The Pandemic and Institutional Investment
The health and economic crises have continued to affect Indonesia since the beginning of March 2020, when the Covid-19 epidemic struck the country.
President Joko Widodo gave a briefing to the Chairman of the Task Force for the Acceleration of Handling Covid-19, Doni Monardo and his staff when reviewing the Task Force Office in Graha National Disaster Management Agency (BNPB), Jakarta on Wednesday afternoon (10/6/2020)
The health and economic crises have continued to affect Indonesia since the beginning of March 2020, when the Covid-19 epidemic struck the country.
The number of victims infected with the virus continues to grow across all categories: confirmed cases, persons under monitoring (ODP), suspected cases classified as patients under surveillance (PDP), as well as and patients who die from the disease. The good news is that the number of recovered cases is increasing faster than deaths. The virus continues to spread to all provinces and the majority of regencies/municipalities in Indonesia. Java has become the epicenter of the virus outbreak.
Beyond this, the government continues to introduce policies to manage the Covid-19 epidemic and attendant socioeconomic issues. The government has issued policies on the provision of medical equipment, working from home (WFH), the large-scale social restrictions (PSBB), fiscal stimulus design, the mudik (exodus) travel ban, relief aid for basic needs, the Pre-Employment Card social assistance program, and so forth. Beyond the debate over its policy choices, one important aspect that the government must pay heed to is institutional investment (rules of the game) so that the policies can be implemented quickly and accurately.
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Certainty and moral hazard
The five principles of institutional analyses that can be referred to in selecting the right policies during the pandemic are: certainty and moral hazard, information asymmetry, transaction costs, rent seeking and resource competition (redistributive combines theory), as well as collective action and social capital. Multi-institutional analyses are frequently conducted at three institutional levels, namely the macro, meso and micro levels. Macro-level institutions look at the legal aspect that enables a policy to provide an umbrella of certainty; meso-level institutions are centered on governance and organization for implementing policies/programs; and micro-level institutions focus on the rules that allow all policy stakeholders and facilities to function properly in meeting their mandates. Institutional analyses do not question the policy option, but instead examine whether the policy/program meets the rules of the game.
The first principle that policies must uphold is to ensure certainty and to prevent the emergence of deviations (moral hazard). Institutional duties limit the occurrence of deviant behavior (North, 1994). Human beings tend to deviate if doing so will mean benefiting personally. The policy option on easing the PSBB, for example, is acceptable to the public on the one hand because of the complex variables that the government must calculate, such as the economic condition, virus transmission, the vulnerable population, bureaucratic capacity, and the state budget.
Commuters maintaining distance sit next to seats with stickers reading “Please don’t sit here” and “Respect social distancing” as red spots on the ground indicate where to stand in an underground metro line in Milan, on April 28, 2020, during the country’s lockdown aimed at curbing the spread of the COVID-19 infection, caused by the novel coronavirus.
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The problem is the diverse views on the execution of this policy, for example, the uncertainty among the decision-making authorities. No standard has been set in implementing the policy. In areas that still have a high number of people with the virus, the PSBB cannot be lifted. Meanwhile, in those regions that are recording a decline in cases, a transition period for easing the policy is being implemented. There is no certainty in the arguments behind each policy choice, which is a matter for macro-level institutions.
The rules are not being fully enforced at the meso level, so this becomes an incentive to deviate. Maintaining safe physical distance is difficult to manage if economic activities that encourage crowds remain open. To illustrate, several shopping centers remained open throughout the implementation of the PSBB, so visitors gathered there. When one shopper made a short video showing the shopping center’s full parking lot and distributed it to the public, the local administration immediately closed the mall without sanctions.
At the micro-institutional level, the policies on distributing relief aid and providing tax breaks (for example) are very appropriate. However, if these policies are not complemented with detailed data and validation on social assistance recipients, what happens is that friction emerges in the field – both among citizens and between residents and government apparatuses like the RT/RW (neighborhood unit/community unit), villages, districts, and regencies/cities. Until now, individuals and SMEs who have bank loans do not fully understand how to follow the mechanism. This is what creates uncertainty.
Asymmetric Information
Conventional (classical/neoclassical) economics believes in perfect information. This means that all parties have the same information so that transactions can be executed fairly. However, in the real world, information is never complete and only revolves around a few select actors.
Afterwards, the study on this issue was continued by Michael Spence, Joseph Stiglitz, and others.
George A. Akerlof has been examining this since 1970 (which later gave birth to intermediary market institutions as an instrument to mitigate information asymmetry). Afterwards, the study on this issue was continued by Michael Spence, Joseph Stiglitz, and others.
At the macro-institutional level, regional administrations need to grasp the details of all central government policies and programs, which enables them to easily oversee the programs and provide public understanding (in each region). The problem is that complete and equal information has not yet been shared among all parties so that different interpretations have emerged. One such example is the two regencies that were in a dispute over government policies some time ago.
At the meso level, the potential for asymmetric information occurs in connection with the data on the number of Covid-19 deaths. The fierce debate is: Should the bodies of people buried under the Covid-19 protocol be counted as confirmed cases? The implications of the answer to this question are far-reaching because it is the basis for the issuance of further policies. For example, if cases of Covid-19 protocol burials are counted as a death from a confirmed case, the death toll will swell and the policy to restrict the spread of the virus (say, the PSBB) must be extended, and vice versa.
At the micro-institutional level, understanding among the public differs widely on maintaining safe distance in relation to this virus (including the equipment that must be used to prevent contracting the virus). Knowledge and awareness among urban residents differ from residents in the suburbs or in rural areas. Likewise, people who live in the Covid-19 epicenter (Java) have different understandings and feelings compared to areas with low to moderate infection. Literacy is the battle in this locus.
Another critical issue concerns transaction costs. It is not easy to define the costs of this transaction, let alone calculate it. Even so, transaction costs (BTE) exists and can be calculated. Yeager (1999) formulated BTE as a cost of obtaining information on, negotiating, measuring, and enforcing the rules.
The BTE is then divided into three types of transaction costs (Furubotn and Richter, 2000): market, managerial, and political.
People line up to enter a government employment benefit office in Madrid, Spain, Friday, April 27, 2012. Spain\'s economic problems were put in sharp relief as official figures from the National Statistics Institute showed that unemployment has spiked to 24.4 percent in the first quarter of 2012, the highest rate in the 17-country eurozone, from 22.9 percent in the fourth quarter of 2011. (
The basis of political transaction costs is the cost of adjusting to policies. If the government issues a travel policy banning mudik, all parties must adjust to this policy. This is then reflected in the opportunity cost (lost benefits). Furthermore, implementing unclear policies also places a different burden on each individual citizen (and economic actors). This is what happened in the transaction costs at the macro-institutional level in the case of the mudik travel ban.
At the meso level, one transaction cost is incurred through the process of identifying and implementing social assistance programs. All processes along this chain fall into the category of managerial transaction costs.
Indonesia is fortunate because it had a relatively well-established social security system before it was hit by the virus outbreak. The government had designed many programs, like the rice assistance program (Rastra), the Family Hope Program (PKH) or the Staple Foods Card program, the Indonesia Smart Card (KIP) program, and the Healthy Indonesia Card (KIS) program. However, when the epidemic emerged and the government announced the expansion of social protection, it caused many complexities and unrest in several areas. The transaction costs these cases generated were not small and have not been overcome to date. Another obstacle emerged from the micro level, namely the limited information that central and regional governments had. As a result, the program did not reach those groups that should receive assistance. Luckily, many community initiatives like the Gusdurian and Kobeta Network (Indonesian Seed Cooperative) tried to fill in this hole.
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Rent seeking
Rent seeking is an enduring theme in each (economic) policy formulation. Krueger (1974) began with the case of import quota policies that failed due to the "buying and selling concessions" given to economic actors who had access to power. After this, many economists studied this issue seriously, including Bhagwati (1982) and Srinivasan (1991). Rent seeking involves twisting government policies to one’s benefit, which disrupts economic resources and leaves the public as the victims.
In the near future, the policymaking process for recovering the economy from the Covid-19 crisis will commence (it has already started in part). At the macro-institutional level, the policy formulations that have been taken must be followed up with detailed rules to avoid creating space for freeloaders. The bitter experience of the 1998 Bank Indonesia liquidity support (BLBI) as a result of the economic crisis must not be repeated. The direction and framework for economic recovery must be defined from the beginning to prevent its infiltration by economic predators.
The program is good and noble in terms of its arrangement in a clear framework as one of the government’s flagship programs.
Economic rent can also arise from the meso level, where policy/program objectives and governance must be precisely prepared. Criticisms on the implementation of the Pre-Employment Card program, for example, are greater at this level. The program is good and noble in terms of its arrangement in a clear framework as one of the government’s flagship programs. However, during its implementation, complaints emerged regarding institutional vulnerability and governance that led to conflicts of interest infiltrating the bidding process, the program scheme, and other aspects. This loophole must be closed immediately so that it does not interfere with the program’s credibility or incur huge losses to the state budget.
At the micro-institutional level, potential rent seeking is very likely to infiltrate the execution of several activities, such as the procurement and distribution of medical equipment (masks, PPE, etc.) and imports dominating medical products, which has shocked the State-Owned Enterprises Minister. The concentrated market structure has provided room for an active black market.
Every national emergency, such as war, crisis, or a pandemic (as is happening now), is actually a good occasion for forming a sense of solidarity. The raw material for solidarity is social capital, which then transforms as collective action. Mancur Olson (1971) convinced the public that collective action was an effective instrument to overcome freeloaders and to design cooperative solutions for managing resources or public goods. (Government) Policies can be classified as "public goods" that can be capitalized if communities take collective action, especially strategic interest groups.
Today’s case is that not all policies have received proper public support. Some policies have even been delegitimized, such as the Pre-Employment Card program and the agenda for economic recovery. This macro-institutional problem must be resolved.
A COVID-19 coronavirus patient lies in bed at the Intensive Unit Care of the CEMTRO private clinic in Madrid on April 17, 2020. – Spain’s death toll increased to nearly 19,500, government figures showed. The country reported 585 new fatalities in the past 24 hours, but said it had revised its counting mechanism, making the figures difficult to compare with previous tolls.
The government has benefited greatly from the social capital that remains extremely strong among the public to easily establish a sense of solidarity. This volunteerism is so amazing that from the beginning the people have been struggling for mutual help and support. The hope is that this social movement will be balanced with the meso institution initiated by the government to facilitate synergy. This living solidarity is facilitated to assist in the data collection, distribution and supervision of the program. Unfortunately, this is not activated adequately so that social capital does not meet the structural capital. Finally, micro-institutions must be mobilized to prevent government policies from breaking up the solidarity. At first there have been more policies promoting certain professional groups (online transportation), thereby causing jealousy. The good news is that the government quickly realizes this so it is swiftly improving policies by touching the protection programs for other vulnerable groups.
Three suggestions
On looking at the complex institutional cases that the government must handle, the following are three suggestions for consideration. First is to review the various policies/programs and identifying the loopholes that have become the source of the problem in terms of certainty, program governance, and understanding among stakeholders (and the public). The problem is most frequently in the details (the devil is in the detail). Second, an independent "Economic Recovery Task Force" should be formed immediately to prevent easy infiltration by rent seekers.
Ahmad Yustika Erani
The task force formulates derivative policies and oversees the quick execution of the programs. This institution is granted firm authority to ensure that the restructuring program works. Third is to institutionalize the abundant social capital and solidarity in collaboration schemes with the government. The government does not have the sufficient resources to manage this complicated issue in terms of finances (fiscal), personnel (bureaucracy/security forces), and the completeness of policies. Integrating structural resources with social capital is the most feasible option.
Ahmad Erani Yustika, Professor at the Economic and Business School of Brawijaya University; Senior Economist of Indef
