OECD main findings Indonesia 2015 Inclusive and Sustainable Growth

1. www.oecd.org/eco/surveys/economic-survey-indonesia.htm
OECD
OECD Economics
2015 OECD ECONOMIC
SURVEY OF INDONESIA
Inclusive and Sustainable Growth
Jakarta, 25 March 2015

2. Indonesia has enjoyed strong
and stable growth
2
Real GDP growth in selected ASEAN countries
Index, 2008 Q1 = 100
Source: National statistics offices.
2008 2009 2010 2011 2012 2013 2014
80
90
100
110
120
130
140
150
INDONESIA
Malaysia
Philippines
Singapore
Thailand

3. Poverty has declined markedly
3
Poverty headcount ratio at $2 a day (PPP)
% of population
Source: World Bank World Development Indicators.
0
20
40
60
80
100
0
20
40
60
80
100
1980
2012

4. Its population is youthful
4
Working age population and dependency ratios
% of population, ratio
Source: United Nations, World population prospects: the 2012 revision.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0
10
20
30
40
50
60
70
80
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Working-age (15-64, left scale)
Dependency (0-14,65+,right scale)
Dependency (0-19,65+, right scale)
% of population Dependency ratio
Demographic
bonus

5. Main Findings
o Growth has been strong since the Asian Crisis.
o The pace of reform needs to accelerate to secure inclusive growth.
o The decline in poverty has been impressive due to healthy per capita
growth and expanding social security programmes.
o Income inequality has risen, calling for further development of the social
safety net.
o Infrastructure bottlenecks are impeding further development.
o Investment has been held back by regulatory uncertainty and
protectionist tendencies.
o Natural resources can be better harnessed by raising productivity in
agriculture and progressively shifting to renewable energy.
5

6. Key Recommendations
o To ensure inclusive growth, strengthen social security, education and
infrastructure spending. Raise tax revenues to fund this additional
spending.
o Tackle labour market informality by making the labour market more
flexible.
o Increase financial inclusiveness by further developing branchless
banking.
o Further increase efforts to combat corruption by providing more
resources, especially to the Corruption Eradication Commission (KPK).
o Focus the mineral ore export restrictions on minerals for which local
refining will have high value added.
o Raise agricultural productivity through technical assistance and training.
o Diversify energy sources by promoting investment in geothermal.
6

7. Challenges ahead
7

8. The fiscal position is strong
8
Central government revenue, expenditure and balance
% of GDP
Source: CEIC data; Bank Indonesia; DPJU; and OECD Economic Outlook 96.
-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
2014e
Fiscal balance (right scale)
Expenditure (left scale)
Revenue (left scale)

9. The government is relatively small
9
Government Revenue
% of GDP
 Raise government revenues in order to fund a needed longer-term
increase in government spending
0 5 10 15 20 25 30 35 40
Turkey
South Africa
Brazil
Malaysia
Korea, Rep.
Thailand
Singapore
INDONESIA
Philippines
Mexico
India
Source : World Bank World Development Indicators.

10. Tax revenues are low, even compared to
other emerging market economies
10
Source : World Bank World Development Indicators.
 Tax revenues could be raised by tacking informality and by improving
the effectiveness of tax collection
0 5 10 15 20 25 30
South Africa
Turkey
Thailand
Malaysia
Brazil
Korea, Rep.
Singapore
Philippines
INDONESIA
India
China
Mexico
Tax Revenue
% of GDP

11. The external balance has deteriorated
11
Current account balance and the exchange rate
% of GDP; rupiah per US$
Source: CEIC data, OECD Quarterly Database.
 Bank Indonesia faces a challenging economic environment.
8000
9000
10000
11000
12000
13000
14000-5.0
-4.0
-3.0
-2.0
-1.0
0
1.0
2.0
3.0
4.0
5.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Current Account
Rupiah US$ exchange rate (right hand scale, inverted )

12. Progress in tackling corruption and
improving governance needs to continue
12
* Malaysia, Thailand, South Africa, Russia, Vietnam, China, Philippines, Brunei (for 1,3 & 4), Brazil, Cambodia, India,
Myanmar (for 2 & 5) and Laos.
Source: 1. World Bank “Ease of Doing Business” 2010 & 2015. 2. Transparency International 2005 & 2014. 3. World Bank Worldwide
Governance Indicators 2005 & 2012. 4. World Bank Worldwide Governance Indicators 2005 & 2012. 5. World Economic Forum 2006-07
& 2014-15.
 Improve mechanisms to prevent corruption, and provide more resources,
especially to the Corruption Eradication Commission (KPK).
 Expand support to sub-national governments for capacity building.
10th 10th
11th
Ease of Doing
Business
Rank1
Corruption
Perception
Index2
Control of
Corruption
Index3
Government
Effectiveness
Index4
Global
Competitiveness
Report Rank5
9th
8th
4th
Indonesia’s change in ranking relative to peer countries*
12th
6th
7th

13. Policies to make growth more
inclusive and sustainable
13

14. More structural change is needed
14
Sectoral shares of total value added
% of value added
Source: World Bank, World Development Indicators.
0
10
20
30
40
50
60
70
80
90
100
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Services etc.
Manufacturing
Non-manuf. Industry
Agriculture
 Transformation away
from agriculture and
towards
manufacturing and
services has stalled.

15. Improving infrastructure is a top priority
15
Logistics performance index, 2014
Quality of trade- and transport-related infrastructure (1=low to 5=high)
Source: World Bank, World Development Indicators.
1.5 2 2.5 3 3.5 4 4.5
INDONESIA
Vietnam
Philippines
India
Mexico
Brazil
Thailand
Chile
Malaysia
South Africa
Singapore
 Raise public spending on infrastructure.
 Focus on transportation and logistics to support industry, as well as natural
disaster prevention and water treatment.

16. Education spending should be stepped up
16
Spending on education, 2012
% of GDP
Source: World Bank, World Development Indicators.
 Devote more resources to education, focusing on access and outcomes.
 Continue regular teacher assessments and professional development, and
link teacher salaries more closely to qualifications and performance.
0 1 2 3 4 5 6 7
Philippines
Peru
INDONESIA
India
Singapore
Japan
Russian Federation
Korea
Thailand
Brazil
Malaysia
South Africa
Vietnam

17. Improve the performance of
the education system
17
 Maintain the focus on increasing access to education, especially for
students from remote regions and disadvantaged backgrounds.
 Reduce drop-out rates, especially after primary level, by extending the
conditional cash transfer scheme.
 Refine access and targeting of conditional cash transfer programmes
that promote school attendance.
 Accelerate programme of teacher assessments and professional
development. Link teacher salaries more closely to qualifications and
performance.

18. Labour market informality is too high
18
Labour market informality
% of non-agricultural employment
Source: ILO.
 Tackle labour market informality by:
o reducing labour market rigidities (redundancy rules etc.);
o improving incentives to join the tax-transfer system (social
insurance and benefits).
0 10 20 30 40 50 60 70 80 90 100
South Africa
China
Brazil
Thailand
Argentina
Mexico
Colombia
Vietnam
INDONESIA
Philippines
India

19. The targeting of social security programmes
should be tightened
19
Benefit Coverage by Decile
Percentage of households receiving benefits
Source: Sumarto, S. (2014), “Social protection policies responding to threats to food insecurity”, Presentation to OECD
Study on Transitory Food Insecurity in Indonesia, Bogor, 26 February.
 Increase spending on poverty alleviation and health measures, and further
improve its targeting.
0
10
20
30
40
50
60
70
80
90
1 2 3 4 5 6 7 8 9 10
Household Per Capita Consumption Decile
0
100
1 2 3 4 5 6 7 8 9 10
Unconditional cash transfer Rice Health
 Over half of these
benefits are paid to
the richest 70% of
households.

20. Measures to improve the performance of the
social security system
20
 Increase financial inclusiveness by further developing branchless banking.
 Better target poverty alleviation programmes to poor households.
 Continue progress towards a single registry of vulnerable households.
 Expand the use of conditional cash transfers so as to motivate families to
keep children in school and encourage the regular use of health care
services.
 Adjust the subsidised rice scheme (RASKIN) to include more foodstuffs
(and perhaps use vouchers).

21. Making the most of natural resources
21

22. Productivity growth in agriculture has been uneven
22
Selected crop output per hectare
index, 2000 = 1
Source: FAOSTAT.
 Increase agricultural productivity by providing technical assistance and
training.
 Improve farmers’ access to credit by accelerating land titling.
 Lower food prices by decreasing trade restrictions.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0.8
1.0
1.2
1.4
1.6
1.8
Maize
Cassava
Rubber
Rice
Palm oil
Sugar cane

23. The energy mix is tilted towards fossil fuels
23
 Diversify energy sources by promoting investment in geothermal.
Source: OECD calculations.
Sources of electricity production, selected countries, 2011
0
10
20
30
40
50
60
70
80
90
100
Hydro
Renewable
(non hydro)
Nuclear
Fossil

24. Illegal logging, agriculture, forest fires and
mining are contributing to deforestation
24
Change in forest cover
% of area
Source: World Bank Development indicators.
 Devote more resources to enforcing laws against illegal forest clearing,
logging and mining.
 Launch an ambitious reforestation programme.
-40
-20
0
20
40
60
80
100
1990 2012 change in percentage points

25. Measures to make the most of natural resources
25
 Focus the mineral ore export restrictions on minerals for which local
refining will have high value added.
 Ensure new smelters have adequate infrastructure and electricity.
 Encourage crop diversification by reducing support to staples (e.g. rice).
 Provide better market price information for farmers and an insurance
system to help them handle more risk.
 Better link smallholders to local and national markets by improving
transport systems and access to information and communication
technologies.
 Clarify and simplify the land tenure system, and develop a long-term
strategy for farm restructuring.
 Boost the energy efficiency of coal-fired power plants, and make more
use of geothermal to limit environmental damage.

26. More Information…
www.oecd.org/eco/surveys/economic-survey-indonesia.htm
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