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Indonesia 2016 OECD Economic Survey Jakarta 24 October

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Indonesia 2016 OECD Economic Survey Jakarta 24 October

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Indonesia 2016 OECD Economic Survey Jakarta 24 October

  1. 1. OECD OECDEconomics 2016 OECD ECONOMIC SURVEY OF INDONESIA Jakarta, 24 October 2016 Getting the fundamentals right www.oecd.org/eco/surveys/economic-survey-indonesia.htm
  2. 2. GDP growth is still strong but has been slowing 2 GDP growth % growth, volumes Source: OECD Economic Outlook database. 0 1 2 3 4 5 6 7 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
  3. 3. Outstanding progress in social outcomes 3 Selected heath and education indicators over the long term Source: World Bank, Word Development Indicators. 0 20 40 60 80 100 120 140 160 180 0 10 20 30 40 50 60 70 80 90 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Gross enrolment ratio, secondary, both sexes (%) (left scale) Mortality rate, under-5 (per 1,000) (right scale)
  4. 4. The business environment is improving 4 1. Rankings of the subcomponents of Indonesia’s Ease of Doing Business (EDB) index. Source: World Bank, Ease of Doing Business. Ease of Doing Business: aggregate and subcomponents Rank 2015 and 20161 050100150200 Aggregate ranking Starting a Business Dealing with Construction Permits Getting Electricity Registering Property Getting Credit Protecting Minority Investors Paying Taxes Trading Across Borders Enforcing Contracts Resolving Insolvency 2015 2016  The government’s 13 reform packages will go a long way to further improving the business environment.
  5. 5. Regulatory impediments remain 5 1. The Services Trade Restrictiveness Index (STRI) between 0 and 1, with 1 being the most restrictive. 2. Emerging markets are an average of Brazil, China, Colombia, India, Indonesia, Russia and South Africa. Source: OECD Services Trade Restrictiveness Index database Services trade restrictiveness, 20151 0 0.2 0.4 0.6 0.8 1 INDONESIA OECD Emerging markets ²
  6. 6. Challenges ahead 6
  7. 7. The fiscal balance has weakened 7 General government revenue, expenditure and balance % of GDP Source: CEIC database. -3 -2 -1 0 1 2 3 4 5 -15 -10 -5 0 5 10 15 20 25 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Fiscal balance (right scale) Expenditure (left scale) Revenue (left scale) Legal 3% of GDP deficit limit  If growth disappoints, employ a prudent monetary response to stabilise output without endangering financial stability.
  8. 8. Tax revenues are low 8Source: World Bank World Development Indicators.  Improve the effectiveness of tax collection. Tax Revenue as % of GDP  The tax base is narrow, the number of tax payers is low and compliance weak.  Automatic Exchange of Information will reduce tax avoidance.  Tackle labour informality. 0 10 20 30 India INDONESIA Philippines Singapore Brazil Korea OECD Malaysia Thailand Turkey South Africa
  9. 9. Low public spending squeezes social services and infrastructure 9 Share of Government Revenue % of GDP Source: World Bank World Development Indicators.  Raise government revenues to fund a longer-term increase in high-priority spending. 0 5 10 15 20 25 30 35 40 India Philippines INDONESIA Singapore Thailand Malaysia Korea Brazil OECD South Africa Turkey
  10. 10. Redirection of spending reflects the government’s priorities 10 Change in government spending Difference between 2014 and 2015, % of total expenditure  Remove remaining subsidies on fuel, electricity and fertiliser to fund public priorities. Source: CEIC database. -14 -12 -10 -8 -6 -4 -2 0 2 4 6 8 Other Infrastructure Education Health Energy Subsidy  Removing subsidies on fuel has created space for increased spending in priority areas such as infrastructure.
  11. 11. Spending on social assistance is low 11 Public expenditures on social assistance latest year, % of GDP1 1. Public social expenditure excluding health and old-age spending. Source: OECD Social Expenditure database. 0 1 2 3 4 5 6 7 8  Streamline social assistance and integrate social security payments with the income tax system.  Boost funding for the most efficient measures, such as conditional cash transfers.  Continue efforts to create a unified database of beneficiaries.
  12. 12. Despite progress important health challenges remain 12 Source: International Food Policy Research Institute Global Hungry Index database; World Bank World Development Indicators database. Prevalence of stunting in children under five years (%)  Focus on those specific weaknesses in Indonesians' health outcomes that have high economic costs, like child malnutrition and stunting. 0 5 10 15 20 25 30 35 40 45
  13. 13. The quality of public governance ranks low 13 Government effectiveness, 2015 Percentile rank1 1. Government effectiveness percentile rank between 0 and 100. Source: World Bank Worldwide Governance Indicators.  Specific targets for spending (20% for education and 5% for health) are fine. However, controls on how funds are spent could be improved.  Move ahead with performance-based budgeting (“money follows the programme”).  Improve evaluation of existing and future programmes. 0 20 40 60 80 100
  14. 14. But corruption remains the number one impediment to doing business in Indonesia 14Source: World Economic Forum, Global Competitiveness Report 2015-16 The most problematic factors in doing business in Indonesia, 2015 0 2 4 6 8 10 12 Corruption Inefficient government bureaucracy Inadequate supply of infrastructure Access to financing Inflation Policy instability Poor work ethic in labour force Tax rates Inadequately educated workforce Complexity of tax regulations Foreign currency regulations Government instability Crime and theft Poor public health Insufficient capacity to innovate Restrictive labor regulations  Corruption is still hampering economic development and should be fought by all means.  Support for anti-corruption agencies is critical.  Including support for further expanding anti- corruption activities into the regions.
  15. 15. Indonesia faces important environmental challenges 15Source: OECD Green Growth Indicators Air pollution  Air pollution and CO2 intensity may get worse due to: o Increasing reliance on coal; o Untaxed fossil fuel consumption; and o Forest clearing and fires.  Forest clearing also generates health and biodiversity risks.  Remove remaining energy subsidies and then begin to tax CO2 emissions.  Better enforce laws against forest clearing. 0 5 10 15 20 25 1990 1994 1998 2002 2006 2010 2014 Annual concentration of PM2.5 (µg/m³) OECD INDONESIA
  16. 16. Decentralisation to promote regional development 16
  17. 17. The variance in GDP per capita across provinces is large 17 % of average national per capita GDP Source: Statistics Indonesia. 0 50 100 150 200 EastNusaTenggara Maluku WestNusaTenggara NorthMaluku Gorontalo WestSulawesi Aceh Bengkulu DIYogyakarta CentralJava WestKalimantan Lampung WestJava WestSumatra SouthKalimantan SoutheastSulawesi CentralKalimantan CentralSulawesi NorthSulawesi Banten SouthSulawesi NorthSumatra SouthSumatra Bali EastJava BangkaBelitung Jambi Papua WestPapua NorthKalimantan Riau RiauIslands EastKalimantan DKIJakarta
  18. 18. 89% 57% Central Government Sub-national governments Expenditure share Revenue share Revenue and expenditure are unbalanced 18 Revenue and expenditure shares by level of government, 2015  The large imbalance between the spending of regional governments limits the benefits of decentralisation.  At the same time, the administrative capacity of local governments is sometimes weak. Source: Ministry of Finance, Statistics Indonesia; OECD estimates.  In the short-term, expand use of targeted grants.  In the longer term, increase regional capacity and then raise regions revenue sources.
  19. 19. The administrative burden on firms varies significantly across regions 19 Cost of a construction permit in major Indonesian cities As a percentage of income per capita by city Source: World Bank, Doing Business in Indonesia 2012, January, Washington, DC. 0 50 100 150 Jambi Pontianak Palangka Raya Semarang Surakarta Palembang Mataram Balikpapan Pekanbaru Banda Aceh INDONESIA Medan Surabaya Denpasar Bandung Yogyakarta Manado Jakarta Batam Makassar  The best performing regions equal that of global best practice.  Work with the sub- national governments to move the regulation of business to best practice.
  20. 20. Other recommendations o Employment protection discourages formal jobs and skills investment and reinforces labour-market segmentation.  Reduce impediments to hiring and dismissal of workers, and provide incentives for investment in skills. o Poor nourishment and exposure to disease have left over one third of all children under five stunted.  Expand existing programmes to tackle stunting. o Sub-national governments often underspend their budgets, impeding infrastructure investment in particular.  Expand assistance to help regions to improve budget planning and implementation capacity. o More special economic zones (SEZs) are to be established, in spite of their limited success to date.  Experiment with different incentives in special economic zones, including more flexible labour regulation, with a view to extending proven good practices to the whole economy. 20
  21. 21. Other Recommendations o Central government transfers cover the entire cost of sub-national governments’ public service payroll.  Revise the system of transfers from central to sub-national governments to remove the link with payroll. o The spending mix could by fine tuned.  Eliminate remaining fuel subsidies. Phase out fertiliser subsidies in favour of investments in irrigation systems, rural infrastructure and research, and direct cash support for the poorest farmers.  Replace RASKIN with food vouchers for the poorest. Liberalise imports to reduce food prices.  Continue prioritising infrastructure investment, and reinforce cooperation with the private sector by promoting further PPPs. 21
  22. 22. More Information… www.oecd.org/eco/surveys/economic-survey-indonesia.htm OECD OECD Economics Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law. This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 22

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