COVID and the ongoing Unemployment Crisis

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Abdul Manap Pulungan INDEF Economist

IO – The COVID-19 pandemic has only persisted for seven to eight months. However, its impact is simply massive – much harsher than any of the previous recent crises, including the trade war crisis, the oil crisis, and the global financial crisis. The biggest concern is that most countries suffer from a financial crisis as well as a social crisis due to the COVID health crisis. Everyone suffers from a multi-dimensional crisis. 

The global economy is suffering a steep drop. The International Monetary Fund (“IMF”) had to repeatedly revise its global economic and trade projections. For this year, the latest projection is negative growth rate down to 4.9% (YoY), and the global economy may grow up to 5.4% in 2021. However, projections of high growth in 2021 are not fully-supported by improved fundamentals of the global economy, making it likely that the projection of positive growth next year will miss its target. 

Meanwhile, growth of developed and developing market countries is down 8% and 3%, respectively, in 2020. The growth projection in 2021 for each is respectively 4.8% and 5.9%. Global trade volume this year contracted down to 11.9% (YoY). Trade traffic in advanced countries is down to 13.4% (YoY), while that in developing country markets are down 9.4% (YoY). Global trade growth is expected to rise to 8% (YoY) next year, with advanced countries and developing markets’ growth rates expected to increase 7.2% (YoY) and 9.4% (YoY), respectively. 

Paralysis of the economy due to the health crisis forces economic stimulus, all depending on Governmental fiscal powers. However, even the Government’s powers are limited, as State income continues to slow down. Consequently, Government debt spikes up. This is worsened by the fact that nobody can say positively when the COVID-19 crisis will end. Recalling IMF data, global fiscal deficit is 13.9% of the Gross Domestic Product (“GDP”) in 2020, predicted to go down to 8.2% in 2021. Fiscal deficit in G-20 countries is 15.4% in 2020 and 16.6% in advanced countries. Meanwhile, global debt to GDP ratio skyrocketed to 101.5% in 2020 from its initial position of 82.8% in 2019. Debt to GDP ratio in G-20 countries is 111.2% and 131.2% in advanced countries. 

One of the most obvious impacts of the COVID-19 crisis is the spike in unemployment rates. The International Labor Organization (“ILO”) predicts that 25 million global workers will lose their jobs this year. In 2019, global unemployment was already 190 million, with 67% or about 2 billion of people working in the informal sector. The rate keeps increasing in direct comparison with the duration of the COVID crisis. The basic issue of unemployment in the COVID era is that the disease hits both the formal and informal sectors equally hard. 

Previous crises did not hit the informal sector. On the contrary, they saved the economy before. In view of the current situation, it will take a long time for global economy to recover. The crisis recovery model is predicted to be a U-curve instead of a V-curve. It will be difficult to achieve a V-curve as economic activities in various countries remain slow. In fact, several countries are already suffering a recession from negative growth for two consecutive Quarters, including the United States, Singapore, South Korea, and Hong Kong. America’s economy in Quarter II of 2020 contracted 32.9% (YoY). Household consumption is down 34.6% (YoY); direct investment is down 49% (YoY); exports and imports are down 64% (YoY) and 53% (YoY) respectively. Only Government expenditure grows 2.7% (YoY). Meanwhile, China is able to maintain positive growth of 3.2% (YoY) in Quarter II-2020, or a quarterly growth of 11.5% (YoY). However, positive growth in China is not enough to lift global economy from its crisis. 

Economic Crisis and Unemployment in Indonesia 

Lowered economic growth worsens the condition of other sectors, especially in social indicators. Statistics Indonesia (Badan Pusat Statistik – “BPS”) recently announces that poverty and income gap rates have both worsened. Poverty jumped to 1.63 million throughout the September 2019-March 2020 period from 9.22% to 9.78%. The poor population in September 2019 was 24.7 million, increasing to 26.4 million in March 2020. The poor in urban areas increased from 6.56% to 7.38% and increased from 12.6% to 12.82% in rural areas. On the other hand, overall Gini ratio increased from 0.38 to 0.381 in March 2020. Gini ratio in rural areas increased to 0.317 from 0.315 and in urban areas to 0.393 from 0.391 respectively. This is a cause of concern: COVID-19 only arrived in Indonesia in March this year, but it has caused such a significant impact. 

The latest unemployment rate (August 2020) will be released in November. However, there are several indications that the spike in the unemployment rate will be significant. 

First, economic growth is moderated. This year, the IMF still counts Indonesia’s growth at a positive 0.5%. However, the OECD calculates a growth rate of minus 2.8% to minus 3.9%. The worst-case scenario calculated by the Government puts national economic growth at negative 0.4%. This slowing down of economic growth naturally affects the employment sector. Government records show that there are 3.7 million newly-unemployed citizens, due to the COVID-19 pandemic. 

In fact, even without COVID-19, worker absorption has slowed due to a low economic growth rate. In fact, the growth target set in the 2015-2019 National Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional – “RPJMN”) was not achieved. Not only that: State Budget growth target was not achieved either. COVID-19 merely worsened an existing problem. In February 2020, worker absorption only increased 1.67 million persons from the February 2019 figure, while the increase from February 2018 to February 2019 was 2.29 million persons. The increase of worker absorption from February 2017 to February 2018 was even higher, at 2.53 million persons. 

Second, the growth of labor-intensive sectors (tradable sectors) is reduced. Indonesia has three major labor-intensive sectors: Agriculture, mining, and processing industry. These three sectors can absorb many workers. However, COVID-19 has paralyzed these industries. The Ministry of Finance has grouped the impact of COVID-19 to business sectors into three levels: “High”, “Moderate”, and “Low” exposure levels. The Ministry’s 2020 records show that the tradable sectors are seriously and moderately hit by the disease. Agriculture, mining, and delving are all moderately exposed. Other sectors in the same category include financial and insurance services, information and communication services, corporate services, and home credit financing services. The processing industry is in the high exposure category alongside wholesale and retail trading; automobile and motorcycle repair; accommodation, food, and beverage provision; transportation and warehousing; flight services; and motorcycle credit payment services. 

Even before COVID-19 hit Indonesia, the growth and contribution of the tradable sector has decreased significantly. The contribution of the tradable sector to the GDP per Quarter I of 2020 was only 39.64%, a significant drop from the 46.43% contribution rate in 2010. This reduced contribution affects worker absorption: It had an absorption rate of 51.78% in February 2011, with the remaining contribution coming from the non-tradable sector, dropping to a mere 44.15% in February 2020. In terms of growth, worker absorption in the tradable sector is down 0.13% a year (2016- 2020 according to February 2020 data). Meanwhile, worker absorption in the non-tradable sector increases 3.19% a year, with an average total worker absorption increase at 1.64% a year. 

Third, the high number of non-full-time workers (working less than 35 hours a week). In March 2020, there are 39.44 million of them, or about 30% of total workers. They are comprised of two categories, i.e. halfway unemployed and part-time workers. They are highly sensitive to any changes in the economy, and COVID has pushed them into open unemployment. 

Fourth, bad realization of the National Economic Recovery (Pemulihan Ekonomi Nasional – “PEN”) program. PEN was expected to be able to stimulate the economy, both in terms of supply and demand. However, so far only 19% of total PEN has been implemented: 38% of the IDR 203.9 trillion in social protection budget is deployed; 25% of the IDR 123.46 trillion allocated for the micro, small, and medium-sized enterprise budget; 7.22% of the IDR 87.55 trillion allocated for health budget; 6.5% of the IDR 106.11 trillion allocated for ministries, Government agencies, and Regional Government sectors’ budgets; 13% of the IDR 120.61 trillion allocated for business incentives; and zero realization of the IDR 53.57 trillion allocated for corporate funding budgets. 

Fifth, slowing down of bank credit distribution, which inhibits business expansion in turn. This shows that our real sector is in trouble. In May 2020, public bank credit only grew 3.04% (YoY). This is the lowest growth rate since the 1997/98 crisis. Purchasing Manager Index (PMI) of manufacturing industry in Indonesia is only 39.1. An IPM below 50 means that the processing industry is contracting. Entrepreneurs do not have a reason to increase current production capacity, which means that workers are either being laid off or asked to stay home (whether they are being paid or not). 

Sixth, actual direct investments are down, causing negative worker absorption. Total realized investment in Semester I of 2020 only grew 1.8% (YoY), with Domestic Investment (Penanaman Modal Dalam Negeri – “PMDN”) growing 13.2% (YoY) and Foreign Investment (Penanaman Modal Asing – “PMA”) down 8.1% (YoY). Only 32.2% of total actual investment is distributed to the secondary sector (industry), with 54.9% of investments being made in the tertiary (services) sector and 12.9% in the primary (extraction) sector. PMDN and PMA distribution in secondary sector is 20.7% and 44.4% respectively, with distribution in tertiary sector being 65.3% and 43.8% respectively. The relatively low investment level in the secondary sector is a threat to employment levels. 

Implications of the Policy 

The year 2020 has proven to be the harshest economic cycle the world suffers within the past few decades, just after the hits sustained by the global economy thanks to the trade war crisis of 2019 and oil crisis of 2018. However, neither of these crises caused both demand and supply to be paralyzed simultaneously. The trade war crisis still encouraged the economy of the countries with sufficient competitive power in global trade, while the oil crisis encouraged stronger economic activities in oil-exporting countries. 

On the other hand, no country can grab an opportunity of the situation in the COVID crisis – including Indonesia. The economy of our 250 million plus citizens is still obstructed by the need to reduce the number of COVID positive cases. This is a stark contrast with other countries, who have successfully repressed COVID infection and are rebuilding their economy. Our national economic prospect remains grim and it affects the employment sector. As an important part of economic recovery from COVID, we need to protect our health as priority. However, the economy must continue to run in order to prevent worsening social impact. 

To prevent further downfall of the economy, prevent more unemployment, and the generation of social impacts, there are several things to consider. First, the Government must accelerate the realization of PEN, in order to stimulate both economic demands and supplies. The bureaucracy must be simplified, and cross-sector coordination must be improved. It must also organize its data, in order to ensure that the program reaches its target properly and to ensure that targets are achievable. Second, the Government needs to increase stimulus in labor-intensive sectors, in order to prevent further layoffs, especially by stimulating the micro, small, and medium-sized business sector. This sector contains about 97% of the total of national workers. Third, the banking sector regulator needs to stimulate banks to issue credit in labor-intensive sectors.