Ari Kuncoro: The Economics of Vaccines
Nino Eka Putra ~ FEB UI Public Relations Officer
DEPOK – Tuesday (8/9/2020) – Kompas daily published an article written by Professor Ari Kuncoro, Rector of Universitas Indonesia, titled “The Economics of Vaccines.”
“The Economics of Vaccines”
There are a number of lessons that can be learned from the lockdown measures in countries in Europe, which can be divided into the eurozone and the European Union (EU) because there are countries that have not adopted the euro as their currency.
First, the huge economic toll in the form of growth contraction, coupled with unemployment. Eurozone economies contracted -12.1% while EU economies declined -11.7%. Unemployment rates in the eurozone and the EU rose 2.8% and 2.6%, respectively, dragging down their economies further after growth of -3.6% (eurozone) and -3.2% (EU) in the previous quarter.
The second lesson is that the number of new Covid-19 cases surged after the lockdown measures were lifted or relaxed. Spain saw a second wave that was blamed on risky behavior from what was glossed over as social gatherings. As many as 23,000 new cases have been recorded since the last Friday of August. What started out as one of the strictest lockdowns in the world ended in vain.
Football stars from prominent European clubs tested positive for Covid-19 after returning from vacations. In times of pandemic, self-restraint and law enforcement by local governments are vital.
Effect of vaccine declaration
Currently, absolute regional lockdowns are no longer an option. After an economic fallout in Q2/2020, the Regional Director of the World Health Organization (WHO) warned that a second lockdown would only lead to disaster. This is in line with the general policy trend in the UK, Spain and France. The reason: the sustainability of the health sector. Economic fallout and a rise in unemployment would eventually disrupt financing of the health sector.
As an initial step, a number of countries have started to give updates on clinical trials for Covid-19 vaccines to set a time horizon and give hope so as to maintain people’s expectations, a crucial aspect in keeping the economy running.
A vaccine declaration would be the implementation of the Lucas (1972) and Arrow-Debreu (1954) concept of expectation adjustment to revive the economy before a vaccine is ready.
The problem is that there is a gap between the series of required clinical trials and developing a vaccine that can be mass produced. In an effort to eliminate the gap, a more decentralized policy has been established that takes into consideration local conditions and targets the source of transmission directly, such as health protocol in cafés, nursing homes and student dormitories.
Consistent with the forward looking behavior hypothesis (Lucas, 1978), the policy has led to growing demand for electric scooters in tourist destinations in Europe from scooter rental service providers.
In Indonesia, the announcement of clinical trials for Covid-19 vaccines, both imported from China and locally developed, was made in mid-July. It is important to note that the announcement was preceded by a relaxation in large-scale social restrictions in early July so that the impact was a combination of both.
At the time of writing, Statistics Indonesia had not yet published the latest data on the variables of the main aggregates of gross domestic product. Therefore, the impact of the vaccine announcement could only be assessed from a number of early indicators.
The variable that showed a stark contrast between July and August was the Purchasing Managers’ Index (PMI) of the manufacturing industry. The index improved from 28.6 in May to 39.1 in June and to 46.9 in July. However, because it remained below 50, it means that there was no expansion in production. The index reached 50.8 in August, which indicates an expansion. Another early indicator was provided by Danareksa Institute, which reported an increase in the Consumer Confidence Index (CCI) in August for the first time since April 2020. The CCI rose to 74.0 in August from 71.4 in July.
Early leveraging power
Unlike with swab tests, positive results are expected to boost the economy in the last two quarters of 2020. The movement of a number of early indicators was consistent with a consumer expectation survey conducted in July 2020. An improvement in the PIM indicated a recovery in the manufacturing sector, which reflected growing consumer interest in purchasing durable goods.
Although still in the pessimistic zone, durable goods index data released by Bank Indonesia showed an improvement in July, particularly among consumers who earn more than Rp 4 million per month. Durable goods purchases by consumers who earn between Rp 1 million and Rp 2 million per month also improved significantly, as was the case with consumers who make Rp 3.1 million to Rp 4 million per month. Based on age group, consumers aged 30 and above contributed the most to index improvement.
The economic growth projection for 2021 outlined in the 2021 Financial Notes, which has been set at 4.5%-5.5%, reflects the time frame for vaccination. The government expects to start vaccinations in January 2021, with a possibility of bringing it forward to December 2020.
Durable goods purchases are related primarily to the manufacturing, trade, and accommodation and restaurant sectors, which contribute around 41% to GDP. These three sectors contracted by 6.49%, 6.71% and 22.31%, respectively, in Q2/2020. For transportation, the latest data showed that fossil fuel consumption reached 122,000 kiloliters per day, down 7% from normal circumstances. Together with the transportation sector, these three sectors play a big role in determining whether Q3/2020 and Q4/2020 will see positive growth.
The leveraging power of lower- to middle-income consumers is heavily dependent on the absorption of National Economic Recovery funds. For upper- and middle-income consumers, excessive fear of the pandemic must be curbed through, among other things, positive news about the prospect of mass vaccination as well as health protocol on public transportation and at tourist facilities that is monitored and implemented by local administrations.
Source: Kompas daily, Tuesday, 8 September 2020 Edition. Economic Analysis Section. Page 1, continued to Page 15.