Muhamad Chatib Basri: Economy in the New Normal
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK, Monday, 8/6/2020 – Kompas daily published an article written by Muhamad Chatib Basri, a lecturer at the Faculty of Economics and Business, Universitas Indonesia, entitled Economy in the New Normal Economy, on its Opinion page. Below is the article.
Economy in the New Normal
The Covid-19 pandemic tells many stories about death, poverty and tears. The pandemic has also caused anxiety over the fate of Indonesia’s economy.
Economic growth plunged from 4.97 percent in the fourth quarter of 2019 to 2.97 percent in the first quarter of 2020. In fact, we know that the pandemic did not have a significant impact on the economy in the period January-February. The government announced the first Covid-19 case in Indonesia in early March 2020. This means that the impact of the pandemic on the domestic economy should have been felt in March. Therefore, if economic growth plunged in March, it means that the economic condition in March was so bad it dragged down economic growth in the first quarter.
Of course the situation is not all bleak. Sales volumes of online health services, pharmacies or supermarkets increased compared to the pre-Covid-19 period. Food and beverages consumption also remained stable. However, I believe that the economic contraction will continue in the second quarter of 2020. Unlike past economic crises, the current economic crisis was triggered by a pandemic that has hit production (supply shock) and purchasing power (demand shock). The situation is made more complicated by the lockdown policies or social restrictions implemented by a number of countries in the world, including Indonesia, to deal with the pandemic. These policies have an impact on the economy. Why?
The new normal and the economy
We know, by definition, that the market is a place where people exchange goods and services, both physically and virtually. Social restrictions prevent physical encounters. As a result, the only markets still operating are virtual markets. The implication is that both production and consumption will suffer. We don’t know how long the pandemic will last. Should we allow disruptions in economic activity to continue? That is why several countries have started preparing for an economic reopening.
Of course, we can only reopen the economy when the pandemic subsides and strict health protocols are implemented. People call it the new normal. Still, we have to be very careful. Health protocols can be prepared on paper, but their implementation is another matter. Who will monitor that health protocols are followed? We can’t possibly deploy all the security forces just to monitor the implementation of the health protocols due the limited number of officers. Discipline is the key. Can the necessary conditions be met? Otherwise, there is a risk of a second wave.
That is why there seems to be a clash of economic and health priorities. I don’t see it that way. The economy can recover only if the pandemic is overcome. Epidemiologists believe that the risk of transmission can be reduced if we stay at home. The implication is that economic activities that require physical presence cannot run and people will lose their income. Therefore, the state must provide social protection in the form of direct cash assistance (BLT), the Family Hope Program (PKH), as well as support for the business world.
People must be compensated in order to stay at home. That is why economic policies on social protection and aid for the business world are integral to efforts to deal with the pandemic. Of course, this cannot go on forever. Then, when should we apply the new normal or are we ready for it? I’m not very good at answering them. The Covid-19 case taught me to humbly say, I don’t know. This paper will only try to discern what will happen to Indonesia’s economy if the new normal is implemented.
Several weeks ago, The Economist magazine published an interesting article that compares Denmark, which emplements a strict lockdown policy, and Sweden, which does not. Interestingly, there is a similar pattern: residents in both countries tend to stay at home and spend less.
I believe that Swedes and Danes can afford to stay at home because their social security allows it. In Malaysia, the re-opening process is also not easy and takes time. They argued that if, for example, a business serves 50 people, and only one person gets Covid-19, then everyone will be summoned and placed in quarantine and the business will be closed. Therefore, if there is a choice, it is better to wait until everything is safe. In China, data shows an increase in the number of subway passengers on weekdays, but not on weekends. This means that people do go out of the house, but to work, not for leisure. It takes a long time to get past of trauma, especially when a vaccine has yet to be invented. The cases of Sweden, Malaysia and China show that reopening is not as easy as we imagine.
What about Indonesia? Will the economy recover soon with the new normal? What policies need to be prepared? Here are a few points to be aware of. First, people’s decision to return to work will depend on how big the reservation wage (the minimum income that workers are willing to accept) is. People who have savings or non-labor income (there is economic support) have the luxury of choosing to stay at home because it is safer compared to the risk of the pandemic. On the other hand, lower and middle-income earners who do not have enough savings have no choice but to return to work.
Therefore, it is predictable that activities in traditional markets or lower and middle-class markets will return to normal faster. By contrast, the upper middle class who have the option of staying at home or shopping online may delay their physical activities. The same thing could happen with school. If parents still have the option of having their children learn from home, the resistance to returning to school will be quite high.
Second, offices or factories may require people to return to work. Production activities will indeed resume, but the problem is, is there a demand? This is what happened in China after the re-opening: production increased, but demand was still very weak. A study by Lin and Meissner (2020) at the National Bureau of Economic Research (NBER) also shows that unemployment remains high in some states in the United States that do not implement lockdowns. Why? Because economic reopening and recovery have not been evenly distributed.
In the case of China, as the global economy is still very weak, the demand for Chinese products is still very low. In Lin and Meissner’s study, even though a state does not impose a lockdown, the demand for their products comes from other states, or from other countries with weak economies. This interdependence determines whether economic recovery is imminent. In the case of Indonesia, I can imagine, exports will still be constrained as long as global economic activity has not fully resumed. On the other hand, domestic purchasing power remains weak as people have lost their income. Third, given the weak demand, policies, including monetary policies to reduce interest rates, that encourage production will not be effective. Interest rate cut has failed to encourage new investment as quickly as expected. It only helps reduce business interest expense. Data shows that the loan to deposit ratio has decreased due to lower demand for credit. It makes sense. If the demand for goods and services is weak, why should businesses seek loan and expand production? My calculations with Fitrania and Zahro (2016) show, for the case of Indonesia, an increase in consumption will encourage investment one quarter later. On the contrary, increased investment does not significantly increase consumption. So, if you want to move the economy in the short term, increase consumption.
Stimulus sequence
Fourth, what can be done? I see that the stimulus sequence must start from fiscal to push demand (jump start). Don’t get me wrong. The fiscal burden will not decrease with economic reopening. Purchasing power, especially of the lower middle class, must be increased. I once wrote on this daily with my colleagues, Rema Hanna from Harvard University and Benjamin Olken from MIT, about the need to expand BLT for the lower middle class or aspiring middle class. Economic reopening requires support for social assistance and cash-intensive programs to boost demand. Once demand is created, Bank Indonesia should follow with monetary expansion.
Fifth, one thing that needs to be considered carefully is social and income inequality. The new normal will not lead us to pre-Covid-19 life. As long as a vaccine has not been found, the economy will not be fully operational. Therefore, there will be sectors that will be affected. The case of China shows that for the time being, people only leave home to work, not to have fun. As a result, the recovery of the entertainment or hotel and tourism industries may be slower. Additionally, to reduce the risk of the pandemic, factories may choose to use less labor than machinery. As a result, capital dividend will increase faster than wages.
On the other hand, we know that the lower middle class workers who do not have the option to stay at home because they do not have savings will take the risk to work again. Lockdown may be more acceptable to the upper middle class if social protection for the lower middle class is not available. Therefore, the issue of income inequality and social welfare for the lower middle class must be taken seriously. With all these notes in mind, the chances of a quick economic recovery (V-shaped recovery) may be relatively small. Economic recovery may be slower (U-shaped recovery).
There are more questions than answers ahead of us. While the pandemic has not been completely put under control, the transmission curve in many countries is starting to flatten. Although tinged with anxiety and nervousness, people have started to talk about the new normal. The blizzard did come. It could last. We must have warm clothes, good and sufficient supplies. We have to maintain the rhythm so that we don’t run out of stamina. We need to be wise and courageous to make hard choices. “In the depths of winter, I finally know that in me there is a summer that is unbeatable,” wrote Albert Camus. (hjtp)
Source: Kompas daily, Monday, 8 June 2020 edition, Opinion column, Page 6.
(lem)