‘Vaccine Nationalism’ and Economy

The Covid-19 vaccine is like a school. It opens the way for a better future but will not serve as a solution.

Education, like vaccines, is a necessity but not the solution. There are many other factors that come into play. However, it gives hope, and perhaps, certainty about the future, that we need.

Uncertainty can make us feel anxious and restless. The pandemic is an uncontrollable uncertainty and the vaccination drive is an effort to provide more protection. Vaccines are believed to be the answer to this pandemic. But, we have to be careful.

Lots of things remain unclear. There are more questions than answers. For example, can a vaccine overcome a new mutation; can it give protection for a long time; do all countries have access to vaccines? The main problem with vaccines today is limited supply. The demand for the vaccine is far larger than the production capacity.

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Another problem is inequality in distribution. The Economist magazine wrote sadly: rich countries with a population of 14 percent of the world\'s total population control 53 percent of total vaccine production. It is estimated that nine out of 10 people in poor countries have difficulty in obtaining a vaccine. Inequality in vaccine distribution will complicate the global recovery. The pandemic can be overcome only if herd immunity can be achieved at a global scale.

Otherwise, the borders between countries will remain closed. To make matters worse, a third wave of the pandemic have taken place in several countries. Predictably, every country puts its own interests first. We call this vaccine nationalism. This situation reminds me of a prisoner\'s dilemma in game theory. The bottom line: people rationally choose not to cooperate even though the cooperation will actually provide better results.

The Covid-19 vaccine is like a school. It opens the way for a better future but will not serve as a solution.

In vaccine nationalism - to cope with a pandemic - many countries limit their vaccine exports to ensure they can fulfill their domestic demand. It makes sense. Unfortunately, the world cannot be completely free from the pandemic if some countries are not yet free from it. That\'s the reality that we see today.

Impact on Indonesia

What is the impact on Indonesia? To answer this question, perhaps, we need to pay attention to a number of factors. First, the IMF wrote: the global economic recovery is unbalanced. Countries that are slow in conducting vaccination; those which have a limited capacity in providing economic stimulus, and those which heavily dependent on tourism, will recover slowly. On the other hand, countries that are fast in conducting vaccination and those which have room for economic stimulus, will recover more quickly.

No wonder China and the united States are in the lead. In Europe, the vaccination program is not as good as in the US. In developing and poor countries, the situation is even worse. Access to vaccines is limited. In this respect, Indonesia is relatively good. Indonesia is among the top 10 countries in vaccination coverage. Among non-vaccine producing countries, Indonesia is number four. I think we deserve to give our appreciation for this even though we know it is still a long way to go the end the pandemic. The emergence of the third wave of the pandemic, limited supply of vaccines, vaccine nationalism, virus mutations, will greatly determine the economic recovery in the world including Indonesia.

Second, the economic recovery will rely on our ability to cope with the pandemic. Vaccines and health protocols play a key role. My study with Syarifah Namira Fitrania (forthcoming) shows that people\'s decision to stay at home has a negative correlation with several economic indicators, particularly those related to mobility, such as sales of auto parts, fuel sales, recreation, and sales of motorcycles.

Also read: Why Indonesia Must Recover Faster

Low mobility disrupts economies of scale so that the Purchasing Manager Index (PMI), production capacity, and use of labor also decline. Consistent with that, the study of the Office of Chief Economist at Bank Mandiri (OCE) shows that the higher the mobility of the people, the higher the spending index. In essence, the reduction in the mobility is in line with the decline in spending and production activities.

The initial quantitative study that I conducted also shows that there are behavioral changes in the mobility of Indonesian people post-vaccination. There has been an increase in mobility after people received a vaccine. The higher the vaccination coverage, the higher people’s mobility. This quantitative study shows that mobility increased in less than a week after the vaccine was given.

Countries that are fast in conducting vaccination and those which have room for economic stimulus, will recover more quickly.

Of course, the data is still limited, and a better methodology in conducting the study is needed. However, these findings provide optimism that vaccine administration can increase the mobility. Increased mobility can in turn push up economic activities, such as spending. This finding is consistent with the IMF report that economic recovery will highly depend on the provision of vaccines. That is why I forecast that the pace of the economic recovery will accelerate in the second half of 2021.

The reason is that people\'s self-confidence has improved. As the people have begun to feel safe with the vaccine, the economic activities have begun to return to normal. This is good news. However, we have to be careful. If the increased mobility is not followed with a strict use of health protocols, there is a risk that the number of new Covid-19 cases will increase again.

In addition, every time there is a long holiday, the new cases increase. The OCE study shows that every time the mobility restriction is tightened, the spending index decreases. Therefore, the vaccination must be followed by the implementation of a strict health protocol. Don’t forget: the pandemic is far from over.

Third, even though the economic recovery has the potency to accelerate in the second half of 2021, the delay in vaccination- both due to vaccine distribution and nationalism - will slow the process of economic recovery. A delay in the vaccination could also make the Covid-19 transmission grow again. As a result, the economic recovery will even be more difficult, especially in countries with limited stimulus capabilities.

I suggest that the Indonesian government be more aggressive in implementing a diplomatic approach to ensure the availability of vaccine supplies. In this case, international cooperation is very important. The G-20 Forum can be used. In fact, if needed, Indonesia could take the initiative to encourage high-level meetings of world leaders to cope with vaccine nationalism. Prisoner\'s dilemma, which I mention above, can only be solved if there is coordination and cooperation.

Also read: Economic Growth toward the End of the Pandemic

Fourth, the imbalanced recovery will have an impact on the stability of the global economy. There are positive and negative impacts. Positively, the economic recovery in the China and the US will enable Indonesia to boost its exports. Prices for commodities and energy, such as coal, palm oil and rubber have increased. As a result, tax revenues have also begun to increase. However, I have to remind that putting your hopes solely on the commodity and energy cycle is not a good policy. When the commodities boom subsides, Indonesia will be hit again.

The downside: the unbalanced global economic recovery can cause instability in the financial market. There is a growing concern that the faster US economic recovery will trigger capital outflows from emerging markets. The fiscal expansion in the US as the result of President Joe Biden’s stimulus program, will increase the supply of US T-Bills (short-term US Government bonds). The implication is that the price of the US’s 10 year treasury will fall and the yields will increase.

By early April 2021, the T-Bills\' yields were approaching pre-pandemic levels. The US Federal Reserve (the Fed) has indeed denied the possibility of reducing asset purchases (tapering) soon, and will not raise interest rates this year. However, the market has anticipated: sooner or later the long-term interest rate will rise.

The financial market will be tight, asset prices will fall. As I wrote in this daily, (9/2/2021), for Indonesia, it may disrupt the financial market stability. When US-T-Bills yields increase, the bond and stock prices will fluctuate and the rupiah weakens.

Difficult choice

Fifth, what should be done? The government and Bank Indonesia (BI) are faced with a difficult choice: financial market stabilization or economic recovery? The stability in financial markets is impossible to be fully maintained when the economy is still weak. If BI implements a tight monetary policy and the government carries out fiscal tightening, for the sake of economic stability, the economic recovery will be disrupted.

If BI has a limited room to raise interest rates, the possible alternative is to implement a monetary policy mix by allowing the rupiah move to follow the market — while maintaining its volatility — and using macro-prudential approach. For example, if the private companies and state owned companies (SOEs) want to borrow foreign debt, they must place a certain percentage of their external debt in the central bank for a certain period of time, for example one year.

This will reduce the short-term debt of the private companies and SOEs . From the government side, the law stipulates that the state budget deficit must be lowered back to 3 percent of GDP by 2023, meaning that fiscal consolidation must be carried out. My advice: do this with caution while looking at the economic condition. Since tax revenues are still low, the tax administration reform is needed to broaden the tax base, for example by transferring the administration of corporate taxes from the regular tax office to medium taxpayer office (MTO), which has a larger number of tax staff.

By doing so, the treatment on business institutions or companies will be more uniform so that the tax burden is not only "borne" by several large companies. As a result, they can still grow and pay taxes (see Basri, Mayara, Hanna, and Olken\'s study at NBER 2019). There is a need to evaluate the effectiveness of the tax incentives that have so far been provided and to explore taxes on non-renewable energy, including carbon taxes, so that recovery will be “greener”, then allocate the money for health, expansion of social assistance such as cash transfer (BLT), financial support for micro, small and medium-scale enterprise (MSMEs) and for digital infrastructure. Other allocations can wait, depending on the increase in the consumers spending.

Also read: Vaccines and Economic Recovery

In terms of investment, industry and exports, there is a need to attract more foreign direct investments to export-oriented sectors, especially the manufacturing industry. The trick is to fully implement the new Job Creation Law. What else? Apply what I call reverse Tobin Tax, in which the government provides tax incentives to investors who reinvest their profits.

It seems that the idea that I proposed a few years ago had been implemented by the new Indonesian Investment Authority (LPI). Equally important is to increase financial deepening in the bond and capital markets, by increasing the role of local investors and domestic savings. The trick is to provide incentives so that there will be more sources of financing from local investors. Therefore, the portion of external financing can be reduced. There is also a need to expand the retail bond market or private placements as well as to promote the role of the LPI in attracting direct investment for infrastructure projects.

Vaccines do provide optimism. As the people’s mobility has increased and economic activities have begun to move, the economic recovery is likely to accelerate in the second half of 2021.

KOMPAS/RADITYA HELABUMI

M Chatib Basri

However, we must remain vigilant. A lack of discipline in adhering to health protocols can make matters worse. In addition, the limited supply and poor distribution of vaccines can slow the pace of economic recovery. In fact, we must recover faster before other countries, especially before the US normalize its economic policies. If not, the financial market will be disrupted. We know the uncertainty remains high. The vaccination is one of important efforts to reduce the uncertainties, but it would not serve as a solution, the same as a school.

Muhamad Chatib Basri, Lecturer at the School of Economics and Business, University of Indonesia.

This article was translated by Hendarsyah Tarmizi.