Recession and New Civilization
Hyman Minsky, the long-forgotten thinker of crisis, stated bluntly: A recession (crisis) in the capitalist economic system is solely due to excessive speculative behavior.
Hyman Minsky, the long-forgotten thinker of crisis, stated bluntly: A recession (crisis) in the capitalist economic system is solely due to excessive speculative behavior.
That is the essence of the theory of financial instability, which is considered a valid explanation for the 2008-2009 financial crisis. What is the relevance of Minsky\'s thinking in the current recession, which is caused by the COVID-19 pandemic?
In June, the Business Cycle Data Collection Committee as part of the National Bureau of Economic Research (NBER) announced that the United States economy has officially entered a recession(Reuters, 8/6/2020). The committee said the peak of the US economic cycle took place in February, ending one of the longest expansion period of 128 months. After that, the US economy entered a phase of recession due to COVID-19.
Also read : Recession and Economic Sustainability
Recession is a natural phenomenon that affects the economy, characterized by a contraction of economic activity for several months after the expansion phase. Judging from the dynamics of the problem, the economic recession that has befallen the world lately is different because it was triggered by the outbreak of a disease.
That is why the International Monetary Fund (IMF) calls it "a crisis like no other". Is it true that the current recession was caused solely by the pandemic without any internal (endogenous) factors in each country/region? This understanding is important for reconstructing the global economy in the future. What is the economic map of the next 10 years and where will we be in that map of change? What should we prepare today?
”Crisis like no other”
The June edition of the quarterly IMF report is titled “A Crisis Like No Other, An Uncertain Recovery”. In this report, the global growth projection was lowered from minus 3 percent in the previous prediction in April to minus 4.9 percent. When compared to the 2019 global growth of 2.9 percent, there was a 7.8 percent contraction with notes, but 2020 growth may still be revised down again.
In this report, Indonesia is projected to grow minus 0.3 percent this year. Developed countries group is estimated to grow minus 8 percent and developing countries group minus 3 percent. The only big country that is projected to grow positively is China, by 1 percent. Indonesia, which in the first quarter of 2020 still grew 2.97 percent, is estimated to have negative growth in the second and third quarters. Thus, like almost all world economies, it will experience a recession.
Also read : New Normal of the Economy
Technically, a recession is a situation where the economy experiences negative growth for more than three months or two consecutive quarters.
Even though it is in a recession quarry, Indonesia still faces some good news. First, the recession pressure is relatively mild compared to many other countries in the world. Second, as part of a group of developing countries, our economy is expected to experience the fastest recovery after China.
Meanwhile, the group of developed countries, besides experiencing great pressure, are also expected to take the longest to recover. Some may not even be able to rise again. According to IMF calculations, Italy and Spain will be the most heavily affected countries with an economic contraction of 12.8 percent this year. They will be followed by France with minus 12.5 percent growth, the United Kingdom minus 10.2 percent, the US minus 8 percent and Germany minus 7 percent.
The Organization for Economic Cooperation and Development (OECD) issued a global projection of 2020 in its OECD Economic Outlook last June titled “The World Economy on a Tightrope”. The global economy is in a tense situation, said the institution, whose membership comprises 37 developed countries. This report made the projection based on two scenarios, namely a single-hit scenario and a double-hit scenario. In the first scenario, the global economy will contract 6 percent, but if the virus attacks twice, the global economy will contract by 7.6 percent. If there is a second attack of the coronavirus, France, Italy and the United Kingdom will be most affected with a projected growth of minus 14 percent in 2020.
Also read : Printing Money During Pandemic
The report also projected fiscal pressure due to the coronavirus attack, even with one wave. If they experience a second wave of the disease, the developed countries group (OECD) will face additional government debt of around 28 percent of gross domestic product as a result of the swelling cost of handling the crisis. Spain will be the country with the highest additional debt of 34 percent, while Japan, the US and Italy will experience a surge in government debt by 32 percent.
Why will developed countries become the worst-hit countries with high costs of saving the economy? This situation cannot be separated from the 2008-2009 global financial crisis, where the epicenter of the problem is in developed countries. Before the COVID-19 pandemic, developed countries were among the most vulnerable due to heavy fiscal pressure. The COVID-19 pandemic emerged when they were still experiencing anemic recovery. Facing this coronavirus, they tumbled the deepest, taking the longest to recover and with the most highest cost.
At this point Minsky was right: Developed countries are unable to deal with the recession this time because their financial behavior has long been very excessive. Meanwhile, developing countries like Indonesia are still relatively prudent, so they are better equipped to face a pandemic. COVID-19 will determine who will survive in this difficult situation and who will be thrown out of civilization.
Also read : New Normal of the Economy
Disruption of civilization
The COVID-19 pandemic will be a sign of a shift in world civilization. Economic recovery will create a new constellation in the global economy. Not only will it produce a map of new growth, but furthermore, it will bring us a map of a new civilization.
For the last 12 years, the world has experienced four major disruptions. First, the 2008-2009 global financial crisis, which in the initial phase caused the decoupling of growth maps between developed and developing countries (especially China). The next phase was colored by the synchronization of economic maps, where the striking difference in economic performance between developed and developing country groups subsides.
Second, the global financial crisis has triggered a massive adoption of technology. At the end of 2008, a white book called Bitcoin: A Peer-to-Peer Electronic Cash System was published, was written by a person claiming to be Satoshi Nakamoto. This short article is a manifesto of a peer-to-peer financial system that negates the existence of third parties. Since the global financial crisis occurred, which was marked by the destruction of the symbol of America’s modern financial system, the level of public confidence in financial institutions as intermediary institutions plummeted. Individuals tend to prefer direct transactions to avoid intermediary institutions. That was the beginning of the emergence of digital currencies, like Bitcoin.
Also read : Pandemic, Recession, and Mitigation
The existence of Bitcon is still controversial. However, the technology used by Bitcoin, namely blockchain, is recognized as an important discovery that is believed to change many business models, not only economically but also politically and socially. Furthermore, this technological innovation marks the rise of Industry 4.0, which is a combination of digital, physical and biological factors.
The second revolution after the global financial crisis is likely to be one of the important pillars in the future. The pandemic has made technology adoption occur intensively in almost all lines of life. It was previously never imagined that we could work at home in full for months or go to school online for one full semester without anyone questioning it. COVID-19 has been a real trigger for technological disruption.
Third, political disruption has been marked by the rise of ultranationalist leaders, such as President Donald Trump in the US, Prime Minister Boris Johnson in England and President Bolsonaro in Brazil. The global financial crisis has triggered the rise of politically oriented, protective and anti-globalization leaders. The US decision to withdraw from the World Health Organization is one of the latest phenomena of the anti-globalization political stance that does not recognize the existence of multilateral institutions.
Also read : Health and Economy under One Control
A new map of civilization
The COVID-19 pandemic will likely not discourage the protective behavior of nations and there is even a tendency to the contrary, becoming more intensive. The July 18 edition of The Economist takes the title “Trade Without trust: How the West Should Do Business With China” covers the UK\'s ban on Huawei\'s 5G network. Britain as a US ally follows Trump\'s policy line to eliminate Chinese business activities in the world market. This dispute will continue, even when Trump is no longer president.
As long as this trade war and protective behavior is identical to Trump, it does not mean that when Trump is no longer on the world political stage, the situation will immediately change. In other words, the trade war and protective behavior have become a new landscape for the global economy that will continue in the future.
Civilization is undergoing a transformative phase, which was triggered by various disruptions that are connected to the COVID-19 pandemic. The World Economic Forum chooses The Great Reset as the theme of the annual summit in Davos, January 2021. The COVID-19 momentum has rearranged our way of life in various aspects, ranging from health and the environment, to new business models in the future. This initiative needs to be welcomed because changes do not only deal with economic maps but also civilization.
Also read : US-China Tension
There are two striking symptoms of civilization as a result of the COVID-19 pandemic, namely the adoption of increasingly intensive technology and solidarity among citizens that will increase. Both will be the foundation of a new civilization that is triggered by the presence of the coronavirus pandemic. The question is, where will Indonesia be in the new civilization or this new era?
Although these days, our concentration is still on crisis mitigation, both in terms of health and economics, this question needs to be pondered. First, the economy of the Asian region is likely to be the most promising in the next 10 years. Designing a recovery in which the Asian region as the main arena is an important agenda. Second, as the group of countries with the fastest recovery after China, we need to define which sectors will develop and be dominant. The recovery plan must consider the new supply chains that will emerge in the future.
Even though the economy will grow negatively or enter a recession in the second and third quarters, there is no need to be discouraged. Our economic resilience is good, both with debt ratios and the magnitude of the fiscal deficit being relatively low compared to developed countries. There are several main targets that must be maintained. First, to ensure that ultranational politics does not develop in the sociopolitical arena of the country. In other words, we can get out of the big trend that is happening to many countries, especially some developed countries. Second, being able to utilize information technology as a modality to build an economy in the era of adaptation to new habits. Third, accelerating solidarity among citizens as the main characteristic of the new civilization in the COVID-19 era.
Therefore, the recession will become an opportunity for us to improve our bargaining position in the global economic and political chain. The way we handle health and current (economic) welfare crises may decide whether we will rise up as a winning nation in the new civilization or just as a loser.
A Prasetyantoko, Rector of Atma Jaya Catholic University.