Are we on the right track?

Transcription

1 Indonesia s Economic Transformation Are we on the right track? Prof. Suahasil Nazara Chairman of Fiscal Policy Agency Bali, 6 December 2018

2 OUTLINE Aspiration to achieve high-income status National goals and global recognition Where are we now? The progress of economic transformation Pathway to realize potential The way forward to address challenges

3 INDONESIA IN 2045 Become an Advanced Economy PROSPECTS DEMOGRAPHY % 75% 80% ECONOMY million people productive-age live in the city middle-class Top 4 GDP in the world Income per capita of US$29,300 Shifting towards more productive sectors Growing of services sector PREREQUISITES INFRASTRUCTURE READINESS HUMAN CAPITAL QUALITY TECHNOLOGICAL READINESS SPATIAL PLANNING ECONOMIC & FINANCIAL RESOURCES (HEALTHY STATE BUDGET) MACRO STABILITY POLITICAL STABILITY RULE OF LAW Source: Fiscal Policy Agency, MoF

4 Indonesia could be the fourth largest economy in the world by PwC, 2017 Indonesia as one of the world s economic centre of gravity - OECD, 2018 Indonesia is well positioned to pursue its further transformation toward an even more prosperous and inclusive society by taking advantage of several beneficial trends, including its young and expanding labor force, the rapid growth of the digital economy, and the growing role of Asia in the global economy - IMF, 2017

5 GDP Growth AFC GDP per Capita Source: Statistics Indonesia Source: World Development Indicators Indonesia has strong sustainable growth above 5% Economic growth episode separated by Asian Financial Crises 1997/1998. Before crises, we were one of the fastest growing countries, and successfully transformed After the crises, we have shown a steady recovery. We maintain strong economic growth, 5.28% on average

6 Gini Ratio Poverty Level (%) Unemployment Level (%) H1 2018: H1 2018: : 5.13 Source: Statistics Indonesia Quality of growth has improved, reflected by improved social welfare indicators Poverty decline to the lowest level ever 9.82 percent of the total population. The Gini Ratio displays a diminishing trend to The unemployment rate demonstrates a diminishing trend to 5.13 percent

7 Continuous reforms to promote growth Banking Law Anti Monopoly Law Decentralization Law Anti Corruption Law Central Bank Law Debt Financing Law Bureaucratic Reform Establishment of KPK Labor Law State Finance Law Treasury Law State Finance Accountability Law National Social Security System Law Direct Presidential Election Sunset Policy Financial Services Authority Law Insurance Law Fuel Subsidy Reform Village Law Local Government Law Reinventing Policy Structural Reform (policy packages) Crisis Prevention and Mitigation Law Tax Amnesty Series of reforms have been implemented and vital laws have been enacted to significantly improve the whole nation s governance

8 New challenge is coming, symptom of premature deindustrialization Output (%) Employment (%) AFC AFC Source: Statistics Indonesia The shape of Indonesia s structural transformation was marked by industrialization up to early 2000, then declining up to date Agriculture sector constantly decreases, on the contrary services sector continues to rise Source: Statistics Indonesia & GGDC Labor reallocation occurred but with a different pattern, manufacturing labor just slightly increase The path to raise manufacturing employment shares have become more challenging Agriculture labor directly shift to services sector

9 Before we discuss further, we want to know your views Go to and use the code instructions 1. Please grab your gadgets (smartphone, tablet, and/or laptop) 2. Connect to the internet 3. For internet access ssid : AIFED2018 password: #aifed2018# 4. Go to Recognizing digitalization, is pursuing industrialization still a realistic strategy or should services be prioritized?

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11 Source: Statistics Indonesia Manufacturing sector is necessity to drive labor productivity & sustain growth GDP per Employee (Million IDR) Manufacturing sector productivity is always higher than agriculture and services sectors amid the weakening trend of growth in recent years Jobs creation in manufacturing could boost income per capita It needed to absorb labor forces, and improve our production & export capacity Employment Productivity Growth (%) Manufacturing sector can improve labor productivity for overall economy by absorbing technology and accumulating capital However, slower manufacturing growth reflected from the declining trend of labor productivity in all sectors after 2000s

12 We still need to pursue industrialization to boost potential growth Period of Asian Crises hampered manufacturing sector, impacting productivity hence lower potential growth AVERAGE : We have to reverse-back the trend of low growth on manufacturing AVERAGE : Source: Statistics Indonesia

13 However challenges lie ahead

14 We need to go further than commodity-based products Share of Manufacture (% of GDP) Export Share Manufacturing 21.1% High 27.7% Medium 25.1% Low 47.2% chemical & pharmacy, metals & electronics, automotive machinery and equipment oil and gas refineries & coal factory, rubber products, non-metallic minerals, base metals food & beverages, tobacco processing, textiles & garments, leather & footwear, wood products, paper products, furnitures, etc. low complexity & low technology = low value added Upgrading product & improve technology urgently required Mineral Products; 21,0% Animal & Vegetable Bi- Products; 13,0% Machines; 12,0% Textiles; 9,0% Plastics & Rubbers; 5,3% Metals; 4,7% Vehicles; 4,5% Chemical Products; 4,4% Footwear; 4,2% Foodstuffs; 4,1% Others; 17,8% Source: Statistics Indonesia Source: The Observatory of Economic Complexity

15 ...diverse locations Currently, industrialization is concentrated in Java Investment in infrastructure required to spread manufacturing activities Need to attract new investment in building the industrial area Source: KPPIP Source: Statistics Indonesia

16 ...and with high-skilled labors Diploma; 2,8% Vocational; 11,5% Senior High School; 16,8% Source: Statistics Indonesia University; 9,2% Junior High School; 18,0% Elementary and Lower; 41,8% 100% 80% 60% 40% 20% 0% Education Background of Sectoral Labor, ,3% 3,5% 4,7% 1,3% 9,0% 14,2% 19,2% 16,0% 17,8% 12,0% 23,2% 22,1% 70,2% 16,7% 39,8% 28,7% Agriculture labor Manufacture labor Services labor Elementary school and lower Junior High School Senior High School Vocational Majority of the workers are with low educational level background Almost 60% of labor s education are elementary school or lower and junior high school -> Low productivity Increasing the labor productivity in the manufacturing sector is important (through education and training) because it has generated high income/productivity Indonesia s Human Capital Index 2018 is 0.53, slightly below global average of 0.57 Indonesia's education quality is still relatively low, shown by PISA score Labor market issues à High informality

17 We have We have been strengthening the quality of spending What next after infrastructure? Expenditures (RP Trillion) 2018 : 2014 Education Infrastructure Energy Subsidy Health Source: Ministry of Finance

18 Yet, what we have done so far is not sufficient United States Korea, Rep. Singapore China Malaysia India Thailand Indonesia Viet Nam GCI Innovation Capability 86,5 78,2 75,0 64,4 55,5 53,8 42,1 37,1 33,4 (rank*) (2) (8) (14) (24) (30) (31) (51) (68) (82) Infrastructure, quality of human capital & technological adaptation still rank below peers.. Business dynamism Innovation capability Institutions Infrastructure Health GCI - Infrastructure Singapore Korea, Rep. United States China Malaysia Thailand India Indonesia Viet Nam (rank) 95,7 (1) 91,3 (6) 89,5 (9) 78,1 (29) 77,9 (32) 69,7 (60) 68,7 (63) 66,8 (71) 65,4 (75) United States Singapore Malaysia Korea, Rep. Indonesia China Thailand India Viet Nam GCI - Skills 86,3 76,0 74,2 73,6 64,1 64,1 63,0 54,5 54,3 (rank) (3) (20) (24) (27) (62) (63) (66) (96) (97) Market size Financial system Skills 0 Product market Labour market Macroeconomic stability ICT adoption Indonesia China Korea, Rep. United States Source: The Global Competitiveness Report 2018 *) rank is out of 140 countries GCI - ICT Adoption Korea, Rep. 91,3 Singapore 85,2 China 71,5 United States 71,2 Malaysia 69,1 Indonesia 61,1 Thailand 56,6 Viet Nam 43,3 India 28,0 (rank) (1) (4) (26) (27) (32) (50) (64) (95) (117)

19 instructions Before we discuss further, we want to know your views 1. Please grab your gadgets (smartphone, tablet, and/or laptop) 2. Connect to the internet 3. For internet access ssid : AIFED2018 password: #aifed2018# 4. Go to Go to and use the code In the scale 1 to 5, how big should government intervene the policies of infrastructure, human capital & technology?

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21 THE WAY FORWARD, WHICH WAY? (some policy questions..) Infrastructure will continue to be the focus But given limited resources, how do we prioritize? what kind of infrastructure should be built? Improve the quality of Human Capital: We aware of students going to school but not learning, how to improve this? Technological Adaptation (particularly in manufacturing) FDI & GVC are keys to transfer technology. How to attract? Role of Government: Macrostability to support investment & business climate, is it posible given global dynamics? Industrialization policy, is what we have enough? Labor market policy? Fiscal Support: Infrastructure spending, how big & how to measure effectiveness? Tax incentive system, what is best to boost small firms? Village fund, opportunity or impediment for industrialization?

22 THANK YOU