Growth without Development

KOMPAS/TOTOK WIJAYANTO

Enny Sri Hartati

According to the latest data from Statistics Indonesia (BPS), the Indonesian economy again saw a contraction in the first quarter of 2021, of 0.74 percent. This means that the economy is still in a recession. What\'s more, quarterly growth is worsening. In fact, in Q3 2020, the economy grew 5.05 percent. Unfortunately, this growth did not continue. In Q4 2020, the economy shrank 0.42 percent on a quarterly basis, which even worsened in Q1 2021 to minus 0.96 percent.

Even so, economic recovery is progressing, as the percentage of contraction is getting smaller. Annual growth continued to improve from last year to Q1 2021. After suffering the deepest contraction of 5.32 percent in Q2 2020, the economy began to show signs of recovery in the successive quarters. The economic contraction narrowed to minus 5.32 percent in Q3 2020 and then to minus 2.19 percent in Q4 2020. Improvements were seen in both business sectors and production output.

In general, all sectors that experienced a deep contraction in Q2 2020 have improved. At least the contraction has narrowed in terms of statistics, including in major industries that contribute significantly to the economy. Growth in the trade industry improved from minus 7.59 percent to minus 1.23 percent, while manufacturing improved from minus 6.18 percent to minus 1.38 percent, and the construction industry improved from minus 5.39 percent to minus 0.79 percent.

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The various statistical improvements have certainly given rise to optimism. In fact, the government is confident that in Q2 2021, the economy will grow in the range of 6.9 percent to 7.8 percent. Indeed, statistically, the growth target of above 4 percent is not difficult to achieve.

This is because gross domestic product (GDP), which fell to Rp 2.59 quadrillion (US$182.40 billion) in Q2 2020, has started to increase on constant 2010 prices. In the first quarter of 2021, GDP increased to Rp 2.68 quadrillion to almost reach the Q1 2020 level of Rp 2.70 quadrillion.

This means that it would not be difficult to achieve the GDP target of Rp 2.70 quadrillion in the second quarter. Based on this assumption, the economy is expected to grow 4.28 percent in Q2 2021, although this is the same as the level recorded in Q1 2020.

As such, there is growth, but it remains stagnant, or without an increase in GDP. In fact, GDP will decline on a per capita basis if it grows only 4.38 percent (Rp 2.70 quadrillion), because the population is expected to grow from 269.6 million people in 2010 to 271.4 million people in 2021.

In order to recover the economy, growth should reach 5 percent to 6 percent in the second quarter. The problem is that a continuing decline in per capita income would affect consumer buying power. As a matter of fact, household spending is the main driver of economic growth.

Crucial obstacle

The government has indeed set a growth target in the range of 7 percent for Q2 2021. However, a number of challenges remain to achieving this target. First, household spending is still under pressure. It shrank 2.23 percent in Q1 2021. In fact, government spending grew 2.96 percent, while exports and imports respectively grew 6.74 percent and 5.27 percent in the same period.

This means that the upward trend in macroeconomic performance has not touched the fundamentals of the economy, which affects recovery of purchasing power. In fact, the government realized up to Rp 55 trillion of its social protection budget in Q1 2021, an increase of 16.5 percent. Ironically, excepting restaurants, consumption growth in the food and beverages sector remains negative at 2.31 percent, worse than the negative 1.39 percent in Q4 2020.

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If household spending on basic necessities remains negative, recovery of purchasing power for secondary and tertiary needs still remains far from expectations. The indicators of weak purchasing power include retail sales. Based on a retail sales survey conducted by Bank Indonesia, the index is forecast to contract 17.2 percent year-on-year (yoy) in Q1 2021.

Likewise, the inflation rate is below 1.5 percent. Meanwhile, although the consumer confidence index (IKK) increased to 93.4 in March 2021, consumer confidence in the current economic condition (IKE) remains at a pessimistic level of 72.6, namely because perceived job availability still remains at the level of 59.6.

KOMPAS/RONY ARIYANTO NUGROHO

One of the shops that is still open in Blok B Tanah Abang Market, Jakarta, Saturday (8/5/2021). Trading activity at Tanah Abang Market is no longer as crowded as last week. A number of merchant stalls have closed and only reopened after Idul Fitri.

Ramadan and Idul Fitri 2021 are expected to drive the economy in the second quarter. The government has made assurances that it will maintain the provision of holiday bonuses (THR) and a 13th month salary to state civil servants (ASN), members of the Indonesian Military (TNI) and the National Police (Polri). However, the amount of this year’s THR for civil servants is determined only on basic salary and excludes performance bonuses. Meanwhile, the 13th month salary will be disbursed in June 2021, even as many companies are facing difficulties in paying employees their annual THR due financial problems.

Second is the lack of employment opportunities. Even though the decline in investments has narrowed to minus 0.23 percent, most new investments are in capital-intensive service industries. Meanwhile, labor-intensive industries are worsening, as can be seen in the 13.28 percent contraction in the textile and garments industry. Likewise, the tobacco industry suffered negative growth of 9.58 percent, the non-metal mining industry recorded negative growth of 7.28 percent, and the transportation equipment manufacturing industry saw negative growth of 10.93 percent.

If the contraction in labor-intensive industries continues, of course there is a risk that the unemployment rate will also increase. This means the April 2021 rise in Indonesia\'s Purchasing Manager’s Index (PMI) to 54.6 will go to waste. Even though the index is in the expansion zone, if it has no impact in terms of job creation, it will remain difficult to recover the economy as targeted.

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Third is negligence of the "black pearl". The agriculture industry is one sector that has been relatively resilient and able to grow positively during the pandemic. Unfortunately, this achievement has been unable to improve the welfare of farmers, cattle breeders and fishermen. The farm gate price of unhulled rice as of April 2021 fell to its lowest level in the last five years. Ironically, in the midst of abundant supply, the government is mulling over a plan to import rice.

If this condition is not corrected, the purchasing power of farmers will continue to decline. Moreover, the production season for sugar and salt begins in early May. It will only hurt farmers further if the government allows the importation of sugar and salt, using price stabilization ahead of Idul Fitri as an excuse.

So far, the agriculture industry has been an example of continuing growth, but the welfare of farmers has not improved: it is growth without development.

ENNY SRI HARTATI, Senior researcher at the Institute for Development of Economics and Finance (INDEF)

This article was translated by Hendarsyah Tarmizi.