Absorbing the Cost of Recession

KOMPAS/RADITYA HELABUMI

A sales promotion is installed in the glass of an outlet at Central Park Mall, West Jakarta, Sunday (4/10/2020). During a pandemic, visitors and turnover have decreased. Retailers are also threatened to increase the number of employees laid off and the possibility of closing their business premises.

Three major economic crises have hit Indonesia over the last two decades, or 23 years to be exact. First was the 1997-1998 crisis that originated in a foreign exchange rate slump. The real sector collapsed, the banking system tumbled, the stock market crashed, economic growth dived and inflation was rampant. The economy was gloomy.

Second, after exhausting efforts to restore the economy, it was again shaken in 2008, albeit at a lower intensity. The situation was dim as the US faced cases of subprime mortgage and became the source of the downtrend in the global economy. Oil prices skyrocketed, as did food prices. In 2008, inflation climbed (11 percent), economic growth promptly declined in 2009 and the fiscal deficit swelled.

Also read: Pushing Back Inflation

The third is the present economic crisis and recession triggered by the Covid-19 pandemic. Human interaction is restricted (confined) to curb virus transmission. This time, the recession has simultaneously paralyzed all countries and has thus turned into a “global curse”. The economy is on its belly.

Crisis therapy

The 1997-1998 financial crisis stemmed from economic inefficiency due to longstanding rent seeking. Monopoly was the culture of the manufacturing sector, so economic competitiveness was not developed. Policy concessions were exchanged behind closed doors so that only economic players who had intimate ties with power were easily able to access various facilities. Thereafter, the exchange rate was fixed too high while the current account balance kept suffering deficits.

Economic players discerned this easily, so speculators only waited for the right moment to deliver their blows. The government and the central bank responded to the crisis with various policies, two of which asked for aid from the International Monetary Fund (IMF) and designed the Bank Indonesia Liquidity Support (BLBI). Bank Indonesia also closed 16 banks on the IMF’s recommendations, causing a crisis of public confidence in the banking system. We understand the subplot of the BLBI: the aid was misappropriated and became a legal matter, the aftermath of which still isn’t over.

Also read: The Pandemic and Institutional Investment

From mid-2008 to 2009, all countries received a warning from a vital issue: food and energy. The two commodity sectors are pillars of life. Food supports the body and health, while energy keeps the economy in motion. The prices of the two commodities soared and created a disaster for countries with low food and energy independence, including Indonesia. Purchasing power decreased as the price of imported foods increased, and fiscal capacity was overburdened with energy (oil) subsidies.

Kompas/Hendra A Setyawan

Visitors leave a shopping center in the Bojongsari area, Depok, West Java, which will be closed at 18.00 WIB, on Monday (31/8/2020). Depok residents are prohibited from doing activities outside the home after 8:00 p.m.

Besides which, the subprime mortgage issue in the US sparked a global crisis that weakened the domestic economy. The Bank Century bailout case emerged as an effect of the crisis, which had some similarities with the BLBI, ending up as a criminal case. The government issued fiscal stimulus measures to buffer the crisis. The economy started to recover, but the range of high economic growth (6 percent) has been beyond reach since then. Growth declined to hover at around 5 percent until 2019.

At the end of 2019, the world was ready to welcome a new decade, seeing brighter economic prospects for 2020. Multilateral institutions launched projections for Spring 2020, as did the Indonesian government. Economic growth in 2020 was projected to reach 5.3 percent, higher (just slightly) than in 2019. However, Covid-19 that emerged in Wuhan, China, early in the year dashed all expectations, and even more so in Indonesia since it announced its first confirmed coronavirus cases on 2 March 2020.

Also read: Deflation Amid Threat of Recession

Since then, the government has applied the policies of social distancing, working from home, the large-scale social restrictions (PSBB) that have incapacitated the economies of Jakarta and other major cities, regular flights have been halted and so on. The number of cases has risen, social life has become dull, and the economy depressed. The government formed the Covid-19 Task Force, followed by the National Economic Recovery (PEN) Task Force. The government issued an economic stimulus package to overcome the simultaneous triple crises in public health, social life and the economy.

Notes on the stimulus package

The stimulus package that the government launched is relatively complete and covers many problematic areas. The amount of the stimulus is not small, and constitutes around 35 percent of the 2020 State Budget (APBN). Moreover, the government continues to expand the stimulus fund as the situation in the field changes, such as by granting subsidies for workers who earn incomes of less than Rp 5 million per month.

Apart from the public health and social issues that have needed to be addressed since the Covid-19 outbreak, here are some essential notes on the design of this stimulus. First, the focus of the economic stimulus can still be narrowed down so that the funds will not become dispersed among many interests with limited usefulness. In general, the stimulus should be designed so it concentrates on specific fiscal targets (purchasing power, poverty, business incentives), as well as banking operations, new trade/logistics methods, and strengthening the manufacturing base.

Also read: Economic Stimulus to Prevent Recession

Second, in its initial phase, the stimulus package should be devoted to programs that increase aggregate demand, rather than be focused on promoting aggregate supply. In a normal economic situation the two work in unison, but when the economy is in trouble, the most reasonable measure is to restore purchasing power first.

Of the almost Rp 700 trillion made ready in the government’s stimulus scheme, only about Rp 172 trillion is in the form of social assistance and directed at enhancing purchasing power. Even this is mostly comprised of the regular budget the government spends each year, such as on the Family of Hope program and staple goods assistance. Aside from these, the programs are designed more for facilitating growth in supply. The problem is that if production is maintained but purchasing power continues to weaken, it is wasted. The cost of recession only grows bigger.

Third, upon thorough scrutiny of the various stimulus programs, some of them have no direct relevance to recovering the economy. The Rp 90.4 trillion compensation for Pertamina and PLN cannot be seen as a stimulus package for Covid-19. This payment is part of the government’s obligation, whether there is a pandemic or not.

Also read: 2021 State Budget Should Accelerate Economic Recovery

The Rp 2.7 trillion subsidy for the B30 biodiesel program is not a stimulus package either, because it has been a government program for the last three years. Furthermore, the subsidies are not enjoyed by oil palm smallholder farmers, but rather by corporations. The Rp 25.2 trillion capital participation program is also an annual government program. The investment bailout fund of Rp 19.6 trillion intended for several state-owned enterprises (Garuda, Perumnas, KAI and others) are not directly related to the pandemic. The above four programs have a combined value of around Rp 138 trillion.

Organizational capacity

The available financial resources are indeed limited, but the government still has a large amount of funds. Other countries are also dealing with limited resources without exception. Aside from this, the urgent consideration is strengthening the PEN Task Force’s organizational capacity to absorb the cost of recession.

The government has formed the task force and the officials in charge of it. In terms of organizational capacity, at least five principles must be observed: vision and strategy, leadership and management, implementation and program impacts, strategic relations, and resources development. Vision and strategy are the anchors of “war”. Although it may be called “economic recovery”, the vision and strategy should be streamlined with the broad outlines of the government’s working program for 2019-2024. This way, economic recovery pursues the government’s major goals at the same time: economic competitiveness, economic transformation and economic democracy.

Leadership and management is the operational backbone of economic recovery. The basic requirement is having authority and being full time. The key positions of the task force must reflect its capabilities and authority. But the biggest problem is that the figures also occupy strategic roles at state institutions that have vital mandates and a heavy workload, so they have limited time and energy. As a solution, ministers should command policy while capable personnel with no formal positions should handle their implementation.

Kompas/Priyombodo

A trader shows the quality of imported soybeans sold at the Sinar Kedele shop in Kebayoran Lama, South Jakarta, Tuesday (5/11/2019).

The operational staff should make sure that each program can be executed (program delivery) and that each target has a measurable benefit for society (the economy). Each program should be viewed not only from active implementation (output), but also its real effect on the economy according to the program’s vision (impact). It should be aware from the outset that the government and the task force have inherent limitations.

The only way to overcome this is to build strategic relationships with a broader range of stakeholders. Regional administrations, colleges, mass organizations, civil society, business associations and research institutes are some groups that should be invited to collaborate. The people can be invited to operate in the major theaters of the “war” so that the burden of the task force is shared collectively. The tail end of this organizational capacity is to develop its resources, which are of course not solely limited to the financial (although this is very important). Once the ties with stakeholders have been established, by default this will be congruent with developing networks for strategic resources.

Also read: Analyzing Recession

The people’s enormous social capital can also be absorbed to drive organizational capacity. In essence, developing economic, social and political resources are the main targets of capacity building.

Paths to recovery

For at least one century, no event has matched this devastating crisis that combines three issues at the same time: public health, social life and the economy. There is a good idea of how to manage the public health and social issues, as such measures have been implemented around the world since January 2020. Although it is not easy to draw up a comprehensive policy framework, there are at least four paths to recovery that can be pursued: fiscal, financial/monetary, trade and manufacturing.

On examining the last six months, the fiscal path should be directed at three goals: maintaining purchasing power, curbing poverty and offering incentives to businesses. The purchasing power of the lower class can be maintained by expanding social assistance and by reducing income tax for the middle class. Poverty can be curbed through various means: direct cash aid, production subsidies and skills training. Business incentives must focus on job creation, or at the very least, preventing layoffs. Micro, small and medium-scale enterprises (MSMEs) are top priority.

For the financial/monetary path, the government has designed several policies/programs like loan subsidies and credit restructuring. Bank Indonesia has eased banking rules, including lowering the minimum for demand deposits. Their implementation should be managed properly, including by monitoring the sectors and players that have been most affected. The issue that has always been a major problem is data.

KOMPAS/TOTOK WIJAYANTO

Traders serve buyers at Pasar PSPT Tebet Timur, Tebet, South Jakarta, on Friday (14/2/2020). This year, the government is targeting food price inflation to fluctuate at around 3-5 percent.

Unless target precision is really observed, such programs are usually oriented to absorption so that players with the greatest access have the chance to be served first. Loan subsidies and restructuring are totally left to the banking system with two caveats: no intervention and simple processing. Everything must be done on the principle of technocracy rather than on politics. Banks should have a new outlook: they should amplify their partiality toward the agriculture and MSME sectors to correct their negligence so far.

Next, the trade path is extremely challenging because curbing the coronavirus necessitates restricting human interaction. To be frank, this challenge should be used as a great opportunity to change the national trade ecosystem. The long supply chain has been held responsible thus far for inefficiency and “victimizing” upstream players (farmers, breeders, fishers and micro/small businesses).

Information technology (the internet, digital marketplaces) should thus become the core platform for trade and should be readied thoroughly. Digitalization is inevitable for MSMEs and primary sector businesses in rural areas. Later, information on the demand and potential of commodities in each region should be provided to upstream players. The government’s facilitation role must also change from physical projects to digital systems. The villages and transmigration, cooperatives and msmes, agriculture, maritime affairs, and trade ministries should spearhead this path towards recovery.

Lastly, the government has made a solid macro plan for the manufacturing path, but it often becomes muddled in terms of its micro action. The villages have the Village Fund program that has developed many economic and physical infrastructures over the last five years. The problem is that their development is not directly related to manufacturing assistance in the agriculture/maritime sectors as appropriate for each village/region. This becomes even more evident on examining the product conversion strategy in the upstream and the economic transformation target (creating value added).

KOMPAS/TOTOK WIJAYANTO

Ahmad Erani Yustika

Economic recovery should later enter this smallest (micro) sphere. If it follows the government’s major agenda of economic democracy, the manufacturing path will fall in line with various strategic programs like RAPS (agrarian reform and social forestry), KUR (microcredit) and the Mekaar (family economy development). In brief, all stakeholders must be involved; do not become obsessed with shouldering everything alone.

Ahmad Erani Yustika, Professor at the Economic and Business School of Brawijaya University; Senior Economist of Indef.