The Organization for Economic Cooperation and Development (OECD) has been working with Indonesia with growing intensity in recent years. Our mission is to help countries foster international cooperation and mutual learning, identify good policy practices that can improve the functioning of their national economies and the world economy more broadly.
This work is relevant to emerging and advanced economies alike. We have a lot to learn from each other.
The perspectives that Indonesia and other major emerging economies bring to OECD discussions are extremely valuable in keeping our analysis and recommendations relevant in the context of an increasingly integrated world economy.
The OECD Economic Survey that I had the pleasure to launch yesterday with Finance Minister Agus Martowardojo is emblematic of this growing cooperation. Its recommendations have benefited from a dialogue between Indonesian officials and their peers in other countries.
As the Survey highlights, Indonesia has weathered the global economic and financial crisis well, demonstrating the resilience of its economy, and the wisdom of structural reforms undertaken after the 1997 Asian crisis. The Indonesian economy grew by 4.6 percent in 2009, trailing only China and India among the G20 nations.
The economic and political environment is sound and stable, government spending plans are responsible and public indebtedness has been markedly reduced. These are all worthy achievements.
They have led rating agencies to upgrade Indonesia’s sovereign rating, with an investment grade in prospect.
But further reform will be necessary if Indonesia is to meet the ambitious development and poverty reduction objectives set out in its Medium-Term Development Plan (Rencana Pembangunan Jangka Menengah Nasional, or RPJMN). The stakes are high: If Indonesia could boost its long-term growth rate from the present 5 percent rate to a more robust 7 percent, the time needed for living standards to converge with those seen in advanced economies could be halved. Indonesia must confront this challenge head-on.
The first key objective should be finding financing for much-needed investment in infrastructure, which is poor compared to other countries in the region.
Indonesia has announced plans for Rp 1,429 trillion (US$160 billion) in new infrastructure investment over the 2010-2014 period, which represents a staggering 25 percent of its GDP in 2009. Government planners expect most of this investment to be financed through public‑private partnerships.
But attracting massive amounts of private investment will be a challenge without reforms to the regulatory framework. We suggest that Indonesia establish independent sectoral regulators and increase the powers of existing ones. It should also consider undertaking measures to ensure better co‑ordination between national and local authorities and remove overly-restrictive regulations on buying land. OECD research shows that relaxing barriers to foreign direct investment helps countries attract capital that finances investment and boosts technology transfer. Indonesia has been opening to international investment since the mid-1980s — now is the time to accelerate.
Indonesian authorities have rightly set the goal of spreading the benefits of economic growth more equitably. To achieve this, we believe that the labor market needs to be made more conducive to job creation in the formal sector. This can be facilitated by modern social safety nets. Many Indonesians work without a proper employment contract. This leaves them with no fallback should they lose their job.
We recommend that Indonesia adopt a two‑pronged strategy of introducing some form of unemployment benefit, and reforming the labor code. If properly implemented, we believe this reform would reduce the size of the informal economy and encourage the creation of jobs in the formal sector.
Indonesia is also gradually expanding the coverage of its formal safety nets as part of wider efforts to fight poverty. We see this as a step in the right direction, and suggest that Indonesian officials start a careful assessment of the costs and benefits of all existing and planned social protection programs, including public health insurance.
This is vital to ensure that new programs incorporate the right incentives and remain affordable in the long run. For example to encourage participation in the health insurance scheme for private-sector employees, Indonesia may want to reconsider the employer opt-out clause and extend enrolment to both the self-employed and employees of small firms.
Investment in high-quality education is also crucial to spur economic progress, and the Indonesian authorities are right to allocate significant resources to this sector. But student performance still remains weaker than in other Southeast Asian countries. Sustained improvements in education will require smoother transitions from primary to secondary education and enhanced quality of teaching.
Indonesia has participated in the OECD world-renowned Program on International Student Assessment (PISA) since 2003. We look forward to continuing to work with Indonesian government officials to measure educational outcomes and spur further policy reforms in this crucial domain.
Financing this large reform Agenda without hampering long-term fiscal sustainability may be the toughest challenge facing Indonesia. The government has already stepped up efforts to improve governance and enforcement, to ensure that higher taxes can be collected. We believe that significant savings could also be achieved by phasing out inefficient energy subsidies.
As pointed out in the OECD Economic Survey, these subsidies are not efficient in achieving their primary goal of helping very poor Indonesians. We think they are hurting Indonesia’s economy, public finances and the environment. The authorities have committed to reduce overall energy subsidies by 10-15 percent per year until 2014, including the full elimination of the fossil fuel subsidies over this period. Their determination is admirable. Going forward, we suggest they consider removing electricity subsidies as a logical next step.
Of course, alleviating the short-run social impacts of doing away with energy subsidies must be managed carefully. The experience of OECD countries shows that governments can shield low-income households from energy price hikes by increasing cash benefits paid to those most in need.
This has worked well in many countries, including in Indonesia itself in the past. Indonesians know that the list of reforms is long, but they have shown wisdom and leadership to remove obstacles to their achievement. Indonesia has come a long way and it is finally taking its place among the most important nations in the world.
Indonesia stands at a critical moment in its history. It has a unique opportunity to pursue reforms that could have a very positive impact on its future. It can count on the OECD to be by its side in this process. We look forward to the deepening of our very promising cooperation.
The writer is OECD secretary-general.
