The Paradox of the Economic Performance

Kompas’ Research and Development (R&D) released its latest survey (Monday, 18/10/2021) on the performances of President Joko “Jokowi” Widodo and Vice President Ma'ruf Amin, which also functioned as a two-year evaluation of their administration. In general, compared to April, the results of the October survey showed a decline in the satisfaction level from 69.1 percent to 66.4 percent.

The satisfaction level was lower, but it was higher compared with the satisfaction level of 65.9 percent in August 2020. Even so, there are some notes related to institutional development. The satisfaction level declined in all aspects, except the economy. Satisfaction in political and security aspects fell from 77 percent in April to 70.8 percent in October. The people’s satisfaction in social welfare decreased from 71.3 percent to 68.6 percent, while that in law enforcement fell from 65.6 percent to 60.6 percent.

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Meanwhile, satisfaction in the economic performance rose from 57.8 percent to 58.7 percent. Although rising only slightly, it has consistently increased from the 52.8 recorded in August last year. The low satisfaction level in the economy cannot be separated from the pandemic, which has caused the economic stagnation through the long social restriction measures. However, the situation is expected to gradually improve, as long as the pandemic can be controlled.

Institutional aspects

The economic growth of 7.07 percent in the second quarter of this year was able to compensate for the 5.3 percent contraction in the second quarter of 2020. Many developed countries experienced higher economic growth, but their economic contraction was deeper. Developed countries have high growth, but not all have been able to achieve their economic performances of the pre-pandemic era, while we have managed to surpass the contraction caused by the pandemic.

KOMPAS/TOTOK WIJAYANTO

President Joko “Jokowi” Widodo delivers his speech virtually during the commemoration of 2021 National Press Day in Ancol, North Jakarta, on Tuesday (9/2/2021. In his address at the event themed “Rising from the Pandemic, Jakarta as the Gateway to Economic Recovery with the Press as the Accelerator of Change”, the President expressed appreciation for all members of the press who had helped the government in educating the public to be disciplined in adhering to health protocols to prevent the spread of the novel coronavirus.

In the third quarter, our economic performance was hampered by the emergence of the Delta Covid-19 variant. The measures to curb public mobility disrupted the economy, which is projected to grow only by about 3 percent in the third quarter. The transportation and accommodation sectors, which began to show signs of recovery in the second quarter, declined again. However, they are expected to pick up again in October.

Institutional quality will determine the efficiency of the long-term economic performance.

The government's measures to mitigate the impact of the pandemic are commendable. Even so, the weakening of satisfaction in the institutional aspects of politics, social welfare and law enforcement, serves as an early warning for the government in navigating the long-term economic recovery. Institutional quality will determine the efficiency of the long-term economic performance.

One indicator that is often used to measure economic efficiency is the Incremental Capital Output Ratio (ICOR), which calculates the increase in economic output of each investment unit. A high ICOR number indicates that the economic system is inefficient.

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In 2019, Indonesia's ICOR was recorded at 6.77. It means that to generate additional economic output or gross domestic product (GDP) of Rp 1, it needs an investment of Rp. 6.77. The 2019 ICOR figure was higher than the 6.44 recorded in 2018. In comparison, the Philippines' ICOR figure is 3.7; Thailand 4.5; Malaysian 4.6; and Vietnam 5.2. In other words, our economy had been inefficient even before the pandemic, especially if compared with our neighboring countries.

SEKRETARIAT PRESIDEN

President Joko Widodo held a meeting with ministers and Coordination Task Force for Covid-19, Doni Monardo at the Merdeka Palace, Jakarta, Monday (20/7/2020). The meeting discussed the formation of the Covid-19 Handling Committee and the National Economic Recovery.

Of course, technically there are many factors that cause investment spending inefficiencies. For example, investment in infrastructure cannot immediately boost growth. There is a time lag between physical development and the increase in output. In addition, there is also the marking-up in the amount of investments, a practice that seems to be rampant, especially in the infrastructure sector. As a result, the amount of the budget does not reflect the actual investment figure.

The message is quite clear; the economic performance must be supported by good institutional arrangements. Without them, improvement in the economic performance will be misleading because it does not reflect reality and tends to be unsustainable in the long term. Efficiency as one of the keys in the economy is determined by various complex institutional factors.

In the midst of economic inefficiency, the large stimulus provided during the pandemic may not produce the performance output it should. The cost in coping with the crisis caused by the pandemic reached Rp 695.2 trillion (US$49.1 billion) in 2020. It is estimated to increase to Rp 755.77 trillion in 2021 and to Rp 699.4 trillion in 2022.

We hope that the amount of economic stimulus will remain in line with the needs in different fields. The stimulus should not result in the increase in distortions caused by administrative problems and corruption. Reflecting on the results of the Kompas R&D survey, the next three years will be a crucial time in establishing institutional arrangements in the political, social and legal fields. Without significant improvements in these institutions, economic growth will be unsustainable.

KOMPAS/HERU SRI KUMORO

A. Prasetyantoko

Improvements in the regulatory framework and administrative efficiency and effectiveness must be supported by a strong institutional system. Efficiency should not only be oriented to practice on a micro scale, while the institutional system on a wide scale still provides room for rent-seeking practices accommodated through various political consensuses.

Building political, social and legal institutions will have a long-term impact, although in the short term it will not be immediately visible. On the other hand, the improvement in economic performance can be seen relatively quickly, but it needs to be supported by a strong institutional system in order to be sustainable.

A Prasetyantoko, Rector of Atma Jaya Catholic University.

This article was translated by Hendarsyah Tarmizi).