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Productivity and long term growth

Going for Growth 2016: Indonesia

 

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‌Indonesia needs to address a wide range of structural bottlenecks in order to sustain strong medium-term growth. The most binding bottlenecks include a large public infrastructure gap, high labour informality and youth unemployment, and low educational attainment. While the government has stepped up spending on infrastructure, many remaining regulatory rigidities are holding back investment – both public and private. Informal employment is rooted in various rigidities affecting the formal labour markets such as stringent employment protection legislation combined with the lack of income support for the unemployed, as well as high minimum wage and non-wage hiring costs.

1. Data refer to 2009 for Indonesia; 2010 for South Africa and China; 2012 for India. For China, the Figure is an official estimate for urban area.

Source: International Labour Organisation (ILO).

Previous Going for Growth recommendations include:

  • Improving the regulatory environment for infrastructure by lifting government spending on infrastructure, by focusing on transportation, logistics, and on poverty-alleviating infrastructure, by considering issuing infrastructure bonds.
  • Enhancing outcomes in education by stepping-up spending on education and encouraging higher enrolment and quality at primary and secondary levels through regular teachers’ assessments and professional development, and by more closely linking teacher salaries to qualifications and performance.
  • Reforming labour regulation and capping minimum wage increases to address the problem of informality by introducing unemployment benefits, initially at a low level, by making dismissal procedures more flexible, by reducing severance payments, and in provinces where the minimum wage is deemed to be sufficient from an equity standpoint, by limiting real increases to be no higher than labour productivity gains.
  • Further reducing energy subsidies by phasing out remaining fuel and electricity subsidies, which will allow a reprioritisation of government spending programmes, and by compensating the poor through existing poverty reduction schemes, as necessary.
  • Easing barriers to entrepreneurship and investment, and strengthening institutions to fight corruption by lowering barriers to domestic and foreign investment through the removal of non-strategic sectors from the negative investment list and of logistics bottlenecks in ports, and by boosting the resources of the Corruption Eradication Commission in order to enable appropriate handling of all reported cases of corruption.

 

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Recent policy actions in these areas include:

  • The government's plan to lift infrastructure spending is now gaining traction.
  • Subsidies on gasoline were scrapped and those on diesel were capped – a welcome move that contributes both to the efficiency of budget allocation and the environment.
  • A new syllabus was introduced in primary and secondary education while the funding for education was increased.

The report also discusses the possible impact of structural reforms on other policy objectives (fiscal consolidation, narrowing current account imbalances and reducing income inequality).  In the case of Indonesia, the complete elimination of energy-related subsidies would allow a reprioritisation of spending in areas aimed at promoting equitable and sustainable growth, not least spending on education and infrastructure.

Economic Policy Reforms 2016 

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