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Inflation in Indonesia is not only a monetary issue or one that occurs simply because of excess demand and can be addressed with monetary policy. More frequently, general price increases are caused by food price volatility or supply shocks that in turn are often caused by poor and inadequate infrastructure, logistics and inefficient supply chains. Regional economic discrepancies make the problem of inflation more complex.

The structure of the regional economy has not undergone significant changes over the last 10 years. Java remains the major driver of national economic growth with a share of 57.65 percent of gross domestic product (GDP), followed by Sumatra with 23.74 percent. The remaining 18.61 percent is contributed by Kalimantan, Sulawesi, Maluku, Papua, Bali and Nusa Tenggara, according to Central Statistics Agency (BPS) data from May 2014.

Seen from indicators of inflation, Java is still a major contributor to the national inflation rate. Viewed by city, Jakarta contributes 22.49 percent, followed by Surabaya and Bandung with 6.47 percent and 5.38 percent respectively. Meanwhile, if viewed by province, three provinces in Java, namely Jakarta, West Java and Banten, together account for almost 50 percent in the formation of national inflation. This was based on the 2007 Cost of Living Survey prepared by the BPS.

Furthermore, it turns out inflation in one region has links with other regions. Analyst Wimanda Rizki has revealed that some regions are leaders in inflation, while others are followers. And again, Java is the main leader in influencing inflation in other regions.

Economic imbalance between regions has become a very serious hindrance to controlling inflation. Inequality in infrastructure is most striking. Infrastructure outside the island of Java, particularly in eastern Indonesia, is relatively underdeveloped. Without adequate infrastructure, it is very difficult and very costly to distribute public goods.

Managing inflation in a vast archipelago such as Indonesia cannot be done in a linear manner. On the one hand, given Java’s great share of the economy, anti-inflation measures often focus on Java with the expectation that if inflation in Java is well managed, national inflation will be curbed.

On the other hand, there is another issue associated with the equality in the distribution of economic activities. Even though Java has a big economic role, Indonesia is not just Java.

Economic relations between Java and the other islands are symbiotically beneficial. With fertile soil and more advanced irrigation networks, Java is a major supplier of agricultural products to almost all regions in Indonesia. But when talking about farms, Nusa Tenggara cannot be ignored. Similarly, when it comes to plantations, Sumatra has the dominant role.

Economic integration among regions in Indonesia is very important not only for enhancing equitable development and income distribution but also for price stability. Equal distribution of infrastructure will impact the distribution channels of staple goods. Effective economic integration will also reduce asymmetric information that leads to high costs in the economy.

Still, in terms of economic integration, controlling inflation requires the coordination of many stakeholders. The monetary policy of the central bank and the fiscal policy done by the central government should also be balanced with local policies that are conducive to price stability.

The classic problem of unequal infrastructure development should be addressed with better coordination between the central government and local administrations.

A collaborative effort to control inflation between the central and local government has been initiated through the Regional Inflation Task Force (RITF). The team is made up of various stakeholders in the region to manage inflation.

Its members consist of local government, the regional office of Bank Indonesia (BI), businesses and other institutions associated with price stability in the region.

Regularly, the team meets at the city level and holds provincial and national coordination meetings.

The output of the RITF is diverse depending on the condition of inflation in each region. To reduce asymmetric information, price information boards have been installed in strategic markets in various parts of Indonesia. To direct the public’s inflation expectations, the RITF makes public interest advertisements on local issues. There are also market operations or low-price market activities to ease inflationary pressures due to seasonal factors.

After more than five years of existence, analysts Tirtosuharto and Adiwilaga concluded through a study in 2013 that there was a positive relationship between the RITF and inflation volatility.

This finding shows that the RITF has proven its role in controlling inflation in the regions, especially in dealing with issues related to region-specific inflation. The stakeholders in the region are parties who know local problems of inflation very well and how to solve them.

In the midst of the regional economic imbalance, the RITF became a bridge between one region and another. Regular meetings allow for easier inter-regional coordination. One example of this form of coordination is when there is one area that is experiencing an oversupply of a commodity, the surplus can then be sent to the area suffering a deficit in that particular commodity, and vice versa.

The RITF is one example of the tools that can be used to control inflation, but beyond that, controlling inflation is a long process that is very dynamic. It requires long-term policy measures to solve structural problems. At the same time, short-term policies are also needed to address seasonal problems.

Published on The Jakarta Post, 30 June 2014

Photo source : nyuad.nyu.edu