Consumption and Savings Behavior

KOMPAS/HERU SRI KUMORO

Ari Kuncoro

Just like during the Great Depression in the United States, as described by John Maynard Keynes in his book The General Theory of Employment, Interest and Money (1936), government spending has played a major role as almost all components of the demand side of consumption, investment and export-import are paralyzed by the COVID-19 pandemic. However, no matter how much the government has spent, the final impact on the economy depends on leverage. In fact, leverage is determined not only by the proportion of income spent but is also influenced by various socioeconomic and cultural factors.

Leverage

Leverage in the economy can be seen from the average propensity to consume (APC) of 68.3 percent, which can be considered as the marginal propensity to consume (MPC) trend. With this MPC size, the leverage is estimated to be about 3.15, or each rupiah of exogenous expenditure, such as government expenditure, will bring an impact of Rp 3.15 on national income.

The COVID-19 pandemic has not automatically lowered the monthly APC. The decline in income can be covered with savings and the drop in loan installments. According to the BI Consumer Confidence Index survey, loan installments in August 2020 accounted for 12.2 percent of income and the figure dropped to 10.2 percent in December 2020.

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The government’s social assistance has two main impacts. First, keeping the APC at its historical level in order to provide sufficient leverage. Second, increasing the proportion of savings to income due to fears of the impact of the pandemic and the decline in job opportunities. Both tend to reduce leverage.

At the start of the pandemic in March 2020, consumption expenditure was 69 percent, and it did not change in December 2020. In the same period, the share of savings increased from 18.6 percent to 20.8 percent. The annual contraction in household consumption of 5.52 percent and 4.04 percent in the second and third quarters of 2020 was largely due to the decline in APC from income groups of above Rp 5 million, from 64.5 percent (March 2020) to 63.4 percent (December 2020). Generally, this group reduced spending on leisure, which resulted in the decline in leverage.

The good news is that the consumption of income groups with monthly incomes of up to Rp 3 million showed an increase as a result of social assistance. The APC figure for this group was 70 percent of income as of December 2020. As a result, the APC figure for all income groups can be maintained at 69 percent or at the same level with that recorded at the start of the pandemic in February or March 2020. The APC for this group increased because the employment opportunity index in December improved, even though it was far below 100, the boundary line between pessimistic and optimistic.

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As a result, the purchasing index for durable goods for the income group of up to Rp 5 million per month improved from 68.7 percent in July to 79.7 percent in December.

Kinship behavior

An increase in the proportion of income savings may also occur due to resources at the extended family level. It is like a social safety net provided in times of uncertainty. The spirit of kinship (extended family) allows them to share social assistance and other sources of income in the style of the Household Altruism Model (Becker, 1974 and 1981) to maintain common welfare.

During long holidays such as Idul Fitri, Christmas and New Year, many migrant workers return to their hometowns. Their presence becomes the “last defense" with kinship networks that can be used as social capital to survive the economic impact of the pandemic. Even though each adult family member still has savings, it becomes an instrument in the collection of resources at the extended family level as in the intra-household allocation model (Behrman [1992] and Haddad et, al [1994]) to protect against uncertain job opportunities.

KOMPAS/AGUS SUSANTO

Visitor activity at a shopping center in the Cakung area, East Jakarta, Saturday (12/12/2020). It is hoped that the momentum for the 2020 Christmas and 2021 New Year celebrations can encourage public consumption.

Health implications

The above micro-behavior also has health implications. The definition of a large family is the nuclear family plus the non-nuclear family who eat from one kitchen. This can become a transmission cluster at the family level.

As an economic unit, extended families and local communities in semi-urban and rural areas are also used as a buffer for decreasing income. The high increase in confirmed COVID-19 cases in several provinces in Java may be caused by this phenomenon.

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Only a limited number of countries have been able sustain people’s welfare and economic growth despite their efforts in coping with the pandemic. One of them is Vietnam, which has Indonesian-like characteristics in which it also has a sizable rural population, urban mobility, migrant workers and close family relationships.

Vietnam’s economy grew 2.62 percent in the third quarter of 2020, partly thanks to its ability to take advantage of kinship behavior, but at the same time, to suppress the spread of COVID-19. Based on its experience in the war involving the US in the 1960s and 1970s, Vietnam used 3T (testing, tracing and treatment) at the micro level, in addition to enforcing health protocols such as wearing masks, washing hands with soap and maintaining distance at the small community level.

Indonesia can implement the existing concept of community micro-interventions. With the existing resources, it would be ineffective if everything were distributed evenly in every region. For this reason, a concept based on potential threats – drastic increases in new COVID-19 cases, areas of migrant workers, etc. – can be used in small communities, such as neighborhood units (RT) and community units (RW) and at the subdistrict and district levels.

ARI KUNCORO, Rector of the University of Indonesia

This article was translated by Hendarsyah Tarmizi.