Recession During Pandemic and Economic Recovery
Indonesia suffers first recession two decades after the monetary crisis hit the country in 1998.
A worker cleans at the KCM Cinemas theater in Bekasi, West Java, Thursday, Nov. 5, 2020. Indonesia\'s economy entered its first recession since the Asian financial crisis more than two decades ago as the country struggles to curb the coronavirus pandemic under control.
Indonesia suffers first recession two decades after the monetary crisis hit the country in 1998.
The Indonesian economy shrank 3.49 percent year-on-year in the third quarter, this year following a 5.32 percent contraction in the second quarter. Although not as bad as in many other countries, the Indonesian economy is expected to suffer contraction of about 2 percent this year.
In 1998 the economy contracted by 13.1 percent due to the financial crisis and also social unrest caused by drastic political changes. The 2020 recession occurred due to the Covid-19 pandemic which has brought almost all economic activities to virtual halt. However, unlike during the 1998 monetary crisis, at present, the financial sector is still doing well, although the lending growth remains sluggish. In both recessions, household spending contracted, albeit, due to different reasons.
Recovery trajectory
During the economic recovery, which lasted five years following the 1998 monetary crisis , the average economic growth was around 4 percent, and then increased to about 5 percent. In 2010-2013, the economy grew by above 5 percent partly due to the sharp increase in commodity prices, especially coal and Crude Palm Oil (CPO). After the commodity boom ended , the economic growth slowed to a level of around 5 percent from 2014 to 2019.
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The economic recovery this time will very much depend on how Covid-19 can be overcome. This, among other things, is strongly related to consumer confidence. Seeing the ups and downs and the extent of the spread of Covid-19 and the ability to overcome it, including the possible availability of vaccines with significant progress lately, the response to Covid-19 has been relatively slow, causing a slow recovery in the consumer confidence.
Customers gather at a street stall in Jakarta on November 5, 2020, as Indonesia tumbles into first recession since the Asian financial crisis.
As a consequence, many economic activities, particularly investment, are also relatively sluggish. The recovery in the world economy is also slow, even slower than the initial estimate due to the same reasons. Apart from a low base, it is yet to be seen any specific sectors that can strongly drive the economy. It is clear that the better and faster we handle Covid-19, the greater the impact on economic recovery.
Structural changes
Initially, the Job Creation Law was intended to boost investment, which is quite needed to drive economic growth without sacrificing the welfare of workers. However, the strong opposition from the public, hasty steps and planned judicial review of the new law to the Constitutional Court have brought uncertainty related to the effectiveness of the law in facilitating future investment.
This situation also shows that efforts to carry out structural change to facilitate high and sustainable economic growth are very difficult to realize, especially in a comprehensive manner such as through the Job Creation Law.
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Structural changes to boost investments and to create a more flexible and competitive labor market are urgently needed to support the economic recovery and sustainable growth. However, regardless of the scope of the problem, public support, and timing will determine the level of success in its implementation. If not, it will decrease its credibility.
Policy consistency
The government’s policies to support the economic recovery have been deemed as maximal which have covered not only the monetary and fiscal sectors but also social assistance and unemployment benefits. However, such policies are not effective enough. The continued increase in Covid-19 infection cases and further implementation of the social restrictions have caused the economic recovery policies not so effective. Likewise, the slow disbursement of the state budget remains a serious problem.
Resesi di Masa Pandemi dan pemulihan ekonomi / Penulis Umar Juoro
Since the beginning, the government has actually taken an economic and health superposition approach, where efforts to overcome Covid-19 have been carried out in line with the economic recovery program. However, as the efforts to overcome Co-19 are still far from optimal, the economic recovery program cannot be carried out maximally.
Superposition is the synergy of the two activities which are carried out simultaneously, not alternately (trade off) such as acceleration and brakes. The superposition requires an extraordinary action in testing, tracing and isolation, and of course vaccines as well as in the use of science and technology. Indonesia has actually carried out such activities, but they are far from optimal so that the number of new cases still increases and the death rate is still higher than the world average.
The monetary policy can maintain the stability of the rupiah exchange rate by keeping inflation low and maintaining liquidity. The banking sector is also quite stable with well-maintained liquidity and low non-performing credit (NPL). However, the lending growth remains sluggish and the loan for consumption even shrinks. This again shows that consumer confidence has not yet recovered and demand for loans also remains low.
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The middle and high income people still keep their funds in the banks rather than for shopping as can be seen from the high levels of third party funds (DPK) in banks. Likewise, companies have yet to apply a significant amount of loans. For an economic growth of 4-5 percent, the lending growth should at least twice as much. The weak chain of the economic movement must be overcome, starting with an improvement in consumer confidence to restore consumption. To achieve the economic growth in the range of 4-5 percent, the consumption should grow at least at the same level.
The direct improvement on the fields such as by overcoming investment barriers are actually contributing more to increased investment than a seemingly comprehensive efforts, but lack of certainties.
Furthermore, production activities and loan demand will follow suit. In order to increase investment, efforts to improve the investment environment must be carried out continuously, whatever the decision of the judicial review on the Job Creation Law is. The direct improvement on the fields such as by overcoming investment barriers are actually contributing more to increased investment than a seemingly comprehensive efforts, but lack of certainties.
Signs of economic recovery can be seen from the significant quarterly growth (qtq) of about 5 percent. The monthly lending growth is also positive. The challenge is how this can be accelerated and sustainable in line with improvement in overcoming Covid-19.
Decisions of economic actors
In making decisions to carry out economic activities, both consumption and production, economic actors either companies or households, do not always perform the optimization as described in economic theory.
Fear has an effect on decision making, according to behaviorist economic theory. This causes the decisions not so optimal, as happened with the impact of Covid-19 such as the decline in household and corporate spending. According to quantum economics, decisions are superpositional and related (entanglement).
The superposition between economy and health, the relationship between sellers and buyers, creditors and debtors determine the level of the optimization of the decision. Currently, the decisions of economic actors are still not optimal.
Umar Juoro
During the period of economic recovery, decisions of companies and households should be closer to optimal levels, depending on the level of confidence, the strength of superposition and linkages in economic, business and household decisions. With the hope of vaccine discovery and its widespread use, the effectiveness of economic and social recovery policies will provide conducive environment for economic actors to make optimal decisions. The more optimal the decisions of economic actors can make, the stronger the impact on economic recovery.
Umar Juoro,
