Synergy Between Braking and Acceleration

ENNY SRI HARTATI

· 5 minutes read

Even before the Covid-19 pandemic, the Indonesian economy was under pressure from a variety of problems, such as sluggish economic growth, deindustrialization, the trade deficit, a volatile exchange rate, and swelling government debts. The complex macroeconomic problems have caused slumps in investment, jobs and purchasing power.

The pandemic has dealt a major blow to an Indonesian economy that was already in a weakened state. As a result, the government must make an extra effort to save the economy while curbing the spread of Covid-19 at the same time. According to the government’s analogy, the large-scale social restrictions (PSBB) can reduce fiscal burdens and thereby prevent economic collapse. Evidently, Indonesia was still able to grow 2.97 percent in the first quarter of 2020 amid the global economic slowdown. In the second quarter of 2020, many countries fell into recession after experiencing negative growth over two consecutive quarters.

Also read : Adapting to Recession

Even so, most countries have been able to mitigate the main cause of the recession. The global curve of Covid-19 transmission began to flatten in June 2020. While striving to develop a vaccine, many countries have implemented effective fiscal stimulus policies to finance social protection and economic recovery programs. With the decline in Covid-19 transmission on entering the third quarter, many countries began to ease their restrictions and gradually resume economic activities. Despite having to adapt to new norms, their economies have begun to show signs of recovery.

In contrast, the implementation of the PSBB in Indonesia has caused an economic downturn. Almost all economic sectors have been disrupted, with productivity and sales falling by 70 percent. Unemployment and poverty have increased sharply to cause a drop in purchasing power. The economy is experiencing a deep contraction, with almost all business owners and consumers screaming for help. As a result, the government decided to ease the PSBB and introduce its “new normal” transitional phase.

Also read : The “Stay-at-Home” Economy

The Coordinating Maritime Affairs and Investment Minister issued a circular on 6 July 2020 to encourage government officials to travel on official business. The Administrative Reform and Bureaucracy Reform Minister also issued circular No. 64/2020 dated 13 July 2020 to revoke the ban on official trips as part of the policy to increase the disbursement of relief funds and to revive the sluggish transportation, tourism and trade sectors.

The policy has made it difficult to bring Covid-19 infections under control, and the transmission curve has fluctuated. Resuming economic activities, even with the new normal policies, has only backfired. The economy remains “unsafe”, while in contrast, new cases of Covid-19 are spiking.

Brake and accelerator

The experience of many countries shows that the economic recovery is possible only if Covid-19 is brought under control. The increasing number of transmission clusters will only cause an uncertain, high-cost, inefficient economy and poses a greater risk for people’s activities. Saving the economy is difficult without serious efforts at managing the health crisis. Good synergy is necessary between the brake and the accelerator.

Synergy is needed to improve the effectiveness of policies and programs that offer concrete solutions to the major issues. Moreover, Indonesia\'s economic problems are actually simpler than those of other countries. At the very least, Indonesia\'s economic dependence on the world economy or the global supply chain is less than 20 percent. The Indonesian economy comprises 56-58 percent household consumption and 34 percent investments, 99 percent of which involves micro, small and medium enterprises (MSMEs).

Also read : Speed of Recovery

It needs to focus only on two key priorities through effective social and economic programs. First, fiscal stimulus provided as social assistance should be able to halt the decline in purchasing power. Second, the national economic recovery program should focus on efforts to restore the activities of MSMEs that are productive, innovative and adaptive amid the conditions of the health crisis. Breakthroug policiesh will be effective only if they are based on the awareness that extra efforts are needed to work in “abnormal” conditions.

However, if the breakthrough policy is mere rhetoric, it will only create an illusion. For example, only Rp 138.28 trillion, or 19.89 percent of the Rp 695.2 trillion stimulus budget for Covid-19 management, has been realized as of 22 July 2020. This was supported by the higher realization of the social assistance budget of Rp 78.12 trillion (38.31 percent), while the realization of the stimulus budget for the economic recovery program remained below 15 percent.

Also read : Enforcing New Normal

Evidently, weak execution cannot be resolved through shortcuts, such as by granting "immunity" to policy implementers in Law No. 2/2020, because every program administrator understands the legal umbrella and does not only rely on just a single law. The key is effective coordination. In extraordinary conditions, a strong leader is needed who can act as a "feudal lord" to consolidate all major forces.

The budget disbursement should not be accelerated through shortcuts that tend to bypass the authority of top state institutions, for example, by reducing the roles of the House of Representatives (DPR) and the Supreme Audit Agency (BPK). It should increase the role of financial institution, instead of appointing the Deposit Insurance Agency to flush liquidity and eliminate the central bank’s independence by asking it to share the financial burden and to use funds from state-owned enterprises to finance the Covid-19 mitigation efforts, at the risk of moral hazard.

If such shortcut policies are implemented, it will further lower the confidence of both domestic and foreign investors. As a result, it will not only cause the economy to suffer negative growth in the third quarter, and could even worsen the economic contraction that occurred during the second quarter. Indonesia could become trapped in a prolonged recession.

ENNY SRI HARTATI, Senior researcher at the Institute for Development of Economics and Finance (Indef).

Editor:

Syahnan Rangkuti

Economic Analysis Enny Sri Hartati mitigation efforts negative growth extra effort economic contraction prolonged recession