Navigating Indonesia’s post-pandemic era: Addressing opportunity, inequality, and growth

In the one and a half years Indonesia has battled the Covid-19 pandemic, the past few weeks may have been the most challenging. The second wave is hitting the country hard, with the rapid spread of the virus threatening the country’s healthcare and financial system. As the government implements an emergency public activity restriction, there is an urgent need for strategic action to cushion the pandemic’s health and economic consequences, protect vulnerable populations, and set the stage for a lasting recovery.

To support this effort, on June 30, J-PAL SEA organized a public webinar on the Emerging Challenges of the Post-Pandemic Era: Addressing Opportunity, Inequality, and Growth. The webinar aimed to provide insights into the Government of Indonesia’s policy directions and learnings from global evidence on challenges faced in health, inequality, and the environment. The webinar featured Sri Mulyani Indrawati (Minister of Finance, Government of Indonesia) in conversation with Abhijit Banerjee (MIT; Director, J-PAL), and was moderated by Chatib Basri (Co-founder and Senior Partner, CReco). More than 600 people attended, most of whom are representatives of governments and universities.

Key takeaways from Sri Mulyani and Abhijit Banerjee’s conversation are summarized below.

“Recovery is going to depend on how you address the necessary condition that is the Covid, and on how you design a policy in order for you to be able to: first, protect the people from the health threat...; second, from the economic catastrophe; third, to make sure that the financial system will continue to be stable; and fourth, the macroeconomic — the fiscal — will continue to be sustainable and healthy” - Sri Mulyani Indrawati

1. Vaccination will be the key to achieve national and global recovery

“The main instrument [for restoring the labor market] is still going to be the normal workings of the labor market. As long as people are not vaccinated, it is not clear how we could do that. It (vaccination) is completely central to the story.” - Abhijit Banerjee

Many countries are torn between opening up the economy and controlling the spread of the virus, and vaccination is the only instrument capable of addressing both. However, not every country is able to secure enough doses for its citizens. This is true especially for low-income countries who either do not have enough financial resources to procure the vaccines, or are facing other political, social, or religious barriers.

The Government of Indonesia acknowledged the importance of international cooperation to make vaccines available and affordable for all. Indonesia’s Minister of Foreign Affairs Retno Marsudi is working to establish a global vaccine collaboration, with the goal to ensure equal access for everyone.

The next priority after ensuring equal vaccine access is restoring economic activity. The economy will not automatically stabilize once lockdowns are lifted, given that many of the actions taken to cushion the impact of the pandemic may have led to loans that cannot be repaid. If left unchecked, this may pose a serious threat to the financial sector, increasing the risk of debt for the government.

One of the possible solutions to addressing the economic crisis is by having adequate support from the international community. The IMF recently discussed the possibility of allocating a new Special Drawing Rights (SDR) of USD$650 billion, an international reserve currency to help countries cope with the fallout of a global crisis like the one caused by Covid-19. This new SDR would provide additional liquidity to the global economic system by supplementing the reserve assets of member countries like Indonesia. Although the proposal is yet to be approved, this arrangement could benefit IMF member states, especially if backed with a clear-cut strategy for allocating the funds.

2. Policies must address Covid-induced inequalities

Another challenge on the road to recovery is addressing the inequality exacerbated by Covid-19. Economists are now picturing a K-shaped economic recovery. Under this scenario, higher-income populations are more resilient and can recover quickly, but those who were in more precarious economic conditions beforehand may struggle to build back. As the impact of the pandemic is larger among poor and near-poor households, there are concerns over whether Indonesia will experience this type of recovery.

To prevent this, one of the strategies taken by the government is to expand the number of recipients in social safety net programs, from the initial bottom 20 percent to the bottom 45 percent of the population. This is applicable throughout various programs, ranging from cash transfers and food assistance to lower interest rate subsidies for small and medium enterprises and pre-employment cards for job seekers. Through these interventions, Indonesia was able to maintain the poverty rate at 10.19 percent, instead of 11.8 percent as predicted by the World Bank. Moreover, from September 2020 to February 2021, unemployment was reduced by 800,000, bringing the percentage back to 6.26 percent from the previous 7.07 percent.

Aside from ensuring the welfare of the people, another important aspect when addressing the issue of inequality is dealing with long-term learning loss. The pandemic has had a substantial effect on education, especially for the poor. The sudden transition from normal schooling to learning from home highlights the unpreparedness of the readiness of teachers, parents, and students in carrying out the teaching and learning process effectively.

Moreover, as explained by Abhijit Banerjee, research estimated that one year of missed education may reduce lifetime earnings by 7 percent in Indonesia. This is why it is crucial not to go back to the conventional method of learning once school reopens, but instead to be mindful of the student’s actual learning level and implement a targeted education method.

3. International cooperation is needed to ensure a green recovery

As human activities are reduced during the pandemic, negative externalities such as carbon emission, air, and water pollution also decreased. Many countries are now considering the possibility of pursuing a green recovery, transforming the threat of Covid-19 into an opportunity. Yet, the pressure of restoring the economy complicates this effort for low- and lower-middle-income countries like Indonesia.

Similar to dealing with the health and economic crisis, the key is to have equal commitments from both the international community and the country itself. From country-level perspectives, governments need to ensure that there is a legal ecosystem in place to support environmental protection. In the case of Indonesia, one of the efforts is through the creation of a Green National Medium-Term Development Plan, which outlines the strategy and indicators to achieve improved living conditions, low carbon emissions, and resilience towards disaster and climate change.

Still, this effort needs to be backed by adequate support from the international arena. With many emerging and developing countries now dealing with increased economic pressure, it now falls to the high-income countries to take the first step and provide financial assistance to aid the transition towards a green recovery. There are high expectations that the upcoming UN Climate Change Conference or COP26 will be able to deliver a series of much more specific commitments towards combating climate change, now that all the world has been given a unique opportunity to ‘reset’ the environment.

A global commitment for a resilient recovery

The Covid-19 pandemic has posed serious threats to multiple sectors, challenging governments to find a balance between protecting the people and stabilizing the economy. Nevertheless, although recovery from the pandemic is an uphill battle, recent developments from the international arena present us with a solid footing and a reason to be hopeful. For Indonesia, the experience in strengthening social protection in recent years and the knowledge generated from the evaluation of poverty alleviation policies from around the world can act as a foundation to better navigate these challenging times.