• Overview of the Economic Survey of Indonesia 2010

Indonesia’s economy withstood the recent global crisis very well. Major social and economic progress has been achieved over the last decade, leading to several upgrades of its sovereign rating toward investment grade. Nevertheless, a number of institutional reforms and policy changes will be needed to deal with several cross cutting challenges of decentralisation, capacity building at the local level and improved economic governance. Only with such reforms can Indonesia hope to meet its ambitious medium term targets for growth and poverty reduction and to move to an environmentally sustainable development path.

Income gap vis-à-vis the OECD countries in OECD’s Enhanced Engagement countries1
GDP per capita (thousands PPP, constant 2005 USD), per cent

1. OECD excludes Chile, Israel, Mexico, Turkey, Poland and Slovenia.
Source: OECD calculations using World Bank (World Development Indicators) data.

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The macroeconomic framework has improved

Real GDP growth was the third highest in the G20 in 2009 and is projected to accelerate to around 6% this year and next. However, inflation pressures may re emerge, and the monetary authorities should thus start to raise the policy rate before the end of 2010. Finding the fiscal room to finance the expansion of growth enhancing programmes, such as investment in infrastructure and education at the secondary level, and the increase in coverage of formal social protection and health insurance will require enhancing tax enforcement and eliminating energy subsidies.

Phasing out energy subsidies will free up fiscal resources

The government should stick to its commitment to eliminate subsidies on fossil fuels by 2014 but also needs cut back on electricity subsidies as well. Widespread communication of the benefits of subsidy removal and recourse to existing well targeted cash transfer schemes will help to overcome resistance to reform.

OECD WP No 808: Phasing out energy subsidies in Indonesia

Boosting investment in infrastructure would overcome obstacles to faster potential growth

Public outlays on infrastructure could be moderately increased without endangering fiscal sustainability. Attracting sufficient private investment will be challenging and will require establishing independent sectoral regulators, strengthening the powers of existing regulators, better co ordination between national and local authorities and removing legal obstacles to land acquisition. The authorities should also consider further relaxing barriers to foreign direct investment.

OECD WP No 809: Tackling the infrastructure challenge in Indonesia 

Extensive safety nets and high quality education and health services would favour inclusive growth

Indonesia is working toward expanding the coverage of its formal safety net as one means of tackling poverty. Workers would be better protected against employment loss risks by introducing some form of unemployment insurance. In turn, generous severance payments could be scaled back and minimum wage increases linked to trend gains in productivity. A comprehensive costing of all existing and new social protection programmes, including public health insurance, is imperative to ensure their long term fiscal sustainability. Participation in the health insurance scheme for private sector employees could be fostered. Budget conditions permitting, additional public spending could be allocated to smooth the transition from primary to secondary education and enhance the quality of teaching.

OECD WKP No 810: Enhancing the effectiveness of social policies in Indonesia

 

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