Ari Kuncoro: New Normal as a Source of Positive Expectations
Nino Eka Putra ~ FEB UI Public Relations Office
DEPOK, Tuesday, 9/6/2020 – Kompas daily published an article written by Universitas Indonesia Rector Ari Kuncoro entitled New Normal as a Source of Positive Expectations in its Opinon column. Below is the article.
New Normal as a Source of Positive Expectations
Decision science recognizes the so-called dynamic optimization, with multiple constraints that change over time.
The aim is to replicate the situation faced by a forward-looking, multifaceted and multidimensional entity in making decisions by taking into account constraints and uncertainties (stochastic dynamic optimization). Technically, because the decision is forward looking, terminal conditions are needed to ensure that mathematically the optimization has a solution that can be analyzed.
The result of this optimization is a time path that illustrates that each policy action will depend on the situation and the condition of the immediate environment. This road map does not set a specific timetable for action as it only signals that there will be light at the end of the tunnel. This is the situation faced by Indonesia and the world as they cope with Covid-19. After focusing on transmission prevention efforts, policy drafting is moving towards more multidimensional measures, saving lives while minimizing the impacts of recession.
Source of positive expectations
From the beginning, the government has taken measures to prevent a drastic decline in economic activity. The first phase was saving human lives and medical personnel, followed by the second phase in the form of social protection for social and vulnerable groups, protection for middle and lower class groups who have lost their jobs.
The third phase was to strengthen the economic habitat to prevent the Covid-19 pandemic from turning into an economic and financial crisis through programs that are focused on the affected sectors, MSME protection, bank loan relaxation, and fiscal relaxation to finance economic stimulus. However, whatever amount of stimulus disbursed, things will depend on whether there is interaction between the purchasing power and promotion, both traditionally and virtually. Therefore, it is important to change expectations from negative to positive.
To that end, a research team from two universities in the US, Yale and Carnegie Mellon, conducted an experiment involving 2,480 volunteers. The results of the experiment were published in the journal Proceeding of the Royal Society A. The analysis found that larger groups usually take longer to find solutions to a crisis or even adopt a passive stance. This is because some members of the groups believe more in hoaxes/rumors, making the groups unable to make a decision.
Negative sentiments make people become uncreative in finding solutions to improve a situation. Negative sentiments will even lead to actions that will make things worse. This fits the description of consumers everywhere, who are the largest group in society. For this reason, public expectations need to be guided by a road map that contains positive information (Isard (1995)).
In decision making using a dynamic optimization approach, the key is terminal condition, which provides an illustration of how the handling of a health emergency will have an optimal impact on the lives of many people in the future. This is where the new normal comes into play. In daily behavior, a positive picture of the future is needed to reduce uncertainty to prevent counterproductive behavior. In Indonesia, there are two major groups that affect the national economic condition, namely consumers and producers.
The livelihood of many people is still guaranteed because of the interaction between the demand and production sides. The demand side is dominated by consumption behavior, which is determined not only by taste and income, but also by future expectations. Global efforts to prevent the spread of Covid-19 include limiting or even temporarily banning interaction between the demand and production sides in the economy. There are countries that opted for strict territorial quarantine such as Italy and Spain.
Meanwhile, other countries such as Sweden, Japan and Indonesia (with its large-scale social restrictions/PSBB), opted for more lenient restrictions that allowed certain aspects of revenue and production flows to continue.
Limiting interaction between people’s purchasing power and production will not only have a direct impact of reduced transactions but will also affect the expectations of those affected by a health emergency, thereby changing their economic behavior. This is evidenced by the consumer confidence index (CCI) published by Bank Indonesia. The CPI weakened drastically from 113.8 in March to 84.8 in April. A CCI below 100 means you are in a pessimistic zone. This can only happen if there is an extraordinary occurence affecting the set of information that influences people’s expectations.
The component most affected was the economic conditions index (ECI), which fell sharply to 62.8 in April from 103.3 in March as a result of a decline in the job availability index to 41.2 due to layoffs. Limiting economic interaction due to a health emergency has affected people, both those who earn a fixed income (especially those who have been laid off) and those who rely on daily income.
In terms of consumption demand, the weakening public spending sentiment is evident from the weakening annual growth in spending on restaurants and hotels, from 5.64 percent to 2.39 percent in the first quarter of 2020. Anything that can be put off will be put off, as indicated by the minus 3.29 percent growth in spending on clothing, footwear and grooming services. In Maslow’s (1943) scale of needs, the purchasing index for durable goods decreased to 87.3 in April and this would delay consumption of durable goods, such as electronics, furniture and household appliances.
This had a strong impact on several branches of the manufacturing industry in the first quarter of 2020. The most striking picture of the difference between the pre-Covid 19 world and the current situation was found in the furniture industry, which experienced the deepest contraction with a growth of minus 7.28 percent, a far cry from the 12.89 percent growth in the first quarter of 2019. Next was the metal goods industry, computers, electronic goods, optics and electrical equipment, which experienced a negative annual growth of minus 3.52 percent.
On the other hand, pessimism on the production side was indicated by a drop in the business activity expectations index, which weakened to 102.3 in April from 126.2 in the previous month. This was confirmed by investment spending on machinery and equipment, which slumped to minus 3.62 percent, a far cry from 8.40 percent a year earlier. Overall, it resulted in investment growing only 1.97 percent in the first quarter of 2020 compared to 5.03 percent last year. The impact on the production side was in the branch of the machine and equipment industry, which experienced a growth of minus 9.33 percent, the lowest among other branches of the manufacturing industry.
In a difficult situation as the one described above, Indonesia can still attain an annual economic growth of 2.97 percent in the first quarter of 2020. Indeed, it is still below the 5 percent average growth in the previous years, but in a health emergency, this level can still be achieved as a foundation for survival and recovery in the future, especially when growth in the second and third quarters is still a big question. To restore people’s livelihoods in the third quarter of 2020 onwards, a situation is needed in which people can resume their activities. The virus will remain a latent danger that lurks for some time to come, making the new normal a concept of balance between efforts to deal with health emergencies and keeping the economy running.
Economy in the new normal
The picture of the economic structure in the new normality is actually already obvious from the BPS publication of the structure of GDP growth in the first quarter of 2020. In essence, those that will survive, even grow, are those that can fulfill their basic necessities. For example, the growth in spending on health and education actually increased to 7.85 percent from 5.54 percent in 2019 (pre-Covid 19). Food and beverages other than restaurants remained relatively unchanged, at 5.10 percent. Likewise, housing and household appliances grew by 4.47 percent, unchanged from the pre-pandemic situation. This has been made possible by the revival of home cooking within families.
On the production side, people’s desire to increase their immune system has contributed to a 5.59 percent growth in the chemical, pharmaceutical and traditional medicine industries, among the highest in the manufacturing sector. Increased online activities as a result of study, work and shop from home has increased the growth of the information and communication sector to 9.81 percent from 9.06 percent last year. Sectors such as transportation, trade, hotels and restaurants, including tourism that is the worst hit because it relies on face-to-face transactions as well as physical attendance and meetings, still have high hopes for the new normal era folowing the transformation of the form of presentation to comply with the Covid-19 prevention protocol.
The recent discourse on the new normal is an instrument for adjusting expectations (expectation realignment) as well as terminal conditions, which gives hope to the public because it shows the storm will pass even though the exact time has not been determined. This is indicated by public interest in shopping for Eid al-Fitr needs in traditional markets such as the Tanah Abang and the Kagetan night market amid the PSBB. The trend looks set to continue after the Eid al-Fitr is over. People’s desire to resume their activities is actually quite high after being confined at home for a long time, although this requires better crowd control to prevent the risk of re-infection. This purchasing power can be used to support economic recovery by consistently adopting a clean and healthy lifestyle. (hjtp)
Source: Kompas, daily, Tuesday, 9 June 2020 edition. Opinion column.
(lem)