COVID-19 and The Economy of Informal Sectors

World Health Organization (WHO) has declared the COVID-19 as a global pandemic. The organization has sent letters to inform global leaders to prepare themselves for the worst to come, including our very leader Joko “Jokowi” Widodo. Jokowi’s way of handling the pandemic so far has been receiving criticism for not doing (professionally) enough, with some Some even suggest a lockdown.

Jokowi is accused to being too concern on economic consequences of the COVID-19. It is a reasonable concern. The economy is arguably as important as the lockdown to keep people alive. Jokowi and the central bank delivers certain measures like rate cut, bond buying, and tax cuts as well as simplifying imports..

These measures are a welcoming sight. Indonesia import most of its basic needs such as rice, sugar and salt, as well as many inputs for industry. Rate cuts and tax cuts may benefit firms’ cash flow as well as employees.

However, Easing import restriction will only be useful if the exporting countries still operate normally. Under a global pandemic, this might not be true, especially since many important inputs are coming from China, the central of the outbreak. Secondly, for manufacturing sectors, if demand is weak, companies may not need that many input imports. That said, easing import restriction is always a welcoming sight. It is just a bit sad we need an outbreak for the government to see this.

Secondly, while tax cuts are helpful for both firms and workers, it may not benefit enough people. There are only 11% of Indonesian have tax registration number (NPWP). A study by World Bank suggests that more than 60% of Indonesian workers are informal. Informal sectors dominate the number of total firms and workers. They pay no taxes, so tax cut won’t help them at all. More importantly, they tend to live hand-to-mouth. Extreme health measures such as lockdown to these people could mean death sentence, probably worse than the virus itself.

In economic textbooks, credit market works to dampen crisis like this. In China and The United States (U.S.), banks put a pause on credit payments, helping firms and individuals with credit cards a breathing space. Chinese firms also got a green light from the government to issue a so-called coronavirus bond to keep their cash flow running for in the short run. Obviously this is not something informal sectors can do. Even without the virus, informal sectors are not bankable, let alone accessing credits.

The logical measure to these vulnerable people and firms is a direct cash transfer. We are not new to cash transfer. We have experience with programs such as Bantuan Langsung Tunai (BLT) and Program Keluarga Harapan (PKH), and other measures to help the poor (involving many “cards”). The infrastructure that the these programs have might help to disburse more money to the vulnerables, given OECD estimates There are only about 49% Indonesian have bank accounts.

However, the central government may have no vision on the people outside of pro-poor programs but may be vulnerable amid working in an informal economy. OECD review of Indonesia’s social protection system (2019) mentioned exactly this problem, where informal sectors are invisible to the system. They are probably not poor, but are very vulnerable to shocks. the need to strengthen Indonesia’s information architecture is emphasized by OECD, as well as the need to increase the coverage of Indonesia’s social protection system to also include the informal sector workers and businesses.

Visibility is one, logistic is another. As far as my memory serves me, BLT was conducted via literal cash transfer (exactly giving away banknotes). I would speculate that delivery via “Jokowi special cards” need the cards to be given away manually. Imagine if one has to do this in a soft-lockdown scale. No electronic transfers, no pipe delivery (except maybe electricity). Everything has to be done physically.

Advance countries like Australia deliver their stimulus package via small and medium business, since most if not all of Australian firms are tax registered. There is also options to conduct bank transfers or access to pensions. This is a luxury Indonesian government do not have.

I am not sure how much cash is needed to finance a lockdown. Even an advance country like Australia opt to not having a lockdown amid the potentially high cost. It seems indeed letting the economy move (albeit slowly) is a much viable option. The cash is then best spend on increasing the availability of tests and the capacity of healthcare. I am sure healthcare system have its own problem, but I won’t comment on that rite now.

Alas, the government has very little option. As expensive as the intervention might be, an ignorance might cost so much more in the long run. The silver lining of all of this is, at least I hope the government realize how important it is to have a clear vision on the economy of the informal.

Lastly, perhaps, government bonds might be the instrument the government need to unleash. Forget the fiscal rule, 3% deficit for now. It is not the time. Local government should probably open to possibility of issuing municipality bonds just in case. There won’t be any buyer maybe, but we always have the central bank.

For now, keep your hands clean and your fingers crossed. We’ll make it thru this together.

Krisna Gupta
Krisna Gupta

Research mainly on international trade and investment policy and its impact on firms. Indonesia in particular is my main geographical focus.

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