Kiki Verico: Survive in a Storm
Since it was first announced on December 31, 2019, a new corona virus outbreak, Covid-19, has infected 75,727 people, 98 percent are in China and 2 percent are spread in 26 countries, with a mortality rate of 3 percent. Its spread is rapid and occurs in China, the world’s second largest economy with 16.3 percent of the world’s gross domestic product (IMF, 2019). This will certainly affect not only the Chinese economy, but also the global economy.
China’s contribution in the world production chain reaches more than 20 percent in electronic products, electricity, and information and communication technology, both from exports of finished goods and raw materials. Meanwhile, exports of furniture and textiles reached more than 40 percent of finished goods and 30 percent of textile raw materials.
There is hardly a single product in the world that is immune from the global production network, both from the need for raw materials, raw materials, and capital goods, because it is not possible to produce one product by one country. It is possible that this corona outbreak will affect the world supply chain because the role of China in the world production and sales network is quite dominant.
According to reports from several global economic survey agencies, if antivirus is found and summer arrives, it is estimated that the weakening of the world economy will only last until the second quarter and begin to improve in the third quarter of 2020. This resurgence takes time because of declining supply of raw materials and machinery maintenance services are expected to continue to be felt until the third quarter. Not surprisingly, many countries began to revise their economic growth down, because the remaining time in the fourth quarter was not enough to cover the decline in growth in the first and second quarters.
For Indonesia, the effect of the decline in the Chinese supply chain will be felt from two sources, namely the weakening of the Southeast Asian production and sales network and the bilateral relations of the Indonesian-Chinese economy. At the regional level, as part of the ASEAN-China free trade cooperation, China’s role in investment reached 6.5 percent or the fourth largest after Japan, Singapore and Hong Kong. In terms of trade, China’s role in Southeast Asia reached 14 percent in terms of exports and 21 percent in terms of imports. Considering the elasticity of imports in exports could reach one, it can be expected that a decline in Southeast Asian imports from China will reduce ASEAN’s export capability by 18 percent.
From the bilateral side, China is Indonesia’s largest export destination country with a proportion of 15 percent of total exports and 24 percent of total imports with a deficit position of US $ 18.4 billion. Dependence on imports from China is not only on final manufactured goods, but also raw materials, so this condition will affect the ability of national production. With the simultaneous elasticity of exports and investment reaching almost half of economic growth, then, if these two variables decrease by 1 percent, growth will contract up to 0.45 percent.
Although the storm must pass, no human being knows how long the storm will last. All global research institutes estimate that the world economy will contract before finally improving. The optimistic scenario shows the fastest recovery begins in the second half of 2020. But the increase in the number of corona patients after changing detection methods creates new uncertainties, and the business world increasingly chooses to wait and see.
In these economic conditions, the role of government is very important. When the global economic depression occurred in the 1929-1930s, effective fiscal expansion pushed the demand side, particularly consumption (countercyclical, Keynesian). In Indonesia, for example, the distribution of the Family Hope Program, Food Packages, Pre-Work Cards, and educational assistance, such as School Operational Assistance; and health assistance, such as the National Health Insurance Benefit Beneficiary.
Fiscal policy to reverse the pace of decline to increase growth must be done quickly and effectively. Fast, for example, by encouraging the acceleration of spending by ministries, institutions and local governments. Effective means increasing the impact of government spending multipliers on development, such as infrastructure and village funds.
In the medium term, there will be an adjustment to the global supply network so that there is a possibility of foreign investment flowing into Southeast Asia, where Indonesia must compete with the Philippines, Vietnam, Malaysia and Thailand. The combination of fiscal incentives and monetary expansion through reduced interest rates and exchange rate stability can drive productivity on the supply side.
Several strategies can be carried out related to employment, taxation, logistics system modernization, customs, export quality raw material production incentives, and improving the quality of workers through vocational training cooperation. History shows, when the economy is hit by a storm, the role of government becomes important to break the deadlock and survive in a storm.
Kiki Verico
Deputy Head of LPEM FEB UI and Lecturer of FEB UI
Source: Tempo, February 24, 2020