By Sri Mulyani Indrawati
The world enters 2020 with slight optimism after a tough year in 2019 when global growth reached its lowest point in a decade. Not knowing what lies ahead, the global financial market was bullish with surges of inflows towards emerging economies in the last quarter of 2019. Then by March 2020, the financial market had finally priced in the full impacts of COVID-19.
The pandemic occurs on the backdrop of heightened trade and 5G technology wars, geopolitical tensions, as well as lack of strong global leadership. Physical distancing and restrictive mobility measures, instituted as part of the pandemic response, have brought dire economic consequences. There have been 14 global recessions in the past 150 years, this recession has been billed as the worst since World War II.
Before the COVID-19 crisis hits, the world has managed to make progress on different fronts towards the Sustainable Development Goals. Global poverty fell to 10 percent in 2015 from 36 percent in 1990 and there have been important gains in gender equality since the adoption of the Beijing Declaration and Platform of Actions back in 1995.
Sadly, we are now seeing many years of economic development, and human capital gains regressing. The World Bank estimated that up to 100 million people fell into poverty as a result of the current crisis. The poor, the vulnerable, and women are disproportionately affected as some labor-intensive and interaction-sensitive sectors are hit hard by the “freeze” in economic activities.
The financial market has regained after a rough volatile period last March and April. The S&P 500 reached an all-time high even during the pandemic supported by low-interest rate, extraordinary monetary expansion, and fiscal stimulus. The real sectors, however, are still struggling to revive and avoid bankruptcy. The surviving companies will be those that are the most efficient, most adaptative to the new technology as well as the new way of working during and post-pandemic. The surviving industries are likely to roll out the use of robotics, automation, and artificial intelligence to cut and to minimize risk to labor forces and supply chain disruptions. This will create a wider gap between skilled and unskilled labor.
Without adequate and appropriate policy interventions, the K-shaped recovery, in which the rich get richer and the poor get poorer, is inevitable. Several megatrends are already underway, and some will be accelerated by the pandemic. I would like to point out three megatrends that are likely to impact the global economy.
First, we might see different lifestyles and the nature of work as more professions allow flexible hours and remote working. These changes in lifestyle combined with advances in digitalization will give rise to the proliferation in online education, cashless transaction, fintech, e-commerce, and telemedicine. It might even drive companies to adopt more automation and remote operation of pieces of machinery. Remote working and online schooling could slow down the urbanization trend which was previously driven by the availability of quality jobs and schooling. This trend provides a window for reducing regional disparity by developing smaller but more efficient smart satellite cities. With reliable and better-quality infrastructure and service delivery, new economic centers will proliferate and the opportunity to distribute growth spreads more evenly for sprawling nations or archipelagic states like Indonesia.
Secondly, the pandemic and the growing awareness of risk for climate change will generate a faster shift out of the brown economy towards a green or low-carbon economy. Energy, transportation, and food security or agriculture are the areas that can be transformed faster using green technology. Indonesia has the potential to bolster the development of those three areas as part of the post-pandemic economic recovery plan while promoting the green agenda in the medium to long run. This can be done, for example, by promoting renewable energy portfolios, ranging from solar, wind, biofuel, wave, hydro, and developing low-carbon-emission mass transportation.
And finally, disruption in the supply chain due to over-reliance on China’s production capacity will push for more diversification of the supply chain. This creates opportunities for other emerging economies, such as Indonesia, to be production hubs and become new sources of global supply. Indonesia should improve its industrial infrastructure, lower logistic cost, improve the investment climate, and ease of doing business as well as labor market flexibility to stand out from the competition.
The pandemic has exposed our weaknesses in global emergency health preparedness and quality of health services, human capital development in preparing our labor force for future jobs, and well-targeted social safety nets to safeguard the poorest and most vulnerable. These areas should become a global priority for a more equitable recovery.
In addition, the pandemic has caused significant pressure on fiscal sustainability as revenue deteriorated and expenditure to finance the socio-economic recovery increased. At the same time, countries must also deal with the mounting pandemic-induced debt burden during an uncertain condition in the global financial market. This limited fiscal space has highlighted the urgency of fiscal reforms in all three areas: revenue, spending, and financing.
Fiscal reform is central for the pursuit of sustainable development and avoids the K-shaped recovery. The limited fiscal space must be spent wisely, hence spending quality should be improved. Good data, which could benefit from the advancement in digitalization and IT, is crucial in improving spending quality. Spending must focus on priority areas of development, such as human capital development, health, infrastructure, information technology, food security, and social protection. Social safety net, insurance, and health coverage must adapt to the possibility of income polarization, to provide more cushion to vulnerable groups.
In order to finance these priority spending, countries’ ability to mobilize revenue must be improved. This can be done by broadening the tax base as well as improving tax administration and compliance. Revenue mobilization must also address the trends in digitalization and remote operation to avoid eroding the domestic tax base as more goods and services can be procured offshore. In addition, as tax expenditure takes away resources from another priority spending, it must be recalculated and reevaluated regularly.
Economic recovery should not rely only on fiscal and monetary supports. Structural reform to improve competitiveness, investment climate, and institutional quality is key and imperative to be able to grow above potential growth and escape the middle-income trap. Industrial regulation and ease of doing business must be further improved to capture the benefit of global supply chain relocation. Furthermore, human capital must be improved to harness the transformative changes in automation and artificial intelligence.
In 2030, when Indonesia’s demographic dividend ends, we hope to see that reforms in the area of education, health, and social protection have resulted in higher human capital quality. We also hope to see a more equitable development across regions and across income levels as better access to quality public services and infrastructure brings investment around the country.
Let’s not waste this crisis. COVID-19 has reminded us that we still need to improve in many areas, ranging from emergency health preparedness to fiscal management. We should use this crisis and recovery as an opportunity to create a better and more equitable world for the future generation.
Sri Mulyani Indrawati is the Minister of Finance of the Republic of Indonesia. She is listed among Forbes' World's 100 Most Powerful Women.