 

**Argumen ini berlaku hanya ketika para politisi Indonesia tahu apa itu ideologi Pancasila. Dengan kata lain, ia mempelajari ideologi Pancasila secara mendalam sebelum mengabdikan dirinya kepada negara dan sebuah partai politik. Satu lagi: sebelum mempertimbangkan antara menjadi bagian dari Partai Nasional Demokrat atau Partai Demokrat, ia tahu didalam konteks apa Partai Nasdem memiliki filosofi Pancasila yang berbeda dengan Partai Demokrat. Banyak calon wakil rakyat Indonesia yang menjadi bagian sebuah partai tertentu karena akses keuangan yang fluid. Banyak juga calon wakil rakyat yang ‘peduli amat’ sama arti Pancasila; ‘yang penting pas saya jual tanah saya buat jadi calon anggota DPR, saya bisa meletakkan foto Pak SBY disebelah foto saya di banner kampanye saya nanti.’

On Government Deficits


I am currently working on a project about formulating appropriate policies in response to the impending U.S. fiscal restraint, also colloquially known as the fiscal cliff. To avoid any form of partiality, the first paper I read was the one written by the Congressional Budget Office, a non-partisan federal agency whose specialty is in providing analysis of the federal budget of the U.S. government.

CBO’s paper reinforces my belief that Rand Paul was not simply vocalizing his Republican predecessors’ political ideology when expressing his detestation towards budget deficits. Indeed, macroeconomic models in our economic textbooks are correct in showing that deficit spending is favorable in the short run–when nobody spends, the government, in a purely economic perspective, has the authority to be the ‘spender of last resort’ by increasing spending or extending tax cuts. (Note that I am discussing this issue from a purely economic perspective without taking into account the concept of government legitimacy in welfare-redistribution. If you are a libertarian, you might disagree that boosting aggregate demand through taxing or government spending is one of the roles of the government). In the short run, no economic agents living in the present cares about the existence of public debt—none of them is concerned about the significance of the rapid ticking of the debt clock located on Manhattan’s 6th avenue.

But in the long run, as most economists and conservative politicians like Paul Ryan would argue, debt is an issue.

a. The increase in debt or the constant implementation of deficit spending, without being followed by an appropriate expansionary measure in monetary policy,  would increase interest rates and thus discourage investments in at least two ways. First, as national saving decreases, the fund available for private-investment purposes will be limited; hence it increases interest rates and disincentives investors to invest in capital-intensive projects. Second, the increase in government spending will drive the economy to produce above its natural rate, increases output, but will then crowd-out investment as interest rates rise. The private investment sector will  therefore have less share of  the country’s economic output, as short-run GDP growth is attributable to government spending, not to private investments.

b. Even in a circumstance in which expansionary monetary policy took place, debt would still be a problem. Endogenous growth models–derived from the world-famous Solow growth model–predict that the decrease in savings would lead to the decrease in capital, an input essential to long-term growth. It is not the increase of demand for goods stemming from deficit spending that promotes long-run growth. Capital accumulation, in addition to growth of worker’s productivity and technological progress, is the key to increasing an economy’s real growth rate.

c. As the paper indicates, having debt would restrict “policy makers to use [fiscal policy] to respond to unexpected challenges.” It should be noted that the ability for government to spend under debt is subject to investors willingness to purchase treasury securities during open market operations. During ‘unexpected challenges’, which I assume to be unpredicted financial crises or events that lead to a decrease in investor/consumer confidence (such as the 9/11 attacks), it is not impossible that investors would be reluctant to lend to the federal government as its government bonds or treasury securities would no longer be perceived as risk-free. This shows that excessive debt would hinder the federal government’s effort in altering its fiscal policy appropriately.

Deficit spending is therefore a temporary panacea for the business cycle. This however, does not mean that the government should not consider spending under debt at all, because the significance of the impact of the ‘panacea’ is not something that is predetermined. Additionally, some might argue that the economy is not a simple disjuncture between Keynesian and neo-classical economics: deficit spending that would bring the economy out of short-term recession would not necessarily afflict the economy in the long run. A single removal of economic disturbance in the short run, by increasing debt, might result in a positive compounding effect in the future.

Note: IMF predicts that U.S.’ debt to GDP ratio is around 70-102%, while Indonesia’s is around 24.5-25%. Imagine how massive an economic boom Indonesia would experience if President Yudhoyono were to be successful in persuading DPR to spend more. 

Irrelevant note: I honestly think Nick Jonas did great in the 25th anniversary of Les Miserables. It is indeed difficult to detach yourself from the preconception that Nick is affiliated with the Jonas Brothers when you first watch it, but once you are over it, you would realize that his voice and character fit Marius Pontmercy’s.

Update: Indonesia on Israel, Gumelar on Education

Foreign Minister Marty Natalegawa during UN’s General Assembly reaffirmed Indonesia’s stance on the Israeli-Palestinian dispute: that Indonesia strongly advocates the two-state solution blueprint, supporting Palestinians in their efforts to achieve independence. Quoting Minister Natalegawa,

“Indonesia sees the two-state solution as the only sustainable option and the optimal effort we can do for Palestinian people. Indonesia supports the independence of Palestine 100 percent. It’s non-negotiable.”

While our diplomats are doing their work in New York, some political charlatans back in Jakarta have been making unsubstantiated comments on the media. A comedian-turned-politician by the name of Dedi Gumelar just recently said that science and social science should be eliminated from the curriculum of Indonesian elementary schools. He said,

“In kindergarten, learning how to count and read should be prohibited because that’s the time to play and know nature empirically.”

I cringed.