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OECD ECONOMIC SURVEY OF INDONESIA 2021

Indonesia after the COVID-19 Recession – Building a Resilient and Inclusive Economy 18 March 2021, Paris & Jakarta (via Zoom)

@OECDeconomy @OECD

http://www.oecd.org/economy/indonesia-economic-snapshot/

Covid-19 hit the economy hard %

Real GDP growth rate

8 6 4 2 0 IDN -2 -4

Other G20 EMEs¹

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

1. Other G20 EMEs include Argentina, Brazil, China, India, Mexico, Russia, Saudi Arabia, South Africa, and Turkey. Source: OECD Economic Outlook 108 database updated.

The pandemic interrupted a long spell of sustained growth %

Real GDP, 2001=100 300

45 40

250

200

30 25

150 100 50 0

20 Indonesia (left)

GDP p/c IDN (as % of OECD) (right)

GDP IDN (% of ASEAN) (right)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Note: Indonesia’s GDP as a share of OECD and ASEAN GDP, computed at 2010 USD PPP. ASEAN GDP is the sum of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. Source: OECD Economic Outlook, No. 108 updated; World Bank, World Development Indicators.

Poverty has trended down %

Incidence of poverty as a share of total population

14 13 12 11 10 9 8

Source: BPS.

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

The sovereign risk premium has decreased but remains high Basis points 2 500

IDN

BRA

RUS

CHN

ZAF

TUR

2 000 1 500 1 000 500 0 - 500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: OECD Main Economic Indicators database.

Public debt will rise, but remain sustainable % of GDP

Larger primary deficit

Baseline

Higher interest rate

40 35 30 25 20 15 10 5 0

2010

2015

2020

2025

2030

2035

Note: In all scenarios, GDP growth and inflation are in line with OECD Economic Outlook projections to 2021. The baseline scenario assumes constant GDP growth of 5.1% and inflation (in the GDP deflator) of 3% from 2022. The primary budget deficit is 0.5% from 2022. The effective interest rate is converging to 6% from 2022. The “larger primary deficit” is an alternative scenario that assumes a primary deficit of 0.8% of GDP from 2022 onwards. In the “higher interest rate” scenario, the effective interest rate is assumed to rise by 150 basis points by 2023. Source: OECD Economic Outlook, No. 108; IMF, World Economic Outlook database; and OECD calculations.

2040

Tax revenue is low

A. Tax revenue as a % of GDP, 2018 % 40 35 30 25

Indonesia

Other G20 EMEs¹

OECD

B. Contribution to tax revenue Personal income tax Corporate income tax Social security contributions Payroll and workforce tax Property tax

Goods and services tax

Tax on production and imports³

Other

Environmental taxes⁴

Indonesia - 2018 OECD average - 2018² 0

Note: 1. Value for other G20 emerging market economies is computed as a simple average of Argentina, Brazil, Mexico, South Africa, and Turkey. 2. OECD average represents unweighted average of the OECD member countries that are available in the database. 3. Tax on production and imports represents a subcategory of Goods and services tax. 4. Environmental taxes cut across the classifications, and it shall not be considered as an exclusive, or belonging to any specific classification. https://www.oecdilibrary.org/taxation/revenue-statistics-2019_0bbc27da-en. Source: OECD Tax Revenue Statistics, and OECD Green Growth Indicators.

15 % of GDP

Key recommendations for mitigating the impact of the COVID 19 pandemic • Prolong measures directed at providing financial support to households and businesses to protect livelihoods and employment. • Plan for fiscal consolidation over the medium run but avoid a premature and abrupt removal of stimulus. • Maintain an accommodative monetary stance as long as inflation is within target, with forward guidance on normalisation. • Step up efforts to raise tax revenue. • Phase out “burden sharing” agreement, as envisaged. • Continue to foster Bank Indonesia’s independence. 8

IMPROVING THE BUSINESS CLIMATE, PROTECTING THE ENVIRONMENT

Pervasive restrictions discourage FDI FDI RI 0.40 0.35 0.30 0.25 0.20 0.15

Average all = 0.108

0.10

OECD average = 0.064

Note: The FDI Regulatory Restrictiveness Index (FDI RI) measures statutory restrictions on foreign direct investment in 22 economic sectors across 69 countries, including all OECD and G20 countries. Countries in blue are G20; countries in green are ASEAN. Source: OECD the FDI Regulatory Restrictiveness Index https://www.oecd.org/investment/fdiindex.htm.

DEU

ARG

GBR

FRA

ITA

JPN

KHM

ZAF

SGP

TUR

BRA

USA

MMR

VNM

KOR

BRN

AUS

CAN

MEX

LAO

IND

CHN

MYS

RUS

THA

IDN

0.00

PHL

0.05

Product market regulations are strict 3.0 2.5 2.0 1.5 1.0

Note: OECD average refers to the simple average of 37 OECD member countries. Source: OECD Product Market Regulation database.

IDN

ARG

BRA

ZAF

CRI

TUR

COL

MEX

SVK

POL

CHL

OECD

HUN

CZE

SVN

EST

LVA

0.0

LTU

0.5

Regulatory barriers to competition are high 5.5

Indonesia Most competition friendly

4.5

Least competition friendly OECD

3.5 2.5 1.5 0.5 -0.5

Public ownership

Involvement in business operations

Simplification and evaluation of regulations Distortions induced by state involvement

Administrative Barriers in service and Barriers to trade and burdens on startups network sectors investment Barriers to domestic and foreign entry

Note: Index scale 0 to 6 from most to least competition-friendly regulation, 2018. OECD average refers to the simple average of 38 OECD member countries; most and least competition-friendly among all countries for which data are available. Source: OECD Product Market Regulation database.

Corruption is still perceived as high Corruption Perceptions Index Scale: 0 (worst) to 100 (best) 80

2020

2010

60 40

Source: Transparency International.

MEX IDN BRA COL TUR ARG HUN ZAF SVK CZE POL LVA CRI LTU SVN CHL EST

The transition to a greener economy could be quicker Index 2002=100 250

B. Population exposure to PM

A. CO2 emissions Real GDP

CO 2 emissons

μg/m³

2000

2010

2019

100

200 150

2002 2004 2006 2008 2010 2012 2014 2016 2018

Indonesia

OECD Indonesia

Mean exposure to PM2.5 (Left)³

OECD

Exposure to >10 μg/m³ (Right)

Note: 1. Data refer to production based CO2 emissions; 2. TPES stands for total primary energy supply; 3. Exposure to PM2.5 refers to mean population exposure to fine particulate matter that is calculated as the mean annual outdoor PM2.5 concentration weighted by population living in the area. It is the concentration level, expressed in micrograms per cubic meter (μg/m3), to which a typical resident is exposed throughout a year. Source: OECD, Green Growth Indicators; OECD, Environmental risks and health; World Bank, World Development Indicators; IEA (2018), IEA World Energy Statistics (database); MoEMR (2020), 2019 Handbook of Energy & Economic Statistics of Indonesia.

Key recommendations for striking the right balance between State and markets • Improve SOEs’ corporate governance to align it with global best practices. • Always subject SOEs to competition law and hold them responsible for abusing their dominant market position. • Review existing FDI restrictions, eliminate those that generate costs without producing benefits, and monitor the remaining ones. • Limit direct awards only to current, urgent and unforeseeable needs, when there really is only one qualified supplier, and terminate them as soon as possible. • Safeguard the independence and authority of the KPK to ensure the effective prevention, detection and investigation of corruption.

Key recommendations on environmental policies • Protect, rewet and restore peatlands and forests and increase the budget resources for environmental protection agencies. • Establish a carbon price on fossil fuels. • Accelerate investment in public urban transport and pursue inter-modal integration. • Confirm plans to reform buy-in tariffs, to make cost recovery possible and increase the share of renewables in the energy mix.

INVESTING IN COMPETENCES AND SKILLS AND REFORMING THE LABOUR MARKET TO CREATE BETTER JOBS

A demographic dividend but a fading boost Share of the population aged between 15 and 65 over total population % 70

Indonesia

OECD

Middle-income countries

66 64 62 60 58 56 54 52 50

1960

1970

Source: World Bank, World Development Indicators.

1980

1990

2000

2010

2018

2019

Ample room to improve schooling quality Years 14

Learning-adjusted years of school

Estimated loss

10 8 6 4

SGP

RUS

OECD

VNM

CHN

CRI

MYS

THA

PER

COL

ARG

BRA

IDN

PHL

IND

TUN

LAO

ZAF

Note: The estimated loss is the difference between the expected number of years of school (given enrolment ratio at successive ages) and the learning-adjusted years of school (incorporating test scores). OECD represents the simple average across 38 OECD countries. Source: World Bank, Human Capital Index 2020 database.

Weak PISA score in mathematics PISA mean scores for pupils aged 15, 2018 Mathematics 600 500 400 300 200

Source: OECD, PISA 2018 database.

PHL

MAR

IDN

ARG

BRA

COL

LBN

JOR

PER

CRI

MEX

CHL

URY

THA

KAZ

ARE

MYS

TUR

RUS

OECD

AUS

NZL

KOR

JPN

SGP

CHN

100

Lower spending per student than in peers Public spending on education per student by education level, in USD PPP, 2018

USD PPP 8 000 7 000 6 000 5 000 4 000 3 000 2 000 0

IDN IND ZAF VNM MYS ARG RUS IND VNM IDN ZAF MEX ARG BRA THA MYS IND IDN MEX THA ZAF BRA ARG MYS VNM IDN IND THA ARG RUS BRA MEX ZAF MYS

1 000

Pre-primary

Primary

Note: Initial government funding (excludes transfers received from foreign donors). Source: UNESCO Institute for Statistics, Education database.

Secondary

Tertiary 21

Invest in early childhood education Percentage of new entrants to grade 1 of primary education with early childhood education experience, 2018 or latest

% 100 90 80 70 60 50 40 30 20 10 0

IND

ZAF

IDN

Source: UNESCO Institute for Statistics, Education database.

MYS

TUN

MEX

CHN

THA

PHL 22

Indonesia risks lagging behind worldwide digitalisation Percentage of upper-secondary schools with access to computers for pedagogical purposes 2018 or latest % 100 90 80 70 60 50 40 30 20 10 0

ARG

MEX

IDN

IND

MIC

BRA

Note: MIC stands for middle-income countries according to World Bank Income Groups classification. Source: UNESCO Institute for Statistics, Education database.

MYS

CHN

TUN

Tertiary education: higher enrolment but with performance gaps across institutions Gross enrolment ratio, tertiary education, in percentage of the official school-age population, 2018 or latest

% 100 90 80 70 60 50 40 30 20 10 0

ZAF

IND

VNM

TUN

PHL

IDN

MIC

MEX MYS

Note: MIC stands for the average of middle-income countries according to World Bank Income Groups classification. Source: UNESCO Institute for Statistics, Education database.

THA

CHN

BRA

RUS

SGP

ARG

Key recommendations for expanding skills and well-being • Consider lowering the starting age of compulsory education. • Review the level of statutory minimum wages in each province. • Promote female employment through: – public campaigns – lifelong training programmes – more childcare facilities – laws promoting gender equality.

• Pilot lower levels of employment protection and discounted minimum wages for youth in SEZs. If successful, extend them. • Expand the unemployment insurance scheme. • Invest more in ICT infra-structure for pedagogical purposes. 25

For more information

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