Ari Kuncoro: Macroeconomics of Recovery Speed
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK – Tuesday (7/7/2020), Kompas.id published an article written by Universitas Indonesia Rector Professor Ari Kuncoro entitled Microeconomics of Recovery Speed in its Opinion page – Economic Analysis. Below is the complete article.
Microeconomics of Recovery Speed
The third quarter of 2020 is a critical starting point for harnessing the power of the head wind. Implementation is critical to the success of policy design and sequencing.
Several international institutions, such as the Organization for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) and the World Bank, are racing to revise down their world economic growth forecasts. In its latest publication, the OECD also released the underlying data of its prediction. The data can be used for various simple calculations.
Borrowing Barro and Sala-i-Martin’s (1990) idea of convergence, we can roughly estimate the coefficient of recovery speed, namely the time required for an economy to resume long-term growth (steady state). This is done by comparing the forecasts of contraction for 2020 with the “long-term” growth rate between 2012 and 2019. The time needed is the window of opportunity.
The growth trajectory may change so that the process of returning to equilibrium is faster or slower. For example, when there are changes in public expectations, new policies, technological developments such as the discovery of vaccines, drugs, and so on.
Recovery speed
In general, the world will lose 7.85 percent of output in 2020 and can only achieve 2.75 percent growth in 2021. If the global economy can only grow at a steady rate of 3.28 percent per annum achieved between 2012 and 2019, it will take more than two years to restore world economic growth to its long-term equilibrium.
Meanwhile, the gross domestic product (GDP) value of OECD countries will be eroded by 9.29 percent this year and can only grow by 2.24 percent next year. Based on the same calculation, it will take approximately 3.45 years for them to return to their long-term growth path.
Countries that suffer the deepest contraction happen to be close neighbors, namely France, Spain and Italy, each growing negatively by around 14 percent. It is no coincidence that these Latin European countries rely on the services sector, especially tourism, as a source of growth that hinges heavily on the physical presence of customers. It is estimated that these countries will only be able to make up for the output lost in 2020 within four years at the latest, maybe even longer.
In 2021, only two countries will be able to compensate for previous year’s negative growth, namely China and India. Even though its economy only grew by minus 6.8 percent in the first quarter of 2020, China is expected to make up for it in the following quarter. That means China will grow by minus 3.67 percent for the entire 2020.
Meanwhile, India’s economic growth will skyrocket to 8.07 percent in 2021, outweighing the negative growth of 7.28 percent in 2020. The coefficient for the recovery speed is less than 1, which means that in 2021, the two countries are expected to return to their pre-crisis growth path. The Purchasing Managers Index (PMI) of India (47.2) and China (51.2) showed that they have been getting closer to or even have entered the positive zone since June 2020.
Policy sequencing
OECD’s data calculations show that without extraordinary efforts, Indonesia can return to the 5 percent growth path within 1.23 years from 2020, which means around the first quarter of 2022. The timing may be a little late as other countries in Asia, such as China and India, are already rushing to seize the world’s supply chain business currently on the back burner. The third and fourth quarters of 2020 are important for Indonesia to get a “head start”.
Therefore, in crisis management, policy sequencing is equally important as policy design to guide expectations to a positive direction. However, there are still concerns that Indonesia will fall into a low-level equilibrium trap.
In the case of Indonesia, the OECD predicted a lower limit of growth of minus 3.9 percent, while the World Bank set the figure at minus 3.5 percent if large-scale social restrictions last four months or longer. To date, some of the exogenous parameters have yet to suggest the right values for positive growth.
The consumer confidence index (CCI) is still 77.8, far below the optimistic level. The CCI for the manufacturing sector has improved even though it is still below 50, which means it is in the pessimistic zone. The index increased significantly from 28.6 in May to 39.1 in June, indicating a glimmer of hope at the end of the tunnel. To increase public and business optimism, concrete examples of policies that balance public health with efforts to restore the economy are crucial, especially at the regional level.
Given the lethargic global export-import activities, the exchange rate can be used as an indicator of a conducive macroeconomic habitat. According to Dornbusch’s (1976) dynamic mathematical equation, several macro variables can be classified as early barometers to check the temperature of the economy. Meanwhile, other indicators, such as economic growth and inflation, have only been seen recently.
The rupiah depreciated by 18 percent against the US dollar in March 2020, from Rp14,500 per US dollar to close to Rp16,800 per US dollar in a month due to the Covid-19 pandemic. Rupiah depreciation was triggered by foreign capital outflows from Indonesia as investors seek safe havens in US dollars over concerns about the negative impact of Covid-19 on Indonesia’s economy.
Policy sequencing to overcome the pandemic in Indonesia and to bring the country back to normal has only recently come to the attention of the international community and has an effect on the macroeconomic variables on exchange rates. The return of foreign investment portfolios to Indonesia improved the rupiah exchange rate to Rp14,000 per US dollar before the pandemic. Indeed, ideally, Indonesia should not rely solely on portfolio inflows. However, as in the sport of sailing, the head wind will facilitate economic recovery. There is also a breath of fresh air brought about by the prospect of the relocation of several factories from the United States to several industrial estates on the north coast of Central Java, which shows Indonesia can still attract direct capital.
Policy sequencing starts with the declaration of Covid-19 as a pandemic; social protection for poor and vulnerable groups; protection of micro, small and medium enterprises (MSMEs); relaxation of banking regulations; relaxation of the fiscal deficit; and the issuance of regulations on the supervision of national economic recovery program were deemed appropriate. In the latest development, Bank Indonesia will bear the majority of the interest on government securities. This is an attempt to alleviate intertemporal budget constraints.
The third quarter of 2020 is a critical starting point to take advantage of the head wind. In terms of policy design and sequencing, it is ultimately implementation that determines its success. The government as system integrator from the demand and production side of the economy must increase budget absorption by several ministries, which is still too low. The goal is to promote the growth trajectories, directly and through multiple and indirect effects by changing public expectations and policy credibility (Drazen and Masson [1994]). This shift tends toward a more positive growth that balances saving lives and efforts to minimize recession. (hjtp)
Source: https://www.kompas.id/baca/opini/2020/07/07/makroekonomi-kecepatan-pemulihan/?utm_source=bebasakses_kompasid&utm_medium=whatsapp_shared&utm_content=sosmed&utm_campaign=sharinglink