Year of Transformation
In fact, no one person or institution has understood the economy well this past year. Economic projections are made with the assumption that the Covid-19 pandemic can be overcome.
A Prasetyantoko.
“The only function of economic forecasting is to make astrology look respectable.” That is a quote from the leading economist JK Galbraith to make fun of his own profession.
Economists are those whose predictions and ignorance of the future can be explained scientifically and in a complicated way. This scorn, however, does not dampen public enthusiasm for economic forecasts.
In fact, no one person or institution has understood the economy well this past year. Economic projections are made with the assumption that the Covid-19 pandemic can be overcome. And, we know, controlling a pandemic has its own complexities. Based on these complex assumptions, the economic outlook for 2021 is anything but certain.
Meanwhile, we also realize that certainty will never just suddenly come. The only way to make it happen is to adjust through changes.
In fact, no one person or institution has understood the economy well this past year.
The World Bank in December 2020 estimated that Indonesia\'s 2020 economic growth would contract by 2.2 percent, lower than the previous estimate of minus 1.6 percent. Meanwhile, the Organization for Economic Cooperation and Development (OECD) projects minus 3.3 percent, the International Monetary Fund (IMF) minus 1.5 percent, Bank Indonesia minus 1 to 2 percent, and the Finance Ministry minus 0.6 to 1.7 percent. Meanwhile, the smallest contraction is estimated at 0.6 percent while the largest one is 3.3 percent.
So, what are the projections for the economic growth in 2021? The World Bank estimates growth of 4.4 percent, the OECD forecasts 5.3 percent, the IMF 6.1 percent, Bank Indonesia 4.8 to 5.8 percent, and the Finance Ministry 5 percent. Several independent institutions predict that Indonesia\'s economic growth this year will range between 1 and 2 percent. The variation in 2021 growth projections ranges widely between 1 and 6 percent.
Also read: Indonesian Economy After Vaccination
The wide gap in growth projections reflects how uncertain the situation is this year. Gita Gopinath, the chief economist at the IMF, said the economic recovery from the pandemic would be long, uneven and very uncertain. Scientifically, this institution shows that the economic situation in 2021 is difficult to predict.
Trend of global stock market movements in January 2021
Opportunity for change
Amid the uncertainty, the availability of vaccines began to give hope at the beginning of this year. Health Minister Budi Gunadi Sadikin recently signed a contract for the procurement of vaccines with United Kingdom-based AstraZeneca and United States vaccine producer Pfizer, each with 100 million doses. This move followed an agreement to procure 125 million doses of the Sinovac vaccine at the end of last year.
However, vaccines only function to reduce transmission and will not eliminate the virus at all. The Health Minister realistically stated that to achieve community immunity, at least 70 percent of the population must be vaccinated. It means it will need about 426 million doses of vaccine for the 181 million people and it will take about 15 months to complete the vaccination, not 3.5 years as previously stated.
Also read: Vaccines and Economic Recovery
Of course the vaccine provides new hope. However, health risks do not disappear and the economy will not suddenly recover. In addition to taking time, the economic growth will not return to its pre-pandemic level.
The World Bank in its December 2020 edition of the Indonesia Economic Prospect report explains that the economic recovery will not be even. A number of sectors that require intensive physical contact and rely on face-to-face interactions with customers, such as the transportation, hospitality, wholesale and retail warehousing, construction and manufacturing sectors, will face a long period of stagnation.
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Meanwhile, sectors that do not require physical contact such as the financial, education, communications and telecommunications sectors will be able recover faster. The commodity-based sector, our strength so far, will be still hampered by the slowdown in global recovery and a shift in the direction to a more environmentally oriented economy.
Stock price movements are displayed on the walls of the Indonesia Stock Exchange building, Jakarta, after the opening of stock trading in 2021, Monday (4/1/2021).
In such an uncertain situation, concrete actions are needed to make significant changes through various policies. The economic recovery will still rely on domestic consumption and investment. The government spending, although its proportion to the economy is small, plays an important role in creating a multiplier effect so that it is able to boost domestic consumption. Therefore, fiscal management is a key in maintaining the economic recovery.
A simple transformation is needed to improve the government financial administration so that it will be more performance-oriented. The initiative of the Finance Ministry to conduct “electronification” of regional government transactions (ETP) has to be maximized so that fund transfers to the regions will be faster and regional revenues can be well monitored. This measure is needed in order to ensure that local governments carry out fiscal policy properly in boosting the regional economy. With such a mechanism, a system of reward and punishment can be imposed over local government performances.
Also read: The Irony of the Pandemic Stimulus
Various forms of social assistance can, therefore, be distributed electronically directly from the government to the targeted recipients. The commitment of newly appointed Social Affairs Minister Tri Rismaharini to ensure that social assistance is distributed in a transparent and responsible manner needs to be supported by government-to-person (G2P) technology. The adoption of technology will make fiscal policy more effective and accountable.
A broader transformation has to be focused on creating a better investment climate through the implementation of the Job Creation Law. Do not let the new law have the same fate as the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI), which was introduced in 2011, and the Economic Policy Package, which was launched in 2015. In the field, many investors admit that they do not get the benefits as promised. Especially for foreign investors, investing in Indonesia is like entering a complicated jungle, with the risk of getting lost.
With such an uncertain situation, the improvement of the fiscal mechanisms and the implementation of the Job Creation Law will be able to boost economic performances. Uncertainty can only be dealt with transformation.
A PRASETYANTOKO, Rector of Atma Jaya Catholic University of Indonesia.
This article was translated by Hendarsyah Tarmizi
