BACKGROUND

The Vision of Indonesia 2045 sets out the goal for Indonesia to become a high-income country as it celebrates its centennial anniversary of independence. With strong economic growth and a substantial decrease in extreme poverty, Indonesia has already achieved middle-income country status. Nevertheless, Indonesia needs to further expand its middle-class population to unlock its development potential and transition to a highincome country status in 2045. Achieving the Vision of Indonesia 2045 will require an inclusive annual growth rate of 5.1 to 5.7 per cent, a GDP per capita of US$19,794–US$23,199 and a middle-income population of around 70 per cent of the total populace by 2045 (Bappenas 2019).

One of the main engines of Indonesia's economic growth is workforce productivity. According to the 2021 World Bank report Pathways to Middle- Class Jobs in Indonesia, the increase in workers’ productivity could contribute as much as 88 per cent to the country's GDP per capita growth of 3.9 per cent between 2000 and 2017, equal to 3.5 percentage points annually. In other words, the pace of Indonesia's economic growth depends on how fast the productivity and skills of the workforce can be enhanced. Several studies have indicated that there is a skills mismatch issue in Indonesia, where the skill profile of the workforce has not kept up with the dynamic demands of the job market (World Bank 2018a; Yoong and Gil Sander 2020). The current economic growth momentum in Indonesia should be supported through innovative labour market policy measures to address this skill mismatch. The government can provide support through education and training scholarships, as well as on-the-job training, to upgrade the workforce.

The opportunity to become a high-income country in 2045 is also supported by Indonesia's ongoing demographic bonus where most of the population, or over 70 per cent, is in the prime working-age group. This demographic bonus, expected to last until 2030, has opened up an opportunity to accelerate Indonesia's economic development. However, Indonesia is also at risk of missing this opportunity without appropriate policies to equip the workforce with appropriate skills.

Three main issues have kept the impacts of the demographic bonus suboptimal.

PROLOGUE

Micro, Small and Medium Enterprises (MSMEs) have been critical to the Indonesian economy, not only for their contribution to GDP and job creation but also for their resilience throughout prior economic crises, thanks to their agility, flexibility and less dependency on external resources. However, the COVID-19 pandemic has hit the MSMEs severely, as it unprecedentedly disrupted supply, distribution and demand simultaneously. UNDP and LPEM FEB UI (2020) revealed that nine out of ten MSMEs suffered a drop in demand for their products during the pandemic, while around 53 per cent recorded a decrease in asset value.

The survival of MSMEs in the current pandemic is contingent on both internal and external factors. Internally, MSMEs have to adjust their financial, production and marketing strategies to cope with the changing business landscape. Externally, given the scale of the pandemic, assistance from both government and non-government agencies is crucial.

Three major challenges, however, stand in the way of implementing these programmes. The Government of Indonesia (GoI) needed to design assistance programmes that can mitigate various types of hardships encountered by MSMEs due to the pandemic. The GOI then launched the largest economic recovery programmes for MSMEs in the country's history including, but not limited to, deferred principal and interest loan payments, loan interest subsidies, tax incentives and working capital loan guarantees. Second, the GOI needed to ensure all MSMEs had the same access to the programmes. This was not a simple matter, given the unavailability of a single updated MSMEs database in Indonesia. Third, the assistance should be designed not only to ease the impact of the pandemic but also to help MSMEs jumpstart and transform their businesses in the recovery period.

This chapter provides an analysis of the impact of the pandemic on MSMEs, the GOI's response to mitigate the impact on MSMEs, the effectiveness of government support, and MSMEs’ internal strategy and business transformation to weather and recover from the pandemic.

MSMEs IN INDONESIA PRIOR TO THE PANDEMIC

Characteristics of MSMEs

MSMEs in many countries across the globe, including Indonesia, have shown their resilience in previous crises, especially the 1998 Asian Financial Crisis (AFC) and the 2007–8 Global Financial Crisis (GFC) (Gunadi et al. 2021; Iborra, Safón, and Dolz 2020).

INTRODUCTION

Indonesia announced its first COVID-19 case in the second week of March 2020 and then, to prevent COVID-19 from further spreading, the Government of Indonesia eventually enforced a social restriction called PSBB (Large-Scale Social Restriction) which later became PPKM (Community Activities Restriction Enforcement), with various levels of implementation, even until today. This restriction has forced most people to work from home, regardless of their readiness.

The COVID-19 pandemic has changed the way the government works in a very significant way. Suddenly, without any preparation, government employees were forced to work in a very intensive information technology environment and to work from home. The Indonesian Ministry of Finance (MoF) is no exception to this situation. Compared to other government ministries and agencies in Indonesia, the MoF was in a relatively better position, thanks to its long track record of adopting digital transformation.

Given the urgency of the government to adopt flexible working arrangements, this chapter was written to elaborate on how bureaucracy is adapting to the new ways of working (NWOW) due to the COVID-19 pandemic with the support of digital technology and how this NWOW can then be adopted and be a norm in the future. We analyse how civil servants adapted to this NWOW by utilizing available digital tools to conduct their administration tasks and deliver services to the public. Specifically, we would like to know the answers to the following questions:

• 1. How well do civil servants accept the NWOW?

• 2. What are the requirements for having an effective NWOW?

• 3. What are the side effects of the adoption of the NWOW?

• 4. What are the civil servants’ expectations for the future NWOW?

• 5. How does the NWOW affect civil servants’ performance?

We conducted our analysis based on the results of internal surveys administered by the MoF (Program Reformasi Birokrasi dan Transformasi Kelembagaan 2020a, 2020b). The surveys were conducted online and participation was by respondents representing the MoF employees belonging to different organizational units. We understand that these surveys are not representative of the Government of Indonesia as a whole. However, we believe that the results provide valid findings regarding the adoption of the NWOW as they are commensurate with findings from other similar surveys done by other prominent institutions. The results show that civil servants can adapt to the NWOW without affecting their performance.

BACKGROUND

The unprecedented COVID-19 virus became a global pandemic in 2020. Indonesia's first case of COVID-19 was found on 2 March 2020. The pandemic dramatically changed human life as all public places such as airports, seaports, train stations, bus stations, malls, shopping centres, roads, railways, restaurants, hotels, and movie theatres were suddenly closed. People work and pray from home, and students, teachers, and lecturers study from home. There were only essential activities that are exempted from mobility restrictions.

Changi Airport in Singapore, one of the busiest airports in the world, was suddenly empty. Jakarta, like other big cities in the world, suddenly changed from a high-density and traffic-jam metropolitan to an empty city with empty roads. The public crowd suddenly disappeared, and economic activities were just stopped and hibernated.

People have no memories of the global pandemic as the latest one was around one century ago, from 1918 to 1920, when the world faced a global pandemic of the H1N1 virus, well known as the Spanish flu, infecting around one-third of the world population. No prior reference can be used on how the COVID-19 pandemic will end. The only vivid figures that people can imagine about the end of the pandemic were taken from the movies that displayed the global pandemic, such as Outbreak (1995), Quarantine (2008), Black Death (2010), Contagion (2011), Flu (2013), and Infection (2019). At the very least, these movies gave optimism that the pandemic is bearable and can be cured.

The real game changer in the global COVID-19 pandemic is vaccine production that can be publicly available within one year. It is an extraordinary outcome as it usually takes more than five years to make the vaccine available for public use.

IMMEDIATE GOVERNMENT RESPONSE

The COVID-19 global pandemic that has changed human life dramatically made governments all around the world alter existing policies to combat the pandemic. Some governments decided on hard-core lockdown.

INTRODUCTION

The impact of COVID-19 on the economy is more severe than the 2008 global economic crisis that was felt by many countries in the world because the global economic crisis was mainly related to the global financial crisis and mostly felt by developed countries, while the economic crisis due to the COVID-19 pandemic is a health crisis that crippled the economy and felt by all countries, and not a single country was free from the COVID-19 pandemic. The crisis caused by the pandemic is also the first experience in the modern era and it needs extraordinary policies that had never been implemented before. The rapid spread of the COVID-19 virus globally in 2020 negatively impacted the world's economy, including Indonesia. Implementation of government policies to restrict mobility and direct interaction among the population has a significant impact on the decline of economic and social activities. In 2020, the world economy contracted by 3.1 per cent, in which the economies of developed countries recorded a larger contraction of 4.5 per cent than the emerging market and developing economies which experienced a decline of 2.1 per cent (IMF 2021). Meanwhile, the Indonesian economy also contracted by 2.1 per cent lower than the rate at which the global economy declines (BPS 2021). When looking at economic growth on quarterly bases, economic growth in the first quarter of 2020 was only 3.0 per cent, lower than an average yearon- year (YoY) growth of 5.0 per cent. This was followed by consecutive contractions of –5.3 per cent in Q2 2020, –3.5 per cent in Q3 2020 and –2.2 per cent in Q4 2020. Those declines indicated that the Indonesian economy fell into recession.

The COVID-19 pandemic had a detrimental effect on Indonesia's economy, not only at the national level but also at the regional level. This was shown by slowing economic growth, increasing unemployment and poverty in almost all provinces. However, the diverse characteristics of regions in Indonesia create regional dynamics where the impact of the pandemic on the regional economy is not symmetrical. For instance, Bali, which is highly dependent on the tourism sector, was most significantly affected by the COVID-19 pandemic.

INTRODUCTION

COVID-19, the virus that caused a multidimensional crisis, has impacted every economy globally, including Indonesia. Having forced mobility restriction policies to restrain the spread of the virus, many countries have experienced a great lockdown recession, referred to as a significant drop in domestic economic activity (IMF 2020). This condition led to a substantial decline in household consumption and business activities, causing state revenues, especially tax revenues, to collapse due to a sudden halt in economic activity. On the other hand, the demands for funding the health sector, social safety nets and other expenditures for handling COVID-19 were rising as well as the need to accelerate national economic recovery. Moreover, the pandemic has also threatened the financial sector with a sharp drop in the economy evoked an appetite to hold deposits and only the most liquid asset.

The pandemic crisis is also more alarming due to the uncertainty of the virus mutation and yet has massively scarring effects for people. The spread of Delta variant waves with high casualties and followed by economic pressure in mid-2021 was evidence of the uncertainty of the impact of the pandemic. Therefore, fiscal policy in Indonesia has expanded since 2020, and as a countercyclical measure, it has continuously played an essential role in protecting the poor and vulnerable until now. In a time of crisis, a fiscal response is necessary and has to be timely. However, questions arise about whether the government can prepare the financing instrument that performs yet are credible to the financial market to support the stimulus.

This chapter discusses Indonesia's experience in fulfilling financing needs during the pandemic to support the government's strategies for economic recovery. Firstly, this chapter examines the policies in responding to the unprecedented crisis, followed by the challenges and opportunities during the crisis and the strategies for utilizing financing instruments to support the budget. Lastly, this chapter ends with some lessons learnt and the way forward.

NECESSARY FISCAL RESPONSE TO STABILIZE THE ECONOMY

In the past decades, the government has utilized the State Budget (Anggaran Pendapatan dan Belanja Negara, or APBN) as a measure to boost economic growth through national priority programmes, which have multiplier effects, such as infrastructure provision, improving quality of health and education, as well as bureaucratic reforms.

INTRODUCTION

Indonesia has made remarkable development progress over the past twenty years, maintaining consistent annual economic growth of 5 per cent and attaining upper-middle-income country status by 2020. The world's tenth-largest economy in terms of purchasing power parity and a member of the G20, Indonesia aspires to become the fifth-largest global economy by 2030. Access to essential services, including education and health, has improved steadily over the last decade. Nonetheless, progress has been uneven, resulting in significant disparities across geographic and income levels and undermining the ability of growth to be truly inclusive. In general, the poor and vulnerable continue to lag. Even though all income groups are achieving better educational achievement, less than one-third of the poorest ten per cent of the population completed basic education in 2018 (Holmemo et al. 2020).

At the same time, Indonesia is in a period of demographic transition which will affect its human capital accumulation and labour market dynamics for decades to come. The working-age population grew by about 24 million from 2013, reaching over 200 million in 2020 (Statistics Indonesia 2021). Currently, half of the population is under the age of 30. Ensuring this generation has a good education and the right skills for employment is critical for the country to increase the productivity of its remaining workforce when the population begins to age in 2025–30. Nevertheless, efforts to improve the quality of human capital are not without challenges. Even before COVID-19, there were problems with learning gaps and disparities in outcomes in the Indonesian education system, which have gotten worse in recent years, especially as an impact of the pandemic.

COVID-19 mitigation measures have resulted in nationwide school closures of at least three months. While the government and educational community worked to maintain learning continuity, students and parents have had to use their own resources to continue learning while away from school, some through the Internet, TV, radio, or completing teacher assignments. At the same time, teachers had to adapt to new pedagogical concepts and teaching methods for which they did not receive any prior formal training. When it comes to the most disadvantaged students, those without access to digital tools or support to learn independently are particularly vulnerable to falling behind.

INTRODUCTION

The first year of the COVID-19 pandemic and the subsequent measures to contain its spread have magnified existing burdens on women and people living with disabilities in G20 countries and around the world.

This period has been referred to as a “Shecession” or “Momcession” because larger employment penalties were borne by women across advanced and emerging countries, particularly when schools and childcare facilities shut down (Bluedorn et al. 2021; OECD 2021). McKinsey (2020) estimated that women made up 39 per cent of global employment before the pandemic hit but took 54 per cent of the job losses. Women gave up paid work faster than men due to increased family responsibilities during the pandemic.

Beyond impacts on employment and unpaid work, women and girls also endured more domestic violence as the poor economic and social conditions coupled with lockdown measures exacerbated existing abuse and control (Gavrilovic et al. 2022). Besides being devastating to individual well-being, such violence takes a heavy economic toll (Oedraogo and Stenzel 2021; UN Women 2020a). With the pandemic and its impact on women, the World Economic Forum estimates that it will take an additional generation to close the large gender gap that prevailed even prior to the pandemic.

Concurrently, in regular circumstances, people with disabilities—which comprise 15 per cent of the world's population—are more exposed to economic insecurity and shocks because they are more likely to be poor and have higher health costs, and have lower levels of education and economic participation (UNPRPD, UNICEF, IDA, and ILO 2020). People with disabilities also have more healthcare needs than others and are therefore vulnerable to the impact of low-quality or inaccessible healthcare services (WHO 2020).

A consensus is building that social protection is a key policy response to address pandemic-related social and economic crises, and that timely action can counter the trends. McKinsey (2020) suggests taking timely action to advance gender equality could add US$13 trillion to the global gross domestic product (GDP) in 2030 compared with a situation where no action is taken.

However, by July 2021, out of 3,099 social protection and labour market measures worldwide, only 19.6 per cent took gender into account because existing systems were inadequate for considering gender within shock-response planning.

INTRODUCTION

Tax reform has been a major challenge for Indonesia which has struggled for many decades to strengthen its capacity to collect taxation revenue. The adverse impact of reduced taxation revenue has adversely impacted the Indonesian government's ability to finance needed social services. This is evident in the tax-to-GDP ratio in Indonesia when compared to similar income group countries. As a result, tax reform has been a continuing challenge for the government, including strengthening revenue collection capabilities.

Most recently, the Ministry of Finance (MoF) initiated tax reforms in 2017 which were a comprehensive revamp of Indonesia's current tax policy and administration landscape. Initially, the government expected to finalize the reform agenda by 2024 with the roll-out of the new core tax system. However, the pandemic hit midway through the reform and, expectedly, shifted the focus of the tax authorities to respond to the COVID-19 disruption.

The unprecedented and extraordinary challenges of the pandemic created a health and economic catastrophe on a global scale. For the government, the immediate priority was to minimize the risk of a health crisis. Nevertheless, the attempts to curb the pandemic through containment and outbreak preventative measures triggered both supply and demand shocks and created social and economic challenges. The government faced the additional challenge of cushioning and protecting impacted households and businesses.

From the perspective of an economic crisis, the COVID-19 challenge was (at a minimum) twofold: the government needed to address the immediate crisis and also provide necessary support during the post-pandemic recovery phase. As a result, the government devised a comprehensive support package through discretionary fiscal responses: additional spending and forgone revenue—to supplement and strengthen the existing automatic stabilizers. The government structured and consolidated the broad economic recovery agenda under the National Economic Recovery (Pemulihan Ekonomi Nasional, or PEN) Programme.

As one of the available fiscal instruments, the role of tax is to raise revenue to fund the services and income supports the community's needs and is not only about collecting revenue. The government has provided a set of fiscal incentives to support the economy and has been reporting tax expenditures since 2018.

INTRODUCTION

Rapid and frantic spread of the coronavirus disease at the beginning of 2020 has sent the world into chaos. Most countries were grappling with the deadly virus. Indonesia was no exception. Worse, it happened just as the government started to roll out that year's financial plans and prepare the 2019 accountability report.

Most government agencies were appalled and had no idea how to deal with the situation. Communities and business players too faltered because they had no experience in dealing with pandemics.

It was devastating, as the number of coronavirus patients continued to increase in some major cities, but government agencies could not respond immediately. One of the issues was budget constraints. The 2020 national and regional budgets were designed for a normal situation, not for the pandemic. Government officials were silent and reluctant to divert the existing budgets (APBN/APBD) to deal with the pandemic or for economic recovery. There was a growing fear that if such a condition is left unsettled, it could trigger a nationwide disaster.

The above situation indeed required the government's presence. But it failed to do so because government agencies were facing various constraints and obstacles. These include the absence of a legal framework for actions, regulations, programmes, budgets and business processes related to budget implementation in an emergency situation.

It was also not clear either which agency should be responsible for the matter. These were aggravated by invalid population data, ill-prepared human resources and inadequate digital information system, restrictions on people's movement, and the high number of employees and their family members who were exposed to COVID-19 (Chon and Kim 2022; Sundqvist-Andberg and Åkerman 2022).

The discussion also revolved around the role of Indonesia's National Disaster Management Authority (BNPB) which has mostly been dealing with natural disasters. On contrary, what the people facing was a pandemic that did not only impact health, but incurring social and economic problems. There was doubt whether BNPB is able to handle these issues. Also, existing laws only encompass natural disasters, and none are on nonnatural disasters. It prompted the Indonesian government to establish a Task Force led by the BNPB chief and its membership consists of ministries and government agencies.