The vaccination program may face a number of problems related to, among other things, the management and effectiveness of distribution to reach all communities in the country.
ENNY SRI HARTATI
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The country’s vaccination program, which will begin early this year, is expected to be able to promote optimism in controlling the Covid-19 pandemic. Unfortunately, there is a crucial challenge as the upward trend of new daily cases is continuing. On Jan. 16. there were 14,224 new Covid-19 cases, with a positive case-to-test ratio (positivity rate) of 31.35 percent. This means that the positivity rate is six times the 5 percent standard set by the World Health Organization (WHO).
In Indonesia, the vaccination program may face a number of problems related to, among other things, the management and effectiveness of distribution to reach all communities in the country.
It is irrefutable that recovery relies much on controlling Covid-19. The success of vaccination is currently one of the government\'s most important priorities. Moreover, the unemployment rate is high, people\'s purchasing power is weakening and there is a decline in the national productivity rate. As a result, efforts to recover the economy have become more complex amid the decline in the people’s economic resilience. The success of the vaccination program does not necessarily guarantee economic recovery, especially if the pandemic is not resolved immediately.
The National Development Planning Agency (Bappenas) predicts that the poverty rate in 2020 will increase to 9.7-10.2 percent, or 26.2 million-27.5 million people. Based on data published by Statistics Indonesia (BPS), as many as 29.12 million people, or 14.28 percent of the working age population, were affected by the pandemic. Average wages decreased 5.18 percent from Rp 2.91 million per month in August 2019 to Rp 2.76 million (US$195) per month in August 2020.
Even though the pandemic has devastated the structure of the economy, at least Indonesia should be grateful as the country’s economic fundamentals remain strong. Thanks to the large domestic market, the dependence on the global economy is relatively small. The main contributor to economic growth is household spending (57 percent) and investment (33 percent). The road map to economic recovery should be simpler, focusing on the protection of household spending and promoting the productive sector.
The required strategic step is to curb the increase in imports of consumer goods. Amid the decline in purchasing power, people\'s consumption preferences have changed. The people no longer prioritize quality as the price has now become the first and foremost consideration.
The influx of cheap imported products has hit the competitiveness of domestic products. The presence of the cheap imported goods may be good for the people amid the decline in their purchasing power, however, the locally produced products will be marginalized, which will in turn lead to further layoffs. This trend in imports can be seen in Indonesia\'s 2020 trade balance, which was increasingly fragile.
Although there was a surplus of $21.739 billion, exports totaled only $163.307 billion, down 2.61 percent on an annual basis. Imports dropped 17.34 percent to $141.568 billion. Imports of raw and auxiliary materials to support the local industry fell 18.32 percent. Imports of capital goods as a benchmark for investment activities fell 16.73 percent. Imports of consumer goods dropped 10.93 percent.
The decline in imports of raw materials and capital goods has two major implications. First, it showed a decline in national productivity. The Indonesian Manufacturing Index (PMI) was recorded at 44.69 in 2020, far below 49.74 in 2019 and 50.9 in 2018. Second, if the decline in industrial productivity is not immediately mitigated, the resilience of the domestic industry will be under threat. Trade protections are difficult to implement because they would weaken the people’s purchasing power and would be against free trade agreements.
In short, if the competitiveness of domestic products continues to weaken, any efforts to promote the investment climate will still be hampered. Despite the implementation of the Job Creation Law, investment realization was still dominated by the service sector. The country’s large domestic market is quite tempting for global investors. The potential for large natural resources can also be used as a source of cheap raw materials.
At first glance, data on Indonesia\'s export growth to China shows an upward trend. In 2020, Indonesia\'s exports to China rose 15.59 percent to $29 billion, which accounted for 19.31 percent of total exports. Indonesia\'s imports from China decreased 11.77 percent to $39 billion, which accounted for 30.91 percent of total imports.
Ironically, the homogeneity of Indonesia-China exports and imports is 70-80 percent. In other words, Indonesia exports commodities and raw materials to China but imports processed products from the same raw materials from the country. In the midst of a pandemic and a decline in global demand, China needs to find an alternative market for its excess production, and this threatens Indonesia’s upstream industries such as producers of iron and steel, and downstream industries such as producers of textiles, footwear and various other industrial products.
If the protection of the domestic market is weak, various fiscal stimulus programs and the National Economic Recovery (PEN) program will face serious challenges. In fact, the social protection assistance provided by the government can be partly used by the people to buy cheap imported goods. There is no choice other than increasing protection for the domestic market, including through anti-dumping and safeguard measures. However, this step should not be taken only through strict import controls.
Ease of raw material imports to support investment in the industrial sector must be prioritized. Therefore, recommendations for investment permits in various industrial areas must be accompanied by a detailed project feasibility study. Investment that is encouraged to enter industrial areas should provide added value and create employment. The government should not only focus on investment with high value but also that in the service sector.
The investment consideration related to global supply chains must also be clear. If the reliance on imported raw materials is high, and more than 80 percent of production goes to the domestic market, it can become a source of problems in the trade balance and domestic industry resilience.
Enny Sri Hartati, Senior researcher at the Institute for Development of Economics and Finance (INDEF).
This article was translated by Hendarsyah Tarmizi.