We build too many walls and not enough bridges.–Isaac Newton
Global economy is currently going through a period of rising integration, with the new platforms emerging that assume transcontinental scale, becoming the principal source of global markets opening up. However, in spite of the positive effects that such new platforms have in store for the openness of global economy, this process also entails intensifying competition between and polarization of these blocs along the North–South axis. In 2022, this opposition was increasingly noted between BRICS and G7, the leading blocs of the Global South and the Global North. Amid these conditions, it is very important to design mechanisms for interaction and cooperation between platforms representing developed and developing nations—already at the early formative stages of large-scale blocs.
Growing North–South competition
For developed nations, coupling the platforms of the Global North with those of the Global South is not so much a matter of assisting the developing world—it is more a matter of maintaining and stepping up the pace of their own economic growth in competition with the Global South since “catching-up development” of developing countries helps them grow faster than developed nations. The principal potential for growth of the global economy rests with the developing world. Moreover, these countries harbor the greatest potential for reducing tariff barriers as part of forming their integration platforms. This prompts increasing competition for platforms in the most dynamic regions of the developing world, as is exemplified by the exacerbating competition between the U.S. and China in Asia-Pacific.
The nations of ASEAN make the acute competition between Beijing and Washington particularly obvious. This regional bloc exhibits one of the best dynamics, both in its pace of economic growth and in building a ramified network of economic alliances in global economy. Besides, ASEAN is a hub of innovations and new integration areas—largely, due to economic agreements on digital economy, with Singapore as the acknowledged leader. With ASEAN states increasingly involved in economic cooperation both with developed nations (such as interactions along the ASEAN-EU axis) and developing economies (Cambodia as an ASEAN representative taking part in the 2022 BRICS+ summit), this regional integration may become the pivotal factor in coupling integration projects of the North and the South.
At the same time, we should note that the acute North–South competition could require certain consistency on the part of developing countries in their strategy of forming integration platforms. So far, integration in the developing world is significantly fragmented as compared to similar processes across the developed nations. “Deficiency of integration” is particularly noticeable in Eurasia, where several states remain outside the perimeter of key regional integration blocs or international organizations, such as the WTO. Given this, developing countries should primarily gear up for building a common platform within the Global South, achieving this over the next few years. The 2022 BRICS+ summit held as part of China’s BRICS presidency became an important step to attain this goal. This summit was attended by representatives of the largest integrations of the developing world, which creates premises for further steps toward a broader cooperation platform.
A common platform for countries of the Global South will significantly increase capabilities of developing countries for building more active and equal platforms of interaction with developed nations. The weightier the trade alliance formed by developing nations, the more countries of the Global North will lose in consequence of trade restrictions against the Global South. With little progress attained by the developing world toward such common platforms, developed nations will most likely interact with individual regions and blocs of the developing world on the basis of conditionality. In this case, developing nations that are building a number of global alliances should prioritize their own platforms while building interactions with integrations of the developed nations later on.
While following a certain sequence in building economic alliances, developing countries may significantly increase the openness of their regional blocs—both for other developing nations and for integrations formed by developed economies. Simultaneously, integration blocs of the Global North should be as open to mutual connections as platforms of the Global South. So far, such a connection is in evidence; on the contrary, we stand witness to growing polarization and competition between the platforms established. For instance, such platforms as Global Gateway or G7’s Build Back Better World (B3W) are positioned as competitors of the Belt and Road Initiative. After the G7 summit of 2022, leading developed nations announced they would be earmarking up to USD 600 bn. to implement connection projects in developing countries. This funding is less than the existing funding in the Belt and Road Initiative, and it does not stipulate mechanisms for coupling with the relevant initiatives of the Global South.
New formats: R20 and BRICS++
Importantly, integration platforms that incorporate both developed and developing states are also emerging amid growing global economic competition for integration platforms. Such groups may serve as bridges between the North and the South. This primarily applies to such largest integration groups as the Regional Comprehensive Economic Partnership (RCEP) and such forums as G20. Yet, for these venues to play their role in connecting the platforms of the North and the South, they need additional mechanisms of inclusivity. For the RCEP, these could be provisions on admitting new states and on interacting with other regional groups.
G20 could achieve greater inclusivity through a platform for interactions between regional groups, of which G20 states are members. The Valdai Club proposed this format in 2018, dubbing it R20 (the Regional 20). With a platform for interaction between regional blocs in place, it would be possible to significantly expand cooperation between the global economic heavyweights and smaller economies, which are regional partners of the largest states. Moreover, extending G20’s format of interaction to the regional partners of the group would overcome one of its key problems and limitations—namely, insufficient representation and lack of legitimacy in empowering all constituent nations of the global economy. It is also important that the R20 format would allow for a more efficient coordination of global and regional anti-crisis steps, providing a better venue for interactions between the regional projects of the North and the South.
On the other hand, the BRICS+ platform, which is currently formed by the Global South, does not so far envisage mechanisms for interacting and connecting with developed states. If BRICS+ opts to develop along the lines of admitting only developing G20 states to its core, that will not provide an impetus for developing the BRICS+ format toward the required inclusivity and will not be conducive to meaningful connections between the platforms of the North and the South. If BRICS+ gears its development toward G20, this trend may also undermine the focus of developing countries on their own agenda and on their own platforms of integration. The very G20 platform, despite several achievements in advancing the global agenda, is still far from being properly inclusive and efficient in coordinating the anti-crisis steps taken by the global economy’s largest states.
A more promising course apparently lies in creating a special format for interactions between developed and developing states within BRICS++. Such a format could include interactions between BRICS+ and individual developed states or developed states’ regional groups, including the EU or EFTA. The perimeter of the BRICS++ format could also include joint blocs and forums of the North and the South, for instance, the RCEP. Additionally, along with regional integration blocs, BRICS++ could also include North–South interactions within regional and global development institutions. Ultimately, BRICS++ could acquire a global scale by connecting projects of developed and developing states and becoming a platform for a new stage in globalizing the world economy. This platform could become an important addition to global institutions such as the IMF and the World Bank and such forums as G20 where developed states thus far largely play a dominant role.
India’s and Africa’s key role
India and South Africa may play an important role in developing the North–South ties and in the evolution of BRICS+ toward greater openness and inclusivity. Representing the developing world in such projects as the emerging system of economic cooperation in the Indo-Pacific, India may also become a key factor in connecting the platforms of the North and the South. India could also be instrumental to security dialog between the nations of BRICS and the developed states that are members of the QUAD
As for BRICS+, this format could give India an opportunity to advance its own platforms and projects, including North–South transportation corridor projects in addition to China’s initiatives aligned along the West–East axis. For India, BRICS+ could serve as an instrument of influencing the further development of BRICS (including China’s) ties with other states of the Global South. Without being actively involved in shaping the development agenda of BRICS+, India loses an important tool for advancing its national interests in building common platforms of the Global South. In this context, it is important that, instead of abandoning BRICS+ as such, India should formulate its own concept and vision of this platform.
India could also make interactions within BRICS+ more pragmatic economic affairs by developing cooperation between BRICS New Development Bank and other regional development institutions (NDB+), and the same applies to expanding the BRICS Contingent Reserve Arrangement’s (CRA+) mandate and enhancing its role. BRICS++ may also carry major opportunities for India that could use its accumulated political capital in its relations with the leading developed states with a view to connecting developed states’ key projects (B3W, Global Gateway) and the global South.
Africa can play a no less important role in BRICS+ and in connecting the platforms of the North and the South. Among all the pan-continental blocs of the developing world, Africa was the first to create a continent-wide free trade area, and this platform can play a key role in the “integration of integrations” with developing states of Asia and Latin America. Connecting such integration projects as the African Union (Africa), the Community of Latin American and Caribbean States (CELAC), and the expanded Shanghai Cooperation Organization (SCO+) could serve as the foundation of a common platform of the Global South. Here, Africa is the key link in the “integration of integrations” in the Global South since it already has a number of agreements with other regional blocs in the developing world. Particularly, the African Union and the Caribbean Community (CARICOM) held their first summit in September 2021.
Given that Africa exhibits a high concentration of such global issues as the food problem, the energy problem, and the debt problem, Africa could also become the region where joint projects run by the development institutions of the North and the South overlap. Transportation connection projects, developing the “green agenda” element of sustainable development, and combating pandemics could become important areas of interaction between development institutions of developed and developing countries. The African Union can also play a more significant role in transforming the global economic architecture in the format of interacting regional integration blocs. In this regard, close attention should be paid to increasing the African Union’s representation in global international organizations along with the established representation of leading regional blocs formed by developed states. As Africa’s key regional platform, the AU should become a systemic participant in G20 discussions along with the EU.
In July 2022, the African Union marks its 20th anniversary. Over this time, much has been achieved in advancing the interests of African states in international forums and multilateral economic organizations. The African Union, of all the Global South regions, achieved significant results in consolidating the pan-continental agenda and in building interactions with regional blocs formed by developed states (primarily the EU) and by the developing world. In 2023, South Africa will assume presidency in BRICS, and in 2025, the chairmanship in G20. It is possible that in the nearest future, it is Africa and the African Union that will be able to play the key role in transforming the global agenda of the North and the South along the lines of resolving global problems and building greater interactions between developed and developing states.
Today, there is both a need and a possibility to couple integrations of the North and the South. However, it requires new mechanisms of cooperation within global forums such as G20, including cooperation between regional integration blocs of the North and the South. Besides, it is necessary to transform the largest regional blocs along the lines of greater openness to “integration of integrations” and the possibility of connections with other regional blocs. Countries of the Global South should be more active in creating common platforms for economic cooperation. In the last few years, developing countries’ prerequisites for creating such mega-platforms have significantly improved. The developing world inaugurating a common integration project will, in turn, see more favorable conditions for constructive cooperation between—and connection of—the platforms of developed and developing states. As of yet, integrations of the Global South are far from the degree of connectedness and structuredness typical of developed states’ integration projects. As the “integration gap” in the global South is overcome, this space will form conditions for stable and balanced connections between platforms of developed and developing states. The African Union and India (by being more actively involved in shaping the agenda of BRICS+ and BRICS++) may play the key role in these processes.
1. Andrey Kortunov analyzed the prospects of building security interactions between BRICS states: https://news.cgtn.com/news/2022-06-23/Can-BRICS-make-a-contribution-to-international-security–1b43c79r4U8/index.html
From our partner RIAC
A New Horizon for Kazakhstan’s Economy
On September 1, President of Kazakhstan Kassym-Jomart Tokayev delivered an address that outlined the nation’s priority areas for development. Primarily focusing on Kazakhstan’s economic trajectory, the President’s remarks have a significant impact on the activities and initiatives of public authorities, including quasi-public sector companies like Samruk-Kazyna, a sovereign wealth fund of Kazakhstan, which owns several major companies in the country.
Rethinking Tariff Policy
President Tokayev emphasized the necessity of reforming the tariff policy and introducing adequate market tariffs for entities subject to natural monopolies. This marks an important shift from the existing approach, which has reached its limits. Adopting a cost-plus principle for tariffs will enable us to discontinue subsidies to the economy. This, in turn, will facilitate timely preventive maintenance, thereby reducing the risk of industrial disasters. This policy overhaul will ensure break-even in the areas of activity, bolster the investment attractiveness of our companies and a number of industries, and ultimately lead to increased dividends and social payments. We have already been collaborating with the Government to systematically increase tariffs, taking into account the 10-12% inflation corridor set by regulators to ensure social stability.
Focusing on Exploration
Tau-Ken Samruk, our national mining company, is currently engaged in exploration projects with leading international companies like RioTinto, Fortescue Metals Group, and others. With Kazgeology joining the structure of Tau-Ken Samruk this year, the number of exploration projects has increased from 15 to 45, expanding the exploration area from 1887.7 km² to 13,609 km². Notably, we are focusing on copper, gold, lead, and zinc, as well as rare metals like tungsten, molybdenum, and yttrium. Joint ventures registered in Kazakhstan will own the extraction rights to these minerals if confirmed. Geological exploration work will be carried out not only by Tau-Ken Samruk, but also by the world’s largest uranium producer Kazatomprom, national oil and gas companies KazMunayGaz and QazaqGaz in their areas of activity.
Energy Goals for the Next Five Years
The President has set a goal to commission 14 GW of new energy capacity over the next five years. This includes the Samruk-Kazyna projects aimed at restoring the first unit of Ekibastuz GRES-1, a coal-fired thermal power station, expanding GRES-2, and constructing GRES-3. These initiatives focus on traditional coal energy.
In addition, the Fund’s portfolio features gas generation projects, the largest of which involve the reconstruction of Almaty CHPP-2 and CHPP-3, as well as the construction of a combined cycle power plant in the Turkestan region.
Special emphasis is being placed on the development of renewable energy sources, particularly hydroelectric power plants. Plans include constructing wind farms with a capacity of up to 5 GW in collaboration with foreign partners such as Total Eren, Acwa Power, Power China, Masdar, and China Power International Holding. The projects also encompass the construction of counter-regulators for Kapshagai HPP and Shulba HPP.
According to forecasted data, a capacity increase of approximately 9 GW is expected by the end of 2028.
Transport and Logistics
Strategic upgrades are in progress to improve our existing transport infrastructure and eliminate bottlenecks. Several significant infrastructure projects are currently underway, including the construction of second lines on the Dostyk–Moiynty section, and the development of new railway lines: Bakhty–Ayagoz, Darbaza–Maktaaral, as well as a bypass line around Almaty.
Alongside the widespread modernization of railway infrastructure across the country, the North–South transport corridor stands out as a promising focus area. Plans are in place to upgrade railway sections leading to the Bolashak station, which is located at the border with Turkmenistan.
Simultaneously, initiatives to boost terminal capacity are in the works both within Kazakhstan and abroad. Noteworthy projects include establishing a container hub in Aktau, constructing a terminal at Xi’an port in China, and creating a dry port at Bakhty station, among others. Kuryk port is receiving special focus; the construction of its ferry complex is nearly complete, and activity along the Trans-Caspian International Transport Route is ramping up.
The expected economic impact of these initiatives is substantial, with freight traffic projected to increase by an estimated 50 million tons annually. These efforts aim to transform Kazakhstan Temir Zholy, Kazakhstan’s national railway company, into a comprehensive transport and logistics enterprise.
Top of Form
Economic development on horizon
Kazakhstan is at a historically significant crossroads. The President’s address underlines a multitude of opportunities that we are keen to seize. For decades, Samruk-Kazyna has collaborated with international entities, and we firmly believe that collective business efforts are the most effective approach for the 21st century.
To attract major long-term investors, stability and clear profit plans are essential. In line with the President’s recommendations, we are refining our tax policy to make it more investor-friendly, among other initiatives. These comprehensive efforts not only offer us a robust toolkit for economic development but are already yielding tangible results. I have immense faith in Kazakhstan’s economic potential and am confident that the global business community will recognize and appreciate the favorable conditions being nurtured in our nation.
The High Percentage of Informal Employment in Indonesia: Causes and Implications
In most developing countries, the informal economy accounts for a large portion of the national economy and it often has a negative connotation because of inferior working conditions, low-productivity firms, and disrespect for the rule of law. The firms and workers as well as their output and production activities that are unregistered and do not pay taxes account for a significant and growing share of total economic activity. In Indonesia, BPS-Statistics Indonesia (BPS-Statistic Indonesia, 2022) records that the informal sector reaches 59.31% with more informal economy workers in rural areas. It captures three provinces including Papua (84,11%), West Sulawesi (77,25%), and West Nusa Tenggara (75,36%), with the highest percentage. The informal sector – where most MSMEs operate – employs more than 61 percent of Indonesia’s total workforce (The World Bank, 2010). From a government or formal perspective, the large participation in the informal sector becomes an issue that must be resolved because restricts the government’s ability to provide support for public goods and services (tax issue) and hinders economic growth.
In addition, policy-makers assume that their status (as companies and informal workers) would put them at a disadvantage relative to formal firms because they may not be able to legally obtain credit from formal financial sources, access government programs or facilities, or export products. The fact that is not surprising anymore is, even though actors in the informal sector know those losses mentioned by the government, most of them remain in their position. This phenomenon is interesting to examine because it has a lot to do with economic growth, social welfare, human capital, institutional issue, to development in various sectors. Therefore, this paper will analyze why the percentage of informal employment remains high in Indonesia despite many efforts by institutions and state agencies.
The Informal Sector: Exclusion & Exit Theory
Informal employment is a phenomenon in which firms and workers are unregistered with social security administrations, meaning their work activity and income are outside the tax control of the state and of the legal provisions in labor matters – most of them are small firms. Some literature analyzes the reasons firms or workers choose to remain in the informal sector on the one hand and the reasons other companies register their firms (and workers) and pay taxes. Perry et al. (2007) highlight informality through two lenses, exclusion & rational exit. The exclusion theory argues that the informal sector exists because workers could not find jobs in the formal sector, more precisely they are excluded from critical state benefits or modern economic circuits. Those exclusions include segmentation in the labor market, burdensome entry regulations that prohibit small firms shift to formality and growth, and informality as a defensive measure toward excessive tax and regulatory burdens. Therefore, the rational exit theory states that the net benefits of joining the formal sector are negative. Firms and workers choose to engage with formal institutions based on cost-benefit analysis, depending on their assessment of the net benefits associated with formality and the state’s enforcement effort and capability. This view suggests that high informality results from a massive choice to leave formal institutions by firms and individuals. It implies societal demand on the quality of the state’s service provision and enforcement capability.
They also argue that formality increases rapidly with firm size and productivity. So, formality can be seen as an input in the production process that is not really needed by small firms. However, most micro firms remain too small to benefit sufficiently from formality to overcome their various costs (a survey of informal Mexican micro firms). Other reasons are the high costs and time required to register or the high costs of operating as a registered business. In their research, the degree of formality increases as the firm grows larger and their demand for formalization increases, as does the probability of detection by authorities. Firms choosing to register do have better performance or, the firms that started operations being registered exhibit higher levels (on average) of labor productivity than their equivalent unregistered peers (survey in Latin America). However, there is evidence that, in some cases, informality reflects defensive evasion of possibly excessive regulation. In short, firms not only consider the cost and benefit of formality but their environment that does not demonstrate demand for its expected benefits also influences their decision. For the last, even if the government reduced registration costs, it would not lead to formalization. In other cases, such as unskilled workers – with lower formal wages, they may find that paying social protection and expected returns from a formal job do not exceed their consumption or greater flexibility and income they can get as informal workers. Especially when they have social protection alternatives from private or noncontributory programs (Perry et al., 2007). However, informality is a multidimensional phenomenon in which exclusion and exit mechanisms depend on each country based on its institutions, historical background, and legal frameworks.
The analyses highlight the characteristics of informal workers, their motivations, and their preference for the benefits and non-monetary characteristics of jobs such as flexibility, autonomy, stability, and mobility. Most of these informal workers seem to choose their jobs according to their individual needs, particularly their desire for flexibility and autonomy, and their abilities (comparative advantage). Either independent workers (firm owner and self-employment) or informal salaried workers are related to the exclusion and exit model. Most independent workers choose their jobs voluntarily, exit the formal social protection system, and underline the non-monetary of self-employment. In contrast, most informal salaried workers are excluded from more desirable jobs, either as formal workers or self-employed. They also choose not to contribute to social security and health insurance plans (exit) mainly because of low incomes and their employer’s decision not to offer benefits. Based on Perry’s research in Latin America, most of the self-employed do not appear to be excluded from the formal sector but they choose to exit (rationally, cost-benefit) of formality. They considered their minimal human capital, access to other assets, and low aggregate productivity in the economy. Informal employment then becomes a better option than suitable jobs in formal ones.
The dualism of the Informal Sector
Furthermore, Rizki, Suryadarma, & Suryahadi (2020) used dual economic theory in their research on informal workers in Indonesia in the 1996-2014 period. The dual economy theory argues that the informal and formal sectors co-exist, and are fundamentally different. They produce different products, with different labor, capital, and technological inputs that automatically have different productivity levels, and also pay different levels of wages and serve different consumers. This theory assumes that changes in registration costs will have no impact on the size of the informal sector in the dual economy model. Only economic growth could solve this issue because it will reduce the size of the informal sector while encouraging the formation and expansion of formal firms (Rafael La Porta & Andrei Shleifer, 2014).
Based on Rizki et al. research, Indonesia with its large informal sector in which 57 percent of the 125 million working population are informal workers (50% in the non-agriculture sectors since 2000), the transition from informal to formal jobs is very gradual and can be rapidly overturned by an economic crisis. Although, indeed, between 1996 and 2014, they found evidence that the informal sector seemed to shrink along with economic growth, however, it took a very long time. The results from the first job trend examination show individuals whose first job was as a low-tier informal (LTI) worker, almost half remained in that position through the next 8 to 19 years, and another 45 percent became low-tier formal (LTF) workers for at least one year. Their findings emphasize that the dual economy is divided between low-tier and high-tier employment, rather than informal and formal employment. Even if they shift, they are still at a low-level of employment. However, they have a relatively good chance of switching to LTF work because of the earnings premium that LTI could gain is large and statistically significant (42%). Hence, the research recommends, instead of creating policies that try to encourage low-level informal sector workers to become high-tier informal sector workers – as most policymakers in developing countries desire, the government should be advised to create jobs, even if low-tier ones, that LTI can apply for.
Another research from William, Horodnic, & Windebank (2017) on the dual informal labor market with a case study in the European Union. They see the informal economy both as the ‘exclusion’ and ‘out’, and as internal dualism of it. The evaluation was carried out on a dual informal labor market composed of an exit-driven ‘upper tier’ and exclusion-driven ‘lower tier’ of informal workers. Their analysis resulted in the finding that 24% of participants did so for pure exclusion reasons, 45% for pure exit reasons, and 31% for a mixture of both exclusion and exit rationales. So, it is not purely for exit or exclusion rationales, instead, there is an internal dualism of the informal sector, with some involved in the informal sector being exit, others exclusion, and yet others driven by a mixture of both motives. However, the weight given to exit and exclusion is not uniform across the European Union. Exclusion is more common in Southern Europe and East-Central Europe but less in Nordic nations and Western Europe. Based on their analysis, the exclusion-driven ‘lower tier’ was identified as more likely to be populated by the unemployed and those living in East-Central Europe, and the exit-driven ‘upper tier’ by those with fewer financial difficulties and who live in the Nordic countries. In sum, the informal sector is not purely a necessity-driven realm for excluded populations or purely a result of a desire to exit a burdensome and over-regulated formal sector, it is a mixture of both exclusion and exit rationales.
In addition to examining the phenomenon of the high percentage of informal employment in developing countries through the perspective of economic literature, the author will also look at it from an institutional perspective. Williams & Harodnic (2015), through the lens of institutional theory, reveal that there is a strong relationship between tax morale and participation in the informal economy. The lower the level of tax morale, the higher the level of participation in the informal economy. They mention that not only formal institutions (codified laws & regulations) – government morality – define institutional strength (non-compliance; enforcement) but also informal institutions (societal morality) such as norms, values, and principles. So, in the case of the informal economy, they argue that there is an asymmetry between government morality and societal morality, thereby resulting in a large percentage of the informal economy. The finding (case: the UK population) is people who participate in the informal economy have significantly lower tax morale than those in formal ones.
Indonesia’s Informal Employment
Based on the literature reviews and theories above, the author observes that in the Indonesian case, the exclusion theory is not really relevant (directly) as a reason for the high percentage of the informal sector, especially since the period 2018-after the pandemic COVID-19 until now. During that period, the government amended and passed regulations that ease and facilitate access for MSMEs and workers to enter the formal economy. For instance, the central government has also reduced registration fees (Directorate General of Intellectual Property, Trademark) and business taxes (1% to 0.5%) (Directorate General of Taxes) which have been implemented since 2018, but participation in the informal economy is still large. There are still many informal economy actors who are reluctant to transform into the formal sector. They still assume that the procedure for formalizing (registration) their business is too complicated – and expensive, although the government has reduced and simplified registration. Even the registration of the Taxpayer Identification Number (Nomor Pokok Wajib Pajak/NPWP) – as a requirement for access to capital loans at the Bank, paying taxes, and reporting the Annual Tax Return (Surat Pemberitahuan Tahunan/SPT) can be done at the tax office or through the online site at pajak.go.id which incidentally makes it easier for the community (theoretically). On the other hand, the formation of the Job Creation Law No. 11/2020 (widely known as the “Omnibus Law”) should also support informal workers and MSMEs to shift, but this is not the case.
The high informal sector in Indonesia is more relevant viewed through a rational exit lens in which MSMEs (and workers) choose to be informal because the costs of formality are greater than its benefits. They assume that formalizing their enterprises (mostly small one) are costly and not worth the benefits they get. They have to pay business taxes (Article 2 (5) Law No. 36/2008 on Income Tax; Government Regulation (PP) No. 23/2018 on Income Tax) and have to deal with regulations related to employment (the Job Creation Law No. 11/2020), product certification, and they have to pay business taxes (Article 2 (5) Law No. 36/2008 on Income Tax; Government Regulation (PP) No. 23/2018 on Income Tax) and have to deal with regulations related to employment (the Job Creation Law No. 11/2020) and product certification, and procedures they find complicated and time-consuming to perform. Most of the MSMEs in Indonesia are small – and mostly run by the lower middle class. Lower middle-class informal actors prefer to remain in the informal sector because they enjoy benefits such as not having to pay taxes – but enjoy tax advantages, wage rates that are not limited by labor regulations, not spending time with registration and administration processes that they consider complicated, and other advantages of not following the rules.
So, the author sees this as more of a human capital and societal morality issue. Small businesses and workers in the informal sector are constrained to meet standards in the formal sector due to their low capacities, such as inadequate skills, low education, and lack of knowledge about technology-digitization, which indeed affects their mentality and performance (productivity, efficiency, marketing, management). This fact is in line with the dual economy theory of informality. Furthermore, from an institutional perspective, the informal sector is a matter of enforcement and societal resistance which requires changing the values and beliefs of the population by trying to harmonize regulations and soft policies, so that trust, self-regulation, and high commitment can grow. Hence, in its implementation, the government must have clear indicators for MSME development. MSME development programs must be synergized so that they do not run separately in each ministry/institution. It is necessary to map and differentiate in handling problems based on the size of MSMEs, worker skills, and class so that empowerment is carried out on target. In conclusion, besides the significance of the institution, meaningful enforcement effort and capacity from above and societal cooperation from below, are very important indicators to create a strong institution. Lack of enforcement capacity relative to societal resistance becomes one of the causes of the high percentage of the Indonesian informal economy. It is also important to pay attention to increasing skills in line with the needs of the labor market. It seems that what is important is no longer whether they become informal (which always has a negative connotation) or formal (good one), but how to empower those at the middle and lower levels so that their capacity and morale support economic growth and prosperity economically and socially.
CBDC vs Cryptocurrency: The Future of Global Financial Order
In the rapidly evolving digital era, the global financial landscape is undergoing profound transformation. At the heart of the debate on the future of digital currency, two concepts dominate the discussion: Central Bank Digital Currency (CBDC) and cryptocurrency. While both offer distinct visions for the future of global finance, there are strong indications that CBDCs hold greater potential to be adopted as a global standard.
A study by the Atlantic Council, a US-based think tank, reveals that 130 countries, representing 98% of the global economy, are currently exploring digital versions of their currencies. Nearly half of these are in advanced stages of development, testing, or launch. All G20 nations, except Argentina, are in these advanced stages. Eleven countries, including some in the Caribbean and Nigeria, have launched their CBDCs. Meanwhile, China has tested its CBDC with 260 million people across 200 different scenarios. However, despite the global push for CBDCs, countries like Nigeria have seen disappointing adoption, while Senegal and Ecuador have halted their developments. Here are some fundamental reasons why CBDCs hold more promise than Cryptocurrencies in setting global financial standards:
1. Authority and Regulation
One of the primary advantages of CBDCs is the oversight and regulation by central banks. With a central authority controlling its circulation and use, CBDCs offer a higher level of trust and security for users and other stakeholders. CBDCs, supervised by central banks, are deemed safer due to a centralized authority ensuring consistent policy and regulation application. The ability to track and monitor transactions to prevent illegal activities, value stability, advanced security infrastructure, legal protection, and monetary control by central banks enhance user trust and security. Moreover, with central bank backing, CBDCs have backup and recovery mechanisms ensuring the digital currency’s integrity and availability.
2. Stability and Sustainability
Cryptocurrencies often face high price volatility, hindering their acceptance as a stable medium of exchange. In contrast, CBDCs, backed by central banks, are expected to offer more consistent value stability. Cryptocurrency price volatility is often driven by speculation, low liquidity, news and regulatory responses, and market immaturity. The nascent crypto market, dominated by retail investors, tends to move based on emotions like fear or greed rather than fundamental analysis. On the other hand, CBDCs, regulated by central banks, are designed for stability, expected to provide more consistent value stability than decentralized cryptocurrencies.
3. Financial System Integration
CBDCs, issued and overseen by central banks, offer easier integration into existing financial infrastructure. With full backing from central banks and existing legal and regulatory frameworks, CBDCs can seamlessly integrate into traditional banking and financial systems, facilitating cross-border transactions and exchanges with traditional currencies. For instance, Swift, a financial messaging service provider, is focusing on CBDC interoperability. They’ve initiated beta testing with several central banks and over 30 financial institutions to ensure new digital currencies operate smoothly alongside current fiat currencies. This aim seeks to address potential global fragmentation in CBDC development.
In contrast, cryptocurrencies, with their decentralized nature, might face challenges integrating with existing financial infrastructure due to the absence of a central authority and regulatory challenges, as well as acceptance by financial institutions.
4. Global Acceptance
As an official currency issued by central banks, CBDCs have the potential for widespread acceptance among nations, becoming an integral part of the global financial order. CBDCs, being official currencies issued by central banks, enjoy the trust and credibility of a nation’s monetary authority, facilitating their acceptance among the public. For instance, China’s Digital Yuan, backed by the People’s Bank of China, has seen extensive domestic acceptance. Moreover, CBDCs are designed to integrate with existing payment systems, as seen with the Sand Dollar project in the Bahamas that enables transactions via smartphones. On an international level, CBDCs can facilitate cross-border monetary cooperation, with countries like ASEAN members considering the interoperability of their CBDCs to ease trade and investment.
5. Transparency and Accountability
The ability to track CBDC transactions provides governments with an effective tool to enhance financial oversight and tax compliance. The transparency offered by CBDCs facilitates the identification of potentially unreported transactions and the detection of suspicious transaction patterns related to money laundering or terrorist financing. Additionally, with real-time monitoring, governments can promptly detect and respond to illegal activities, such as fraud, ensuring the integrity and security of their financial systems remain intact.
6. Promoting Financial Inclusion
CBDCs can play a pivotal role in promoting financial inclusion, providing access to financial services for those previously marginalized from traditional banking systems. CBDCs hold immense potential to boost financial inclusion, especially for those marginalized from traditional banking systems. With easy access via mobile devices and low transaction costs, CBDCs make financial services more accessible, especially in rural or remote areas.
Furthermore, the ease of account opening and cross-border transactions at more efficient costs supports migrant workers and those previously challenged by conventional banking services. For example, the Sand Dollar project in the Bahamas has showcased how CBDCs can expand access to financial services across the islands, allowing residents on remote islands to transact using just a mobile phone. Such initiatives demonstrate how CBDCs can be a crucial tool in promoting financial inclusion globally.
7. Monetary Policy Control
With CBDCs, central banks have an additional tool to implement monetary policy, allowing for more timely and effective interventions in the face of economic crises. CBDCs grant central banks enhanced capabilities to implement monetary policies. With better liquidity control and the ability to apply negative interest rates, central banks can respond more quickly and accurately to economic condition shifts.
Moreover, CBDCs allow for faster monetary policy transmission, such as direct stimulus provision to public accounts, and provide access to real-time transaction data. This capability is crucial as it allows for quicker responses to potential crises, maintaining economic and price stability. Additionally, swift and accurate actions from central banks in crisis situations can boost public trust in financial institutions and the government. Thus, CBDCs can be a vital tool in a central bank’s monetary policy toolkit, reinforcing their role in safeguarding a nation’s economic well-being.
While cryptocurrencies offer benefits like decentralization and privacy, the lack of consistent regulation and high volatility make them less ideal as a global financial standard. On the other hand, CBDCs, with the backing and regulation of central banks, promise a new era in a more stable, transparent, and inclusive global financial landscape.
In the context of modern diplomacy, the acceptance of CBDCs as a global standard can facilitate cross-border economic cooperation, strengthen bilateral and multilateral relationships, and advance sustainable development agendas. As a step towards a more integrated and harmonious future, CBDCs might be the key to transforming the global financial order.
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