The COVID-19 pandemic in Indonesia has resulted in a significant slowdown in business and investment activities, leading to widespread layoffs and unpaid leaves, and forcing some businesses to suspend their operations. We find that, during the pandemic, firms in the high-vulnerability sectors experienced significantly lower levels of investments and labor demand than those in the low-vulnerability sectors. Our findings also show that firms experiencing a closure during the early stages of the pandemic decreased their labor demand significantly compared to those that did not experience a closure. Furthermore, the effects are larger for firms with a longer duration of closure. These negative effects on investments and labor demand persisted even two years after the beginning of the pandemic.
To address these challenges, the Government of Indonesia implemented several policies to support firms in facing the difficulties brought by the pandemic and government-imposed restrictions aimed at containing the spread of the virus. Unfortunately, we find that only the tax deferral program had a significant effect to counter the negative effects of high sectoral vulnerability on firms’ labor demand. Similarly, we find that firms’ investments in digitalization and machinery had significant effects to counter the negative effects of high sectoral vulnerability on firms’ labor demand.
Firms’ appetite for physical and labor investments are essential factors that will shape the economic outlook in the coming years. We find that during the early period of the pandemic, the average number of hired workers was significantly lower than the average number of layoffs. However, this trend began to reverse in the last quarter of 2020. Nevertheless, our qualitative investigation reveals that the business community continues to hold a neutral or pessimistic view on their investment appetite due to unfavorable external and internal factors.
These findings carry several important policy implications. First, to prevent the scarring effects on firms, it is very crucial for the government to support firms during a crisis to avoid closures in the first place. Second, if a firm closure does occur, to limit the scarring effects, firms need to be assisted to reopen as quickly as possible. Third, to accelerate recovery, firms’ investments in machinery and technologies should be encouraged and facilitated.
