Coronavirus and Economic Resilience

KOMPAS/HENDRA A SETYAWAN

Kompas Humanity Fund Foundation (DKK) members prepare staple food packages to be donated to residents of Gelora subdistrict, Tanah Abang, Central Jakarta, on Thursday (16/4/2020). The aid was handed over from DKK chairman Rusdi Amral to Gelora subdistrict head Nurul Huda, who will distribute it to residents affected by COVID-19. The DKK also gave assistance to residents in Kebon Jeruk subdistrict.

One of the interesting developments in the prevention of COVID-19 is that several countries that have been on lockdown, such as Spain and Italy, are thinking about relaxing physical distancing measures, claiming to have seen a peak or plateau in the number of new positive cases, deaths and those who have recovered.

In Spain, the number of workers in the manufacturing and construction sector, reaching around 300,000, were allowed to return to work starting 13 April. Testing was used as an important tool to find out who can get back to work, who can\'t. Italy hopes to end the lockdown at the end of April. The urge to open the economy mainly arises from representatives of the four industrial regions in northern Italy, the worst place with 45 percent of gross domestic product (GDP) being produced. Meanwhile, across the Atlantic Ocean, in the midst of a pandemic that has not subsided, US President Donald Trump plans to open the economy 1 May, although the feasibility of the time continues to be debated.

The threat of world recession

The International Monetary Fund (IMF) predicts there will be a contraction of minus 3 percent in global growth in 2020. The slowdown in world economic growth is the worst since the Great Depression of the 1930s or even worse. Several industrial countries will experience negative growth: Spain (minus 8 percent), Italy (minus 9.1 percent), United Kingdom (minus 6.5 percent), France (minus 7.2 percent), Japan (minus 5.2 percent) , Germany (minus 7 percent), and the US (minus 5.9 percent).

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Paul Romer, winner of the 2018 Nobel Prize in Economy, in an interview on leading US news TV suggested the need to make a balance between the health problem and economic benefits, while warning the US economy would enter a major depression if at the beginning of May 2020 it remains in a lockdown situation as it is now. Therefore, another way to balance between efforts to cut the virus outbreak chain and those to maintain the badly needed growth momentum must be found so as not to lead the US in the brink of depression with an unemployment rate of 30 percent, given that by mid-March the number of unemployment benefit applications had reached 10 million people.

AFP/DANIEL MUNOZ

People buy food and supplies in a supermarket before quarantine in Bogota, on March 12, 2020. - The Colombian stock market collapsed 9.35% on Thursday, March 12, 2020, due to the Coronavirus panic, reaching its lowest value since 2016.

The various examples above show the dilemma faced by the government in dealing with this outbreak. Initially there was an assumption that with the lockdown, transmission would be stopped and the economy would recover in a relatively short time with the letter V pattern, especially since the world had been hit by the US-China trade war. The problem is that the lockdown that is not planned well and takes place in a very long time will bring damage and even destruction in the supply chain. Many things are unknown about this virus to guess how long this outbreak will happens.The new fact shows the emergence of mutation of the coronavirus into three variants A, B, and C. Another thing is to what the proportion of the population is infected. The limited sampling for testing makes it difficult to estimate the portion parameter of the infected population so that it is still an iceberg phenomenon, which is seen only at its peak. In this case, Romer recommended a wider Covid-19 test and the isolation of the people with COVID-19, while those who are negative are allowed to work.

According to him, in the long run this strategy will be cheaper than the lockdown option and the economy can still run.

Policy convergenceIn another interview, the chairman of the US central bank\'s Minneapolis, Minnesota, regional office, said that the hope for a quick solution was almost impossible due to the many mysteries from this outbreak that must be answered. A blitzkrieg against the pandemic is difficult to materialize as what will happen is a struggle that requires patience through a universal war with all available resources (all-out). It is no longer running a 100-meter sprint, but rather like a marathon that needs strategy and stamina.

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The approach that will be used is like a push-and-pull way to play kites: tighten (the control) when the number of cases increases (flare-up), then relax it again when the economy is almost suffocated, tighten again if the positive cases jump again, then relax again, and so on until the plague passes . This is done because the economy needs space and time to breathe just to survive.

What is interesting is there is a kind of convergence from countries that are not imposing lockdowns, such as Japan and Sweden, with countries such as Spain, Italy, and Austria, which chose total lockdowns. Japan, which has not conducted a lockdown, on 7 April declared a state of health emergency, but remained without lockdown, for seven of the 47 prefectures, including Tokyo and Osaka. The consideration for still not implementing the lockdown is the relationship between one company, one sector, and another in one chain value is increasing in line with the economic progress.

AFP/SAMUEL HABTAB

A staff member of the World Food Programme (WFP) checks boxes that arrived, mostly personal protective equipment (PPE), at Ethiopian Airlines\' cargo facility at the Bole International Airport in Addis Ababa, Ethiopia, on April 14, 2020. - Ethiopia and the United Nations opened a humanitarian transportation hub at the airport in Addis Ababa to move supplies and aid workers across Africa to fight the COVID-19 coronavirus.

This mutual dependence causes the economy to be difficult to recover if a link is disrupted or is sacrificed. This even has the potential to undermine the entire demand-expenditure chain of the people and the supply side, like a domino. The time needed for recovery will be very long, known as the recovery of the letter L. Japan no longer expects fast recovery like the letter V, but more with the motto "it is OK not to be too fast, the important thing is that the action is done", which is known as the recovery pattern of the letter U.

Recovery and supply chain

Indonesia experienced a major economic crisis that began in late 1997 and ended in 1999. In the first quarter of 1998 GDP growth was still positive 1.08 percent, but for the next three quarters successively recorded negative growth so that the average for 1998 was minus 8.19 percent. In 1999, GDP growth in the first two quarters was still double digit negative and only positive again in the third and fourth quarters so that the average for 1999 was minus 4.94 percent. It took five quarters for growth to be positive again with a mixed pattern between U and V.

This happened because despite the deep crisis, the supply chain was relatively well maintained.

This recovery pattern was determined by the two largest sectors in GDP, namely manufacturing and trade. If seen in more detail, only the trade sector showed a rapid recovery in the form of the letter V. Having experienced a growth of minus 28.6 percent, but within two quarters it had again recorded positive growth of 1.1 percent. This happened because despite the deep crisis, the supply chain was relatively well maintained. The retail trade sector had a supply chain dominated by small and micro business entities in the informal sector. These entities had local networks which were practically only slightly affected by the global economy which even enabled to survive (Turner, 2002).

The manufacturing industry had a mixed pattern between U and V with a recovery rate of five quarters. This pattern was determined by the largest branch of industry, namely the food industry which was dominated by MSMEs and had forward links with the trade sector, as well as backward links with the agriculture sector. The food industry needed only three quarters to grow positively again with pattern V. The same pattern occurred in other manufacturing branches, which generally had a U pattern which generally required a longer recovery time. For example, textiles, which required more time, namely four quarters to recover with a pattern mixture of U and V. The long sequence of recovery above followed Maslow\'s hierarchy of needs (1943), starting from basic needs, food, then clothing, and so on.

The manufacturing sector was affected by growth of under 2 percent, for the three consecutive quarter since the first quarter of 2009.

The global financial crisis (GFC) in 2008 had a significant impact on Indonesia even though the negative impact was not like the 1998 crisis. GDP growth fell significantly, but was still in a positive range. The cause was the fact that most of the commodity bonanza effect still carried positive momentum until 2012. Quarterly GDP growth fell from 6.25 percent in quarter III-2008 to below 5 percent in the first two quarters of 2009. Growth only recovered above 5 percent in quarter III-2009. The manufacturing sector was affected by growth of under 2 percent, for the three consecutive quarter since the first quarter of 2009.

The impact of the GFC on the trade sector was more severe. Growth fell from 5.5 percent in quarter IV-2008 to zero percent, even negative for the next two quarters. But then its growth recovered quickly to 4.8 percent in quarter III-2009. Once again the trade sector showed the ability to recover quickly with the letter V the same as in the previous crisis as long as the supply chain and logistics transportation were not disrupted.

AFP/MARIA TAN

Police personnel hold up placards reminding people to stay at home amid concerns of the spread of the COVID-19 coronavirus in Manila on March 31, 2020. - The main Philippine island of Luzon, home to 55 million people which includes the capital Manila, is in the second week of a lockdown to contain the spread of the disease.

Learning from the experience

Indonesia chooses sequences of strengthening the demand and supply side habitat of the community first, then moving towards health emergencies with large-scale social restrictions (PSBB). PSBB at least includes: school and workplace closures; restrictions on religious activities, crowds; restrictions on activities in public places or facilities; and limiting the number and traffic of people using public or private vehicles, but still permitting logistical movements.

As the guardian of the PSBB habitat, to maintain the people\'s purchasing power on the demand side, the government has provided Rp 405 trillion to cope with the impact of Covid-19, including Rp 75 trillion in health funds, Rp 70.1 trillion in tax incentives and Rp 110 trillion in social safety nets, and budget financing support of Rp 150 trillion. The relaxation of MSME loans announced by the Financial Service Authority (OJK) is one example of maintaining the supply chain. Two government scenarios about the impact of Covid-19 on the economy, namely bad with positive growth of 2.3 percent, and very bad with growth of minus 0.4 percent, reflect to what extent the supply chain, especially in the informal sector, both in the trade and manufacturing sectors, can be maintained in a health emergency situation.

In public policy it is very important to know the response and motivation of those who will be affected by the policies in the policy design. That GDP and employment in Indonesia is largely supported by the informal sector is a fact. In the 1998 crisis, when the corporate sector collapsed, they managed stay alive because indeed only by surviving they could continue their livelihoods. This informal sector played a role as a buffer for recovery in the post-crisis period before finally the commodity bonanza lifted Indonesia again. Policy makers must understand that the design of policies must be in accordance with their basic instincts, namely to survive. Without it, the policies will have low credibility.

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

As with any policy, ultimately what is needed is coordination and implementation so that it needs technical and implementation guidance for implementers in the field. Moreover, the credibility of the PSBB is determined by the coordination and cooperation of various related parties, ranging from the central, provincial, to regional governments. Only with this will the termination of the chain of outbreak transmission and the economic recovery happen, at least like the letter U, or a mixture of U and V, not like the pattern L.

Ari Kuncoro, Rector of the University of Indonesia