Group of students using mobile phone. Photo: iStock

The government of Indonesia has been employing expansionary fiscal policy to boost the economy by reducing taxes and increasing government spending. While fiscal policy has always been a favorite tool of policymakers to control the economy, it could lead to unintended consequences.

Indonesia’s government debt continues to balloon, reaching an all-time high in 2017. The size of the country’s foreign debt has resulted in a heated argument over which policy approaches should be utilized to help the economy to grow positively.

In regard to this debate, some economists believe that Indonesia’s debt-to-GDP ratio is still at a safe level at 34%, as per Bank Indonesia, which is much lower than in countries such as Greece. However, comparisons between countries to counteract the notion that Indonesian government debt is indeed alarming is utterly irrelevant.

The indicator that should be used to determine whether a country has a low, moderate or high level of debt is the benchmark set by the International Monetary Fund. For developed countries, the debt-to-GDP ratio prudential limit is 60%, while for developing and emerging economies it is 40%. Looking at the upward trend of Indonesia’s government debt, it is therefore possible that it could soon reach the prudential limit as determined by the IMF.

The surge in Indonesia’s debt in the last three years was expected to have enormous positive impacts on employment and the wealth of its citizens. Yet the reality is very different. The Gini ratio is currently 0.39, with rural income inequality on the rise, data from the Central Bureau of Statistics (BPS) suggest.

Furthermore, job creation has not done much to absorb the growth of the labor force of Indonesia. According to BPS data, between February 2017 and February 2018, only 140,000 people were released from unemployment, while 6.87 million remained jobless.

Moreover, annualized growth of Indonesia’s gross domestic product remains stagnant at 5.06%, with development still highly concentrated in Java. The number of people living in poverty is down somewhat, but the government has failed to reach the ambitious target set in the National Medium-Term Development Plan (RPJMN) to reduce the poverty rate to 7%.

All this shows that fiscal policy does not always work in practice as it does in theory. There are internal factors that influence the success of fiscal-policy implementation.

The total population of Indonesia is currently 265 million, with 131.88 million females and 133.12 million males. Although the gap between the proportions of men and women is narrowing, that is not what is happening in the workforce. In the first quarter of 2018, the employment to population ratio (EPR) was 78.62% for men and  52.73% for women. This indicates that nearly half of the country’s women are unable to participate in the economy.

Indonesia still has a traditional view of gender roles in society. Women are expected to tackle household chores while men make their way through the economy. Women are not seen as equal to their male counterparts and even if they do participate in the labor force, often they only hold minor roles in their affiliated institutions.

The low participation of women in the workforce negatively affects the country’s economy. Gender gaps in economic participation have been found by such economists as Stephanie Seguino of the University of Vermont to be associated with the rate of per capita GDP growth. In addition, women who are not being given the opportunity to work might face difficulties on maintaining their well-being.

As such, unemployment is not merely the result of “no jobs,” but also the lack of opportunity to be included in the pool of qualified labor. The government therefore must design new policies aimed at stimulating the demand for the employment of women. This will act as an external factor that can reduce the gender-specific unemployment rate of women and hence the overall unemployment rate. Consequently, this will increase aggregate demand, because recently employed women will have the incentive to buy, which will stimulate the economic growth of Indonesia.

Increased female participation in the labor force has been shown to have a long-term effect on the economy. Job opportunities for women contribute to lower fertility rates as the opportunity cost of having children soars. By holding employment, women will have greater bargaining power that will positively impact their children’s well-being. Therefore, educational and employment equality are mutually causative. With the provision of employment opportunities to women, the government will be able to tackle not just poverty, but the lack of education and health.

Expansionary fiscal policy will often result in two conflicting outcomes: large government debt and positive economic growth. In Indonesia, the growth rate is not so promising, which is believed to be indirectly influenced by gender inequality in economic participation.

Therefore, government spending and tax reduction should not be the only fiscal-policy approaches taken by the government of Indonesia. By looking beyond what was expected and carefully examining the macroeconomic issues of Indonesia, growth can be stimulated and development can be equally distributed via a reduction in gender employment gaps. In order to realize this, macroeconomic policies are necessary, as they act as the crucial enablers of gender equality and shape the overall tools for advancing women’s economic empowerment.

Namira Samir

Namira Samir is an economist and consultant specializing in Islamic finance, multidimensional poverty and women's empowerment. She holds a master’s degree in Islamic finance and management from Durham University in the UK.