Kiki Verico: A frozen winter for the global economy and Indonesia’s response
by: Kiki Verico, Ph.D., Vice Director – Economic and Community Research Institute
DEPOK – (Monday, October 12, 2020) As a result of continuing COVID-19 outbreaks in a number of countries, the global economic recovery is expected to take longer, getting closer to its initial forecast and entering the below-zero economic growth zone. Some countries have recovered from the pandemic, while others are struggling to contain it.
The more successful the containment of the pandemic, the more room there is for national economies to recover. As more countries have cases of the virus than those that do not, the global outlook is gloomy. A frozen economic winter is in store for the world economy.
In a freezing winter, people choose to stay mostly at home. Similarly, most people around the globe are staying home. Nevertheless, people need to heat their homes to stay alive. In the economy, the heater is government expenditure. As of August, Indonesia’s annual government expenditure had increased 13.97 percent in response to the pandemic, while transfers to provinces and village funds had increased 5.04 percent. These surges improved both the demand and supply side of the economy during this challenging time.
The world economy is in hibernation, and in the short-to-medium term, productivity will not be impacted much, but in the medium-to-long run, it will. During a freezing winter, people at home still need to consume basic necessities and keep warm. Likewise, in this economic contraction, the household economy must keep consuming basic needs and improving their skills. The latter would mean the economy would be more than ready to jump-start, accelerate and achieve higher economic growth than its previous projection once the pandemic is contained.
There are still potential economic opportunities during this crisis. One is the economic transformation from agriculture to the manufacturing sector through agroindustry. A second is increasing the participation of women in the labor force, and a third is a human capital improvement.
In The Jakarta Post on Aug. 6, I mentioned the potential for economic transformation in the value chains between food-related supply and food and beverage manufacturing, as well as the possibility of an economic jump-start through the increasing participation of women in the economy. Data shows that these sectors are among Indonesia’s top fifteen export values where female workers are the majority. This indicates that women are behind Indonesia’s global competitiveness.
The next potential economy is economic transformation and the importance of human capital for supporting it. Annual economic growth data showed that during the negative economic growth in the second quarter, the positive sector was human capital-related in education and health.
Nevertheless, both sectors remain labor-intensive because their contribution to value-added is less than that in labor absorption. This indicates room for improving human quality in the education and health sectors, directly increasing the human development index.
With its accumulated knowledge, know-how and high-tech capability, human capital is fundamental for productivity, and productivity is the key to economic jump-starting and transformation. Therefore, during this pandemic, both regular and non-typical educational activities have to be kept as usual.
The ICT (information, communication and technology) role can help service sectors like education keep going. Accumulated knowledge and know-how are essential to support economic recovery in the short-run and economic transformation in the medium to long run.
In a normal situation, the classical economic proverb says supply creates its own demand but in any unprecedented crisis like this global pandemic, the Keynesian mantra, which was born during the global economic recession in the 1930s works more. Keynes says demand creates its own supply.
From the macroeconomic side, aggregate demand needs to boost before aggregate supply increases. In this global pandemic, aggregate demand remains paused up until the pandemic is contained. The public health strategies are a necessary condition before the economic jump-start.
The core issue for jumpstarting is the quality of economic growth. It is not about how much economic growth can be preserved after the pandemic but about to what extent it can create jobs. The more jobs can be created, the more attractive the country is to investors.
Aggregate demand will increase because of both the Keynesian government stimulus and the Schumpeterian market mechanism. The latter is known as the role of digital economic disruption that does not need physical interactions.
The digital economy fits all the sectors, in particular service sectors, which do not require people’s mobility. This explains why the recent annual growth of the ICT sector is higher than before the pandemic. In the first quarter of 2020, the sector’s growth increased from 9.06 percent to 9.81 percent and 9.6 percent to 10.88 percent in the second quarter. ICT’s role made the global pandemic impact this year different from that of 100 years ago.
Some sectors become champions during the pandemic. In addition to ICT, education, health and water supply are also champions. The last is due to the increasing demand for the “new normal” hygiene. Other champion sectors are financial services due to cashless transactions and food-related products of the agriculture sector, which fulfill basic human needs. Time frame-wise, there are three different strategies in response to poor global economic growth.
First, government expenditure may generate more than a double economic multiplier from its winner sectors in the short run. Second, a contained pandemic will allow the highly impacted sectors of transportation, trade, construction, hotels and restaurants to reopen with the new normal protocol in the medium run.
Third, in the long run, the economy will transform through agroindustry, mining and human capital improvement. The last of these will generate a new production and value chain network rooted in Indonesian original comparative advantage. (hjtp)
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This article was published in thejakartapost.com with the title “A frozen winter for the global economy and Indonesia’s response”. Click to read: https://www.thejakartapost.com/paper/2020/10/11/a-frozen-winter-for-the-global-economy-and-indonesias-response.html.