The coronavirus disease (COVID-19) that started in Wuhan just over a year ago has changed nearly every aspect of our lives. In just a few months, the virus spread around the globe, creating extreme uncertainty unlike what most of us have ever seen. And it is still with us today, with more than 630,000 Indonesians infected.
It shocked the government into action, prompting it to respond early with unprecedented measures. In normal times, government policies usually aim to support economic growth and boost employment. But to contain the virus spread and save lives, it needed to take stringent large-scale social restriction measures (PSBB). This required the temporary closure of some businesses and restricted people’s mobility, leading the domestic economy into recession.
The Asian Development Outlook Supplement (ADOS) released on December 10 projects the Indonesian economy will contract by 2.2% this year, its first drop since 1999. The main reason is a sharp fall in household consumption and investment, which have traditionally been the two largest contributors to growth. Compared with some other countries in the region, a 2.2% contraction is not too bad, thanks to the government’s large fiscal stimulus and Bank Indonesia’s accommodative monetary policy. Other countries, which imposed lockdowns and other stringent quarantines—and are more dependent on tourism and international trade—contracted more (see Figure). Others that managed to contain the spread of COVID-19 early on, such as the Peoples’ Republic of China and Viet Nam, are forecast to show positive economic growth.
But a rebound is expected around the region next year. The ADOS forecasts the Indonesian economy to grow by 4.5% in 2021. So why should we be so optimistic about next year? First, there is better recognition now that COVID-19 remains the biggest risk to economic recovery. And second, the arrival of a series of vaccines is a game changer in containing the virus spread so we can begin to get our economies moving again. Also, data from the second and third quarters indicate that household consumption and investment seem to have bottomed out. So, the 2021 recovery will surge in part due to the base effect of negative 2020 growth. While encouraging, household consumption and investment will not yet recover to pre-crisis levels, yet we will still see respectable positive economic growth. In addition, the government will also continue with its strong fiscal support next year.
Although our economic recovery will begin in 2021, the negative impact of COVID-19 will last much longer. Some of the sectors badly affected by the pandemic may not survive, while some others may take more time to recover. As data show, smaller enterprises and vulnerable workers have suffered disproportionately. Children from less well-off backgrounds have struggled to even join online learning. The government will have to continue assisting those hardest hit by the pandemic by better targeting social assistance.
But this also leads to a more positive impact. The pandemic has—and will continue to—accelerate the wholesale digital transformation of businesses of all sizes and public services. The latest World Economic Forum (WEF) report on the Future of Jobs released in October suggests that the majority of companies surveyed in 26 advanced and emerging economies are rapidly digitalizing their working processes—including a significant expansion of remote working arrangements. The good news is that digitalization and disruptive technology generally is not always about replacing workers with machines or robots, as feared by many. According to WEF estimates, by 2025, the number of new jobs created by the accelerated adoption of these “disruptive” technologies will surpass the number of jobs lost due to the new division of labor between humans, machine, and algorithms. For this to happen, however, proactive efforts to give workers the new skills they will need will require support from both the corporate and public sectors.
Indonesia too must use this opportunity to accelerate its own digital transformation across businesses and government. It must avoid the experience that followed the Asian Financial Crisis (AFC), which led to prolonged lower economic growth. After the AFC, Indonesia’s growth weakened gradually from its pre-AFC 7% average due to a shrinking manufacturing sector, as the global value chain (GVC) emerged as the dominant new vehicle for manufacturing exports. Indonesia was not a big part of the GVC and largely missed out of that opportunity.
Now, post-COVID-19, embracing the digital economy has become the new opportunity, the new vehicle of promoting continued growth and innovation across many critical economic and social sectors. Not able to fully benefit from it as Indonesia aims to become a high-income economy, will have lasting impact on future competitiveness and growth. So, it must strive to reap the full benefits of digitalization. If it doesn’t, it would be like missing out from the GVC for the second time.
To realize the potential gains from developing a digital economy, the government will need to concentrate policies on several fronts. First and foremost is to improve digital infrastructure and connectivity. Second, an appropriate regulatory framework will need to be developed to manage the advantages and risks associated with new technologies and digital platforms. These regulations should include (i) competition policies to manage “winner take all” risk; (ii) provide labor and social security to accommodate new working arrangements; and (iii) balance the data-sharing and privacy needed when optimizing the use of big data for business and policy making. And most importantly, the new and faster moving working arrangements in an increasingly digitalized economy requires the government to provide stronger support for reskilling and upskilling, while strengthening the education and national innovation ecosystem.