Beware of Pandemic-Induced Economic Inequality

The pandemic has the potential to cause economic inequality with a growth pattern similar to the letter "K". With this condition, a structural reform is needed to create more inclusive economic growth.

JAKARTA, KOMPAS — The COVID-19 pandemic is predicted to further widen the gap between those who have digital and financial access and those who do not or who have limited access. The gap is predicted to result in a growth pattern in the form of the letter "K".

Like the branches of the letter "K", groups or countries that have privileged access will grow. On the other hand, those who do not have such access will continue to weaken.

The vice president of the Asian Development Bank (ADB), Bambang Susantono, made the prediction during a seminar entitled "ISEI\'s Role in Strengthening Synergies to Accelerate National Economic Recovery in the Digital Era", which was held virtually as part of the XXI Indonesian Economist Association (ISEI) congress on Tuesday (31/8/2021).

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Under such a situation, a structural reform must be carried out. In his address at the event, President Joko “Jokowi” Widodo said the government was committed to carrying out structural reform to create more inclusive economic growth, such as through the Job Creation Law. It is now the moment to turn Indonesia from a country that is dependent on consumption to a producing country.

Besides the President, Perry Warjiyo, the chairman of ISEI and the governor of Bank Indonesia, and the acting governor of South Sulawesi, Andi Sudirman Sulaiman, also gave addresses at the event. Other speakers included Finance Minister Sri Mulyani, the chairman of the Indonesian Chamber of Commerce and Industry (Kadin), Arsjad Rasjid, the executive secretary of the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP), Armida Alisjahbana, the rector of the Bandung Institute of Technology (ITB), Reini Wirahadikusumah, and the chief executive officer of Madeindonesia.com, Ilyas Bhatt.

Branching growth

We don\'t want the gap to widen.

According to Bambang Susantono, before the pandemic, the world economy recognized a growth model similar to the letter V, which indicated that the economy declined but recovered quickly. In addition, the world also recognized a growth model like a “tick” symbol, which indicated that growth declined but then slowly recovered, he added.

However, now the world must be wary of a branching growth pattern as a result of the pandemic. According to Bambang, the pandemic has formed an ecosystem that requires the use of digital technology in every aspect of life. Those who do not have digital access will be further weakened and left behind. "We don\'t want the gap to widen," he said.

KOMPAS/TOTOK WIJAYANTO

A resident sleeps on an empty land under a train bridge in the Cikini area, Central Jakarta, Thursday (20/5/2021). Based on BPS data, the number of unemployed in February 2021 was 6.93 million people, a decrease from the position in August 2020 which was 9.77 million people.

The growth pattern like the letter "K” is the antithesis of the previous opinion that digitalization would reduce inequality. "Economic growth should be inclusive and be enjoyed by everyone without exception, and no one [should be] left behind," said Bambang.

According to Armida, the pandemic has exposed the fragility of countries’ economic, health and social protection systems. Some countries responded quickly to the pandemic, while some others were slow. Just waiting for the pandemic to end and the economy to gradually recover was not enough to create a stable and sustainable economy, she said.

According to Sri Mulyani, the government has been actively involved in trying to resuscitate the economy, such as by providing a large amount of state funding for the National Economic Recovery (PEN) program. The government allocated Rp 692.5 trillion in 2020 and further increased the amount to Rp 755.77 trillion in 2021 to support the PEN program, she said, adding that in the 2022 draft state budget, the government had set aside Rp 699.4 trillion for the same program.

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Meanwhile, Perry said that there were four main strategies that the ISEI could propose in responding to the current situation.

The first was the strengthening of the national economic recovery agenda by synchronizing the easing of the public activity restrictions (PPKM) and fiscal and monetary policies. The second was promoting innovation and the implementation of structural policies, such as downstreaming of natural resources, creative economic development and increased entrepreneurial capacity. The third was accelerating the digitalization of the economy and finance. And the fourth was the empowerment of ISEI management and members.

Consumption rises

Consumer spending has begun to increase in line with the easing of PPKM. In a study, the Mandiri Institute noted that the consumer spending index had risen from 73.3 on Aug. 1 to 79.7 on Aug. 15.

The head of the Mandiri Institute, Teguh Yudo Wicaksono, said the middle group expenditure index was recorded at 110.5 on Aug. 15, back to the level before the pandemic, before January 2020. The recovery in spending occurred in three groups of people, who were divided based on incomes, namely lower, middle and high.

According to the study, the increase in the level of spending occurred in Java, indicating a recovery in line with the decline in PPKM. Another driving factor, said Teguh, was the decline of COVID-19 cases. On the other hand, the spending index outside Java had declined, but it was still at a high level, namely 86.4 on Aug. 15.

A senior economist at the Center of Reform on Economics (CORE) Indonesia, Yusuf Rendy Manilet, said that the consumption of the upper-middle class would be greatly influenced the economic growth in the third and fourth quarters of 2021. The rise in the spending of the upper-middle class relied on three factors, namely the implementation of PPKM, government assistance and the decline in COVID-19 transmission with the increase in vaccinations, he added.

“The increase in the consumption of the upper-middle class, among others, is influenced by the decline in [COVID-19] cases and the increase in vaccinations. When the condition is good, this group will be more flexible in raising their spending,” said Yusuf.

The government also needs to issue incentives, such as in the property and automotive sectors, to stimulate the spending of the middle class. So far, this group has been the main driver of the rise in spending and economic growth.

This article was translated by Hendarsyah Tarmizi.