Keeping up the reform effort for stronger, cleaner and fairer growth in Indonesia


Remarks by Angel Gurría, OECD Secretary-General, delivered during the Roundtable Discussion at the Indonesian Centre for Strategic and International Studies (CSIS)

Jakarta, Indonesia, 28 September 2012

(As prepared for delivery)

Minister Pangestu, Excellencies, Ladies and Gentlemen:

It is a great pleasure to be at the Indonesian Centre on Strategic and International Studies (CSIS). Just like the OECD, the CSIS has spent more than 40 years working to improve policy making through policy-oriented research, dialogue, and public debate. We are definitely complementary institutions. I am delighted to be here today to share the OECD’s vision of Indonesia and join efforts to help this country.

Indonesia’s recent economic performance has been remarkable. Since the 1990’s Asian crisis, Indonesia has been experiencing strong annual economic growth rates, between 5% and 6.5%. While most advanced economies are still struggling to recover from the Great Recession, Indonesia’s economic dynamism continues (with a 6% growth rate for 2012), aiming at becoming one of the 10 largest economies in the world by 2025.

The country is on its way to reach this ambitious goal. However, there is still a lot of work to do. Indonesia is still facing important economic and social challenges. To assure a long term and high quality growth, Indonesia must continue to pursue reforms and innovative policies in four parallel tracks: as we say in the OECD, it is time to Go Structural, Go Social, Go Green and Go Institutional. Let me explain.

Go Structural

Structural reforms can help to unleash productivity, a central ingredient in the recipe for growth. In the last 20 years 61% of Indonesia’s growth has been driven by productivity increases, 39% by increased labour input.

But productivity can be further improved. Average labour productivity across sectors is still around half of Malaysia’s. Productivity in micro, small and medium-sized firms, a key source of employment and economic growth, is particularly low.

What can Indonesia do to improve productivity?

Small firms can be formalised. Lessening red tape, lowering tax compliance costs and introducing flexibility in the formal labour markets will help to increase output in the long-term.

Measures can also be used to boost investment. Clarifying property rights for real estate and improving infrastructure will help to attract capital.

The quality of human resources can be enhanced. Indonesia suffers from a lack of skilled workers. Policies should aim to increase the pool of workers and ensure workers are best prepared with skills that are in high demand. These measures will also help to reduce inequality, another challenge which Indonesia must tackle as its economy continues to prosper.

Go Social

Indeed, despite the country’s prosperity, inequality in Indonesia has increased. The Gini coefficient has risen from 0.35 in 2008 to 0.41 in 2011.This will shackle Indonesia’s growth. Widely unequal societies function inefficiently. Their economies are neither stable nor sustainable in the long term. To reduce income inequality we recommend taxing fringe benefits and allowances and tackling underreporting of taxable income to improve the fairness of the system.  

Equally important are improvements in education. I recently launched this year’s OECD publication ‘Education at a Glance’. In comparing the educational attainment of the adult population, we find that in OECD countries on average 44 % have an upper secondary education while 30% have a tertiary level. For the G20 this average is 33% and 26% respectively, for Indonesia 19% and 5%.

The right mix of policies can help to increase adult learning. Extending conditionality in income support programmes to include attendance in secondary education, raising the skills of the drop-outs and encouraging tertiary education financing through student loans will help to improve educational opportunities.

These reforms will help to reduce inequality, harness the demographic dividend and improve productivity while moving up the value-chain in economic development.  

Go Green 

As well as going social, we also need to “Go Green’’. When I say this, people say, Gurría, Give me striped growth, checkered growth, yellow growth – but green growth, now? Well, the costs and consequences of environmental inaction could be absolutely colossal, particularly in developing countries. These countries have more limited adaptive and resilience building capacities.

Being an archipelago, Indonesia is highly vulnerable to climate change and its impact. It is the world’s fourth largest GHG emitter, with 4.7% of the world total. CO2 emissions per capita are increasing faster than GDP growth.

Deforestation rates in Indonesia are amongst the highest in the world, second only to Brazil. As mentioned in our last two economic surveys Indonesia needs to swiftly review the most cost efficient measures to slow deforestation rates.

Our forthcoming Agriculture Review will recommend reinforcing the legislation on environmental and forest protection and its effective implementation as well as strengthening law enforcement for forest management.

Go Institutional

Lastly, Indonesia must focus on improving the strength of its governance. Implementing these reforms and achieving the status of an advanced industrialized country will not be possible under the country’s current complex, disorderly policy-making process.

Corruption is still also an issue, with Indonesia ranking as no. 100 in Transparency International’s Corruption Perception Index. There are a number of OECD tools that Indonesia can use to tackle corruption, like our initiative, that offers countries improved anti-corruption tools and reinforces their implementation.

The OECD’s Regulatory Reform Review for Indonesia presented yesterday should also provide useful insights in this regard. Our guidance on Regulatory Reform will allow Indonesia to realise the economic dividend from political democracy, to support the investment climate that is needed to shift wealth and ultimately to define Indonesia’s place in the world.  

Ladies and Gentleman,

Going structural, going social, going green and going institutional will enable Indonesia to secure its path to prosperity and ensure inclusive and sustainable growth. Yesterday I signed a Framework Agreement for Co-operation between the OECD and Indonesia. It is the first with one of our key partners and will provide the basis for an expanded exchange of insight and experience. I look forward to the work we will do together as the Indonesian economy continues to grow.

Thank you very much.


Related Documents