Research Lounge 2012/13: Catalogue

For details on Research Lounge sessions in 2012/13, please visit the following links:

Research Lounge: Jennifer Ljungqvist, “UK Fuel Poverty: Is the liberalisation of energy markets to blame?”

Date: Monday 17 June, 2013
Location: PG Hub 7, Senate House
Topic: UK Fuel Poverty: Is the Liberalisation of Energy Markets to Blame?
Speaker: Jennifer Ljungqvist

About the Speaker: Jennifer Ljungqvist previously did an MA in Economics and International Relations at University of Aberdeen before commencing her MSc in Economics at Warwick. She has in the past done IT Risk, IT Assurance and Health Consultancy work with private and public bodies in the Utilities, Retail, and Aviation, Telecoms, Financial Services and Healthcare sectors. Jen has also long held an interest and done economics research work in Health Economics at e.g. the Health Economics Research Unit in Aberdeen and Environmental Economics. Her undergraduate dissertation was titled ‘The Lack of Corporate Environmental Responsibility Environmental Management in Context’ and her recent research on Energy Poverty for Dr. Monica Giulietti, Associate Professor of Global Energy at Warwick Business School, was the foundation for her 17 June presentation.

Presentation: Though a relatively recent topic in terms of academic literature, with Belinda Boardman leading the way in the 1980s, the subject of ‘Fuel Poverty’ [FP] or ‘Energy Poverty’ is not a recent phenomenon. Three of the main definitions of FP can be outlined as follows:

  • ‘Need to Spend’: Households who would spend >10% of their income on fuel to achieve recognised heating standards (rhs) – Used in the UK
  • ‘Actual Spend’/ ‘Expenditure Fuel Poor’: Households who actually spend > ‘specified % of their income’ on fuel (often 10% mark used) – Used in Ireland, Australia, New Zealand
  • ‘Feel Fuel Poor’: Households who report difficulties in affording sufficient energy for their needs

There is yet to be a commonly agreed definition of the concept, thus comparisons of FP statistics across countries and the value of FP targets is subject to the definition used. The ‘Need to Spend’ definition for instance, unlike ‘Actual Spend’, is promoted for taking into account both those who under-heat their homes and those with high fuel bills but is does not take into account consumer attitudes, perceptions or preferences the way that the ‘Feel Fuel Poor’ definition does.

So why should we care about FP?

First, looking at the UK as an example of a country with colder winters, if vulnerable energy consumers such as older adults, families with young children or the ill do not adequately heat their homes because they cannot afford it or because it costs too much due to rising energy prices and poor insulation then this could have direct adverse effects on their health. The World Health Organisation recommends minimum indoor temperatures of 18C or 20-21C for more fragile elderly adults, but if temperatures are below this there are risks of small adverse health effects (16-19C), increased probability of respiratory or cardiovascular conditions (<16C) or even hypothermia (<10C).

Second, if households do spend enough to heat their homes but this expenditure is a significant proportion of their income then this will affect those consumers ability to spend money elsewhere in the economy and their living standards in general. Research has shown that a large number of fuel poor are also often income poor.

Third, long term solutions to tackle FP such as improved insulation, more cost-efficient use of energy, more educated energy consumers and utilizing waste heat from renewables and other industries (e.g. Combined Heat and Power [CHP]) also tie into today’s climate change targets.

The problem in the UK is a prominent one, there was a rise in the number of fuel poor in England to 2.8 million (13.2%) in 2004-2007 of which 2.3 million were vulnerable households and 56% were in the lowest income percentile. The problem peaked in 2009 (see graph) at a total of 5.5 million households and has since decreased to 4.5 million in 2011, possible correlated to improved insulation and wider use of more cost-effective heating mechanisms such as district heating using combined heat and power (CHP); the efficient use of waste heat from renewable energy sources.

The title of the presentation was whether liberalized energy markets are to blame for FP in the UK. Some of the existing arguments for and against are as follows:

Since the 1990s de-regulation of UK gas and electricity markets the initial rise in prices among prepayment consumers (mostly low income households) as a form of cross-substitution for the decrease in prices for direct debit payments and the prevalence of market dominating energy suppliers (the ‘big six’ in the UK) and distributors (only 7 in the UK) the reform has been criticized for allowing natural monopolies and possible cartels to form and focusing energy companies’ attention on energy pricing rather than efficient supply and use of energy.

On the other hand, more recent data does not support the fear that prices for prepayment users is rising faster. Also, many of the large energy suppliers and distributors argue that the consistent transparency of price changes maintained by watchdogs Consumer Focus, Ofgem and Energy UK as well as the UK Government’s 2000 and 2004 Fuel Poverty targets are providing unofficial pressure on prices, keeping them from increasing significantly.

Final considerations…
Whatever conclusion you reach on the advantages and disadvantage of a de-regulated market Waddams Price (2005) cautions that re-imposing price caps would bring new costs and disturbances in the market. Furthermore, it should be noted that British history of cheap access to coal for heat starting during the industrial revolution, which required large and open air vented buildings and resulted in poorly constructed and insulated buildings, the country’s cultural trend to admire and maintain old buildings and the bas past experiences with energy efficient solutions such as district heating have also played their part in today’s fuel poverty numbers. Whereas the much earlier and wider use of energy efficient solutions in continental Europe in large part grew out of necessity.

The problem of fuel poverty, though prominent, does not only apply to the UK or cold climate countries. The recent summer heat wave of 2013 where a number of fragile energy consumers have died shows that too hot temperatures and the lack of access to or inability to afford cooling facilities such as air conditioning can be equally detrimental to one’s health.

Thus, lessons learned in tackling fuel poverty alongside climate change through more energy- and cost-efficient means such as renewable energy, district heating and/or CHP can be applied to developing as well as developed countries. This will become more and more important as energy use and costs look to continue to increase; see below graphs.

 

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Research Lounge: Grace Chang, “What is wrong with immigration? Immigration economics as a way of thought”

Date: Monday 17 June, 2013
Location: PG Hub 7, Senate House
Topic: What is wrong with immigration? Immigration economics as a way of thought
Speaker: Grace Chang

About the Speaker: Grace Chang previously attained her BSc (Hons) Economics from the University of Warwick and has continued on in the University to pursue Masters in Economics this academic year. She previously was interested in microeconomic behaviour and her previous work focused largely on Life Satisfaction where she wrote her dissertation on the “Happiness of Working Women”. Later on, she delved heavily into labour economics and settled on immigration as her topic of interest. She is currently writing her dissertation on “The impact of skilled migrants on skilled natives: a study in the US” where she hopes to investigate any displacement effects, if any, and the mobility of natives from the influx of migrants.

The main aim of the talk was to encourage the way of thinking about a typical academic subject in Economics. In this particular case, Grace decided to focus on immigration, a large topic in labour economics that is still under scrutiny by academics and in public debates.

Firstly, it is important to assess the importance of focusing on the issue. Why is it important to still discuss issues on immigration? Besides the various results in academic literature, there are still on-going differences in public policies in countries worldwide today. The issue at hand is why do we see the policies enacted today, why do they vary and how are we to judge it ourselves?

Thus, we see a transformation in perspective over time. Using a rough guideline, she finds that the literature first had the investigation of the pressing issues during that time. The first “headlining” literatures in the 90s are focused largely on mass emigrations onto the respective countries such as seen in Card (1990) and Friedberg (2001). Here, there was a large interest in the substitutability of natives and migrants – that is, if natives and migrants are perfect substitutes, the migrants would displace natives of their jobs, or saturate the labour market to then put downward pressure on native wages and employment.

However, more recent studies then had a transformation in their perspective. Recent work by Hunter and Gauthier-Loiselle (2010) find that educated migrants have positive effects on native workers and on the native economy through increased patenting. So in her perspective, the accumulation if literature today has led to the exhaustion of the popular question of “Is immigration bad?” The bias of each “native” country will always exist and the question will always be asked. However, at least academically, the argument of substitutes and complements may be a weak one. As labour becomes more mobile, it is perhaps more interesting to question: 1) Do migrants add productive value to the native economy? Who are they and how can we encourage their contribution? 2) Do restrictive policies help native workers to better contribute to the economy? 3) How well do migrants (first and second-generation) assimilate into the native country and how can we encourage this?

The idea is to think ahead of the current literature, and to question the old. Perhaps substitutability in labour is not as strong as we assumed it to be such as its comparison to substitutability in goods. Maybe the migration policies enacted today are in such a variety because we have been holding on to such old assumptions that lead us to contrasting results. Thus, the talk concluded as a food for thought about the way we think about an argument, especially when there is always a natural bias to one side.

 

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Research Lounge: Katharina Allinger, “Happiness Economics: Key findings from several decades of happiness research and their implication for economics”

Date: Monday 10 June, 2013
Location: PG Hub 7, Senate House
Topic: Happiness Economics: Key findings from several decades of happiness research and their implication for economics
Speaker: Katharina Allinger

In my research lounge talk I attempted to discuss a variety of interesting findings from the research on “happiness economics” *. I chose an interactive format where we tried to use common sense and economic intuition to approach questions and answers from the field of happiness economics. For this reason I want to thank all of my amazing colleagues for their participation and, as usual, very insightful comments. This article cannot possibly reflect all the issues we touched upon which is why I focus on two topics instead: the relationship between income and happiness and happiness equations.

Income and Happiness
What economists ultimately care about is welfare and not GDP, but GDP and welfare maximization have often been equated in the public debate. Whether GDP and well-being are indeed necessarily positively related has been questioned on various accounts and happiness research has made important contributions to the discussion. One of the earliest academic contributions in the field was a book chapter written by Richard Easterlin in 1974.

What Easterlin discovered was that when you looked at time series data for the United States, GDP per capita in the period of analysis had increased rapidly, but there had been no increase in life-satisfaction over the same time period. If you believed that GDP growth was sufficient for increasing life satisfaction, then the logical conclusion was to name the finding “Easterlin paradox”. As usual, when conventional wisdom gets challenged, people reacted strongly to the findings and tried to prove them wrong. Almost 30 years later, the consensus among economists is that Easterlin’s results are robust and indeed, do not only apply to the United States, but to some other developed countries as well. His findings have been confirmed and extended in numerous studies. On the other hand, there are also some stylized facts on the impact of income on happiness: Individual-based cross-country studies, experimental evidence and macro studies largely show a positive correlation between measures of happiness and income.

So how can we reconcile the Easterlin Paradox that shows no increase in happiness combined with large increases in GDP over time with these stylized facts that suggest that GDP does lead to higher happiness? Many researchers have attempted to answer this question and found two main explanations: social comparison and adaptation. The former refers to the fact that for individuals it does not only matter what they have, it also matters what others - our reference groups - have. An impressive amount of studies has focused on different reference groups and in many studies the effects on happiness of a personal income increase are exactly neutralized if the income of the reference group also increases by the same amount. In addition, there is a certain adaptation effect, meaning that a one-off increase in income may only increase happiness temporarily. Studies have shown that income’s long-run effect is only 40% of it’s short-run effect. **

If we wanted to translate these findings into economic intuition we could say that increasing income for an individual has two effects: a consumption effect and a status effect. When we assume that happiness rises with income we normally invoke the idea of a positive but decreasing marginal utility of consumption. Therefore in developed countries the additional benefit from more income and consumption may become relatively small. On the other hand, if the income of the reference group is held constant, the individual gets a happiness boost because its relative income rises: we can call this a status effect. If we assume that status is not a zero-sum game, then we can, for example, hypothesize that increasing income inequality might have negative effects on happiness even though it might raise average income. There are certainly many different combinations of consumption and status effects that can lead on aggregate to very different effects of an increase in average income on average happiness.

Happiness Equations
Most of the second half of our discussion was then devoted to another interesting question. Obviously, income is not the only factor that causes people to be happy (or in this case maybe better: content with their lives). After some brain storming we were able to use common sense to figure out the main determinants of happiness and stumbled upon one important distinction: the difference between “being happy in the moment”, which could be triggered by eating chocolate, and “being generally happy with one’s life”. This distinction is mainly one between “affective” and “evaluative” measures which have yielded different results in empirical studies. While every study follows a slightly different approach and focuses on different measures we could generally say that the factors that are most important for evaluative happiness are: income, employment (unemployed, employed, housewife, job satisfaction, …), family (marital status, children, …), community and friends, subjective health, freedom and religion (which has yielded ambiguous results in empirical studies).

In addition to these “happiness equations” that try to explain the variation in happiness through different individual variables, a number of authors, e.g. Helliwell, have argued that we need to include societal variables as well in our happiness equations and that including purely individual determinants without societal controls leads to confounding results. For this reason many studies in recent years have attempted to distinguish between individual and national determinants of well-being.

Footnotes:
* To avoid confusion I subsequently use the term happiness even though it is generally assumed that happiness is a more „affective“, short-run measure while subjective well-being is a more „evaluative“ and long-run measure and that both are strongly linked but not identical.
** If one cares to dig a little deeper into the literature on happiness, we can find that what happiness economists have proven with the means of elaborate econometrics, Bernard Mandeville already discussed as early as 1705 in his book „Fable of the Bees“.

 

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Research Lounge: Justus Timmers, “Income Inequality in the UK and beyond”

Date: Monday 4 March, 2013
Location: PG Hub 7, Senate House
Topic: Income Inequality in the UK and beyond
Speaker: Justus J.H.P. Timmers

Note on the author: Justus Timmers was at arms length from core of the 99% protest at St. Paul’s Cathedral during his internship over the summer of 2011 when the nationwide riots and looting sparkled among others the income inequality debate in the UK. Income inequality is traditionally often a secondary consideration at best in the hierarchy of considerations in economics. As a student Economics and Geography at UCL and currently of Behavioural and Economic Sciences at Warwick, this is core to Justus’ interests and found the national divide on the issue striking. At the Warwick Economics Research Lounge Justus sought to discuss further the causes of income inequality.

Presentation: Justus started his presentation with providing an overview and definitions of inequality, to continue with some traditional sociological and economic theories on the causes of inequality. His own empirical research is based on the 2002 and 2010 Labour Force Survey data for a course at UCL titled Scales of Inequality. Possibly a quirk of history, the protest witnessed nearby was marked by little structure, no identifiable leader and no demands: yet it might have been very successful in its goal, which is to stipulate debate in this unprecedented social and somewhat ignored academic territory.

The economic terrain is indeed unprecedented in terms of scope and depth, as both the universality and severity of the economic crisis and levels of inequality have not been seen since founding of the OECD in 1961. The level of income perceived as typical is often severely biased by surrounding, neither rich nor poor often realise the scale of the differences, and I refer you for the pre-tax hourly job wages and the coefficients of inequality to the presentation, please click here for the slides.

The graph below summarises the key facets of increase of income inequality over the last decade adequately: income inequality is a feature of the top earnings monopolising most economic gains. This requires some additional comments.

The bottom 90th percentile of earners are more egalitarian. It is indeed neither at the 99th percentile – i.e. those just making the 1% category – nor even the 99.9th percentile that capture the situation to any justifiable extend. It is the top-of-the-top earners.

To translate this in the more protest’s banker bonus terminology: it is not all those greedy bankers, it is the one banker who earned a £40mm bonus opposite to me in his glass office responsible for corporate and financial engineering, as dicing and slicing ABN-Amro in a €72bn deal. The consequent bailouts might have nearly bankrupted governments, but enriched a few grossly over the crisis for those who manage to benefit from their connections.

Ascribed characteristics / SBTC.

It should therefore indeed not come to a surprise that these ascribed characteristics are not key in making these individuals so privileged in society. These super-earners are typically male (gender however is the fastest closing gap and accounts for about 4% of inequality in 2010), reside around London (again about 4% of inequality can be explained by region) and are white-European (0.3% of inequality is explained by ethnicity). Yet, these characteristics barely account for the discrepancies in earnings.

The inequality within any group you can imagine is far greater than that between different groups and increasingly so. It is indeed very hard to guess in advance exactly who the individuals are by characteristics they are endowed with.

Instead of ascribed characteristics, maybe these people are more skilled, more experienced, more future oriented, and educated? Skill-Biased Technological Change (SBTC) is a popular economic theory based on these premises and actually does a better job than the ascribed characteristics mentioned above.

To summarise the SBTC theory predicts that technological change caused some workers to become very productive (think designers, IT engineers, bankers) and other workers (think catalogue keepers, toy makers, etc.) to become replaceable. Dependent on skill level some groups gained and others lost out. The high skilled are the predicted winners. Slightly counter-intuitive those losing out most are not the lowest skilled, as non-routine work is hard to replace, but pretty a university education to adapt to take advantage of the newest advances in technology has become a prerequisite.

Yet the capacity of education and experience to explain income is diminishing. Differences in education and age accounted for about a fourth of inequality in 2002, but diminished in explanative power to a fifth in 2010.

Intuitively it makes sense that these explanations do not bring us very far. For Joe on the street to Warren Buffet there is a large realization that income is greatly affected by serendipity. For an economist this is very dissatisfying, as lucky few by definition are impossible to identify a priori, nor does this say much about the underlying causes of inequality.

Alternative explanations.

Therefore people have increasingly been looking to alternative explanations, often involving politics, institutions, globalisation and norms. Prominent thinkers include Stiglitz, Acemoglu, or Pogge and all believe that the political aspect is undeniable. It is the interaction between economic and political power that create this vicious spiral of increased inequality. Put very simply: (political, economic) connections matter and are becoming more profound. What empirical evidence can we present here?

Justus focuses in his presentation on parent-child earning elasticities. Previous research, by e.g. Björklund, shows that unequal countries often have very high father-son earning elasticities. This nears parity for the top 0.1% earners. Given the low accountability of income personal characteristics have, it can only be concluded connections – if not outright nepotism – play a main role in income inequality. Why is it right now that income inequality is increasing? For instance, in his presentation Justus Timmers presents evidence of his research that the institution of marriage is very recently becoming less universal and dependent on incomes. This effect is not significant yet in 2002. However, post anno 2010, if you have two parents from which connections you can benefit: they are most likely financially well off. We find hereby evidence for an increasing polarisation of those not connected and those connected in a bubble providing unlimited financial opportunities.

N.B. My current MSc. Research Project (eq. dissertation) is on the topic of assortitative matching in couples.

N.B. The analysis is based on hourly earnings from the main job before deductions. As Lukas Mergele noted in the discussion, the inclusion of capital gains would most likely exacerbate the effect of income inequality.

 

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Research Lounge: Konrad Gudjonsson, “Fisheries economics: How Iceland made professional fisheries profitable”

Date: Monday 25 Feb, 2013
Location: PG Hub 7, Senate House
Topic: Fisheries economics: How Iceland made professional fisheries profitable
Speaker: Konrad Gudjonsson

About the Speaker: Konrad earned his B.Sc. in Economics at the University of Iceland before going to Warwick. Coming from a tiny fishing village in a rural part of Iceland, he has learned to understand the industry and how efficient it can be if the right framework is provided. He wrote his undergraduate dissertation on profitability in mackerel fisheries in Iceland and concluded that there was a great capacity for higher profits without increasing the catch.

Why are commercial fisheries so special?
The short answer is simply: The tragedy of the commons. Free and wild fish in the seas are per se not owned by anyone, which gives fishermen incentives to overfish and not consider the effect of their own actions on other fishermen and the fishstocks. This very often leads to unsustainable fisheries, higher costs per unit of catch and low, or even zero, profits in the industry.

Commercial Fisheries around the world.
Around the world, fisheries are generally unsustainable, with small stocks and small profits. Furthermore, fisheries get large subsidies, which are estimated to account for 30-35% of revenues (Milazzo, M. 1998. Subsidies in World Fisheries: A Reexamination). The economic loss has then been estimated by the World Bank to be around $50 billion, which is equivalent to the GDP of Cameroon or Uruguay.

How Iceland solved the problem:
Gradually, from 1970′s until the 1990′s, Iceland implemented what is called “Individually Transferable Quotas” (ITQ). In its simplest version the system works like this: The Fisheries Institute decides each year how much fish can be caught, “Total Allowable Catch” (TAC), based on stock size and looking at maximizing the size of fish stocks in the long run. Then each vessel, or company, is given a fixed percentage (quota) in the TAC which they can fish during that year. These quotas, if they are permanent property, can then be traded between companies.

Why can ITQs work in theory?
First, if the quotas can be traded, those who have the best technology or knowledge are likely to buy quotas from those who are less profitable. Second, ITQs eliminate the competition to catch the fish and give fishermen better incentives to protect their resource, especially if the quotas are permanent property. That essentially eliminates the “Tragedy of the Commons” problem. Finally, the fishermen have incentives to make better long-term investments and invest in R&D.

How has this worked out for Iceland?
- Profits have increased dramatically with net income increasing by 170% in real terms, while catch has decreased slightly.
- Productivity in fisheries has increased more than in other industries and capital utilization has improved with smaller and more efficient fleet.
- Positive impact on the environment with less oil being used for unit of catch and less chance of overfishing.
- The incentives to look at the long-run have increased the prices and brought Iceland to the “best markets” with vertical integration, long-term supply contracts and marketing.
- Has provided a platform for Icelandic companies that service the fishing industry, such as Marel hf.

Challenges ahead:
Although Iceland has overall done well in managing its fisheries in the past two decades, there is still a lot of work to be done. For instance, there are still disputes ongoing over the initial allocation, and the Fisheries laws don’t state clearly how permanent the quotas are.

As mentioned before, the total catch has not increased, which is a bit disappointing but could be caused by other factors. Also, with quotas moving away from some towns and villages has caused negative socio-economic effects. That, along with unhappiness over how few people have earned most of the profits from the industry, has caused the fisheries management to be in center of the debate for some years now.

However, the EU, with its seriously flawed and heavily subsidized fisheries, and other countries should seriously consider ITQs. They could without a doubt both learn from the mistakes Iceland has made, and more importantly, how well Iceland has done relatively to most other countries in managing its fisheries.

 

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Research Lounge: Leslie Djuranovik, “How Indonesia has moved towards macroeconomic stability”

Date: 11 February (Monday), 2013
Location: PG Hub 7, Senate House
Topic: How Indonesia has moved towards macroeconomic stability
Speaker: Leslie Djuranovik

About the Speaker: Before joining the MSc in Warwick, Leslie obtained a BSc in Statistics from Bogor Agricultural University (Indonesia) and worked for the monetary policy division of the Central Bank of Indonesia for several years.

Country Background
Indonesia is the fourth largest country in the world in terms of population after China, India, and the United States of America (US). Results of the 2010 Population Census by Indonesia Central Agency of Statistics show that the population in 2010 is around 238 million people. Thanks to its large number of population, domestic demand plays a dominant role in the economy. With regards exchange rate management, Indonesia has adopted the free floating exchange rate system since 1999.

Overview of the Economy
Against a backdrop of weaker global economic growth, the Indonesia’s economy in 2012 grew strongly by 6.2%, buoyed mainly by domestic demand. Over the past eight years, the Indonesian economy has continued to grow solidly, averaging in excess of 6%, making Indonesia one of only a very few countries in the world to combine rapid economic growth with maintained stability. This sustainable economic growth was underpinned by a favorable macroeconomic environment and stable financial system.

Inflation reached a single digit, along with improving policy credibility under Inflation Targeting Framework (ITF). Core inflation has been fairly stable in the last three years at around 4%.

In the financial sector, resilient domestic economic performance was also supported by sound performance in the banking sector, as indicated by strong credit expansion and at the same time could be maintained at a level deemed safe for the economy. This was followed by a credit allocation strategy aimed at productive sectors in the form of investment credit.

The intermediation function was performed relatively well, backed by sound banking conditions and well-managed risk exposure. Bank capital picked up, primarily in the form of core capital, therefore adding resiliency to absorb risks emerging from the banks’ business activities or to changes in the business environment.

Monetary policy was aimed to steer future inflation within the target range and provide support for sustainable economic growth. Exchange rate policy is designed to maintain rupiah stability at a level appropriate with economic fundamentals.

Prospects and Challenges
The Indonesia’s economy is expected to post high growth in 2013, with the domestic demand to remain the key contributor to economic growth. Meanwhile, the contribution of exports to GDP is projected to pick up in line with the recovery in the global economy.

The government (in conjunction with the central bank) has set the medium-term inflation target at 4.5%±1% in 2013 and 2014, and 4.0%±1% in 2015 in order to anchor inflation expectations.

In the medium term, Indonesia’s economy is expected to sustain economic growth in excess of 7% along with low and stable inflation. If the trend continues, a report from PwC indicates that in the long term Indonesia will be one of the ten largest economies in the world.

 

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