The Organization for Economic Cooperation and Development (OECD) is publishing its first comprehensive Economic Assessment of Indonesia. This initiative is important because it is linked to our efforts to strengthen cooperation with a number of important non-member countries.
The OECD has been dealing with the challenges of economic development for many years. We are now proposing to develop a special relationship -- which we call "enhanced engagement" -- with five countries. Indonesia is among these countries, together with Brazil, China, India and South Africa. This initiative offers each partner country the opportunity to work more closely with the OECD with a view to possible membership in the future, in ways that are focused, comprehensive and mutually beneficial. We are also working with another five countries -- Chile, Estonia, Israel, Russia and Slovenia -- towards full membership over a shorter horizon.
Our interest in Indonesia is in recognition of the country's importance in the global economic landscape. A large economy with a population of nearly 230 million and vast endowments of natural resources create opportunities for growth and development. But it also poses challenges.
We argue that Indonesia's key policy objective should be to raise and sustain the economy's growth potential to reduce poverty and unemployment at a faster pace. GDP has grown by over 5.5 percent per year since 2005, the highest rates since the Asian crisis. Democracy is well established. But, as we often find for our own member countries, Indonesia can perform better.
Needless to say, a stable macro economy is essential for making growth sustainable. Our assessment of Indonesia is positive on this score. Fiscal policy has been conducted responsibly and in an increasingly decentralized manner. Falling public debt is creating room in the budget to finance infrastructure development, human capital accumulation and social protection.
The authorities are taking bold steps to reduce the burden of fuel subsidies on the budget. This is a good policy move, because fuel subsidies are particularly onerous when energy costs are high. They are also inequitable because according to official estimates about two thirds of spending on fuel subsidies benefits people who are among the richest 40 percent of the population.
The private sector can play a leading role in the growth process. But this will only happen if the business environment is improved and barriers to entrepreneurship are removed. We see a large potential pay-off from further liberalizing state-owned monopolies, especially in key network industries. This would open up opportunities for the private sector and help to resolve infrastructure bottlenecks. Indonesia has some of the weakest infrastructure development indicators in Southeast Asia.
But further liberalization will only bring more investment and lower prices for consumers if there is an effective regulatory framework combining price liberalization and easy entry with independent regulators to protect consumer rights.
Our report also analyzed labor issues. In this area, the OECD advocates some liberalization of the labor code coupled with better social protection for the needy. Indonesia's labor code is fairly rigid compared to most OECD countries and regional peers. This ends up penalizing vulnerable workers, instead of protecting them. It also discourages employers from hiring formally. It is difficult to accurately measure informality, but about 80 to 90 percent of employment can be considered informal in Indonesia.
One option is to strengthen formal social insurance programs. We believe that participation in workers' social insurance Jamsostek could be extended to the self-employed and employees in smaller enterprises on a voluntary basis. Of course, membership will only be attractive to workers if they believe in the value of social protection.
Therefore, designing correct incentives for workers to join is as important as making sure that programs are credible and affordable.
Social safety nets could also be strengthened. Several programs, including community-based and targeted income transfers to poor individuals, are working well. But conditionality for benefits could be improved in the Program Keluarga Harapan, the family-based poverty alleviation program.
International experience shows that the most effective requirements to receive income transfers are related to school attendance and use of preventive health care. This way, individuals at risk can be protected in the short run while acquiring the minimum skills needed to pull themselves out of poverty.
This first Economic Assessment constitutes a landmark in the cooperation between Indonesia and the OECD. Over the coming years, we will seek to have an increasingly active dialogue between the OECD and Indonesia, a dialogue through which this country can both draw on international best practice in a range of policy areas and share its own valuable experience and insights with OECD Members. I look forward to it.
The writer is OECD Secretary-General.
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