Indonesia: Ideas for the Future Reducing Poverty Indonesia s Poverty Challenge Over 110 million Indonesians live on less than US$2 a day equivalent to the entire populations of Malaysia, Vietnam, and Cambodia combined. Most of South East Asia s population living under US$2 a day lives in Indonesia. In addition, Indonesia is doing poorly with regard to key social development indicators relative to its East Asian peers. Indonesia s maternal mortality rate is twice that of the Philippines and five times greater than Vietnam s. Almost half of Indonesians lack access to either safe water or sanitation. Indonesia has made notable progress in reducing poverty since the 1960s, and again since the crisis. Yet Indonesia must squarely confront three fundamental challenges to make further progress in getting large numbers of its people out of poverty and destitution: Accelerate growth. The numbers of people in poverty cannot be substantially reduced without further, faster growth that benefits the poor. Since the crisis, much of the recovery in poverty numbers has come from regained macroeconomic stability and lower food prices. Further reductions in income poverty will have to come from growth. Improve service delivery for the poor. Indonesia must solve the problems related to the weak delivery of social services if it is to improve on its poor social development outcomes. Significant gains can be made in improving the efficiency and effectiveness of services delivered by fixing the institutional and legal framework (including the relevant aspects of the decentralization framework) so that service providers know their responsibilities and are held accountable, by both citizens and government, for the quality of the services they provide. Protect the poor. Most Indonesians are vulnerable to poverty. Close to 40 percent of the population are above the national poverty line but live on less than $2 a day, and small changes in prices, incomes, and health status can throw families into poverty, at least temporarily. Existing social protection programs do not adequately address the risks and vulnerabilities of poorer households, while many better-off Indonesians receive their benefit. Indonesia can do better and create social protection tailored to the needs of poor and near-poor Indonesians. Ten Steps to Beat Back Poverty Addressing these challenges requires a clear poverty reduction strategy. To Indonesia s credit, Government and other stakeholders have already put much effort into developing such a strategy over the past year. The first thing the new Government could do to show its strong commitment to reduce poverty would be to finalize and adopt the existing draft Poverty Reduction Strategy. It can then start immediately with implementation. Below are 10 decisive steps which the new Government could take to implement its strategy.
Indonesia Policy Briefs - Ideas for the Future 1. Invest in rural roads and electricity. Evidence from China and Vietnam, and Indonesia s own past shows that building rural roads is one of the most effective ways of reducing poverty. National and provincial roads are of good standards, but almost half of Indonesia s Kabupaten roads are in poor or bad condition. Moreover, five percent of the population 11 million people have no access to an allseason road. Similarly there are still 6,000 villages some 90 million people that have no access to electricity. While issues of implementation in the context of decentralization may be difficult, the solution to this major problem is clear. Launch a large-scale program to invest in rural and district level roads. Building such roads could raise incomes for the poor and lower their spending, while stimulating rural growth more generally. Fund these roads through a special DAK. Funds should be targeted at the areas where access is worst, particularly among the poor. Using poverty maps and road maps together can help to identify where investment is most needed. And poor people should be given a voice in decisions about roads provision to ensure that the roads serve their needs, are cheaper and better maintained. Develop a labor-intensive public works program. In addition to being an effective form of social protection, such a program could help to build rural roads. This would be particularly relevant in remote areas where the costs of constructing roads can otherwise be very high. Devise a rural electrification strategy to bring power to villages with no electricity. Competition in the sector should be encouraged by enabling providers to sell electricity to PLN or to gain non-discriminatory access to PLN s grid. A detailed implementation plan must be developed for the two existing electricity subsidies to ensure that they do not discourage wider provision. 2. Improve health through better sanitation. Sanitation in Indonesia is in crisis. Less than 1 percent of domestic sewage goes into a sewerage system and on-site sanitation systems have not been accompanied by investment in collection, treatment and disposal infrastructure. In 2002, government spent less than 1/1000 th as much on sanitation as on water. As a result, the poor often wash and collect water from highly contaminated rivers and live near open drains, making them sick and unproductive. Economic losses attributed to inadequate sanitation were estimated in 2001 at over 100,000 Rupiah per household per month. Action is needed in two areas: On the demand side, the Government should undertake a simple but wide-spread national public awareness campaign aimed at improving better sanitation practices by all and to stimulate demand and pressure for change. This would be a relatively low cost measure but with high visibility and potentially high returns. On the supply side, service delivery must be improved. A critical starting point is to sustainably finance increased investment in sanitation. Two immediate options to be considered by Government would include (i) holding a national summit to consider how to effectively increase sanitation financing in Indonesia; and (ii) taking action to encourage local government to invest in appropriate sanitation infrastructure facilities at the neighborhood and city-wide levels, for example through a specific DAK for sanitation or including sanitation services in minimum service standards. 3. Remove the ban on the import of rice. The current ban on the import of rice is not a good way to support farmers, while it harms most of the poor. Recent research shows that over 1.5 million people may have been pushed into poverty by the rice import ban. Even food aid rice for the poor is being held at the port because the World Food Program has no import licence. Measures to protect rice aim at increasing the price of rice but only benefit those who produce more rice than they consume. But over 90 percent of urban dwellers and over 70 percent of rural households consume more rice than they produce overall four fifths of the population are
Reducing Poverty The vast majority of people -- and the poor -- will benefit from lower protection... (Gainers and losers of eliminating protection per expenditure quintile) Share of population 1 0.8 0.6 0.4 0.2 0-0.2-0.4 Poor Expenditure Quintile 1 2 3 4 5 Note: World Bank staff estimates Rich Gainers Losers hurt by protection whilst only one fifth stands to gain. Even the gains are not obvious: the farmgate price of rice did not increase after the ban was imposed, whereas the retail price did, and most likely it was rice traders that received the benefits. Support to farmers can be done better through providing rural infrastructure and more support to agricultural research and extension. Even a tariff is better than an import ban. The new Government should: Remove the ban on the import of rice. Replace the ban with a low specific tariff, if considered politically necessary, or better yet with targeted provision of rural infrastructure and agricultural research and extension. Allow anyone to import rice, rather than restricting imports to a handful of organisations. Give a single ministry or other body the authority to determine both tariff and non-tariff trade policies to avoid contradictory policies by different Ministries. 4. Limit local taxes and charges that hurt local businesses and the poor. Self-employment and off-farm employment is an important source of income for the poor, particularly in rural areas. Even among poor agricultural households, about 50 percent of income comes from off-farm sources. Encouraging growth of such off-farm income, particularly that from small and medium scale enterprises requires a conducive business climate. However, since decentralization there has been an expansion of taxes and charges at the local level as local governments seek to boost their local revenue, whilst businesses now have to pay significant fees and retribusi for licences and services which were formerly free. In addition businesses routinely pay illegal levies and security payments to ensure the safe transport of their goods. Such costs stifle growth and lower the prices that the poor obtain for their products. To alleviate the burden on the poor from local taxes and charges the Government should: Replace the current system of local taxes with a closed list of allowable revenue instruments for local governments; this list should include instruments that can substantially increase revenue at the local level, such as the property tax. Stop unnecessary taxes and charges by ensuring that every district undertakes a simple Regulatory Impact Assessment before enacting new charges. Proposed new taxes or charges should be published in the media and the private sector should have an opportunity to comment before they are enacted. Expand One Stop Shops and provide incentives and capacity building to improve the efficiency of service. Set up a Commission to tackle illegal fees and protection payments. Solving the problem of illegal fees and protection payments is complex but vital to improving the investment climate. The Commission should produce workable proposals for tackling the problem within six months. 5. Give the poor access to land title. Security in ownership enhances investment on land and agricultural productivity. Access to land title can also expand the poor s
Indonesia Policy Briefs - Ideas for the Future access to credit: rural recipients of land certificates borrow more, invest more, and earn more from their land-based economic activities. Yet in Indonesia, less than 25 percent of holders of rural land parcels have a formal land certificate, compared to almost universal possession of land use certificates by farmers in China and Vietnam. Progress in land titling in Indonesia has been extremely slow. Even though the Government has titled over a million parcels of land since 1997, at the current rate, it will take another 100 years to title all land. Moreover, individual land tenure is not allowed on the 64 per cent of Indonesian land classified as forest land despite the fact there are private dwellings, farms, and even cities on this land. To give the poor greater land security, the new government should: Dramatically accelerate land titling in areas where individual title is appropriate, to reach at least the East Asian average. Review and revise the core land laws, the forestry law, and basic agriculture law. Consider redistributing idle land of state companies to poor landless households. Accommodate communal use of land in land titling the principle should be security of use, rather than private ownership. Support community based resolution of land disputes and establish a land court to adjudicate claims. Devise measures to ensure greater land security for poor communities living on forest land. 6. Create sustainable microfinance institutions to serve the poor. Some 50 percent of households lack effective access to micro-credit, while less than 40 percent of households have savings accounts (even fewer in rural areas). The solution is not to provide yet more subsidised credit. Although subsidised credit obviously benefits its recipients it stifles the more widespread growth of commercial microfinance institutions who could reach many more of the poor. Rather, the solution is to take advantage of the liquidity of commercial banks and foster increased lending by commercial banks to good microfinance institutions (MFIs). Key steps that can be taken immediately to improve access to credit for the poor: Finalize a draft microfinance law that establishes the legal and institutional framework that will allow MFIs to thrive and lend to the poor. Link microfinance providers with the formal banking sector. For example, permit BKD to act as agents of commercial banks savings programs, and to borrow commercially. Stop spending on capital replenishment and interest subsidies for credit schemes. Use the 3 trillion Rupiah which would be saved to build capacity in both formal and community-based informal microfinance providers to increase their outreach. Pass the revised draft Cooperatives Law to provide a better framework for microcredit; including required external audits and supervision for savings and loan cooperatives. 7. Improve education quality and secondary school transition. Indonesia does well in terms of aggregate enrollment rates for primary education. But many children from poor backgrounds do not complete basic education and drop out before entering secondary education (see figure). 100 90 80 70 60 50 40 30 20 10 percent 0 The poor are dropping out early second poorest quintile poorest quintile richest quintile 1 2 3 4 5 6 7 8 9 10 11 12 grade Source: SUSENAS, staff estimates
Reducing Poverty This poor outcome is related to Indonesia s central education problem poor quality. Government can raise education quality and prevent the poor from dropping out by: Fostering school based management and financing. Require district governments to provide most of their financing to schools in the form of block grants. This will increase transparency and increase the scope for community oversight. Block grants should be determined using a transparent, formula based, procedure. More accountability of schools to the community can also enhance quality. Establishing an education for the poor grant. This grant should provide central funding matched with district funding through a DAK, and target the money to schools that serve poor children and that do not meet minimum standards. The grants could be made conditional on agreed upon improvements in standards and caps on school fees. Transforming the JPS scholarship into a scholarship to assist poor children in making the transition from primary to secondary school. 8. Reduce Indonesia s shockingly high maternal mortality. In Indonesia close to 310 women die with every 10,000 live births, the highest maternal mortality rate in Southeast Asia. The death rate is high for two reasons. Firstly, women giving birth seek medical attention too late, and when they do, there is often no medical facility nearby. Secondly, even where facilities exist, many households prefer to use traditional midwifes rather than more modern facilities. The government can take some basic measures to bring down the high rate of maternal mortality in Indonesia. Launch a widespread national campaign informing women and their families of the benefits of both professionally assisted birth delivery and of delivery in health centers. Provide free delivery to poor women at health clinics or by village midwives. Perhaps even a transport stipend can be provided for delivery at health clinics. This can initially be administered through the existing health card system. Improve formal and in-service training for village midwives. In addition, further consideration is warranted on how to improve midwife deployment so as to cover more remote villages. 9. Give more money to poor regions. Fiscal inequality among Indonesia s local governments is large. The richest local government in Indonesia receives 46 times more revenue per resident than its poorest counterpart. As a result, poorer local governments cannot deliver basic services to their citizens at an acceptable level and quality. More money in poor regions, if well spent, can help. The Government can do two things to redress this imbalance: Fix the DAU to enable local governments to provide basic services. The DAU was supposed to equalize local finances using a formula based on poverty, the size of the region, population, cost of living and fiscal capacity, but it is still largely allocated on the basis of past spending patterns. To make distribution more equal, the formula share of the DAU should be expanded and the poverty weighting increased. Give more DAK to support reaching national poverty reduction goals and targets. The DAK could provide an important financial incentive for local governments to meet Indonesia poverty reduction-related goals. The DAK should be increased, and be used to fund priority actions for poverty reduction, including rural infrastructure, health, education, and water and sanitation program priorities. As long as the DAU is not equalizing enough, the poorer regions should receive more of the DAK than the rich. The expansion of the DAK should be financed by cutting back central spending (DIPs) on regional tasks. 10. Target social protection better. Current programs to protect the poor rice for the poor, fuel subsidies, electricity subsidies are badly targeted. Indonesia spent 74 trillion on social protection in 2004, more than all government spending on health and education. But only about 10 percent actually reached the poor, while over Rp. 60 trillion goes to the non-
Indonesia Policy Briefs - Ideas for the Future poor. The average poor household only gets about Rp. 12,000 of rice subsidy and Rp. 9,000 of kerosene subsidy per month. The Government can increase protection, and save lots of money at the same time by: Cutting subsidies on gasoline. This fuel is used for cars, and benefits only the rich and the middle classes. Cutting the subsidy could save some Rp. 15 Trillion in 2005 at projected oil prices. If price on diesel were moved up to the ceiling price of the existing KEPPRES, an additional Rp 12 trillion could be saved. Use the savings to expand social protection programs. These could include a wide range of activities but should be clearly targeted to the poor. Improving targeting to reach more poor people. The existing system of identifying the poor, the BKKBN rating, is expensive and inaccurate the Government could target assistance better with poverty maps. These poverty maps, developed by BPS, allow for the identification of the poorest Kecamatan that should receive most assistance. The poor within each community could then be reached by combining (i) community-based targeting, where the community is in charge of assessing eligibility, implementing delivery and monitoring programs for poor households; and (ii) self-targeting, in which the benefits of the program are designed such that only the poorest wish to participate. Lower quality rice, and kerosene packed in bottles could improve targeting, while introducing competition in the distribution of rice and kerosene can further cut costs. Setting up a task force to review the social protection system. Currently social protection and transfer programs are scattered across Ministries. Many were put into effect quickly during the crisis with no systematic monitoring or evaluation system. There is a need to comprehensively review the various transfer programs with the objective of reforming them so as to maximize their benefit to the poor. Savings could also be used to fund other programs that will help raise economic opportunities and human capital among the poor Rp.trillion 40 35 30 25 20 15 10 5 0 Subsidies are not reaching the poor... Portion Reaching the Poor Kerosene Other fuel Rice Others (electricity, fertilizer,etc.) Total health sector expenditure Note: Revised 2004 Budget and World Bank staff estimates Indonesia Policy Briefs Ideas for the Future 1. Poverty 2. Creating Jobs 3. Investment Climate 4. Regaining Competitiveness 5. Infrastructure 6. Corruption 7. Legal Reform 8. Decentralization 9. Financial Sector 10. Finance for the Poor 11. Education 12. Health 13. Feeding Indonesia 14. Environmental Management 15. Forests 16. SME Development 17. Mining 18. Civil Service Reform 19. Agriculture 20. Land Policy All Indonesia Policy Briefs are available at http://www.worldbank.or.id - January 2005