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Jakarta Post

How to move on from economic contraction

  • Kristianus Pramudito Isyunanda

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Jakarta   /   Fri, August 21, 2020   /   09:37 am
How to move on from economic contraction Business as usual: PT Indonesia Port Corporation (IPC) car terminal workers use cranes to lift jet bridge parts produced by PT Bukaka Teknik Utama Tbk for export at Tanjung Priok seaport in North Jakarta on Aug. 3. Export activities have continued at the facility despite the COVID-19 pandemic. (Antara/Aditya Pradana Putra)

Statistics Indonesia (BPS) has confirmed what most analysts had predicted. Indonesia’s gross domestic product (GDP) contracted by 5.32 percent year-on-year in the second quarter due to the pandemic-induced public health and economic crisis. Many other developed economies suffered even deeper contraction.

The COVID-19 pandemic can be seen as an unprecedented economic crisis. The shock that comes from the health crisis has hit both supply-side and demand-side economies. Businesses are losing revenue, investors are in great doubt, and the government faces a deeper deficit. Furthermore, the contraction is driven by turbulences in household spending and investment. Mobility restrictions have impacted productivity and wealth, while the end of the pandemic remains uncertain.

Uncertainty is perhaps the only thing that is certain in this life. This crisis has the world wondering whether tomorrow will be as good as today. COVID-19 has highlighted the path of economic uncertainty. However, uncertainty always haunts the economy, even without a pandemic. Uncertainty is inherent to the economy.

Unlike risk, uncertainty is impossible to calculate. A number of contemporary solutions are out there, which might be good or bad. Any effort is yet to be tested in the long-run, a highly reasonable reason to keep the public policy prudent at all times.

In the monetary sector, BPS data show that July saw month-to-month deflation of 0.1 percent in July. Although it might not always be the case, deflation usually comes as a consequence of economic contraction.

But why does deflation matter? Doesn’t it mean that the economy is going back to square one, where prices are lower? Straight answer: It does. The problem lies with the reality that the burden of the economy rises from time to time. Deflation is not what the economy needs.

The world has known for long the concept of the central bank, which has the main duty to act countercyclically with the business cycle to ensure stability. In normal times, the central bank fights against inflation to keep it low and stable to support growth. Today, it is quite the reverse.

The central bank needs to move beyond inflation, at least to prevent deflation, but it cannot do this alone. Deflation is more complicated. Ben Bernanke, the former chairman of the United States Federal Reserve System, said that the prevention of deflation is preferable to the cure. The central bank needs to cooperate closely with the government, which has direct access to the real economy. That means combining the task of assuring liquidity on the monetary end and providing stimulus on the fiscal front.

Due to the challenging situation, people and corporations are forced to refrain from spending. Because one person’s spending is another’s income, less spending means less productivity to serve the economy as a whole. Everybody reduces spending as a rational move and is more risk-averse, but the downside is that this collective action invokes the contraction.

The collective solution to this matter is for the collective agent, namely the government, to take the driver’s seat. When the private sector is sluggish, the economy depends on government spending. The remaining challenge is that the economy is still somewhat restricted, because of the consistent virus spread. This is why governmental support is needed. Put another way, fiscal stimulus has to play a bigger role.

There are several promising industries with a multiplier effect for the economy, i.e. a rebound in GDP growth and employment. Food and beverages retains growth potential, as basic survival needs remain despite the pandemic. Innovation, such as creative products and digital marketing, will facilitate recovery.

In the commercial sector, the online retail business shows big potential. People are shifting their behavior and tend to use online platforms for consumption. This new trend supports commerce, even for nonprimary goods. It even offers an opportunity to grow stronger than before the pandemic.

Another strategic industry is transportation and logistics as a catalyst for growth in other sectors. All other sectors should gradually follow in the course of reopening. In the banking sector, the ongoing credit restructuring should still be monitored, and it is worth keeping an eye on the real sector recovery and maintaining adequate liquidity.

In the pursuit of an economic rebound, restoring confidence is essential. Economic contraction always disrupts welfare. Hence, it has been in the interest of policymakers to take any necessary action in their power, solely in the public interest. Recovery then needs to be accelerated to re-inflate demand, starting with leveraging high-potential industries.

It might be tough to rely on hope in today’s world, but as the people of the country, it is important to retain confidence in our part. The good news is that the signal of recovery might now be here. Economic activities are reemerging, while markets are beginning to be less volatile. It is also reasonable to believe that every difficulty can force improvements.

Departing from COVID-19, there are wide opportunities to leverage digitalization, to conceive of a greener economy and to embark on a healthier lifestyle.

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The writer is a legal affairs staffer at Bank Indonesia. The views expressed his own.

Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.