Let the Garuda soar – further steps to a stronger, cleaner and more inclusive Indonesian economy

 

Remarks by Angel Gurría, Secretary-General OECD
Jakarta, Indonesia
27 September 2012

 

Honourable Ministers, Ladies and Gentlemen,

It is a pleasure to present to you the 2012 edition of the OECD’s Economic Survey of Indonesia and the first Regulatory Reform Review of Indonesia. I would like to thank Minister Martowardojo and his staff for their warm welcome and their engagement with these reviews. These reports reflect the strengthening policy dialogue between the OECD and Indonesia, one of our key partners. This is all the more important as the OECD has launched its Development Strategy that will enable us to deal with key developing economies.

Over the last twenty years Indonesia has come a long way in its institutional and economic development. Since the Asian crisis, it has produced strong annual economic growth rates between 5% and 6.5%.  Despite the recent global crisis, this year is no different. Robust domestic demand has fuelled real GDP growth to a projected 6%. Indonesia’s legendary Garuda bird is indeed spreading its wings.

This country has set for itself the ambitious target of becoming one of the 10 largest economies in the world by 2025. But on its way forward Indonesia faces significant challenges. Overcoming them will require all of its determination and resourcefulness.

The Garuda has spread its wings but now it must learn to soar! The OECD’s Economic Survey and the Review of Regulatory Reform identify policies and governance reforms that will help the economy grow rapidly, inclusively, and sustainably. Let me focus on three key messages - on macro-economic growth, micro-economic efficiency, and on governance:

 

1. Promoting Macroeconomic Growth: Rethink the Spending Mix 

Promoting macrogrowth with a long-term view is crucial. To achieve this, Indonesia must make the most of its public and private resources. For the public sector this requires more efficient spending and effective taxation. Efficient spending demands swift actions, like reducing energy subsidies. These subsidies are inefficient, inequitable and – most important – they are expected to reach 24.1% of central government spending in 2013, according to the draft central-government budget. By contrast spending on social assistance and infrastructure remains insufficient for the country’s needs. We therefore encourage the Indonesian government to rethink the spending mix in order to achieve its ambitious development objectives while maintaining its commendably prudent fiscal policy.

On the taxation side, Indonesia’s tax to GDP ratio has been increasing, but it is still at 12.6%, one of the lowest in the G20. In our view, rather than raising tax rates, broadening the tax base by reducing informality and tax evasion provides the necessary scope for raising tax revenues.

In addition, reconsidering corporate tax holidays for firms in some sectors, removing exemptions for employer-provided fringe benefits, broadening the VAT tax base, and raising taxes on economic rents in the resource sector would efficiently generate higher revenues. These improvements on the macro level must be accompanied by reforms on a micro-scale.

 

2. Micro-economic Efficiency: Boosting Productivity

Improving productivity is one of the major challenges for Indonesia’s economic development. Despite strong progress over the last years, average labour productivity across sectors is still only around half of Malaysia’s – 6,000 USD GDP-contribution per employee in Indonesia versus 14,000 in Malaysia. Achieving Indonesia’s 7% annual GDP growth target will require labour productivity to grow 60% faster than in 2000-2010.

Micro, small and medium-sized firms (MSMEs) are the backbone of the Indonesian economy. These firms provide great economic flexibility. However, they tend to be in the informal sector which limits their access to capital and reduces their productivity. They provide 97% of employment but only 57% of value-added. Addressing the productivity gap has to start in the SME realm!  

Formalisation of workers and firms can be a key source of productivity growth. Encouraging firms and workers into the formal labour market could best be done by reforming the labour code and keeping minimum wages in line with productivity growth. Both reforms would reduce the costs of being in the formal sector.

Removing obstacles to investment, especially for small and informal firms provides a second route to spur productivity. We recommend easing access to finance by allowing all lenders access to the public credit registry. In addition, underdeveloped financing sources such as micro finance could be deepened by expanding the coverage of the regulatory framework and stepping up efforts to pass a micro-finance law.

An important factor holding back investment in Indonesia is the lack of infrastructure. Bottlenecks in ports, rail and shipping remain a serious constraint; some progress has been made over the years but there remains scope to increase public outlays on cost-effective infrastructure projects without endangering fiscal sustainability. This need for more infrastructure underlines, once more, that the spending mix in the Indonesian budget may be changing.

As the Master Plan for Economic Development recognises, the private sector plays a key role in infrastructure development. Subsequently, Indonesia has formulated legislation underpinning private investment. It is important, however, that proper implementation and administration accompany these reforms.

More specifically, Public Private Partnerships (PPPs) must better coordinate in identifying and procuring projects, and work to reduce administrative delays. A presidential committee for infrastructure projects could improve the consistency of ministerial decisions and develop a shortlist of projects to get the PPP programme moving. This takes me to my third key message: macro and micro reforms will only bear fruit through improved governance.

 

3. The Crucial Role of Good Governance

Improved governance is essential for Indonesia to realise its ambitions for private investment and to raise living standards. The Master Plan notes that the conditions for economic development will require bureaucratic transformation to benefit from economic and market opportunities. Achieving this transformation is a considerable challenge.

A comprehensive approach to reform, advanced by sustained and committed political leadership, will be more effective than piecemeal measures. The government of Indonesia has a key role to play in improving coordination among ministries and in ensuring that policy and regulation facilitate connections among markets across the country’s far-flung archipelago.

An important next step is to formulate a whole-of-government approach to regulatory management. Indonesia has committed to this under the Honolulu declaration, signed by the members of the Asia Pacific Economic Cooperation (APEC) in 2011.

The 2007 Investment Law is a significant step towards improving the investment climate. However, too many government agencies still have the authority to create
regulations that pose obstacles to investment. The government should formalise the process for assessing new regulations by empowering the Coordinating Ministry for Economic Affairs to ensure that new regulations serve public interests and do not restrict investment and trade.

These reforms are crucial to not only foster growth, but also to ensure that growth is inclusive. As Indonesia continues to prosper, we must be sure that all are on board.

 

A Final Message: Time to Go Social

Let me conclude by highlighting this particular challenge: promoting inclusiveness. Currently, income inequality in Indonesia is on the rise. In 2011, the Gini coefficient was 0.41, up from 0.35 in 2008. Social support, such as compensatory measures for the most vulnerable, and safety nets for the unemployed, will reduce inequalities. Taxing fringe benefits and allowances and tackling underreporting of taxable income will improve the fairness of the system and also close the income gap.

Providing broader access to education will enable more participants to transition from the informal to the formal economy. In the recently launched OECD publication “Education at a Glance,” we find that in OECD countries on average 44% of the adult population have an upper secondary education, and 30% have a tertiary level of education. For Indonesia these averages are 19% and 5%, respectively.

Reducing inequality, harnessing the demographic dividend and moving up the value-chain in economic development are three good reasons to improve educational inputs and outcomes. Extending conditionality in income support programmes to include attendance in secondary education, raising the skills of the drop-outs, encouraging tertiary education financing through student loans – these are some of our recommendations for an education system commensurate to the shifting wealth narrative.

The recent efforts to provide health insurance to all of the country’s 240m citizens from January 1st 2014 can make a remarkable contribution to levelling the playing field in Indonesia. It will be crucial that this initiative receives the appropriate resources to back it up.

Ladies and Gentleman,

Indonesia is building a bright future. Its GDP has been growing strongly for years. This has had a positive impact on its gross national income per capita, which has also risen steadily.  According to consulting groups – like PricewaterhouseCoopers – Indonesia will become the 8th largest economy in the world by 2050 (in PPP terms). This is a very encouraging perspective. It is crucial that this growth is equitable and respectful of the environment.

To achieve this, Indonesia must keep implementing key reforms, focusing on macro and micro policies and improved governance measures that are beneficial across the board. 

The OECD stands ready to help. We will keep strengthening our links. In a few days, the OECD will launch an agricultural review, undertaken in close cooperation with the Ministry of Agriculture. The Framework for Cooperation, signed today, creates a solid basis for our continued work together and cements our ability to support Indonesia in its quest to become one of the world’s top economies.

Let us use the Framework for Cooperation as part of the nest from which Indonesia’s Garuda will soar!

Terima kasih banyak dan selamat siang! [Thank you very much and good luck]

 

Related Documents

 

Official visit of the OECD Secretary-General to Indonesia (Jakarta, 27th-28th September 2012)

 

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