The Pandemic and the Debt Burden
The debt problem has always been a public concern and has made the government a target since the New Order era and on up to the present.
President Joko Widodo chaired a virtual limited meeting regarding the Stipulation of the National Economic Recovery Program from the Merdeka Palace, Jakarta, on Wednesday (3/6/2020).
The debt problem has always been a public concern and has made the government a target since the New Order era and on up to the present.
The debt problem resurfaced in line with the soaring potential for increased government debt during the Covid-19 pandemic, an issue that has a tendency to spread to political movements. Differences of opinion conveyed as criticism in the media or through public discussions, even physically through demonstrations, are part of democracy and even show that democracy is progressing. However, any useful discussion must be based on arguments of solid reasoning. Through this short article, the writer intends to contribute to the discourse on the government’s debt burden in referring to what is known as “Japan disease”.
Debt burden from the pandemic
First of all, the most basic issue is that Indonesia has been dealing with the health emergency caused by the new coronavirus, Covid-19, since March 2020. This virus spreads rapidly from person to person and until now it has no vaccine or medicinal treatment, either in our own country or in the international sphere. The government has implemented policies in keeping with the international protocols to prevent transmission and has promoted a new structure of life, the ”new normal”, and other policies to prevent wider transmission.
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By default, these policies have restricted the movement of people, which have had a direct impact on economic activity and ultimately led to a contraction in economic growth, even giving rise to a potential recession. This means that even though it started out as a health crisis, Covid-19 has had a deep impact on the economy. To overcome this, the government adopted a counter-cyclical fiscal policy of adjusting the budget ceiling to fund the Covid-19 mitigation response. The state budget has been adjusted several times through Presidential Decree No. 54/2020, followed by Presidential Decree No. 72/2020. This extra spending, aside from managing the Covid-19 public health crisis, is intended to protect communities from the fallout from Covid-19 and to encourage economic activity.
Increasing expenditures and decreasing revenue will no doubt have an impact on the budget deficit. The budget deficit is projected to increase considerably compared to previous years, which have been maintained below 3 percent of gross domestic product (GDP) under statutory restrictions: 2.49 percent (2016), 2.51 percent (2017), 1.82 percent (2018), 2.20 percent (2019). However, this deficit cap cannot be maintained after the pandemic struck Indonesia. Regulation in lieu of law (Perppu) No. 1/2020 authorizes the government with the flexibility to raise the budget deficit to above 3 percent of GDP, which is projected to reach 6.34 percent this year.
The pressure on the state revenue is reflected in the low revenue from tax collection, which had declined an estimated 14.7 percent in July.
The debt financing policy has been implemented to cover the widening deficit and the funding needs of the national economic recovery (PEN) program. The increase in debt, apart from the funding needed to manage the impacts of the health crisis, is also caused by the decline in state revenue from negative growth in 2020. The pressure on the state revenue is reflected in the low revenue from tax collection, which had declined an estimated 14.7 percent in July.
Looking more closely, the allocation of funds in connection with the Covid-19 response indeed targets the three major challenges in managing this crisis: public health services, social protection for affected communities, and short-term economic recovery efforts. For example, a large portion of the funds have been set aside for micro enterprises, which comprises 12 million businesses, and aims to sustain economic activities at the lowest level. In terms of protecting the most economically vulnerable people, the government has taken the steps that must be taken.
Minister of Finance Sri Mulyani conveyed his greetings after submitting the document on the Macroeconomic Framework and Principles of Fiscal Policy for the 2021 Draft State Budget to the Chairman of the DPR, Puan Maharani, at the DPR plenary session at the Parliament Building Complex, Senayan, Jakarta, on Tuesday (12/5/2020).
Financing the state deficit through debt has been unavoidable not only in Indonesia, but also in nearly all countries of the world. All countries have an interest in protecting the health of their people, including by developing vaccines and drug therapies and protecting their economic condition, because if economic activity stops, the citizens’ suffering will be even greater.
Even though debt is unavoidable, at least two major problems must be considered vital. First is good management. Calculating the additional debt should have taken into account the government\'s ability to pay its debt within a certain time frame by considering the sources of state revenue. Careful calculation is needed to maintain fiscal discipline.
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Second, debt management must be free of manipulation, excess, and other external interests, never mind corruption. Do not give any impression that the debt funds are being used for political interests or certain interest groups. Government debt must be used solely for the purposes of mitigating the health crisis and protecting the most vulnerable groups of society that are most affected by the crisis. The government must also ensure that the wheels of the economy continue to turn to prevent a downward spiral due to weak supply and demand.
In this time of crisis as a result of the pandemic, debt management will be a critical touchstone. Not many options exist: if debt is managed properly, it will be easier for Indonesia to survive the crisis and continue on its progress to becoming an upper middle-income country in the next two to three decades. However, if it does not pass its debt management test, it is very likely that Indonesia will find it difficult to escape from the middle income trap.
We also realize that post-pandemic growth of the Indonesian economy is highly dependent on developments in the world economy. The multifaceted Covid-19 crisis has pushed the global economy into a contraction. This has presented a big puzzle: Will the world economy recover, that is, along a V-shaped trajectory towards positive growth?
China, formerly the engine of world economic growth, is no longer growing as fast as it had been in the previous decade.
Experts are still finding it difficult to answer this question. This is because the world economy was not in a stable condition even before the pandemic. The world market was weakening to hamper economic growth, especially among developing countries that depend on exports and commodity prices. China, formerly the engine of world economic growth, is no longer growing as fast as it had been in the previous decade.
Although projections of global recovery have been made, it may not be as fast as predicted and it is wholly dependent on whether the pandemic is resolved successfully, so that economic activity, in terms of supply and demand, can recover quickly with the adoption of various innovations and technologies.
What if the world economic recovery is not V-shaped, and is L-shaped instead? Answering this question is also difficult, and we can only hope that this scenario does not come to pass. However, some countries have experience with prolonged economic stagnation, like Japan, and hence the moniker "Japan disease" for this kind of economic stagnation.
‘Japan disease’
“Japan disease” was coined by Richard D. Erb, the former deputy managing director of the International Monetary Fund (IMF), who defined the term as ”extended low growth, unheard of levels of debt, disinflationary pressures, a non-stimulative monetary policy, low productivity, and an aging population” (The International Economy, Spring 2020).
Japan\'s Foreign Minister Toshimitsu Motegi addresses counterparts from ASEAN, China and South Korea through a live video conference during the 21st Association of Southeast Asian Nations (ASEAN) Plus Three Foreign Ministers\' Meeting, held online due to the COVID-19 novel coronavirus pandemic, in Hanoi on September 9, 2020.
Japan has been experiencing stagnant growth, along with high lending rates, from 1988 to the present. The country has also been experiencing deflationary pressures with very low interest rates, and the monetary policies undertaken by several regimes have been unable to stimulate accelerated development. Its aging population also has been an obstacle to boosting productivity.
Kishore Mahbubani (ibid) looks at the Japanese experience from a different angle. It is true that after the Covid-19 pandemic many countries, especially low-income, developing countries that are finding it are increasingly difficult to escape the disease of low growth and high debt. However, developed countries (and moderately developed countries like Indonesia, as added by the writer) can turn the “Japan disease” into a “Japan cure”.
In the three decades between 1988 and 2018, the US economy grew 2.6 percent, while Japan grew a mere 1.4 percent.
Mahbubani compared Japan to the United States, and conventional wisdom states that in the last few decades, the US economy has developed relatively well as the Japanese economy faltered and stagnated. In the three decades between 1988 and 2018, the US economy grew 2.6 percent, while Japan grew a mere 1.4 percent. During this period, per capita income in the US increased from US$21,427 to US$62,794, while Japan followed behind the US with per capita growth from US$25,051 to US$39,290.
Then, what has been the condition for the people in these two countries? Who has been enjoying that growth? Although the US economy grew relatively well in that period, a sizeable portion of its population did not enjoy it. The US is the only developed country where the average income of the bottom 50 percent of its population has fallen over the last 30 years. This condition, which Nobel laureate Angus Deaton (ibid) called the "sea of despair", has led to dysfunctional families, social isolation, drug addiction, obesity and a variety of other diseases. All these have resulted in the populist anger and sharp political polarization that is seen today.
On the other hand, Japanese society has been better off in reference to key social welfare data such as life expectancy, infant mortality, workers\' wages, and basic living expenses (food, health, clothing, education). John Rawls (ibid), an expert on US political philosophy, points out that the bottom 10 percent of the Japanese population is better off than that in the US.
Mahbubani concluded that in Japan, social harmony is more important than individual achievements. Despite being burdened by large debts and low growth, the Japanese people value social harmony that emphasizes deep-rooted values like the meaning of life, including beauty, the environment, self-reflection, and sensitivity towards their fellow citizens. The Japanese case shows that using state debt for equitable distribution and public welfare has determined the success of development for the nation as a whole.
DPR members wear masks when attending the DPR plenary meeting at the Parliament Building Complex, Senayan, Jakarta, on Tuesday (12/5/2020).
Of course, nothing in this world is perfect, but some aspects of Mahbubani’s views are not only applicable to Japanese society, but are also reflected in Eastern culture, especially in Asian communities including Indonesia.
What the above writers said are not intended to justify an undesirable condition, namely debt bondage, but to offer the insight that we are not alone. Indonesia\'s debt condition is not as heavy compared to other countries, including our peer countries, or countries with comparable incomes. The most objective way is to look at a comparison of the strength of national economies in terms of GDP. Our budget deficit is 6.3 percent of GDP, which is relatively good compared to India (7.5 percent), the Philippines (7.7 percent), Malaysia (7.7 percent), Thailand (6.4 percent) and Singapore (13.5 percent).
As for the bigger picture, Indonesia\'s annualized debt was 37.3 percent of GDP in the first two quarters of 2020, up from 36.2 percent in 2019. Compare that to the 2019 debt ratios of India (69 percent), Malaysia (56.3 percent), Thailand (42.4 percent), the Philippines (39.3 percent), and Singapore (114.1 percent). This year, these comparative differences will certainly be even greater. We can conclude that our debt condition is better and safer than many countries in the world, including our peer countries.
Ginandjar Kartasasmita
In closing, the writer wants to underline that debt is part of the modern economy. Big and small companies need loans, for both operational activities and investment, and to start, grow, expand, or strengthen their businesses. What is important, as mentioned earlier, is that the debt is within the bounds of our ability to repay and is used properly as necessary, as well as for the general advancement and welfare of society.
Ginandjar Kartasasmita, Former Coordinating Economic Minister/Chairman of the National Development Planning Agency (Bappenas)
