Out of Recession

Out of Recession

By: Muhamad Chatib Basri, Lecturer at the Faculty of Economics and Business, University of Indonesia

“There is too much bad news to justify complacency. There is too much good news to justify despair.” wrote Donella Meadows, an environmental scientist from the United States.

KOMPAS – (11/8/2021) Meadows is one of the main authors of a very influential environmental report: “The Limits to Growth”. She wrote the sentence because she was impatient to see the debate whether we should be pessimistic or optimistic.

I was reminded of this Meadows essay when I read the good news from the Central Statistics Agency (BPS) last week: Indonesia’s economy grew 7.07 percent in the second quarter of 2021. And Indonesia is out of recession. This is news that gives optimism. Actually, there is nothing too surprising about this news.

I once wrote in this daily (28/5/2021), that there are two factors that might accelerate economic growth in the second quarter of 2021.

First, growth in the second quarter of 2021 will be relatively high because it departs from a low base. Our gross domestic product (GDP) based on constant prices (HK) 2010 in the second quarter of 2020 was recorded at Rp 2,589.6 trillion. Meanwhile, the GDP for the first quarter of 2021 has reached Rp 2,683.1 trillion. This means that to obtain a growth rate of 6-7 percent in the second quarter of 2021, GDP (HK2010) only needs to reach Rp 2,744.9 trillion-Rp 2,770.8 trillion. Enough with a growth of 2.3-3.3 percent from the first quarter to the second quarter of 2021.

Second, growth of 2.3-3.3 percent between quarters is very likely to be achieved because almost all leading indicators consistently show economic improvement.

The reason: increased mobility and improved exports. Along with increased mobility due to the decline in infection cases from February to before Ied—spending has increased. Bank Mandiri’s Office Chief Economist data shows that the spending index has returned, even higher than the pre-Covid-19 period. This explains why household consumption experienced high growth (5.93 percent). In line with the increase in household consumption, the business world responded by increasing investment.

In terms of exports, the increase in commodity prices of palm oil and coal, as well as the economic recovery of the US and China, made our export performance increase (growing 31.78 percent). Indonesia is able to take advantage of this opportunity. That is the reason why economic growth reached 7.07 percent in the second quarter of 2021. I think we need to give appreciation: the government’s stimulus has brought the economy back on a positive growth path. Indonesia is out of recession.

Continuity of recovery

However, the important question is: is this leap in growth sustainable? Honestly, I’m not good at answering it. There is one variable that cannot be completely predicted: the pandemic. How long will the pandemic last? Will there be another wave of the pandemic? I don’t have the answer. However, there are a few things that might help us look ahead.

First, the economic recovery in several countries in the world seems to be closely related to the ability to overcome the pandemic. Countries that are able to cope relatively well with the pandemic, either by implementing strict health protocols, or by accelerating vaccination, or a combination of both, generally have a faster chance of economic recovery.

My initial quantitative study showed that the higher the vaccination per 100 population, the higher the prospects for economic growth. I use the projections of the International Monetary Fund (IMF), July 2021. In line with that, the IMF in its July 2021World Economic Outlook, with a worried tone, wrote: the global economic recovery is uneven.

Vaccination is an important factor that determines the ramifications of this economic recovery. Countries that were able to cope with the pandemic relatively well were able to restore their economic activity more quickly. This explains why the projected economic growth in many developed countries—which have access to vaccines—or countries that implement health protocols well, has a recovery pattern in the shape of the letter “V”.

On the other hand, countries that have limited access to vaccines, or are weak in implementing health protocols, need a long time to recover their economies. In this case the economic recovery takes the form of a swoosh shape (like the Nike logo) or the letter “L” or “W”. The message of these findings is clear: economic recovery will only occur if health issues are addressed.

Second, if health is the key, will our economic performance in the second quarter of 2021 continue? Here we have to be careful. A study conducted by the Mandiri Institute showed that the implementation of emergency (or level 4) community activity restrictions (PPKM) resulted in a decrease in mobility. However, this must be done to save lives and the economy.

The Mandiri Institute also showed that the implementation of the emergency PPKM had an impact on a 17.2 percent decline in spending, since it was implemented until July 18, 2021. This decline was indeed lower than the decline in spending due to large-scale social restrictions (PSBB) implemented March 2-9 April 2020 (36.2 percent). The implication is that we will see a slowdown in economic growth in the third quarter of 2021.

I suspect that we will see a pattern of economic recovery in the shape of the letter “W”: economic growth reached its worst condition in the second quarter of 2020, then increased sharply in the second quarter of 2021, and then declined again in the third quarter of 2021.

Will economic growth increase again in the fourth quarter of 2021? The answer will largely depend on the extent to which mobility can return.

Easing mobility will boost the economy. However, at the same time, we are learning—at a very high price—that the relaxation of mobility that is not accompanied by the implementation of good health protocols and without the acceleration of vaccination risks causing a new wave of pandemics. Eventually the government had to reimpose mobility restrictions. If this pattern continues, we will repeat the “W” pattern, until community immunity is achieved.

Third, here is the dilemma. Very strict restrictions on mobility, is biased in favor of the upper middle class. Why? This group has digital savings and access. What about the lower middle class? This group has to work because they have no savings. Therefore, restrictions on mobility must be accompanied by the provision of compensation so that people can stay at home. This is where the important roles of direct cash assistance (BLT), the Family Hope Program (PKH), and other social assistance are felt.

In my writing with Ben Olken and Rema Hanna (Kompas, 2020), we once suggested that social protection should be expanded, not only for the poor, but also for the vulnerable. In addition to social protection, a focus on health such as accelerating vaccines and 3T (test, tracing, treatment) is key. One of the current problems with PCR testing is access and the price is still too expensive. I think there should be government intervention here.

Fourth, it may be necessary to think about increasing the number of beneficiaries and the value of BLT and PKH. The reason: the savings of vulnerable groups may have been eroded—or exhausted—because they have been used to survive all this time. If we expand our beneficiaries to 160 million people (60 percent of the total population), assistance needs to be given to around 40 million households (assuming one family consists of four people, father and mother and two children).

If the value of the benefits is Rp 1 million-Rp 1.5 million per month (higher than the current one), and is given for three months, it will take Rp 120 trillion-Rp 180 trillion or 0.75-1.1 percent of GDP. Health budget allocations also need to be increased for the provision of vaccines and 3T. Data in several countries shows that in general vaccines are quite effective in minimizing the severe impact of Covid-19 infection. Therefore, the acceleration of the vaccine is key.

Vaccine delays—whether due to limited supply, distribution, or vaccine hesitancy—can make the impact of a pandemic very dire. As a result, the process of economic recovery has become increasingly difficult, especially for countries with limited stimulus capacity.

Fiscal ability

All of the above proposals—addition of social assistance, additional budget allocations for health and support for MSMEs—will increase the budget deficit. Can our fiscal capability keep up? For this reason, it is necessary to reallocate the budget. Just focus on health, social protection, such as BLT, PKH, and other social assistance, as well as support for MSMEs. Other budgets can wait after the pandemic subsides. Priorities must be clear.

In terms of income, tax revenue must be increased. Minutes that I shared with Ben Olken, Mayara Felix from the Massachusetts Institute of Technology (MIT), and Rema Hanna from Harvard, at the National Bureau of Economic Research (NBER) (2019), showed that for every one Rupiah increase in the tax rate increase, taxpayers will get an additional burden of Rp 0.51. Therefore, other ways must be considered that do not burden taxpayers, but still increase the government’s total tax revenue.

The trick is to improve tax administration, as recently implemented by the Directorate General of Taxes, by moving business entity services from the regular tax office to the intermediate tax office (MTO). Why?

We suspect that limited resources in regular tax offices make them tend to focus on a few taxpayers with high income potential. As a result, large business entities will be targeted. There is a possibility that they will increasingly avoid paying taxes as the scale of their company grows.

If transferred to the MTO, with a larger number of staff, the tax burden is not only “borne” by a few large companies. As a result, they can still grow and pay taxes. In addition, re-evaluate the effectiveness of the tax incentives that have been provided so far. Explore taxes on non-renewable energy, including carbon taxes, offset by access to carbon credits for a greener recovery.

Fifth, with conditions like this, it seems that the government needs to carefully consider when is the right time to start withdrawing its stimulus. I understand that the budget deficit should be back below 3 percent by 2023. However, this needs to be done with caution. By looking at the economic conditions. If fiscal tightening is carried out too quickly and drastically, an economic contraction will occur. As a result, the debt-to-GDP ratio will actually increase because GDP growth is weak. Economic growth in the second quarter of 2021 is a good sign. It brings optimism. A sign of hope has not been deterred by this country. However, it is good to remember Meadows, “there is too much bad news for us to be complacent. There is too much good news to discourage us.” The problem is not pessimistic or optimistic, but how do we maintain that growth momentum with the right policies.

Source: Kompas Daily. Edition: Wednesday, August 11, 2021. Opinion Rubric. Page 6.

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