The Economy of Covid-19 and the Ukraine War

The Covid-19 pandemic is an unprecedented blow to the world and the economy. The Russia-Ukraine war added to the catastrophe, in addition to the issue of the impact of climate change.

Recently I had the opportunity to chat with a bakery and cake seller at a market in Jakarta. He said that the increasing prices of eggs and wheat caused him to need to fight hard to keep supplying bread for his customers.

He had to increase prices in order to survive and earn only a small profit. Not only that, in order to support his family and send his children to school, he had to sell the gold jewellery his mother gave him, his asset in difficult times. Stories like this are not unique because many people today have to contend with increasing food prices.

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The Covid-19 pandemic is an unprecedented blow to the world and the economy. Millions of people in Indonesia have lost their livelihoods, especially in key service sectors, such as restaurants and tourism. Factory closures in various parts of the world, either because too many workers are sick or to limit future transmission, lead to reduced production, which pushes up prices.

We all breathed a sigh of relief in November 2020, when the first vaccine gave hope of reducing both hospitalizations and deaths. Indeed, massive vaccination efforts have paid off, dramatically reducing the number of severe cases of Covid-19, and allowing economic activity to get back on track and governments to rebuild. We are grateful for that.

Not completely gone

Unfortunately, life has not completely returned to the way it was. Stories like the one above, of people struggling to make ends meet, continue to be commonplace. Globally, Covid-19 continues to be a threat because of people’s reluctance to get vaccines.

This has hindered the absorption of the vaccine. In addition, the emergence of new variants will also have an impact on an uncertain future. The closure of economic activity (lockdown) in many countries to stem the threat of contagion -- including in China -- triggered supply shortages for some time.

Meanwhile, new economic challenges emerged. The Russia-Ukrainian war, apart from creating a humanitarian crisis with an unprecedented number of refugees, also wreaked havoc on the world economy. One might ask: why does Ukraine affect the daily lives of Indonesians? Ukraine is so far away, so why does it affect our life?

The answer is that we are all economically connected. First, Ukraine is a large producer of basic food needs, such as cooking oil, wheat and fertilizers. As a result of the war, it was no longer able to produce and export these products, and this lifted the prices of these basic goods. For

example, world wheat prices increased nearly 30 percent at the start of this year, and have remained high to date. This means that the price of bread in grocery stores in Indonesia has also increased, even though the war did not occur here.

Global fuel prices have also soared because of the war. The price of gasoline in Indonesia is set by the government. That is, people do not see the increase in gasoline prices immediately when they fill up their motorbikes at the gas station. So, we may not consider this a problem. However, ordinary citizens actually paid the price increase even though they did not see it directly.

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First, the government pays more to buy oil and sells it at a lower price to the public. This is not free: the governments must find a way to pay for it, either by increasing future taxes or reducing spending on important investments in society, such as reducing infrastructure investment or health and social spending.

Second, it means that globally transportation costs will go up and it will be more expensive to ship goods. As a result, the price of the product increases even more.

Protection of the poor

These price increases are a challenge for many Indonesians, curbing household budgets and perhaps forcing people to forego those extra expenses in their lives: eating outside the home less, or perhaps not traveling to see family this year, or choosing not to buy new clothes.

However, for the poorest and most vulnerable, the increasing food prices can be very detrimental because food makes up the bulk of the poor's household expenditures. This means that many people will eat less and starve, as well as reduce their consumption of more nutritious foods (e.g. vegetables and meat).

Apart from the moral reason that people should not go hungry as a result of this situation, increasing prices have implications for Indonesia's future and economic growth. As prices increase, many poor and vulnerable people have had to reduce spending on food and health care for their children.

Research shows that investing in early childhood is critical to their future -- it is important to have nutritious food and to invest in health and education.

Our research, for example, shows how providing sustainable cash transfers via the Indonesian Family Hope Program to children from birth can dramatically reduce stunting and improve children's health. It is much more difficult to “catch up” if the investment is not made from the start.

Policy challenges

In light of these challenges, it is important for governments to act -- to ensure that the poor are adequately fed and are not marginalized, and to ensure that children have what they need to start life well.

We saw this happen during the Covid-19 crisis. Like many governments around the world, Indonesia overcame the crisis through the expansion of social assistance during the Covid-19 crisis

with programs such as the Sembako Card, the Family Hope Program, Direct Village Cash Assistance and Pre-employment Cards. We have a lot to learn from this expansion of the program: what worked and what could be improved further. We must take this lesson as we redesign policies and face the current economic difficulties.

In the next two articles, we will try to discuss this issue. In the second of three articles, Benjamin Olken will propose several principles to guide how economic policies should be designed and adapted to ensure that the most vulnerable among us survive today's challenges.

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In the last section, Chatib Basri will discuss the broader macroeconomic climate, and how to ensure that the government budget can meet the required policies. Of course it should be noted that we must not be complacent, there is still much to be done. The Ukraine war is not the only threat to food security today. This will not be the last either. The issue of climate change, for example, will continue to hamper global food security. Increasing global temperatures have had an impact on crop yields, and there has been a large increase in natural disasters compared to 30 years ago which led to shifts and loss of crops.

Even if this happened far from Indonesia, global food prices would be affected, and people in Indonesia would be affected too.

Therefore, the writing of the three of us, apart from discussing the policy changes needed to address today's threats, also discuss more broadly how to make policies that make Indonesia more resilient to future shocks and more resilient to impending food scarcity.

Rema Hanna, The Jeffrey Cheah Professor of South-East Asia Studies, Harvard Kennedy School, Faculty Director of Evidence for Policy Design, Scientific Director of J-PAL Southeast Asia.

This article was translated by Kurniawan Siswo.