The COVID-19 pandemic has not only caused changes in the health sector and economy, but also in the social and political climate and the habits of people.
By
A PRASETYANTOKO
·5 minutes read
The post-pandemic economy will not be the same, according to Klaus Schwab, the founder of the World Economic Forum in his book, COVID-19: The Great Reset, which was published last year. The COVID-19 pandemic has not only caused changes in the health sector and economy, but also in the social and political climate and the habits of people.
After a year of facing the COVID-19 pandemic, the Indonesian economy has begun to show signs of recovery, although it is not yet optimal. In the fourth quarter of 2020, the economy suffered a 2.19 percent contraction on an annual basis. Even though it is still in the negative zone, economic growth has improved from the third quarter of 2020 which saw a contraction of 3.49 percent, and from the second quarter of 2020, which was a 5.32 percent contraction.
The economy is expected to begin growing again in 2021, although this may start only in the second quarter. Even though the economy is entering a recovery phase, the challenges are quite formidable. The challenges are not only in the economic and health fields but also in politics, especially ahead of the 2024 general election. Global factors also complicate the efforts to revive the domestic economy.
Five main challenges
First, the United States economy is expected to recover faster than projected. The long-term implication is that the global economy will be more bullish. However, in the short-term, there is a potential risk of volatility on the financial market, particularly the exchange rate. If the US economy recovers faster, inflation will rise towards 2 percent. As the consequence, the US Federal Reserve (the Fed) will most likely start raising its interest rates. The domestic financial market, which has benefited from the inflow of foreign funds in recent months, will experience a reversal phase. This situation will be similar to that of 2013, when the Fed began to normalize monetary policies, causing panic, a “taper tantrum”.
Second, if financial markets are volatile, Bank Indonesia must respond by raising its benchmark interest rate as well, which is currently at 3.5 percent – the lowest in history. Although the increase in interest rates can affect lending growth, there are not many options available because the dominance of the short-term foreign funds in our financial markets is relatively high.
Third, the cost of the economic recovery in 2021 is still high. The cost of handling COVID-19 and the national economic recovery program in 2021 is estimated to reach Rp 699.43 trillion (US$49 billion). The amount has been revised four times. It seems that the role of the government in the economy will be dominant for the next few years. As a result, the plan to reduce the budget deficit to below 3 percent of gross domestic product by 2023 is quite challenging.
Fourth, the recession has brought a severe impact on employment. According to the Manpower Ministry, the number of laid off workers reached 386,000 people, 20 times the 2019 figure (Kompas, 10/3/2021).
Fifth, the economic recovery also faces challenges from the political side, which has started to heat up ahead of the 2024 general election. It is estimated that as the election gets closer, political problems will grow further.
How should we get out of this difficult situation? Even if we are facing complex problems, we must not lose our focus on the main problem, namely solving health problems. The acceleration of the vaccination program should be the main priority.
Furthermore, economic policies cover three pillars, namely fiscal, monetary and industrial sectors. Fiscal and monetary policies have been relatively good, but industrial policy still needs to be sharpened. The first focus should be to help the business sector survive this difficult situation. The role of the fiscal sector should be strengthened so that sectors that employ a lot of the workforce, micro, small and medium enterprises (MSMEs) and large businesses, receive proportional shares of the stimulus program. With this program, the number of layoffs can be reduced as much as possible.
In the next phase, industrial policy needs to be adjusted toward post-pandemic industrial development. Technology-based industries and environmentally friendly industries will become global standards that must be anticipated.
Despite the uncertainty and complexity of the situation, health and economic policies are relatively easy to formulate. In fact, the issues that are difficult to anticipate are the dynamics and political risks as a result of the battle ahead of the 2024 general election.
Within the framework of economic policy, sociopolitical and cultural issues are important institutional factors. Their roles will greatly determine the effectiveness of economic policy and economic performance. Douglass North, the recipient of the 1993 Nobel Prize in economics, has identified the importance of institutions to economic performance. The COVID-19 pandemic, identified by Schwab as the great reset, will become a new institutional context that determines the relationship between institutional factors and economic performance.
For our economy, apart from political friction ahead of the 2024 general election, corruption cases involving ministers with political party backgrounds will further worsen the situation. It seems that in its second term, President Joko “Jokowi” Widodo\'s administration needs to take an assertive stance regarding institutional factors. The Corruption Eradication Commission (KPK) and other legal enforcement institutions must be strengthened so that corruption can be maximally suppressed.
Regarding political friction, President Jokowi should take a more assertive stance so that his bureaucracy is not trapped in political party conflicts. An important contribution of President Jokowi\'s administration in the second term is to build political institutions and parties so that they are more professional. If there are no significant changes in the institutional aspect, it is most likely that the effectiveness of post-pandemic economic policies will not be optimal.
A Prasetyantoko, Rector of Atma Jaya Catholic University of Indonesia.
This article was translated by Hendarsyah Tarmizi.