Kiki Verico: Options for the Economy Amid Pandemic
DEPOK – (9/9/2020) In the Global Economic Prospects published in June, the World Bank estimates that the world economy will be shrinking by 5.2 percent. In the second quarter of 2020, the global economy entered a negative growth zone, with China and Vietnam reporting positive growth.
China booked positive economic growth in the second quarter after negative growth in the first quarter of 2020, meaning an escape from recession. In this second quarter, Indonesia also experienced negative economic growth, but together with South Korea, Indonesia’s economic growth was slightly better than others. Every country, including Indonesia, is now struggling to prevent an economic contraction for this year.
Negative economic growth with a lower inflation rate in the second quarter compared to the first one indicates that aggregate demand in Indonesia has decreased more than the aggregate supply. Data from Statistics Indonesia (BPS) on Aug. 5 confirmed that household spending, the largest proportion in aggregate demand, contracted to negative 5.51 percent, which was a little lower than the 5.32 percent negative growth in the economy.
Yet this condition is better than if aggregate supply shock was higher than aggregate demand shock because scarcity in output will raise the inflation rate, reduce real wages, real money and decrease savings.
Keynesian approach-wise, government budget expenditure such as social security must generate a positive spill-over effect on household spending while supporting the supply-side to get ready to adopt the new normal until a vaccine and medicine are developed.
From the aggregate supply side, sectoral data demonstrated that manufacturing and trade, the top three largest economic sizes in Indonesia, experienced a deeper negative economic growth than total economic growth. Nevertheless, agriculture, as the second-largest economic size, is the opposite, growing around 2.19 percent.
Aggregate demand and aggregate supply are endogenous, of which aggregate supply affects aggregate demand and vice versa. Theoretically, economic recovery must start from aggregate supply, then the aggregate demand as consumption needs income. Nevertheless, the necessary condition must be fulfilled first, which is the effectiveness of the pandemic’s containment.
Another essential feature is spatial dimension. In the second quarter, BPS data shows that Indonesia’s economic center, Java island, grew slower than the national economic growth at a negative 6.69 percent. In terms of online transactions, western Indonesia is the center of economic gravity, covering more than 55 percent of inflow and outflow trading. In comparison, the center and eastern Indonesia are 34 percent and 11 percent, respectively.
Therefore, the second quarter’s economic growth contraction was biased to the contraction of Indonesia’s economic gravity center. Improving this gravity center will improve the national economy. The economic sectors related to Indonesia’s gravity center are manufacturing, agriculture and retail trading.
In terms of size, manufacturing is the largest sector in Indonesia’s economy. The data indicated that the improvement in the manufacturing sector is another success factor for enhancing the economy. My article, published in The Jakarta Post on Aug. 6, mentioned that Indonesia has the potential to boost the manufacturing sector’s economy with food and beverage products.
This sector’s improvement will have a significant impact. Note that the food-related raw materials are still dependent on imports. Therefore, Indonesia needs to improve its agriculture to compete with imported products. The data shows that machinery imports increased while raw material imports decreased. It indicates a positive sign as machinery has high production linkages, and decreasing raw material imports indicate the increasing demand for domestic raw materials.
The linkage between domestic agriculture and the food and beverage manufacturing sectors is essential and timely. In the second quarter, the data confirmed that food products grew by 9.23 percent, the highest compared to any other agricultural products. As most of Indonesia’s labor force works in the agriculture sector, transformation and modernization in the agriculture sector are needed. How? One way is to connect agriculture to the manufacturing sector and support local food and beverage manufacturers to compete globally.
Clothing, footwear, food and beverages are the top three sub-sectors in the manufacturing sector, in which more than 50 percent of the workers are women. Increasing economic competitiveness in these sectors means to not only grow Indonesia’s competitiveness but also increase women’s income.
Enhancing the agro-industrial linkage in Indonesia will not only improve the village economy, create formal jobs, enlarge the tax base, as well as reduce poverty and income inequality, but also empower women’s participation in value-added creation. The latter will boost Indonesia’s economic potential.
From the Schumpeterian approach, the inclusive economy succeeds with the digital economy’s role throughout e-commerce and financial technology. Enhancing the digital economy’s role up to the village level will also open Indonesia’s potential economy, as at least 13 percent of workers in online merchants are women. This will not only help economic recovery but also increases women’s participation in the economy.
The digital economy allows people to be able to produce and sell their products while staying at home. Both the agro-industrial linkage and digital economy enhancements at the village level will support economic inclusiveness. The latter will increase not only the quantity but also the quality of economic growth.
In dealing with this unprecedented global pandemic, health care, people’s physical and psychological wellbeing and the economy must complement each other. The economy will be jumpstarting with the necessary conditions of an untroublesome pandemic, while containing the pandemic needs a government budget that depends on economic jumpstarting. Indeed, our health and the economy are complementary.
*** The writer is special adviser on industry and international trade to the finance minister and Lecturer at the School of Economics and Business, University of Indonesia. The views expressed are his own.