Will Indonesia succumb to a secular growth slow-down? If so, does it matter?

In an iconoclastic paper, Lant Pritchett and Larry Summers (2015), question the standard view that emerging economies in the Asian region that are currently growing rapidly are expected to do so for the next decade and beyond. The authors call this a case of ‘Asiaphoria’. Yet, they argue, an enduring feature of growth statistics is that there is ‘regression to the mean’, that is, over time even rapidly growing economies converge to mean rates that lie between two and four percent.  Hence, ‘abnormally rapid growth’ does not last too long. As countries grow richer, their growth rates slow down. One can also call this a case of secular growth slow-down. Summers and Pritchett argue that the most popular case of Asiaphoria is represented by China. Yet, China is not immune to the phenomenon of a secular growth slow-down – see Figure 1 below.

Figure 1

Source: Pritchett and Summers (2015)

What about other Asian economies, such as Indonesia? It had the misfortune of suffering from a historically unprecedented double-digit recession in the wake of the 1997-1998 Asian Financial Crisis. This was followed by decades of solid growth of just over 5 percent.

Despite such impressive achievements , there is a yearning among policymakers to grow at an even faster rate that is at par with the rapid growth era of the Suharto regime when, between 1980-1996, the economy grew at an average rate of seven percent. This aspiration is one of the reasons behind the current push for comprehensive structural and regulatory reforms. The expectation is that such reforms will allow the replication of the golden period of growth of the 1980s and mid-1990s – or at least a growth rate in the six percent range.

Figures 2 and 3 depict the average long run growth rate of Indonesia (5.5 percent) – measured over four decades – relative to seven selected economies from ASEAN and OECD and adds a new metric: the number of recessions per country over forty years. Indonesia’s long-run growth performance is commendable relative to regional and OECD norms. It is noteworthy that Indonesia had fewer recessions (two) than the selected OECD economies (five to seven) and some ASEAN economies (three).

Derived from IMF DataMapper

Derived from IMF DataMapper

The key issue is whether it is reasonable to expect that Indonesia should aspire to grow at even faster rates – six percent seems to be one of the aspirations – for the next decade and beyond.

Will Indonesia succumb to a secular growth slow-down? If so, does it matter? Figure 4, derived from long-run projections by the OECD (2018), suggest that aggregate growth rate will decline by one percentage point between now and 2030 – thus corroborating the notion of a (partial) regression to the mean.

Source: Derived from OECD (2018)

Optimists suggest that it is possible to avoid the phenomenon of secular growth slow-down by adopting an ambitious agenda of structural and regulatory reforms cutting across governance and education. In the case of Indonesia, such reforms are projected to increase the aggregate growth to a moderate degree – but not to the six percent threshold. It is, however, reassuring to note that, even in the case of a ‘business-as-usual’ scenario, Indonesia’s per capita GDP is expected to increase from 30.5 percent of OECD-wide per capita GDP to 48 percent by 2045 . At that point, Indonesia will be celebrating its 100th year as a sovereign nation.

This terse, but important, discourse on secular growth slow-down implies that one should avoid the temptation to succumb to ‘Asiaphoria’. The emphasis should be on the quality of growth rather than its quantity. This, in turn, entails an understanding of the employment and social dividends that accrue at a given rate of growth and how to enhance such dividends with an appropriate mix of policies.

How hard will the Indonesian economy be hit by the current pandemic?

Indonesia rose from the ruins of the 1997-1998 financial crisis in a commendable fashion. Economic recovery from a historically unprecedented double-digit recession was followed by decades of solid growth of just over 5 per cent (Figure 1) . This led to more than doubling of per capita GDP between 1998 (the nadir of the Asian Financial Crisis) and 2019 (Figure 2). Furthermore, Indonesia managed to consolidate democratic and decentralized governance in a country with an entrenched tradition of an authoritarian and centralized political system.

As data from the national statistical agency (BPS) show, poverty has come down significantly over the last decade and is now below 10 percent based on a national poverty line. Unemployment too has come down from double digits to a little over 5 per cent. Of course, there are persistent labour market challenges: a high degree of informality, a significant proportion of the population at risk of poverty, more than 20 percent of young Indonesians who are not in employment, education or training (NEET), and persistent gender disparities. Despite these challenges, one cannot overlook Indonesia’s achievements after the 1997/1998 Asian financial crisis.

Source IMF datamapper

The pernicious influence of the current global pandemic – COVID-19 – has not escaped Indonesia. It has affected both lives and livelihoods and is threatening the country’s sustained increase in living standards. So far, there has been more than 100,000 cases and nearly 5,000 deaths (Johns Hopkins University as at July 30).

The GDP growth projections for 2020 are universally negative, ranging from moderate to severe (Figure 3). This is the result of mobility restrictions and partial lockdowns to contain the pandemic with their inevitable dampening effect on economic activity.

It is worth noting that even the most pessimistic projection does not come close to the double digit recession of the late 1990s. Still, like many nations today, Indonesia faces an uncertain future as it seeks to cope with the malevolent consequences of the current global pandemic.

Alternative growth projections for Indonesia – ADB, IMF, OECD, World Bank. OECD has two scenarios: (a) pandemic is time-bound with a ‘single hit’; (b) pandemic has a second wave and economy suffers a ‘double hit’
Source: World Bank

How the great Indian lockdown became the great Indian ‘policy disaster’

Source: https://www.sciencemag.org/news/2020/05/india-s-lockdown-ends-exodus-cities-risks-spreading-covid-19-far-and-wide

Among countries fighting to stave off COVID-19, India became known as the world’s largest and the most stringently imposed lockdown, with the Modi government giving barely four hours’ notice to residents and citizens before the shutters went up on March 24. The lockdown, after multiple extensions, lasted for several weeks. Yet, today, India is ranked as the third most affected country in the world (as depicted by Johns Hopkins University) in terms of total confirmed cases (although, when adjusted for population size, it has a better ranking). In terms of number of deaths too, it does not fare well relative to many of its peers.  

What happened? How did the great Indian lockdown fail to produce the expected outcomes? It appears that, instead of ‘flattening’ the pandemic curve, the lockdown strategy merely delayed it for a while.

Table 1 Confirmed Cases by Country/Region/Sovereignty – the top ten

3,711,359 US
2,074,860 Brazil
1,038,716 India
764,215 Russia
350,879 South Africa
349,500 Peru
338,913 Mexico
328,846 Chile
295,632 United Kingdom
271,606 Iran

This is what Kaushik Basu , noted Indian economist (former Chief Economic Adviser to the Indian government and former Chief Economist of the World Bank) says:

The lockdown, announced on March 24, far from controlling the spread of the pandemic, seems to have made it worse. Two weeks after the start of the lockdown, the infection rate picked up and it has been on an alarming upward climb since then (See Figure below)

There is apparently more bad news on the pandemic front. Media reports in India highlight the following disturbing prospects:

A study by researchers from the Massachusetts Institute of Technology (MIT) that stated that the number of Covid-19 cases recorded per day in India may surge to 287,000 by early 2021 if a vaccine or treatment isn’t developed soon. In fact, India may record the highest number of fresh cases in the world by the end of winter in 2021, according to this study.

Basu notes that:

There was a natural expectation that the government had plans of how to handle the sudden stoppage of work and movement of people, and the break in supply chains. But there was no evidence of any of these ancillary actions. I do not have enough information to know what plans there were, but the total absence of any supporting action, to ramp up testing, expand the medical sector and to help the millions of stranded poor workers, was baffling. It was almost as though some people in government — bureaucrats and even some politicians who are part of this government — had decided to sabotage the Prime Minister’s lockdown by sitting back and doing nothing.

Perhaps the worst aspect of the lockdown was the immense suffering caused to hundreds of thousands of poor migrant workers. Deprived of livelihoods that are typically based on daily wages, these poor and vulnerable migrant fled – or at least tried to do so – the cities to seek sanctuary in their villages. Huddled together as they travelled to their destinations, these migrant workers paradoxically became a potent source of new rounds of infection.

What has happened, Basu concludes, is a ‘policy disaster’. The economy is spiralling down while the pandemic is spiralling up. IMF forecasts suggest that the Indian economy will contract by -4.5% before recovering in 2021. This is the worst such contraction since 1980. Estimates of monthly unemployment rates suggest that it shot up to a staggering 23.5% in May before coming down to 11.0% in June 2020 – a historical high. The incidence of extreme poverty is likely to go up by 100 million, reversing sustained reductions in poverty over past decades.

India’s experience is a cautionary tale on how simply implementing a lockdown – however ambitious and stringent – is not enough to cope with a pandemic. Crucial supporting actions are required that can balance the risks of lost lives with that of lost livelihoods.

Economic damage from COVID-19 worse than expected

Recent projections suggest that the economic damage unleashed by COVID-19 on countries across the world is worse than expected. In it’s June 2020 update, the IMF now projects that global growth will contract by 4.9% in 2020 vis-a-vis 3% in it’s April 2020 World Economic Outlook . As the IMF notes:

The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4 percent. Overall, this would leave 2021 GDP some 6½ percentage points lower than in the pre-COVID-19 projections of January 2020.

World Economic Outlook, June 2020, Growth Projections table

The OECD, in its June 2020 outlook, offers equally grim predictions and highlights the magnitude of the economic recession across the world based on two scenarios – (1) the current pandemic has a time-bound single wave (‘single hit’) (2) the current pandemic is followed by a second wave towards the end of 2020 (‘double hit’)

Wold gross domestic product

Policy-makers across the world thus face a monumental challenge – how to cope with the pandemic while dealing with one of the most severe recessions in living memory. Whether governments can muster the imagination, political will and resources to deal with a pandemic-induced economic crisis remains to be seen.

The geographical spread of recessions during the current pandemic: A map of the world in 2020

The IMF – and other international organizations – have predicted a severe global recession following the major disruptions to economic and social activities in the wake of COVID-19.

Here is a map of the world  reflecting the imprint of the coronavirus pandemic.

The number of countries with either severe or moderate negative GDP growth  – depicted in red and yellow – dominate this map. This was not even considered a remote possibility a few months ago. While the IMF’s April 2020 World Outlook expects a robust recovery in 2021, there is now growing recognition that global recovery might not happen until 2023.

download

Source: IMF data mapper