Recession and Economic Sustainability

KOMPAS/TOTOK WIJAYANTO

A Prasetyantoko

In the midst of so much uncertainty, one thing certain is that the world economy will go into a recession. The World Bank, in the June 2020 edition of its Global Economic Prospects, projected that the Covid-19 pandemic would result in the worst contraction per capita output since 1870 in most countries in the world.

According to World Bank records, there have been 14 major recessions since the 1870s and this year’s recession will be one of the deepest since the Second World War. The global economy contracted by 18 percent during the Great Depression of 1930-1932, and the Second World War resulted in a 15 percent decline in the economy. This year, the World Bank estimates that the global economy will shrink by 5.2 percent while the Indonesian economy will grow zero percent.

The International Monetary Fund (IMF) made a similar projection in its quarterly World Economic Outlook Update, June 2020: A Crisis Like No Other, An Uncertain Recovery, revising its global growth forecast to minus 4.9 percent from minus 3 percent in April. Meanwhile, the estimated economic growth for Indonesia was also revised to minus 0.3 percent from 0.5 percent during the same period. In addition to being deeper, the recession is also expected to last longer until recovery.

All policy tools have been implemented to address the growing risk of recession. It will certainly be not be enough if we rely solely on fiscal policy. A mix of fiscal, monetary, and real sector policies is needed, although this will not necessarily be sufficient. We cannot rely on economic policy alone with a pandemic of this magnitude, because it also requires a thorough evaluation of all stakeholders.

Economic relaxation

The Covid-19 pandemic has caused world economic growth to come to a virtual standstill and to enter a new, abnormal phase. Statistics Indonesia (BPS) has conducted a study using a big data on changes in behavior due to the pandemic.

First is monitoring the movement of people with the help of the Google Mobility Index. In April, following the implementation of the large-scale social restrictions (PSBB) policy in Jakarta, office activities dropped by 73 percent while retail and recreational activities dropped by 70 percent.

Second, the flight data showed that the number of daily domestic flights to Jakarta plunged 67.3 percent in April. Outdoor activities dropped dramatically to cause an improvement in air quality. The Air Quality Index showed that the air quality in the Bogor area improved 44.9 percent, while air quality in Bekasi and Surabaya increased respectively 3.8 percent and 39.2 percent in April.

Also read : New Normal of the Economy

Third, an increase in electronic transactions marked the migration of transactions to online platforms. Transactions at online marketplaces increased 4.8 times in April compared to the records in January. The highest jump was recorded in food and beverage transactions, which increased 10.7 times.

The Covid-19 pandemic has brought good news, namely an improvement in air quality and a surge in online transactions. However, its general impact on the economy has been severe. Economic growth, which reached 2.97 percent in the first quarter, is projected to fall into the negative in the second and third quarters. Technically, if growth is negative in two consecutive quarters, the economy is in a recession. The risk of recession is becoming more apparent. The IMF estimates that the economies of developed countries will contract by an average 8 percent this year, while the economies of developing countries will shrink by 3 percent. The good news is that the economies of developing countries will recover earlier than those of developed countries.

Also read : Enforcing New Normal

SUGIARTOWI ALONE

Clear Blue Sky

No matter how large the challenges of the global economy, developing countries will be in a better position to manage the recession. With proportional and appropriate policies, the recession can be overcome and we will enter another economic phase. In addition to gradually reopening the economic sector with strict health protocols in place, the government is prioritizing the reopening of nine sectors with certain conditions. The nine sectors are mining, oil, manufacturing, construction, plantations, agriculture, fisheries, supply chain and logistics (transportation).

These nine sectors have been chosen because of their large contributions to gross domestic product (GDP) and employment, as well as their close links with other sectors. According to the BPS estimate, the workforce comprised 37.1 million people in February 2020. About 30 percent of the workforce was in the agriculture industry, 20 percent in trade, 25 percent in manufacturing, 5 percent in construction, and 3 percent in transportation.

The resumption of economic activities could cause a spike in the number of people infected with Covid-19. In addition, strong demand cannot be guaranteed because buying power remains weak and many people prefer online transactions.

Also read: New Normal, Its Trace and Message

This is the situation of the new normal that needs evaluating. In the short term, there will be a trade off between relaxation and closure, either voluntarily or because of (regional) government policies.

The most important thing in this phase is to redefine the new normal of the post-pandemic economy. It is very likely that many business sectors will be no longer relevant, because even if they are reopened, they will not continue much longer. Traders may no longer need to have a physical store in a shopping center, as trading through online stores could be more effective. Likewise, food and beverage traders may find it no longer relevant to open a physical outlet that carries high rent.

Also read : Three Phases to Recovery

The initial phase of reopening the economy is an opportunity to conduct thorough evaluation, not only in terms of business processes, but also in terms of the business models for various economic activities. For regulators, this is the best time to offer incentives to industry/business sectors that are environmentally friendly, inclusive and oriented towards sustainability.

The recession can instead become an opportunity to select those economic/business sectors that can contribute to improving air quality and adopting new technologies. The Covid-19 pandemic is an occasion for developing a civilization that can push us to be grounded in the principles of sustainability in how we think and behave.

A. Prasetyantoko Rector, Atma Jaya Catholic University.