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Social protection: WB’s formula for RI to unlock growth potential
The World Bank has suggested the government focus its structural reform agenda in a number of areas, including the country’s social protection scheme to improve people’s welfare and unlock growth potential in the medium term
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span>The World Bank has suggested the government focus its structural reform agenda in a number of areas, including the country’s social protection scheme to improve people’s welfare and unlock growth potential in the medium term.
Reforming the country’s social protection scheme would ensure that people entering the workforce were under the best possible conditions to thrive in the labor market as Indonesia would soon transition from being a demographic dividend country to an aging society, according to the bank’s Indonesia Economic Quarterly issued Wednesday.
“Social protection helps build, employ and protect human capital. It helps build human capital because a demographic transition means that there are fewer Indonesians entering [the] labor market and more will enter old age,” said World Bank lead Indonesia economist Frederico Gil Sander in Jakarta during the report’s release event.
“This demographic transition means you will have to invest a lot in these fewer people joining the labor force because this is the key asset that Indonesia has in the future.”
The number of older Indonesians will increase significantly, with important implications for health care and pension systems, according to the report. Moreover, technology will continue to change the nature of the labor market and work itself, increasing the need for skilled labor.
President Joko “Jokowi” Widodo has envisioned that Indonesia will become a developed country in 2045 with near-zero percent poverty rate and Rp 320 million (US$22,827.11) annual per capita income, a more than fivefold increase from today’s level. The GDP is then expected to reach $7 trillion, from a little over $1 trillion today, placing the country among top-five largest economies by the 100th year of independence.
The bank suggested that social protection be reformed by combining government subsidized programs with privately financed insurance so as to guarantee the population had a certain level of protection.
Currently, the government’s social protection programs include the Family Hope Program (PKH) and national health insurance (JKN), among others.
People with incomes that fell in the bottom 40 percent of the population were expected to be able to access government subsidized social assistance and social insurance programs with a tapered benefit. People that gradually climbed the income distribution ladder should receive fewer government subsidized benefits compared to the poor, Gil Sander suggested.
Meanwhile, middle- and high-income people could gain access to a minimum guaranteed level of protection through a combination of individually mandated social insurance tied to payroll taxes.
“At some point, people are wealthy enough that they, through payroll taxes, are contributing toward employment insurance, toward retirement [benefits], toward health insurance,” said Gil Sander.
In addition to extending the social safety net program to the bottom 40 percent of the income distribution with tapered benefits, Gil Sander suggested the government integrate its PKH and the Indonesia Smart Card program, which provides tuition benefits to the children of the poor.
The cost of reforming the country’s social protection scheme to bring universal social protection was estimated to reach around 2.3 percent to GDP, with the guaranteed minimum package expected to cost around 1 percent to GDP and additional social insurance schemes related to old age and health care to incur about 1.3 percent to GDP.
The government will set aside Rp 372.5 trillion for social spending in the 2020 budget, a slight increase from the Rp 369.1 trillion social spending outlook this year. The spending is set to subsidize 96.8 million people in the JKN scheme, providing social assistance through the staple food card to 15.6 million households and scholarships for 20.1 million students, among other programs.
Despite the slight increase, Indonesia’s spending on social protection compared to GDP was relatively small at 0.7 percent, while it was similar to its neighbors such as Malaysia and the Philippines, it was still quite low by global standards, according to data from the World Bank.
Other than reforming its social protection schemes, Gil Sander also suggested the government focus its structural reform on continuing its infrastructure drive, developing human capital, attracting job-generating investment, managing the country’s natural assets, as well as reforming the government’s revenue collection and spending allocation measures to improve public finances.
With these reforms implemented in a consistent manner over the next five years, it would be possible for Indonesia to unlock around 6 percent of GDP growth in the future, Gil Sander estimated.
Finance Minister Sri Mulyani Indrawati said the government would review the World Bank’s suggestion to reform social protection schemes, saying that the Jokowi administration had the “building blocks” with existing programs that could be adjusted going forward.
“I believe it is best [that] we continue to review and look at [not only] social safety net issues but other government programs in agriculture and fisheries. So all programs that could create employment opportunities are complementary to these efforts,” said Sri Mulyani.
