By Haryo Aswicahyono and Hal Hill*

It takes a serious crisis to reveal a country’s fundamental strengths and vulnerabilities. As in all countries, the COVID-19 pandemic of 2020 and 2021 has strained all aspects of Indonesia: its governance, its institutions, its political system, its economic resilience, its health system, its cohesion society, its vulnerable communities and its international relations.

More importantly, the country held firm, the administrative and political apparatus continued to function despite deep economic and social tensions. This is in marked contrast to the country’s last major crisis, in 1997-98, which crippled the government, led to violent ethnic conflict and triggered the collapse of the Suharto regime.

This time, President Jokowi has somehow consolidated his political authority. As in much of developing Asia, there are concerns about “democratic regression”, including the weakening of the anti-corruption commission, authoritarian tendencies in the administration and unresolved issues in Papua. But Indonesia remains a functioning democracy with a vibrant civil society, arguably more so than any other ASEAN state.

In 2020, Indonesia experienced its first recession of the 21st century, itself a testament to competent economic management in the democratic era, and in stark contrast to the 13% collapse in GDP collapse in 1998. Indonesia’s economic recession was a relatively modest 2.1%. , much smaller than many of its neighbors. Economic recovery is gradually underway in 2022, with growth estimated at 3-3.5%.

At the start of the crisis, the authorities reacted quickly, with the Bank of Indonesia adopting an unconventional but effective monetary policy, in part to support a cautiously expansionary fiscal policy. The strength of commodity prices has further stimulated the economy. As the recovery continues, the challenge will be to return to pre-crisis fiscal and monetary policy settings, lest they become embedded in the political system, especially in the run-up to the general elections in 2024.

The government has also taken advantage of the crisis to enact a more ambitious program of microeconomic reforms, notably through its so-called omnibus law, which parliament approved at the end of 2020. Although the consultation and socialization processes in the preparation of the law have been deficient, foreign investment has indeed increased in 2021. The challenge in the country’s Constitutional Court is unlikely to derail its implementation.

Nevertheless, Indonesia continued to drift slowly towards a more inward-looking development strategy. The strategy for promoting greater national added value, known as hilirisasi, has strengthened, particularly in the natural resources sector, and with the consequent proliferating risks of cronyism. At the same time, official policy emphasizes the goal of increased participation in global production networks. These two goals are fundamentally incompatible, and the result is that Indonesia continues to miss important manufacturing export opportunities. The parliament also still has to ratify the RCEP agreement of which the Indonesian strategists were the craftsmen.

Unsurprisingly, the healthcare system was initially overwhelmed by the pandemic. Indonesian official COVID-19[female[feminine the mortality rate, 53.3/100,000, is not high by global standards. But its “excess mortality rate” is much higher, estimated at several multiples of this figure.

There is no quick health fix for a system that has historically been a low priority for public investment. A large minority of the population has little or no health insurance. The initially slow vaccination rate also reflected global inequalities in vaccine supply, with China by far the largest and most promising supplier. The health response in the first half of 2020 was also complicated by the confusing directives issued by the Minister of Health, who was subsequently replaced.

Protecting the standard of living, especially that of the poor, has been a major challenge. Since the Asian financial crisis, Indonesia has made significant progress in building a viable if rudimentary social safety net. But the programs are modestly funded and not designed for a large-scale shutdown of economic activity as has happened periodically in 2020.

There has been a surprisingly small deterioration in living standards, likely because the economic contraction in 2020 has been limited and social programs have had some protective effect, according to research by Asep Suryahadi and others. Initially, these programs only covered the poor, not the near-poor. But the government subsequently made an effort to extend their coverage.

With around a third of secondary school students in households without working internet or enrolled in schools that are unable to provide digital education, there has almost certainly been a growing educational disadvantage that can never be corrected without programs specific catch-ups.

Despite the severe loss of life, Indonesia has not been deeply affected by the pandemic. “Stability” in its various economic and political manifestations continues to be the cornerstone of political life.

the recovery program is still substantial, in the context of a slowing pre-pandemic economy. With such low tax base, falling to less than 10% of GDP during the pandemic, the government’s fiscal room for maneuver is very limited. Public debt has increased, albeit moderately. There is a growing educational and labor market disadvantage to overcome. Public health and medical research systems require huge investments. Social safety nets need to be strengthened. Investment needs in physical infrastructure remain considerable, although President Jokowi still seems determined to pursue his grand plan for a new capital in remote Kalimantan.

Indonesia will also chair the 2022 G20 summit, which provides an opportunity for the Jokowi administration to bring the voice of developing economies to the global agenda as the world recovers from COVID-19. It is also an opportunity for quiet Sino-US diplomacy on the sidelines, especially since ASEAN countries are a crucial player in this dispute.

*About the authors:

• Haryo Aswicahyono is a senior researcher at the Department of Economics, Center for Strategic and International Studies (CSIS), Jakarta, Indonesia.
• Hal Hill is HW Arndt Emeritus Professor of Southeast Asian Economies at the Australian National University.

Source: This article is published by East Asia Forum and is part of a series of EAF special features on 2021 in review and the year ahead.