Stimulus amid the Coronavirus
A bitter article was published in The Guardian daily on March 14. Coronavirus may force UK doctors to decide who they save, wrote Jonathan Ives.
A bitter article was published in The Guardian daily on March 14. Coronavirus may force UK doctors to decide who they save, wrote Jonathan Ives.
He remarked that the Italian College of Anesthesia, Analgesia, Resuscitation and Intensive Care had offered a clue on what to do when the number of patients infected with coronavirus exceeded the existing medical capacity. With sadness he wrote, priority must be given to those who have the possibility of survival -- and who have the potential for a long life.
This is the moral dilemma we face. The Covid-19 outbreak has become a humanity problem. It is no longer just a pandemic. There is a moral dilemma, humanity. The situation has changed very fast. Current conditions indicate that Covid-19 has exceeded SARS. Therefore, it is interesting to read the minutes written by economists Warwick McKibbin and Roshen Fernando of The Australian National University in the book Economics in the Time of Covid-19 edited by Richard Baldwin and Beatrice Weder Di Mauro (2020).
Also read : Being Agile Against the Pandemic
Impacts of social distancing
McKibbin and Fernando made an estimation of the economic impact of Covid-19. Their calculations show that the impact of the outbreak is not limited to China, but on a global scale, temporary, with low severity. But with the attack rate for China 10 percent and the death rate in China 2 percent, Indonesia\'s economic growth will drop 1.3 percent if mitigation is not done. That means that if in 2019 Indonesia\'s economic growth is 5 percent, there is a risk -- with this scenario -- Indonesia\'s economic growth will drop to 3.7 percent.
In a harsh scenario, McKibbin and Fernando point out, Indonesia\'s economic growth will fall 4.7 percent from the initial condition. That means that in the most severe circumstances, our economy will only grow 0.3 percent if mitigation is not carried out. We can argue about the accuracy of number and the analysis. However, he warned, in a global pandemic situation, the impact on the Indonesian economy could be enormous.
Baldwin and Di Mauro show there are three things that need to be anticipated from this economic shock. First, the medical shock. Because of illness, people cannot work. The implication is that production is disrupted. Second, the economic impact occurs due to various restrictions, including quarantine and social distancing. Third, because of the psychological impact, namely due to fear or worry, people will delay their economic activities.
Then, what can be done as mitigation? The Government and Bank Indonesia (BI) have issued a series of stimulus packages. I think we must appreciate the speed of the government and BI’s response. This is not easy. However, the situation is changing so fast. This is not enough. We must look at the stimulus in terms of relevance to the situation, order, priorities and time.
Why? Let\'s look at the following developments. Last weekend, the government recommended social restrictions. In essence, people were told to avoid unnecessary interactions in the crowds. The government asked that we work from home, learn from home and worship at home. The goal is clear, namely to inhibit the spread of Covid-19. This is a good step because we know that prevention is better than treatment. And, if the epidemic spreads, the economy will stagnate. Safety and health must be a priority. I am not interested in entering into the debate on whether or not this step is necessary, or how effective this policy is. What I will talk is, what are the implications of this decision for the economy, and what economic policies are suitable.
Also read : Public Poised to Face Covid-19
Social distancing measures have an impact on economic activity. It can be imagined, people will avoid shopping places. Production activities that require direct contact will also be disrupted. Economic activities that require physical presence will be reduced. The implication is that both demand and production will be disrupted due to the decrease in demand (demand shock) and disruption of supply (supply shock). How big is this disruption? It really depends on whether the activity can be replaced with activities electronically (online) or not. If yes, the disruption will be small.
However, what about online motorcycle taxi drivers, laborers, traveling vendors, shop assistants, restaurant waiters, drivers and so on? Don\'t forget, there are many of them. And, many of them work in the informal sector. Rizki Nauli Siregar, a doctoral student in economics at the University of California at Davis, reminded me, if production activities are disrupted, companies will reduce working hours or close completely. As most are in the informal sector, relaxation of income taxes will not have much impact. Or even if people have money from the stimulus packages if they cannot spend it, because of social distancing, it will not be effective in driving demand.
How big is this disruption?
Social distancing, in the short term, will also affect production. If production is disrupted, fiscal stimulus, such as relaxation of import taxes and acceleration of restitution, is not enough. Fiscal stimulus measures like this — at present — will be limited in their effectiveness. Another example, in the first stimulus package, the government provided discounts for airlines, hotels, and so on. The goal was to support tourism. This is clearly no longer effective because people will avoid traveling.
This stimulus package may be effective after the outbreak is overcome, and social distancing ends. So what to do? I want to remind once again that all of the above stimuli are useful, but they must be examined in terms of relevance to circumstances, time, priorities and order.
Focus on fiscal stimulus
During a period of social distancing, in the short-term fiscal stimulus is better focused on several things. First, focus on health: prevention of the outbreak and efforts to reduce transmission.
Indonesia\'s population is very large. Transmission of a new type of coronavirus can be very fast. We have to make a scenario of what will happen if this outbreak occurs on a broad scale like in many other countries. At a time when the number of cases is still small, it is better to be prepared before we are shocked and late. The government must ensure that we have enough hospitals or places to treat coronavirus patients. In China, for example, the Chinese Government rented hotels to quarantine patients who were not in a serious condition. This also directly provided income for businesses that have been hit.
More than that, we also need sufficient test kits, medical personnel, both nurses and doctors, as well as drugs and treatment procedures. This will have a large cost. Not only that, for those who lose income due to social distancing, health insurance contributions will become a worrying burden. At present, the cost of treating coronavirus patients is borne by the government. This is the right step. However, if it happens on a large scale, a larger budget is needed.
Second, as the budget is limited, we cannot finance all of them. There must be priorities. Maybe it is better to focus on cities. Why? Because city dwellers may be more susceptible to contracting Covid-19 due to high density. Moreover, the intensity of social interaction is also higher. Industry is also located in urban areas. Data shows that around 55 percent of Indonesians live in urban areas. The implication is that the greatest food supply needs are also in urban areas. That means that the stimulus needs to be focused on cities.
If the stimulus in urban areas is not large enough, those who lose their jobs will return to villages. Then there will be the risk of urban dwellers transmitting the virus to more remote villages. When the Asian financial crisis occurred in 1998, urban dwellers returned to the villages. However, I want to be careful here: as health facilities in villages are more limited than in cities, they can also be affected. Therefore, the government needs to think carefully and make careful calculations.
Third, we know the economic impacts of the coronavirus will be very significant. One impact is that many community groups will lose their jobs. To mitigate this, and ensure the lower middle class has the ability to meet their daily needs, the government needs to improve and expand the Cash Direct Assistance (BLT) program, the Family Hope Program (PKH) and Non-cash Food Aid (BPNT). Under conditions when social distancing is implemented, the BLT program might be more effective than PKH. Broaden the scope of target households, not only for the poor, but also for near poor or middle-poor. In Hong Kong, all residents over the age of 18 are given a certain amount of cash. We certainly cannot imitate Hong Kong because our fiscal capacities are different, but increasing the scope of the BLT and PKH programs is very important.
Fourth, the most important thing is to ensure that food stocks are under control. Price increases due to unavailability of food stocks will cause panic and social unrest. This is not an easy thing because there are several issues that must be taken into consideration here, namely the adequacy of supply and its distribution. If the epidemic spreads and social restrictions become increasingly intense, who will distribute the food? Here the role of the government becomes very important. The same is also true for drug stocks.
Fifth, as I mentioned above, the business world will be hit. There is a risk that companies will have difficulty paying their obligations. Therefore, it is important to take steps to relax credit restructuring.
Sixth, everything discussed here requires funding. In fact, we know that falling oil prices, falling commodity prices and an economic slowdown will hit government revenue. In such a situation, the government must relocate expenditure from activities that have low urgency to health spending to cope with the Covid-19 outbreak and social protection. Review the priorities. Raise the budget deficit.
That is why government stimulus needs to look at the relevance, priorities, order and time. It must also be temporary. In times of social distancing, fiscal stimulus is better focused on the health sector and social assistance to tackle this outbreak. Only after transmission has declined, and social distancing stops, "standard fiscal stimulus" to encourage demand and production, such as relaxation of import taxes and so on, should be implemented. After demand moves, monetary policy to reduce interest will then be effective.
We are in a world that is not easy to navigate. This is a humanity disaster. The article in The Guardian about the doctor\'s dilemma in Italy is indeed bitter, but nonetheless on the other hand we still see hope. The Xinhua news agency, for example, noted President Xi Jinping\'s statement that humans are a community with a shared future; and only through unity and coordination, humans can overcome various global risks and challenges. And China has also sent teams and medical equipment to help Italy and Spain. Maybe this doesn\'t solve the whole problem, but as Albert Camus wrote: in the midst of disaster, there are more qualities in humans that can be admired rather than hated.
Muhamad Chatib Basri, Lecturer at the School of Economics and Business, University of Indonesia.