For Indonesia, it is interesting trying to reveal consumer preferences before and after the Covid-19 pandemic.
By
ARI KUNCORO
·5 minutes read
SALOMO TOBING
Ari Kuncoro
Indonesia recorded economic growth of 5.03 percent in the first quarter of 2023, with the largest contribution coming from public consumption. Therefore, it is interesting to note the dynamics of consumption. In this case, the revealed preference theory, first put forward by Samuelson (1938) and then developed by Afriat (1967) and Mathew (2007), is used to reconstruct consumer preferences from consumption data.
As a preference is ordinal (ranking), it is only an indication of priority that is not bound by numerical value. Revealed preference has weakness, as the assumption of preferences does not change (constancy) over time. In fact, as time passes, especially in the current world situation, external conditions that are beyond the control of consumers are always changing so that behavioral adaptation is required.
For this reason, the revealed preference method was modified so that in aggregate, consumers need not be bound by an unchanged rating assumption. With this modification, the revealed preference approach is useful for viewing the dynamics of consumption behavior when the external environment is experiencing rapid changes, such as in present world.
Analysis can be carried out by comparing the composition or growth of consumption bundles in different periods. The simplest approach is taken before and after, and it is very practical if there is a shock in the middle. Observations can also be made on the production side, for example the figures of the purchasing manager index (PMI), which can be divided into durable goods (manufacturing) and services.
Consumption in the US
The banking crisis in the United States is an interesting case for looking at the differences in consumption behavior before and after the incident. The 10th of March 2023 was the day when Silicon Valley Bank in the US collapsed, which spread to several other regional banks. The manufacturing PMI had been increasing since January and peaked in April at 50.2. This increase showed the resilience of the production sector and public consumption, even though the central bank continued to raise its benchmark interest rate.
However, the situation changed after the crisis among regional banks, as these banks had been financing working capital for local small and medium businesses, property developers and mortgages. The manufacturing PMI reentered the 48.5 contraction zone, indicating a decline in demand for durable goods. Interestingly, the PMI for the services sector increased from 53.6 in April to 55.1 in May. It seemed that the regional banking crisis in the US led to a shift in consumption towards services and away from durable goods.
The slowdown in the US, as the locomotive of the world economy, needs to be watched because of its impact on exports.
At the same time, the residential construction sector also contracted minus 5.4 percent. This, and not consumption, was the main contributor to the slowdown in the US economy in the first quarter of 2023 to 1.3 percent, from 2.6 percent in the previous period. On the other hand, public consumption increased from 3.7 percent in Q4 2022 to 3.8 percent in Q1 2023.
The slowdown in the US, as the locomotive of the world economy, needs to be watched because of its impact on exports. Indonesia's export growth is still in the double digits, while until March 2023, it recorded a trade surplus for 35 consecutive months.
For Indonesia, it is interesting trying to reveal consumer preferences before and after the Covid-19 pandemic. Data for 2015-2019 before the pandemic showed that average annual growth of quarterly spending on health and education exceeded consumption growth (5.6 percent versus 5.1 percent). In addition, it was also higher than accommodation and restaurants (5.5 percent), transportation (5.1 percent), and food and beverage (5.3 percent). The World Bank (2020) refers to this pattern in its report, Aspiring Indonesia: Expanding the Middle Class.
Revealed preference was disrupted during the coronavirus pandemic in 2020. Overall quarterly average consumption contracted minus 2.6 percent. Meanwhile, health and education continued to grow positively at 3.1 percent. When the pandemic started to be brought under control in 2021 and mobility restrictions were relaxed, household spending increased sharply due to pent-up demand. What happened then was expenditure switching.
Quarterly average spending in transport and warehousing grew 2.8 percent, while accommodation and restaurants rose 4.4 percent. Both of these expenditure groups outpaced growth in health and education (1.7 percent).
This pattern persisted until the economy began to recover in 2022, and through Q1 2023.
Average spending in transportation and warehousing as well as accommodation and restaurants was respectively 8.1 percent and 6.4 percent, while it reached 2.5 percent in the health sector. People also began to buy clothing and footwear again (4.3 percent), as well as housing and household equipment (2.8 percent).
The above preferences were also reflected in per sector average quarterly GDP growth from 2022 to Q1 2023. Mobility sectors such as transportation/warehousing and accommodation/restaurants recorded the highest growth of respectively 19.2 percent and 11.9 percent, far above GDP growth of 5.2 percent. Also benefiting from the leverage of these sectors were trade and manufacturing. Health services also showedfairly strong growth of 4.8 percent.
Looking at the data before and after the pandemic using the revealed preference method shows that the Indonesian people are becoming more complex in their hierarchy of needs, looking ahead, paying attention to quality of life by investing in human capital for their children (Becker and Tomes, 1976). At the same time, food is also important as a basic need. However, these are not enough because there are new needs, namely mobility (transportation, accommodation/restaurants), which requires infrastructure and facilities to take advantage of their driving force for the economy.
ARI KUNCORO, rector of the University of Indonesia.
(This article was translated by Hendarsyah Tarmizi)
