Abstract
The Indonesian economy, which is the largest in Southeast Asia, has been reeling under the impact of the COVID-19 pandemic that has caused its first recession in over two decades. Examining its economic turnaround from the Asian financial crisis, the paper studies how strong fiscal support and reforms to improve its healthcare sector along with the launch of its mass COVID-19 vaccination programme would be critical in its recovery.
Indonesia’s Economic Recovery post-Asian Financial Crisis
Indonesia experienced a depression in the post-Asian financial crisis period with its annual growth in 1998 falling to -13 percent. For Indonesia, this was not merely a currency crisis as in other Asian countries, but a more fundamental one, exacerbated by the fall of Suharto and the democratisation of its institutions. Bacharuddin Jusuf Habibie, who replaced Suharto as Indonesia's next president, turned to the economic technocrats to deal with the ongoing financial crisis. The new government initiated a series of measures to overcome the economic slowdown that included restoring the macroeconomic stability, restructuring the banking system, structural reforms, and stimulating demand and reducing the impact of the crisis on the poor through the social safety net.[i]
In the post-2010 years, there has been an active intervention by the government towards accelerating economic development under the newly established democratic and decentralised institutions. The Masterplan for the Acceleration and Expansion of Indonesian Economic Development 2011-25 (MP3EI), announced by the Yudhoyono government in May 2011, laid out plans to transform Indonesia into a developed nation in the 21st century, and place itself in the top ten advanced economies in the world by 2025 and the top six by 2050. It saw Indonesia becoming a basis for global food security, a centre for processing products of agriculture, plantation, fishery, mineral, and energy resources, as well as a centre of global logistics. President Yudhoyono, in launching MP3EI, stated that for an efficient economy, the invisible hand is important, but the visible hand is also necessary for a fairer and more balanced economy.[ii] The impact of the economic reforms helped Indonesia’s economy to recover marginally and as indicated in Figure One, the GDP continued to increase from 0.70 percent in 1999 to a sustained growth of 5-6 percent until 2019.
Figure One: Indonesia’s GDP, 1999-2017 (in percentage)
Source: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=ID
The ongoing uncertainty to the existing multilateral trading order and decline in global demand post the 2008 financial crisis, has been a major factor for a Indonesia’s GDP falling below six percent since 2013. Since 2014, Indonesia has been taking steps to revive and strengthen its manufacturing sector which played a key role in the post-Asian financial crisis recovery. As a whole Indonesia has been on a steady growth path due to the prevalence of strong and stable economic fundamentals driven by private consumption, strong investments particularly in public infrastructure and exports.[iii] After several years of witnessing a steady growth in its economy, the impact of the COVID-19 pandemic has pushed Indonesia into a recession with its GDP for 2020 declining to -2.1 percent. In Figure two the GDP for some of the major emerging and developed Asian economies indicate that except for Bangladesh, Brunei, China, Myanmar, and Vietnam; all other countries witnessed a sharp contraction in 2020.
Figure Two: Asian Countries GDP in 2020
Source: IMF World Economic Outlook (April 2021),*https://www.dawn.com/news/1624995, ** Department of Statistics Singapore, Ministry of Trade and Industry.
A surge in export of merchandise goods such as personal protective equipment, electronics, and other products to enable work from home has been beneficial. As a consequent of the increase in merchandise export in the fourth quarter of 2020, some countries in the region witnessed a positive or lesser contraction in their GDP.[iv] However, across the region low demand, disruption of supply chain, along with the impact on key sectors such as tourism – which is a major industry for many Asian countries including Indonesia – has led to a sharper decline in the GDP. In 2021 Indonesia might see a modest growth which would be dependent on the growth in its exports, tourism, domestic demand, and the pandemic not spiralling out of control. In May 2021, the Statistics Indonesia (BPS) reported that the Gross Domestic Product (GDP) for the first quarter (January-March), contracted 0.74 percent, however the decline was less compared to 2.19 percent contraction seen in the fourth quarter (October-December) 2020. The decline in the level of contraction in the first quarter of 2021 indicates that the country is on course for an economic recovery with the government projecting growth between 4.5 to 5.3 percent in 2021.[v]
Indonesia’s COVID-19 Response: Two Key Factors
As a result of the economic fallout caused by the pandemic the Indonesian government has shifted its focus towards strengthening policies and institutions particularly in the health and social sector.[vi] Two key factors that would be crucial for this economic recovery are: first, the need for strong fiscal and government support. The tourism industry in Indonesia is one such sector which was severely impacted due to the pandemic. In 2019 the sector contributed $ 20 billion in revenue with 16 million foreign visitors. The sector which employs about 13 million people – which is around ten percent of Indonesia’s work force – the pandemic had a major impact on the industry with a decline of almost 60 percent tourist in the first half of 2020 along with 90 percent of the workers losing their source of income.[vii] The National Economic Recovery programme launched in 2020, through which the government allocated Rp 695 trillion to strengthen health care capacity and provide financial support to vulnerable households and businesses. The government introduced several extraordinary support measures such as large-scale loans restructuring programmes and interest subsidies. Following the easing of the containment measures along with strong government support to businesses, the decline of its GDP was smaller in comparison to the other countries in the region, with the economy making a slow recovery.[viii]
The second critical factor would be to build a long-term plan for strengthening Indonesia’s healthcare sector. A robust healthcare system is at the centre of the fight against the COVID-19 pandemic. Even before the crisis, Indonesia’s spending on healthcare has been one of the lowest in the region. In 2017, Indonesia’s spending on healthcare per capita was $115 which was well below the regional average of $604.[ix] As indicated in Figure three, even amongst the ASEAN countries given the size of its GDP, Indonesia in terms of its GDP per capita has one of the lowest spending towards the healthcare sector. This has been one of the major reasons for the large number of COVID-19 cases in Indonesia in comparison to the other ASEAN countries such as Vietnam (5.92 percent) and Cambodia (6.03 percent) that has a higher percentage of their GDP directed towards healthcare.
Figure Three: ASEAN Countries Spending on Healthcare per capita of their GDP in 2018 (in percentage)
Source: The World Bank
The steps taken by the government towards strengthening its health sector would be crucial with the rollout of the COVID-19 vaccination drive as a first step which it is doing so by securing a massive and diverse vaccine supply. Through a Presidential Decree No 99/2020, signed by President Jokowi on October 5, 2020, regulations on the procurement of COVID-19 vaccines and vaccination was issued. According to the regulation, frontline medical staff and public sector workers were the first priority, therefore targeting the workforce aged between 18-59 years. The second priority was the religious and community leaders. The third priority group included teachers, followed by government officials and legislative council members with the general public of more than 57 million fell under the last priority group.[x]
According to Indonesia’s Minister for Economic Affairs, Airlangga Hartarto, “...the country secured commitments for the delivery of 271.3 million doses of COVID vaccines of which 30 million doses would be available by the end of 2020…”. The ordered vaccines were produced by Chinese firms Cansino, Sinovac, and Sinopharm and a 100 million doses of AstraZeneca.[xi] Three million doses of COVID vaccine manufactured by Chinese manufacturer Sinovac Biotech arrived in Indonesia in two batches on December 6, and December 31, 2020 respectively. Further, Indonesia ordered an additional 122.5 million doses of Sinovac, 50 million from Novavax, 54 million from Covax GAVI, 50 million from AstraZeneca, and 50 million from Pfizer; a total of 329.5 million doses.[xii] The Indonesian Food and Drugs Supervisory Agency (BPOM) on January 11, 2021, authorised the emergency use of the Sinovac and on January 13 Indonesia launched its COVID-19 vaccination campaign with the aim to inoculate 181.5 million people.[xiii] The BPOM also issued its Emergency Use Authorization (EUA) for the AstraZeneca vaccines that arrived in Indonesia on March 8, 2021.[xiv] With over 1.66 million infections and more than 45,000 deaths, on April 30, 2021, Indonesia’s drug regulator approved the COVID-19 vaccine of China’s Sinopharm making it the third vaccine to be approved after Sinovac and AstraZeneca.[xv] In May, Indonesia has begun the third phase of its national vaccination programme with the aim to inoculate 140 millions of its citizens and it is targeted at the vulnerable social and economic sections.[xvi] While mass vaccination is the main focus of the Indonesian government however, issues of procurement of the vaccines to distributing the vaccine throughout the country’s vast archipelago remains a major logistical challenge.
Conclusion
By undertaking appropriate reforms and policy actions after the Asian financial crisis, Indonesia has been able to make a strong economic recovery by the turn of the 21st century. Over the years Indonesia by pursuing a strong developmental policy along with building economic partnership with other countries, is looking at achieving a more balanced growth between its Eastern and Western part, which is critical for its long-term stability. For the past two decades, Indonesia’s GDP has witnessed a moderate growth and is on the roads towards becoming the seventh-largest economy by 2030. The pandemic however has been a major setback for its economy which caused a contraction in its growth attributed by its weak healthcare system and key industries taking a major hit. Its economic recovery and growth reaching the pre-pandemic level would depend on how it is able to manage the health crisis along with strong fiscal support which would encourage consumer and infrastructure spending.
While Indonesia is yet to see the end of the ongoing health crisis, the various fiscal support and other government stimulus programmes targeted towards healthcare, households, and businesses have begun to produce results. As highlighted in the paper its GDP in the first quarter of 2021 having a much smaller contraction in comparison to the fourth quarter (October- December) of 2020. Indonesia with the largest cases of COVID-19 in Southeast Asia and amid the uncertainties over the pandemic, the challenges faced by its vaccination programme remains a major hurdle. However, the need for the successful rollout of its vaccination drive despite the ongoing challenges would be critical, as it does not only address the health crisis but would help manage the larger economic crisis.
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*Dr. Temjenmeren Ao, Research Fellow, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.
Endnotes
[i] Ginandjar Kartasasmita and Joseph J Stern, Reinventing Indonesia, (World Scientific Publishing Co.Pte.Ltd, 2016), p. 152-153.
[ii]Yuri Sato, “State, Industry, and Business in Indonesia’s Transformation”, in Khoo Boo Teik, Keiichi Tsunekawa, and Motoko Kawano (edits), Southeast Asia Beyond Crisis and Traps: Economic Growth and Upgrading, (Springer Nature: Cham, 2017), p. 72-73 and 79.
[iii]“ASEAN Economic Integration Brief no.03/ June 2018”, ASEAN, http://asean.org/storage/2018/02/AEIB_3rd-Issue_v3-Ready-Print-Single-Page.pdf, Accessed on July 16, 2018.
[iv]Roland Rajah, “Southeast Asia’s post-pandemic recovery outlook”, Brookings, March 15, 2021, https://www.brookings.edu/blog/order-from-chaos/2021/03/15/southeast-asias-post-pandemic-recovery-outlook/, Accessed on June 4, 2021.
[v] Dzulfiqar Fathur Rahman, “Indonesia’s Q1 GDP contracts 0.74%, on track to recovery”, The Jakarta Post, May 5, 2021, https://www.thejakartapost.com/news/2021/05/05/indonesias-q1-gdp-contracts-0-74-on-track-to-recovery.html, Accessed on May 15, 2021.
[vi] “Indonesia: New Country Partnership Framework to Focus on Economic Recovery and Long Term Growth”, The World Bank, May 11, 2021, https://www.worldbank.org/en/news/press-release/2021/05/11/indonesia-new-country-partnership-framework-to-focus-on-economic-recovery-and-long-term-growth, Accessed on June 7, 2021.
[vii] Rajat Agarwal, Antonius Santoso, Khoon Tee Tan, and Phillia Wibowo, “Ten ideas to unlock Indonesia’s growth after COVID-19”, McKinsey & Company, May 3, 2021, https://www.mckinsey.com/featured-insights/asia-pacific/ten-ideas-to-unlock-indonesias-growth-after-covid-19, Accessed on June 7, 2021.
[viii] Minsuk Kim and Robin Koepke, “Indonesia Has an Opportunity to Boost Growth”, International Monetary Fund, March 3, 2021, https://www.imf.org/en/News/Articles/2021/03/03/na030321-indonesia-has-an-opportunity-to-boost-growth, Accessed on May 22, 2021.
[ix] Rajat Agarwal, Antonius Santoso, Khoon Tee Tan, and Phillia Wibowo, “Ten ideas to unlock Indonesia’s growth after COVID-19”, McKinsey & Company, May 3, 2021, https://www.mckinsey.com/featured-insights/asia-pacific/ten-ideas-to-unlock-indonesias-growth-after-covid-19, Accessed on June 7, 2021.
[x] “Jokowi Issues Presidential Regulation on COVID-19 vaccination”, The Jakarta Post, October 8, 2020, https://www.thejakartapost.com/news/2020/10/08/jokowi-issues-presidential-regulation-on-covid-19-vaccination.html, Accessed on May 15, 2021.
[xi][xi] “Indonesia secures more than 200 million doses of COVID-19 vaccines”, The Jakarta Post, October 13, 2020, https://www.thejakartapost.com/news/2020/10/13/indonesia-secures-more-than-200-million-doses-of-covid-19-vaccines.html, Accessed on May 15, 2021.
[xii] “Government ensures stock of 329.5 million doses of Vaccines: President”, ANTARA News, January 6, 2021, https://en.antaranews.com/news/165076/government-ensures-stock-of-3295-million-doses-of-vaccines-president, Accessed on May 19, 2021.
[xiii] Stanley Widianto, “Indonesia launches one of the world’s biggest COVID-19 vaccination drives”, Reuters, January 13, 2021, https://www.reuters.com/article/us-health-coronavirus-indonesia/indonesia-launches-one-of-worlds-biggest-covid-19-vaccination-drives-idINKBN29I09U?edition-redirect=in, Accessed on May 19, 2021.
[xiv] “COVID-19 developments in Indonesia”, German-Indonesian Chamber of Industry and Commerce, May 20, 2021, https://indonesien.ahk.de/en/infocenter/news/news-details/covid-19-developments-in-indonesia, Accessed on May 22, 2021.
[xv] “Indonesia approves Sinopharm COVID-19 vaccine for emergency use”, Reuters, April 30, 2021, https://www.reuters.com/world/asia-pacific/indonesia-approves-sinopharm-covid-19-vaccine-emergency-use-2021-04-30/, Accessed on May 19, 2021.
[xvi] COVID-19 developments in Indonesia”, German-Indonesian Chamber of Industry and Commerce, May 20, 2021, https://indonesien.ahk.de/en/infocenter/news/news-details/covid-19-developments-in-indonesia, Accessed on May 22, 2021.