Going for Growth - Indonesia

164 ď ź

Indonesia GDP per capita has been growing steadily at around 4% annually, gradually narrowing the large gap with the upper half of OECD countries. Growth has continued to be driven by productivity growth.

Poverty rates have fallen steadily and income inequality appears to have moderated in recent years.

Nonetheless, inequality is pronounced, in particular between regions. Greenhouse gas emissions are low per capita. Land use change is a major contributor to Indonesia’s total emissions as well as biodiversity loss.

Considerable progress has been made in infrastructure provision, particularly transport. Efforts to streamline regulation and administrative processes have improved the business environment. While electricity subsidies have been reduced, fuel subsidies have increased, including by shifting some to state-owned enterprises. New electricity tariff regulations for independent power producers discourage private sector investment in renewable energy.

Tackling informality and increasing the share of high-quality formal sector jobs, requires measures such as improving skills by raising the quality of teaching and reducing barriers to formal sector employment such as high minimum wages and dismissal costs. Continuing to improve the quality of regulation and governance remains crucial for raising investment and encouraging formalisation. Greater regulatory certainty would help improve private sector participation in infrastructure investment.

Growth performance, inequality and environment indicators: Indonesia C. The large gaps in GDP per capita and productivity have diminished rather slowly

A. Growth Average annual growth rates (%) GDP per capita

2002-08 4.0 0.4 3.6

1

Labour utilisation Labour productivity

2012-18 3.8 0.3 3.4

Gap to the upper half of OECD countries4

Per cent 0 -10

B. Inequality and environment Level

-20 -30

2015

2013-18 0 -0.6 Average of levels 2010-2012-2015

GHG emissions per capita3 (tonnes of CO2 equivalent)

3.7 (12.3)*

3.5 (12.8)*

GHG emissions per unit of GDP3 (kg of CO2 equivalent per USD) Share in global GHG emissions3 (%) * OECD simple average (weighted average for emissions data)

-60

0.4 (0.3)* 1.9

0.4 (0.4)* 1.8

-70

Gini coefficient for rural areas2 Gini coefficient for urban areas2

2018 32.2 39.6

Annual variation (percentage points)

-40 -50

-80 -90 GDP per capita

GDP per employee

-100

Source: Panel A: OECD, Economic Outlook and Productivity Databases; Panel B: Statistics Indonesia; OECD, Income Distribution and National Accounts Databases; International Energy Agency (IEA), Energy Database; Panel C: OECD, Economic Outlook and Productivity Databases.

StatLink 2 https://doi.org/10.1787/888933955009

 165

Policy indicators: Indonesia A. Student performance is low

B. The level of corruption is perceived to be high

Average of PISA scores in mathematics, science and reading, 2015

Index scale of 0-100 from highest to lowest level of perceived corruption,¹ 2018

500

80 70

475

60 450

50 40

425

30

400

20

375 350

10

INDONESIA

Advanced economies

INDONESIA

Emerging economies

Advanced economies

Emerging economies

0

Source: Panel A: OECD, PISA Database; Panel B: Transparency International Database on Corruption Perceptions.

StatLink 2 https://doi.org/10.1787/888933955883

Beyond GDP per capita: Indonesia B. Exposure to fine particulate matter is higher than in advanced economies

A. Poverty has significantly decreased in both urban and rural areas %

Percentage of population living in households with consumption or income per person below the poverty line at USD 1.9 per day

Percentage of population exposed to PM2.5, 20171 Less than 10 μg/m3 More than 35 μg/m3

%

35 2004

2017

10-35 μg/m3

INDONESIA

30 25

Advanced economies

20 15

Emerging economies

10 5 0

World Urban areas

Rural areas

0

10

20

30

40

50

60

70

80

90 100

Source: Panel A: World Bank, PovcalNet; Panel B: OECD, Environment Database.

Note: For the explanation of the sets of indicators above, please go to the metadata annex at the end of this chapter.

StatLink 2 https://doi.org/10.1787/888933956757

166 

Indonesia: Going for Growth 2019 priorities Enhance outcomes in education. Outcomes and teaching quality remain a concern, with many children leaving school without basic skills. 

Actions taken: Programmes to improve teacher qualifications through certification and training are ongoing. The government is using the national poverty database to improve the targeting of conditional cash transfers to facilitate school attendance for children from poor households. The revised 2018 budget targeted 19.7 million transfer recipients.



Recommendations: Introduce regular teacher assessment and link teacher remuneration more closely to performance and ongoing training. Continue to encourage higher enrolment rates through access to cash transfers for eligible students. Increase employer engagement in vocational education.

Improve the regulatory environment for infrastructure. Regulatory uncertainty, particularly at the regional level, is hampering private investment in infrastructure via public-private partnerships. 

Actions taken: The government increased funding for land acquisition in 2017 and 2018 to remove obstacles to key infrastructure projects.



Recommendations: To increase private sector involvement, legal and regulatory certainty should be improved, including through clearer property rights and project documentation for public-private partnerships. Increasing the transparency of state-owned enterprises could help ensure they do not crowd out private investment. Sub-national governments should be encouraged to allocate more of their budget to infrastructure spending.

Reform labour regulations to reduce informality. Labour informality is high, excluding workers from access to employment protection, on-the-job training and social security coverage. 

Actions taken: No action taken.



Recommendations: Pilot lower levels of employment protection and discounted minimum wages for youth in special economic zones. This includes lowering severance pay, accompanied by the creation of unemployment insurance accounts. If these trials are successful, extend them. Reduce administrative burdens for self-employed workers and micro enterprises to encourage formality.

Continue to make energy prices more cost-reflective. Explicit and implicit subsidies are poorly targeted, and greenhouse-gas emissions are costly. New electricity tariff regulations discourage private investment in renewable energy generation. 

Actions taken: Electricity subsidies were reduced for non-poor households in 2017. However, spending on fuel subsidies increased in 2018 and the administratively set price of the previously subsidised fuel has been held constant despite rising international oil prices.



Recommendations: Continue to shift away from subsidies and towards more targeted social assistance to address distributional concerns. Allow fuel prices to move more with prices in international markets. Review the 2017 regulations determining tariffs for independent power producers with the aim of making prices more cost-reflective and increasing certainty for investors.

ď ź 167 Ease barriers to entrepreneurship and investment, and strengthen institutions to fight corruption.

Businesses, foreign and domestic, face significant barriers to both formation and operation. Corruption remains an impediment to business growth and the efficient functioning of the civil service. 

Actions taken: Central government licensing processes were eased in 2017 and 2018, including through the operation of one-stop shops for large investors that process licences in three hours, the launch of an online single submission system for licensing and by striking out large numbers of regulations in some sectors. In 2018 a regulation was passed to ease the administrative process for hiring foreign workers.



Recommendations: Continue to streamline and simplify business regulation, paying special attention to regulations in sub-national jurisdictions. Collect user feedback to improve the online single submission system. Ease barriers to foreign investment by removing sectors from the Negative Investment List. Sustain the fight against corruption, including by increasing resources to the Corruption Eradication Commission and vigorously defending its independence.