Keeping Economic Resilience Amid Global Uncertainty
By: Kiki Verico, Ph.D., is an adviser on industry and international trade to the finance minister and senior lecturer of international economics at the University of Indonesia. The views expressed are his own.
TheJakartaPost – (14/2/2022) Statistics Indonesia (BPS) reported last week that the Indonesian economy grew by 3.69 percent year-on-year (YOY) in the last quarter of 2021, from a contraction of 2.07 percent in 2020, and strongly recovered by 5.02 percent on a quarterly basis. Meanwhile, Bank Indonesia (BI) announced that inflation in 2021 rose to 1.87 percent from 1.68 percent in 2020.
The combination of economic growth and the inflation rate pattern is validation that Indonesia’s aggregate supply has recovered, and demand has entered the optimism zone. This pattern shows that in 2021, Indonesia’s economy returned to productivity as growth was above the inflation rate. Indonesia’s economic productivity depends on how the country contains the pandemic shock.
The question now is how to maintain the country’s economic resilience? This question is rooted in the essential sources of economic growth.
Almost 2,500 years ago, the great ancient Greek philosophers Socrates, Plato and Aristotle explained the importance of knowledge, value and passion. In my own words, they are intelligence for knowledge, morality for value and mentality for passion.
Every person needs these elements together to enhance their competitiveness. Without one, human competitiveness will always remain below its potential. The higher a population’s competitiveness, the higher the economic growth of its country.
Therefore, the government’s fundamental role is to ensure the quality of human knowledge based on education and the health system, strengthening the quality of institutions through ongoing reforms and stimulating the productivity of the people through market mechanisms.
Over the last 100 years, modern economists have mathematically formulated the importance of human capital, integrity and productivity, while as Plato explained, knowledge indicates the quality of human capital, value represents institutional integrity and passion promotes productivity.
Both the philosophical and mathematical methods reveal the essential sources of economic growth. Both combinations prove that robust economic growth is dependent on three factors, which are human capital, institutions and productivity. These three factors work in-between market mechanisms and government intervention. We must manage the balance between the two.
Nothing in life is perfect. All we have is our best, and we need to work hard to keep what we have on an ideal path. The market mechanisms we have are not perfect, but are the best the economy has produced. Government intervention exists to complete market mechanisms.
Every time market mechanisms collapse, government intervention must come to the forefront and work harder. In fiscal policy terminology, this is known as the counter-cyclical approach, where the annual budget deficit increases to face economic contraction and market stagnancy. If market mechanisms return to normal, the counter-cyclical policy can be tapered.
Law No. 2/2020 on state financial policy and system stability for COVID-19 handling projects that the counter-cyclical policy will end in 2022, and in 2023 the annual budget deficit will return to the global standard measurement of below 3 percent of the gross domestic product (GDP).
If the market mechanisms begin to work as usual and people start to live with COVID-19 as an endemic virus, the economy will become normal. Indonesia can refocus on its three essential economic growth sources. This will involve endogenous factors, covering education and health, with exogenous factors including physical and digital infrastructure, technological development and structural reforms.
Nevertheless, global health and economies have remained uncertain with the new variant of Omicron starting to increase the number of infections worldwide in late 2021 to early 2022, following the Delta variant in mid-2021. Both global health and economic recovery patterns are asymmetric within countries.
This phenomenon is part of the so-called prolonged scarring effect of the global pandemic, as the world also witnessed around 100 years ago with the 1918 influenza. Governments around the globe must work together to guarantee the game-changer in the convergent recovery: equal vaccination access for all countries. Nobody wins until everyone gets to the finish line.
As no product is produced by one country because of global supply chains, the health and economic recovery for all countries are vital. Convergent shifting from pandemic to endemic must happen at the same time for all countries, and this indeed takes time. Success relies on patience and persistence while riding the wave of the pandemic’s effects.
In 2022, the most significant challenges lie in production and logistic disruption of aggregate supply. Global production networks face both energy crises and production disruption due to uneven recovery patterns from the pandemic. These supply shocks increase inflation worldwide through the increasing imported inflation, including in Indonesia.
However, in 2021, the Indonesian inflation rate remained stable and below its economic growth. This shows that the increasing money supply in Indonesia can be attributed more to the increase of output than that of price. This pattern shows good practice in Indonesia’s economy.
The next challenge is in Indonesia’s “Phillips curve”, where economic growth increases labor force absorption; hence the inverse relation between open unemployment and the inflation rate exists.
Indonesia’s economy has returned to positive economic growth and it is time to aim for quality growth, with the core focus on unemployment and formal activities. Both are the cornerstones of economic transformation. The combination of declining open unemployment and inclining formal activities is the catalyst for escaping economic contraction.
A complete set of macroeconomic achievements in 2021 for Indonesia are good starting indicators, and in 2022 Indonesia needs to ride the wave of global economic turmoil correctly. To ride this wave, the country needs a bigger international reserve buffer, which Indonesia has strengthened from US$129.2 billion in 2019 to $135.9 billion in 2020 and $144.9 billion in 2021. Indonesia needs to keep up its economic resilience throughout the rest of the pandemic.
Economic growth rooted in productivity ideally generates jobs locally and international reserves globally. If the COVID-19 pandemic becomes endemic this year, from 2022 onward, Indonesia’s economic growth will increase even more, and possibly above the pre-pandemic average rates.