Economy in the New Normal
The COVID-19 pandemic has many stories about death, poverty and tears. The Indonesian economy has also been affected by it.
The COVID-19 pandemic has many stories about death, poverty and tears. The Indonesian economy has also been affected by it.
Economic growth fell sharply from 4.97 percent in the fourth quarter of 2019 to 2.97 percent in the first quarter of 2020. In fact, from January to February, the coronavirus did not have a significant impact on our economy. The government announced the first COVID-19 case in Indonesia in early March 2020. This means that the impact of the epidemic, from the domestic side, should only hit our economy in March. If economic growth in the first quarter fell so sharply, it means that the economic situation in March was so bad that it pulled down economic growth in the first quarter.
Of course not everything is dark. Sales volume for online health services, pharmaceuticals or supermarkets increased compared to the pre-COVID-19 period. Food and beverage consumption was also stable. But I suspect the economic contraction will continue in the second quarter of 2020. Unlike the previous economic crisis, the current economic crisis was triggered by an outbreak of disease which then hit production (supply shock) and also purchasing power (demand shock). Making the situation more difficult to overcome are regional quarantine policies and social restrictions countries have implemented. Such policy has an impact on the economy.
New normal and the economy
We know, by definition, the market is a place for the exchange of goods and services, both physically and virtually. Social restrictions do not permit physical meetings. In a market of virtual activities, both production and consumption will be hit. We do not know how long this pandemic will last. Do we have to let economic activities continue to be disrupted? To counter this, several countries are beginning to prepare for an economic re-opening.
Of course, after the pandemic subsides, strict health protocol will be implemented. People call it a new normal. Of course we must be very careful. Health protocols can be prepared on paper, but implementation is another matter. Who will monitor health protocols? It is impossible for us to deploy all security forces just to monitor this. Can the necessary conditions be met? If not, the risk of a second wave is there.
Read also: New Normal? This is Really Normal
That is why it may seem that there is a conflict between economic and health priorities. I don\'t see it that way. The economy will only be able to recover if the outbreak is resolved. Epidemiologists consider it possible to reduce the risk of transmission if we stay at home. Its implication is that if economic activities that require physical presence cannot work, people lose their income. Therefore, the state must provide social protection in the form of direct cash assistance (BLT), the Family Hope Program (PKH), and also support for the business world.
The COVID-19 situation has taught me to be humble, to say when I don\'t know.
People must get compensation in order to stay at home. Therefore, economic policies for social protection and assistance of the business community are inseparable from efforts to deal with a pandemic. Of course this cannot happen forever. Then, when should we apply the new normal? Are we ready for it? I don’t have a proper answer. The COVID-19 situation has taught me to be humble, to say when I don\'t know. This article will only try to look at the Indonesian economy if the new normal is applied.
The Economist magazine a few weeks ago published an interesting article about a comparison between Denmark, which implemented a strict lockdown policy, and Sweden, which did not apply a lockdown. Interestingly, there is a similar pattern: people in both countries tended to stay at home and spend less.
I suspect Swedes and Danes are able to stay at home because social security allows for that. In Malaysia, the re-opening process is also not easy and requires time. They argued that, if a business is serving 50 people and one person is affected by COVID-19, then everyone will be quarantined again. Then, the business will be closed. Therefore, if there is a choice, it is better to wait until everything is safe. In China, data shows subway users are returning to work on weekdays, but not weekends. That means that people do leave the house, but to work, not for pleasure. It takes a long time to get rid of trauma, especially when a vaccine has not been found. Cases in Sweden, Malaysia and China show that reopening is not as easy as we imagine.
Conversely, those who come from lower-middle income groups, because they do not have enough savings, have no choice but to return to work.
How is Indonesia? Will the economy soon recover with the new normal? What policies need to be prepared? Several things must be taken into consideration. First, people\'s decision to return to work will depend on how big the reservation wage is (what the minimum income a worker is willing to accept). For those who have savings or non-labor income (there is economic support), with the luxury of choosing to stay at home. Conversely, those who come from lower-middle income groups, because they do not have enough savings, have no choice but to return to work.
Therefore, it can be expected that activities in traditional markets or lower-middle class markets will return to normal faster. Conversely, the upper-middle class, because they still have the choice to stay at home or shop online, may still delay physical activities. The same thing might happen with school. If parents still have the choice of allowing their children to learn from home, resistance to returning to school will be quite high.
Read also: New Normal In Manufacturing Industry
Second, it could be that an office or factory requires people to return to work. Production activities will indeed resume, but the problem that will arise is, will there be a demand? This is what happened in China after the re-opening: production increased, but demand was still very weak. A study from Lin and Meissner (2020) in the National Bureau of Economic Research (NBER) shows that unemployment remains high in several US states that did not apply a lockdown. Why? Because the opening and recovery of the economy was not evenly carried out in all places.
In the case of China, the global economy is still very weak, so consequently the demand for Chinese products is still very low. In Lin and Meissner\'s study, even if a state does not impose a lockdown, the demand for its products comes from other states, or from other economically weak countries. This interdependence affects whether economic recovery will happen soon. In the case of Indonesia, I can imagine, exports will still be hindered as long as global economic activities have not fully returned. On the other hand, domestic purchasing power would be due to people losing income.
Third, with the condition of weak demand, policies with the aim of encouraging production will not be effective, including monetary policy to reduce interest. Decline in interest rates does not encourage new investment. It only helps reduce the interest burden on the business world. Data shows that the loan-to-deposit ratio decreases due to falling demand for credit. It makes sense to see that the demand for goods and services is weak, because why should the business world ask for credit and expand production? My calculation according to Fitrania and Zahro (2016) shows that, for the case of Indonesia, an increase in consumption will encourage investment one quarter later. But on the contrary, increased investment does not increase consumption significantly. So, in order to move the economy in the short term, consumption should be increased.
Stimulus sequence
Fourth, what can be done? The stimulus sequence must start with fiscal matters to start driving demand. Don\'t be mistaken, the fiscal burden will not decrease due to reopening. Purchasing power, especially for the lower-middle class, must be encouraged. I once wrote in this newspaper with my colleagues, Rema Hanna from Harvard University and Benjamin Olken from MIT, about the need to expand BLT for the lower-middle class or aspiring middle class. The reopening of the economy requires the support of social assistance and cash-intensive programs to drive demand. After demand is created, Bank Indonesia would follow suit with its monetary expansion.
Read also: Enforcing New Normal
Fifth, two things to note carefully are social issues and income inequality issues. The new normal will not lead us to a pre-COVID-19 life. As long as a vaccine is not found, the economy will not be 100 percent fully operational. Therefore, there will be sectors that will be affected. China has shown that, for the time being, people just go out to work, not have fun. As a result, economic recovery in the entertainment industry or hotel and tourism may be slower. Moreover, to reduce the risk of a pandemic, factories might choose to use less labor than machines. As a result, capital compensation will rise faster than wages.
A lockdown might be more acceptable to the upper-middle class but social protection for the lower-middle class is not available.
On the other hand, we know that lower-middle class workers who do not have the choice to stay at home – because they do not have savings – will take risks to work again. A lockdown might be more acceptable to the upper-middle class but social protection for the lower-middle class is not available. Therefore, the issue of income inequality and social welfare of the lower-middle class must be taken into consideration seriously. With all these notes, the possibility of rapid economic recovery (V curve shape) may be relatively small. Economic recovery may be slower (U curve shape).
In front of us there will be more questions than answers. The outbreak has not yet been fully resolved, but the transmission curve in many countries has started to level off. Even though there is anxiety and nervousness, people are having discussions about the new normal. We must be prepared. We must maintain a rhythm so as not to run out of stamina. We need to be wise and courageous to choose between difficult choices. "In the depth of winter, I finally know that in me there is an invincible summer," wrote Albert Camus.
Muhamad Chatib Basri, Lecturer at the School of Economics and Business, University of Indonesia