Remarks by Angel Gurría
10 October 2018 - Bali, Indonesia
(As prepared for delivery)
Dear Minister Sri Mulyani Indrawati, Distinguished Guests, Ladies and Gentlemen:
Before I begin, let me convey, on behalf of the whole OECD family, our condolences to the people and the Government of Indonesia. The fatalities of the terrible earthquake and tsunami that struck your country on 28 September continue to increase, almost as we speak. The OECD stands ready to help in any way that we can. These natural tragedies push us to keep improving our policies, institutions and frameworks to support the most vulnerable, to promote inclusive growth and more and better opportunities for our people. This is what the OECD’s partnership with Indonesia is all about.
Since becoming a Key Partner in 2007, the OECD-Indonesia relationship has continued to strengthen. Co-operation has deepened considerably in tax policy and compliance, green growth, SME policies, employment and social protection, international trade and investment, and regulatory reform. And the OECD’s Jakarta Office is supporting efforts to bring Indonesia and the OECD closer. Indonesia’s experience, perspectives, and practices are highly valued by OECD Members. Today, Indonesia takes part in six OECD bodies, 12 legal instruments, practically all of our flagship research and publications, and a wide range of OECD reviews and databases.
This collaboration is bringing about tangible benefits to Indonesia. On tax, Indonesia’s participation in the Automatic Exchange of Information and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS is helping to raise tax revenues while enhancing transparency and reducing opportunities for tax evasion. On corporate governance, Indonesia’s adherence to the G20/OECD Principles on Corporate Governance is supporting efforts to fight corruption and money laundering. The OECD is also supporting important reform efforts through OECD reviews and studies, for example, the 2018 Economic Survey of Indonesia – which I will return to shortly – and the ongoing OECD Green Growth Policy Review.
In a few moments, Sri Mulyani and I will sign the OECD-Indonesia Joint Work Programme (JWP) for 2019-21. The JWP will consolidate our existing co-operation and advance new strategic priorities, including infrastructure financing, human capital development, harnessing the opportunities of the digital transformation, promoting sustainable tourism, as well as fostering a vibrant business and investment climate. Poverty reduction, inclusiveness and sustainability feature prominently across policy areas of the JWP to support Indonesia’s efforts to implement the 2030 Agenda for Sustainable Development.
The OECD’s 2018 Economic Survey of Indonesia – which we are launching today – is one of the key fruits of our co operation. I would like to thank Sri Mulyani and her team at the Ministry of Finance for their insights, feedback and productive collaboration.
Since I presented our last Survey in Jakarta in 2016, the Indonesian economy has continued to make remarkable progress. GDP growth has averaged around 5% per year. Per capita incomes have increased by around 4% annually. Annual inflation is low, at around 3%. Poverty rates have fallen in both rural and urban areas, and the national poverty rate is at its lowest level in history. And confidence in the national government is higher than in any OECD country!
Despite this positive context, policymakers face numerous challenges as Indonesia progresses towards higher-income status. Many of the poor are trapped in precarious employment. Regional disparities in income and well-being are significant. Infrastructure needs are large – equivalent to 7% of GDP each year. The social safety net is expanding but still in its infancy. Rapid economic growth risks endangering environmental sustainability.
Against this challenging backdrop, the Survey highlights three priorities for action: raising tax revenues; securing environmentally-sustainable growth in the tourism sector; and reaping the demographic dividend. The government is making important progress on each of these issues, but much more remains to be done! Allow me to address each one in turn.
First, to enable government spending on infrastructure, social services and other areas critical for inclusive growth, tax revenues must rise. Revenues are currently low in Indonesia ─ at only 12% of GDP in 2016 ─ much lower than the OECD average (34.3%). With low incomes and high rates of informality, the current personal income tax net includes few individuals and raises little revenue. While the number of registered taxpayers increased by 50% from 2012-2016, compliance remains a major challenge.
While the Automatic Exchange of Information and implementation of the OECD-G20 BEPS Project will help tackle tax evasion and tax avoidance, improving compliance and broadening tax bases are critical to durably strengthening the tax base. The Survey recommends: accelerating efforts to modernise IT systems and processes, reinforced by investment in staff; gradually lowering the top income tax thresholds to improve progressivity; and removing exemptions to Value Added Tax and increasing the number of VAT taxpayers.
Second, Indonesia should harness tourism for regional development, but not at the cost of the environment. Annual foreign tourist arrivals to Indonesia have almost tripled over a decade to reach 14 million in 2017 and the government aims to reach 20 million by 2019. Here on beautiful Bali, the Island of the Gods, it’s not difficult to understand why! Tourism has the potential to help diversify Indonesia’s economy, boost regional development and reduce inequalities, but it also presents serious risks to environmental sustainability.
This is why the Survey calls for greater investment in tourism-specific and environmentally-related infrastructure. It recommends investments in vocational and on the-job training, and greater engagement with local governments, to help unleash the full economic benefits of the tourism sector for regional and local populations. The Survey also proposes greater use of revenue-based targets, not only tourist numbers, to focus growth on higher quality tourism and mitigate its adverse environmental impacts. This shift could be complemented with measures to expand protected areas but also open more of them up to visitors where it is environmentally feasible. User fees, along with quantitative restrictions as necessary, could control numbers and help fund the maintenance of these sites.
Third, the Survey highlights the incredible opportunity presented by Indonesia’s youthful population. In contrast with most OECD countries and many emerging economies, around half of Indonesia’s population is aged under 30. As recognised in the Making Indonesia 4.0 Roadmap, reaping the benefits of these youthful demographics requires shifting the policy mix to high-quality, high-productivity formal sector jobs to grow incomes and government revenues. This means tackling pervasive informality – which we estimate affects around 70% of all workers, particularly early school-leavers, youth and over 55 year olds – and investing in skills, skills, skills – skilling, upskilling and reskilling!
The Survey recommends conducting pilot tests of easier employment regulations and a discounted minimum wage for youth in special economic zones, which could then be extended across the country. It also proposes measures to raise educational quality, including by introducing regular teacher evaluations, linking teacher remuneration more closely to performance and ongoing training, and encouraging greater employer engagement in school-based vocational education and training, which is at the heart of successful VET systems.
These three areas must not come at the expense of other essential reforms which can support an action plan on inclusive growth in Indonesia, such as more effective business regulations, improved competition, public governance and quality healthcare.
Ladies and Gentlemen:
In these heart-breaking times for Indonesia, it is difficult to look to the future. Nothing can repair the pain of lost loved ones, and destroyed homes. However, I hope that this Survey can offer the country support in moving forward, by helping to design, develop and deliver better policies for better lives in Indonesia. Thank you.