Getting Out of the Recession

“There is too much bad news to justify complacency. There is too much good news to justify despair," writes Donella Meadows, an environmental scientist from the United States.

Meadows was one of the lead authors of the highly influential environmental report, “The Limits to Growth”.

She wrote that sentence because she could not wait to see the debate over whether we had to be pessimistic or optimistic.

I was reminded of Meadows’s writing when I read the good news from the Statistics Indonesia (BPS) last week: Indonesia\'s economy grew 7.07 percent in the second quarter of 2021 and Indonesia is getting out of its recession. The news gives optimism. In fact, there is nothing too surprising about the news.

I once wrote in this daily (28/5/2021) that there were two factors that might cause the economy to grow rapidly in the second quarter of 2021.

Also read:

> Avoiding the Slow Growth Path

> Economic Stimulus Exit Strategy

First, the growth in the second quarter of 2021 would be relatively high because it departed from a low base. Our gross domestic product (GDP), based on 2010 constant prices (HK 2020) in the second quarter of 2020, was recorded at Rp 2.589.6 quadrillion (US$180 billion). Meanwhile, the GDP in the first quarter of 2021 had already reached Rp 2.683.1 quadrillion. This means that in order to obtain a growth rate of 6 to 7 percent in the second quarter of 2021, the GDP, based on HK 2010, only needed to reach between Rp 2.744.9 quadrillion and Rp 2,770.8 quadrillion. So, it needed only to grow by between 2.3 percent and 3.3 percent from the first quarter to the second quarter of 2021.

Second, the quarterly growth of between 2.3 and 3.3 percent could be achieved because almost all leading indicators consistently showed economic improvement.

The reason: The increase in mobility and exports. Along with the increased mobility, due to the decline in COVID-19 infections from February to before Idul Fitri, household spending also grew. Bank Mandiri data shows that the spending index had recovered, exceeding even the pre-COVID-19 period. This explains why household spending experienced a high growth rate (5.93 percent). In line with the increase in the household spending, investment also grew.

In terms of exports, the increase in prices of Indonesia’s main commodities such as palm oil and coal as well as the economic recovery of the United States and China helped push up our exports by 31.78 percent. Indonesia was able to take advantage of this opportunity. That is the reason why the economic growth reached 7.07 percent in the second quarter of 2021. I think we need to give appreciation: the government\'s stimulus program has brought the economy back to a positive growth path. Indonesia is getting out of recession.

Continuity of recovery

However, the important question is: Is the leap in economic growth sustainable? Honestly, I cannot answer this question. There is one variable that cannot be completely predicted: the pandemic. How long will the pandemic last? Will there be another wave of the pandemic? I don\'t have the answer. However, there are a few things that might help us project what will happen in the future.

First, the economic recovery of several countries in the world is closely related to their ability to overcome the pandemic. Countries that are able to cope with the pandemic relatively well, either by the implementation of strict health protocols, the acceleration of the vaccination program or the combination of the two, generally have a chance of having a faster economic recovery.

KOMPAS/RIZA FATHONI

Workers harvest oil palm in the plantation area of PT Sawit Sumbermas Saran Tbk (SSMS) in Pangkalan Bun, Central Kalimantan, Thursday (29/4/2021).

My initial quantitative study showed that the higher the vaccination rates per 100 population, the higher the prospect for economic growth. I used the International Monetary Fund projection in July. In line with that, the IMF in its July World Economic Outlook, with a worried tone, wrote: Global economic recovery is uneven.

Vaccination plays a key role in determining a country’s economic recovery. Countries that are able to cope with the pandemic relatively well are able to restore their economic activities faster. This explains why the projected economic growth in many developed countries— which have access to vaccines — or countries that implement health protocols well, have a V-shaped recovery pattern.

On the other hand, countries that have limited access to vaccines or are weak in implementing health protocols, generally need a longer time to recover their economies. In this case, the economic recovery takes the shape of a swoosh (like the Nike logo) or the letter “L” or “W”. The message of these findings is clear: Economic recovery will only occur if health problems can be well addressed.

Also read:

> Why Indonesia Must Recover Faster

> Economic Growth toward the End of the Pandemic

Second, if health is the key, will our economic performance in the second quarter of 2021 continue? Here we have to be careful. A study conducted by the Mandiri Institute showed that the implementation of emergency or level 4 public activity restrictions (PPKM) had resulted in a decrease in mobility. However, the measures must be implemented to save lives and the economy.

The Mandiri Institute study also showed that the implementation of the emergency restrictions had resulted in a 17.2 percent decline in spending since it was imposed in 18 July, 2021. This decline was indeed lower than the drop in spending caused by large-scale social restrictions (PSBB) imposed during the period between 2 March and 9 April 2020 (36.2 percent). The implication is that we will see a slowdown in economic growth in the third quarter of 2021.

I predict that we will see a pattern of economic recovery in the shape of the letter W: The economic growth reached its worst condition in the second quarter of 2020, then increased sharply in the second quarter of 2021 and it is expected to decline again the third quarter of 2021.

Will economic growth increase again in the fourth quarter of 2021? The answer will depend on the mobility of the people.

The easing of the people’s mobility will boost the economy. However, at the same time, as we previously learned at a very high price that the relaxation of mobility that is not accompanied by the implementation of strict health protocols and without the acceleration of the vaccination program may cause another wave of the pandemic. In the end, the government has to reimpose mobility restrictions.

If this pattern continues, we will repeat the W-shaped economic recovery pattern until herd immunity is achieved.

Third, here is the dilemma. The strict restrictions on mobility will be in favor of the upper-middle class. Why? This group has savings and digital access. What about the lower-middle class? These groups have to work because they have no savings. Therefore, restrictions on mobility must be accompanied by compensation so that people can stay at home. This is why social assistances such as direct cash assistance (BLT) and the Family Hope Program (PKH) are quite important.

In an article I jointly wrote with Ben Olken and Rema Hanna (Kompas, 2020), we suggested that social protection should be extended not only to the poor but also to the vulnerable. In addition to social protection, focusing on health such as the acceleration of the vaccine program and 3T (test, tracing, treatment) is key. One of the problems with PCR testing is the lack of access and the high cost. I think there should be government intervention here.

Also read:

> Getting off the Slow Line

> ‘Vaccine Nationalism’ and Economy

Fourth, it may be necessary to think about increasing the number of recipients and the value of the BLT and PKH social assistances. The reason: The savings of the vulnerable groups may have been eroded —or even drained — because the money has been used to survive all this time. If we expand the recipients to 160 million people (60 percent of the total population), the assistance will have to be distributed to 40 million households (assuming one family consists of four people: father and mother and two children).

If the value of the benefits is Rp 1 million to Rp 1.5 million per month (higher than the current amount) and given for three months, we will need between Rp 120 trillion and Rp 180 trillion or 0.75-1.1 percent of GDP. Health spending allocations also need to be increased for the provision of vaccines and 3T. Data in several countries show that in general, vaccination is quite effective in minimizing the severe impact of COVID-19 infection. Therefore, the acceleration of vaccination programs is the key.

A delay in vaccination — whether due to limited supply, distribution or vaccine hesitancy — can worsen the impacts of the pandemic. As a result, economic recovery will be more difficult, especially for countries with limited stimulus capacities.

Fiscal capacity

All of the above suggestions—adding social assistance, increasing spending allocations for health and assistance for micro, small and medium enterprises (MSMEs) — will result in an increase in the state budget deficit. Do we have the fiscal capacity to finance this? For this reason, it is necessary to reallocate the state budget; just focus on health, social protection — such as BLT, PKH — and other social assistance, as well as support for MSMEs. Other sectors can wait until the pandemic subsides. Priorities must be clear.

In terms of income, tax revenues must be increased. The article I jointly wrote with Ben Olken, Mayara Felix of the Massachusetts Institute of Technology (MIT), and Rema Hanna of Harvard and the National Bureau of Economic Research (NBER) (2019), showed that for every one rupiah increase in the tax rate, the taxpayer will get another additional burden of Rp 0.51. Therefore, other ways must be considered that do not burden taxpayers but are still able to increase the government\'s total tax revenues.

The trick is to improve tax administration, as recently implemented by the Taxation Directorate General by moving the services for business entities from the regular tax office to the medium tax office (MTO). Why?

There is too much bad news to justify complacency. There is too much good news to justify despair

We suspect that due to limited resources in regular tax offices, the service is focused on a few taxpayers with a high income potential. As a result, large business entities will be the main targets. There is a possibility that they will try to avoid paying taxes as the scale of their businesses grows.

If transferred to the MTO, which has more staff, the tax burden is not only borne by a few large companies. As a result, they can still grow and pay taxes. In addition, there is a need to reevaluate the effectiveness of the tax incentives that have been provided so far. It is also needed to explore taxes on non-renewable energy, including carbon taxes, offset by access to carbon credits for a greener recovery.

Fifth, with the existing conditions, it seems that the government needs to carefully consider the right time when it should start withdrawing its stimulus. I understand that the budget deficit should be reduced to below 3 percent of GDP by 2023. However, this needs to be done with caution and should be based on the economic conditions. If fiscal tightening is carried out too quickly and drastically, it will cause an economic contraction. As a result, the debt-to-GDP ratio will increase because GDP growth is weak.

KOMPAS/RADITYA HELABUMI

Muhamad Chatib Basri

The economic growth in the second quarter of 2021 is a good indicator, which brings optimism. It is a sign that hope has not been deterred by existing problems. However, it\'s worth remembering Meadows’ words: “There is too much bad news to justify complacency. There is too much good news to justify despair". The problem is not pessimism or optimism but how we can maintain the growth momentum with the right policies.

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

The article was translated by Hendarsyah Tarmizi.