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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
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
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)
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.
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
Challenges ahead
6
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.
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
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
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.
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.
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
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
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.
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
Decentralisation to promote regional
development
16
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
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.
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.
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
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
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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Indonesia 2016 OECD Economic Survey Jakarta 24 October

  • 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. 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. 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. 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. 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
  • 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. 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. 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. 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. 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. 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. 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. 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. 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. Decentralisation to promote regional development 16
  • 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. 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. 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. 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. 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. 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

Editor's Notes

  1. Slide 1: I crafted all the bullet points by combining the titles of key recommendations to make sentences.