Pandemic and “Tsunami” of Bankruptcy
The world has grappled with the Covid-19 pandemic for almost two years. Socio-economic restrictions imposed to curb infections have hit the business sector hard. Many businesses saw their sales plummet, forcing them to close or go bankrupt.
This happened in many countries. In Japan, for instance, bankruptcies have been on the rise since February 2020, peaking in July 2021 where 179 companies went bust in that month alone.
According to Teikoku Databank, as of September 3, as many as 2,000 companies in Japan had closed or gone out of business during the pandemic. They are mainly based in metropolitan areas, such as Tokyo, Osaka, Kanagawa, Hyōgo, and Aichi.
Industry-wise, a majority of them are in the restaurant business (336) and construction sector (203). Another worst-hit sector is tourism. Of course, the “tsunami” of bankruptcy also slammed Indonesia. Although there is no official data on this, it is highly visible. Many retail stores and several malls have closed or gone bankrupt. According to the Indonesian Shopping Center Association (APPBI), there has been at least seven malls that were sold and one closed down during the pandemic. This means that tens or even hundreds of shops inside them also folded.
As in Japan, the tourism sector in Indonesia is also under immense pressure. Regions that are highly dependent on tourism, such as Bali, still suffer from economic contraction. Many hotels and restaurants, as well as businesses linked to the tourism ecosystem, have had to close down or at least scale back their operations.
This, of course, has also driven the unemployment rate higher. If we assume that a company employs ten workers on average and a hundred of them went out of business, this means a thousand workers suddenly found themselves jobless.
It is not surprising that unemployment surged during the pandemic. According to BPS, open unemployment rate in 2019 was 7.1%; this spiked to 9.77% in 2020 and while it went down to 9.1% in 2021, this is still unacceptably high.
As unemployment rose, so has the national poverty rate. In March 2021, the number of poor people was set at 27.54 million. Although slightly lower than September 2020, it was still up by 1.12 mil lion, year on year.
Apart from exacerbating poverty, rising unemployment also poses demographic challenges. A majority of workers in Indonesia are of the productive age population, commonly known as the demographic bonus. This can turn into a demographic disaster if the state is not able to provide sufficient job opportunities.
The hope for economic recovery
As the pandemic subsides in Indonesia and public mobility resumes, there are high hopes for economic recovery, especially after the economy emerges from recession and public activity restrictions enforcement (PPKM) was loosened.
After suffering 5.32% GDP contraction in Q2-2020, the economy has steadily improved. In Q2-2021, it grew by a respectable 7.07% YoY. Unfortunately, it dropped down to 3.51% YoY in Q3-2021, due to the Delta-fueled second wave. However, as daily caseload continues to decline, the government projects that Q4 growth can be as high as 6%.
Many also hoped that the pandemic can end in 2022, and the economy can fully recover to pre-pandemic levels. This is, of course, not wishful thinking.
As the government has been aggressive in vaccinating people and enforced discipline in implementing health protocols in public life, infections can hopefully be brought under control.
In terms of vaccination, for example, Indonesia is among the world’s most-vaccinated countries. As of November 21, 2021, 134 million people have received their first jab, and 89 million their second jab.
This, coupled with PPKM measures, have greatly reduced the number of cases. Daily cases, which in July 15 peaked at 56,000 were brought down to 2,577 on September 13 and further down to below 500 by November. This is
a dramatic improvement indeed.
High vaccine uptake and the low caseload have greatly boosted people’s confidence in carrying on with their daily activities and this in turn has positively impacted the economy. So, it is not entirely a pipe dream that 2022 might be the year of full recovery and return to normalcy.
The role of the business sector
The government should make good use of improved pandemic handling to boost the economy, so it not just recovers but grows even higher. To this end, the government is expected to continue — even increase — the breadth of its economic stimulus programs.
However, it is realized that the national economic recovery will not be optimal if it is largely dependent on government support. The private sector, including the banking industry, must also step up their role. The government is well aware of this. Thus, in the Economic National Recovery (PEN) program, it has come up with stimulus and relief packages to help the business sector.
In 2020, the government allocated Rp695.2 trillion of PEN funds, of which Rp579.8 trillion (83.3%) were realized. In 2021, this increased to Rp744.75 trillion, of which as of November 19, Rp495.77 trillion (66.5%) has been disbursed. It is hoped that by year’s end the realization can exceed 90%.
The PEN fund is spread across five clusters, namely, healthcare, social protection, priority programs, support for MSME and cooperatives, and business incentives. Currently, the highest realization is in the business incentive cluster. On the other hand, the realization for funds to help MSMEs and cooperatives to aid their recovery is still very low.
Realization for business incentives fund in 2021 was Rp62.47 trillion (99.4% of the Rp62.83 trillion budget). These funds are mainly appropriated to provide various tax incentives, such as discount or exemption of income tax (PPh 21), final income tax (PPh final), income tax from imports (PPh 22), discount and deferred payment of corporate income tax (PPh 25), repayment of overpaid VAT, VAT for new home purchases, and luxury tax (PPnBM).
Meanwhile, the realization of 2021 PEN fund for MSMEs and cooperatives was Rp81.83 trillion (50.4% of the Rp162.40 trillion budget), which is still low compared to other clusters. The budget is mainly channeled to assist
MSME players, loan guarantees (IJP), fund placement, interest subsidies for micro credit program (KUR), and assistance for street vendors.
Given the vital role of PEN funds in driving economic recovery, it was regrettable that its allocation in Budget 2022 was reduced to only Rp414 trillion: healthcare (Rp117.9tn), social assistance (Rp154.8tn) and economic recovery reinforcement (Rp141.4tn).
The budget for economic recovery is allocated for programs to increase connectivity (infrastructure), tourism and the creative economy, food security, ICT, industrial estates, government investment, tax incentives and support for MSMEs, cooperatives and SOEs. Many programs to support MSMEs and the business sector were discontinued in the 2022 PEN fund.
Many lamented the reduction of PEN fund for 2022 because the government is supposed to increase, not decrease, funds to support businesses that closed or went bankrupt during the pandemic.
The government is also expected to aid businesses that are able to survive by improving efficiency or operating below their capacity so they can get back on their feet and operate at full capacity.
This will in turn help workers who were furloughed or even laid off to be reemployed. Only with the support of the business sector can unemployment and poverty driven high by the pandemic be reduced when the pandemic ends.
A New Paradigm
The minimum wage policy is a measure to protect, maintain and ensure the welfare of workers who have been employed for less than a year. But what about the unemployed?
Also, for those who have worked for more than a year, their wage will be determined based on the pay scale at their workplaces. Given that the majority of workers fall into this category, policies on wage structure do more to improve the welfare of workers.
Thus, a new paradigm is needed. The minimum wage policy should not be seen as the only instrument to raise workers’ welfare. It has to be reinforced by other complementary measures.
There are at least three conditions to achieve this. First and foremost, widely available job opportunities to absorb laborers. If a large portion of the workforce cannot find jobs, they will struggle to make ends meet, or even enjoy better welfare.
Second, a minimum wage policy that meets the minimum living standards for workers. This, in certain cases, can be contradictory compared to the first condition.
A minimum wage that is too high can be a barrier to investment and job creation; if it is set too low to encourage investment, it can potentially create injustice for workers.
Thus, there must be a compromise in determining the appropriate minimum wage, so that on the one hand there is an incentive for investment which creates jobs, while on the other hand it can guarantee fair treatment for workers. As a rule of thumb, the minimum wage must be able to meet the “minimum living standards” of workers.
Third, a wage structure or pay scale that provides incentives for workers to be more productive. This condition, which complements the other two, is more impactful on the welfare of workers. Unfortunately, not many people understand and speak about its importance in many discussions about workers’ welfare.
By adopting this new paradigm, it will be easier for us to analyze the minimal increase in the 2022 national minimum wage. As long as the UMP and UMK can still meet the minimum living standards of workers, then they have achieved the objective of the minimum wage.
The slight increase does not mean that the welfare of workers is ignored. Realizing workers’ welfare in the throes of the pandemic will be determined more by the economic recovery marked by relatively high GDP, which then spur businesses to invest and expand, and subsequently create as many jobs as possible.
Going forward, under this new paradigm, the demand for minimum wages should be replaced by demands for a better wage structure or pay scale that can provide incentives for workers and raise their productivity. When that happens, the cacophony about minimum wage will dissipate and the productivity of workers in Indonesia will improve significantly. Only when this happens can Indonesia become globally competitive. (Piter Abdullah Redjalam)