Why re-open Indonesia economy won’t get the “economy” back?

The spending dilemma

Freepik.com

Have you ever think the reason why you spend your money on something? Maybe before, it’s not something that urgently matters to you, because it’s something you always do, it feels like automation. You can answer this question with “Yeah, because I want it” or “Oh, because I need it”. But can you answer this question right now with same answer as before?

People spend due to several reasons, but one of the most important things on why people spend is highly related on how they perceived their income in the future. In a good time, you can always predict your income. Such as, “I’ll get yearly bonus in the next few months”, or “I’ll get THR [Tunjangan Hari Raya] every year”, or “I’ll get additional income due to promotion or side hustle”. Even in the worst case, you can say “I’ll get income as same as I get before”.

This kind of thinking will encourage you to spend on things at that moment, because you always think that your saving [cash on hand] will be replenish by your future income. So in short, the certainty of your income in the futureis highly correlated with your spending

Our new normal won’t bring the economy back

Right now Indonesia Government is trying to force the economy back by create several regulations such as:

  1. Mall and other business can be re-open again in several green zone area — which the parameter is not clear, and since we have the second lowest testing per million ratio in the world. This decision will be more to authority decision than data driven decision
  2. All the government employees and state owned enterprise should get to work in the office as soon possible
  3. Incentive tourism, again! — like hell this is even possible???

So even you force people to get out of their home, even by force, and put business open again, people won’t spend money, because of 2 things:

  1. They don’t have money. It’s either they just got lay off or they got income reduction.
  2. They don’t feel their income is save in the future. Either they’re not sure how long their company can survive and they’ll eventually get lay off, or they got income reduction so the company can survive.
Angela Markel. Source: Forbes

Now, lets learn from Germany. Germany have one of the best economy during Covid-19 crisis. Germany unemployment rate are only increase by 1%, meanwhile US are increase to 14,7% and some economist think it headed to 25%. Germany also already re-open the economy right now by easing the lock down, in a very short time strict lock down. This is because they are one of the best on handling Covid-19 health crisis in the world, because of several things:

  1. Test, Test and Test. 200k PCR test in a week!
  2. Impressive health care system . Germany are the second best in having critical care bed per capita, 621 bed per 100k people. They also have strict lock down in the beginning and the time they gain from this are used to build more health facility and better regulations. They also have highly specialized doctor and facilities that are needed to save severely ill patient.

This all lead to only 0,74% death rate from Covid-19 [compare to indonesia, we have 6% death rate]. And even after all of that good things their government do, you can see no people in the stores. The shop and restaurant all totally empty. This is one of evidence that you can’t force people to spend.

Even after the economy going back, labor will always on the bad side. because demand are declining, business owner will try to play safe. They may not hire as much as they do before crisis and full employment will be very rarely. They tend to reduce cost by offering hourly contract or offering salary cut to their existing employee. So many people still don’t have income or have lesser income than before, and it may made the vicious cycle that create demand issue and made the economy are getting worst and worst.

Our new normal are darker than what people think

Freepik.com

Economy is always about 2 things, supply and demand. So before, I already explain to you how’s the demand shock inflicted the economy during Covid-19. But not just that, we may have supply shock issue in the near future. What a time to be a live, global supply and demand shock in the same time!

In supply side, there’re 2 things that drive the modern economy right now, globalization and technology. Covid-19 situation are make the situation between US and China are getting heated, from trade war, financial war, technology war and any war you name it. It will lead to what we called as “decoupling situation”. Decoupling means, you try to build national security by build things on your own and reduce dependencies on other country, or in simple word, nationalization.

Can you imagine, in one smartphone, all the parts are coming from different country. The camera lens maybe from Europe, the chip from China and etc. Both of US and China are try to ban each other in any possible ways, and it will lead to high cost economy. Such as Huawei case, Huawei are banned to have access to US semiconductor and technology. If US are cut resource from China, and build by their own. They need to build new factory and hire more people with higher salary, and it will lead to higher cost.

And the second is technology. Technology made supply can catch up with demand without increasing the price. More advance technology, more scale-able, and more cheaper product. One of the easiest example for this is 5G. 5G market leader is Huawei, the Erickson and Nokia 5G cost 30% more and have 20% less productivity compare to Huawei. It will leads to slower adoption of 5G. This soon will lead us to higher cost economy since our option for things are getting limited.

Now we have both demand and supply issue, lower income compare to the past, and higher price of product in the future. The future it’s waaaay to dark than we can imagine

How long the suffer until it ends?

Covid-19 already become economy recession and soon, depression, no doubt about it. Our generation right now soon are facing the biggest economy depression modern human ever see, in my humble opinion, it must be bigger than economy recession during world war and America great depression combined. So the question is, how long till everything back to normal and we can enjoy life again?

There are 3 type of recovery after recession, V shaped, U shaped or L shaped [this one what we know as depression]. The problem is, no one can know which way our economy will be going ahead. As a product manager, I’ve trained to split what known and unknown. We can only predict the end of crisis after we know everything. The problem with Covid-19 crisis, we ain’t know shit

  1. We don’t know when we can get vaccine [or antiviral drugs].1 Year? 2 Year? FYI, we never have vaccine for corona strain families before, like SARS and MERS. So create vaccine for Covid-19 maybe one of the biggest challenge humanity ever face.
  2. After we get infected [or get vaccine in the future], we don’t know how long antibody can last. Is it forever? or 1 year? or 3 months?
  3. We have more than 1 strain covid-19 right now, and the mutation will keep going and won’t stop [RNA virus known to have a very high mutation rate]. Can antibody for 1 strain protect us from another strain?
  4. How exactly the virus transmitted from one person to another? is it Aerosol or Airbone?
  5. and many other things we still don’t know yet.

With this high level of unknown, the L shaped recovery are more likely to happen. And economy depression are inevitable.

Who’s gonna win and who’s gonna lose?

Freepik.com

Soon it will become the lose lose situation for all the player. But some will get hit harder than the other. I think the biggest looser will come from 3 considerations:

  1. Direct hit industry. For every player in industry that got hit directly from Covid-19, will have small chance to survive. This industry will be travel [airline, train etc] and hospitality [hotel, event, concert etc]. People won’t travel for leisure and business anyway, since they scare they got infected for leisure travel and the rising of digital teleconference make business travel are not necessary needed anymore. No demand, no industry, no company.
  2. Tight margin business. Demand are lower and supply are getting costly. So business that rely in volume and have lower margin will get impacted badly, such as Airlines business. People won’t travel, but even tho they have to travel, the game already change. You cannot sit closely to other passengers, means less volume in 1 flight. Meanwhile, the cost of operation [OPEX] are not changing. Less income, but cost are keep steady or getting higher. Since you can’t run company with negative balance sheet for forever, it may a dead end for them.
  3. Luxury. People won’t buy channel bags in this economy, aren’t they?

What things we should do to make things better?

@basicincome twitter

Universal Basic Income is the answer. Now we know that economy are not drive by only material things, but also what is it in our mind. The way we perceived the economy are what build the economy itself, it’s like self fulfilling prophecy.

UBI [Universal Basic Income] will help to solve this. With certainty of income in the future, people will spend again, and it will make the economy moves again from demand perspective. Things won’t be as good as before, but we, as society, can start to looking at the future again.

At this time, supply shock is almost inevitable, and it’s something we can’t control. So we need to do what we need to do, focus on one things at a time. Get more cash, it’s okay to have bigger debt now than ever, either we create more “pandemic bond”, get loan from IMF or ADB or anything you name it, or the very very very last resort, printing money.

There will be time we think how we pay our debt, but it definitely not now. Let’s focus on saving more lives right now

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