Indonesia rising: 2012 and beyond Indonesia s potential and the challenges to realizing it Shubham Chaudhuri Indonesia Lead Economist World Bank April 16, 2012 Jakarta, Indonesia www.worldbank.org/id www.worldbank.org/indonesia
Indonesia rising: the potential
Three decades of sustained growth One of a select few 3
until the twin political-economic crises of 1998 from which Indonesia recovered faster than most 4
A decade of robust growth especially through the global financial crisis 5
A decade of robust growth trailing only China and India 6
underpinned by prudent fiscal management A remarkable record of public debt reduction 7
underpinned by prudent fiscal management Low budget deficits 8
A remarkably stable political transition from authoritarian to democratic governance Constitutional reforms mandating direct elections to all levels of government have created greater electoral accountability In 2009 Indonesia conducted its second direct presidential election, and its fourth peaceful presidential transition since the crisis A free albeit noisy press and vocal civil society and free if chaotic elections have contributed to Indonesia being considered one of only four free societies in Asia An extensive system of institutional checks and balances has been introduced.. apex government oversight and accountability agencies have been established 9
A remarkably stable political transition from centralized to decentralized control Big bang decentralization in 2001 (and again in 2005) devolved substantial funds and authority to local governments Notes: Central spending excludes transfers, subsidies and interest payments. Sub-national 2001-2007 data are realization, 2008 is budget, 2009 and 2010 are projections. Sources: WB staff estimates based on SIKD data and Central Government Financial Report (Laporan Keuangan Pemerintah Pusat, LKPP), Ministry of Finance and Ministry of Home Affairs 10
Improvement in various dimensions of governance though perhaps not as much as many had hoped 11
Improved business environment in some ways but worsening in others 12
Looking ahead Rising or floating? 13
Indonesia rising: the potential Strong future growth is supported by domestic drivers and rising productivity Indonesia s growth potential is strong, supported by rising domestic incomes, natural resources and growing labor force (and demographic dividend) Contribution to average annual potential growth, percentage points 10 Capital services Labor services Total factor productivity Potential growth 8 6.5 6.5 6.8 7.1 5.8 6 4 4 2 7.9 10 8 6 4 2 0-2 -1.6 0-2 -4 Baseline Upside Baseline Upside 1991 97 1998 99 2000 05 2006 10 2011 13 2014 16-4 Source: IMF 2011 14
Maximizing opportunities, managing risks Global commodity prices are likely to remain high 15
Maximizing opportunities, managing risks which will benefit Indonesia given its export basket 16
Maximizing opportunities, managing risks and changing export destinations Japan & USA were the primary destinations of Indonesia s exports in 1990... but today, the ASEAN, China, India, and South America are important trading partners 17
Maximizing opportunities, managing challenges Indonesia s remaining demographic dividend 18
Maximizing opportunities, managing challenges Booming services sectors 19
Maximizing opportunities, managing challenges All population growth from hereon will be urban 20
Maximizing opportunities, managing risks A growing middle class 21
Maximizing opportunities, managing risks A growing middle class but its rise is not guaranteed 22
Indonesia rising: the challenges
Priorities for a rising Indonesia Creating more and better jobs 24
Priorities for a rising Indonesia by revitalizing manufacturing 25
Priorities for a rising Indonesia by helping firms to grow and filling in the missing middle of manufacturing 26
Priorities for a rising Indonesia and regaining export competitiveness Based on product grouping suggested by Lall (2000).Other resource based manuf includes : cement, glass, non-ferrous metals, organic & inorganic chemicals, etc.. Low tech manufacturing includes: base metal, furniture, iron & steel. Machinery, electronics, processed manufacturing includes chemicals, transport and automotive parts 27
Priorities for a rising Indonesia Investing in infrastructure, especially transport and urban 28
Priorities for a rising Indonesia Enhancing connectivity: intra-island, inter-island & international GEOGRAPHICAL distance between major cities in Indonesia and Singapore ECONOMIC distance within Indonesia based on SEA transport costs ECONOMIC distance within Indonesia based on AIR transport costs 29
Priorities for a rising Indonesia Increasing regulatory transparency and certainty 30
Priorities for a rising Indonesia Redirecting spending Percent 5 4 3 Energy subsidies Capital expenditures Social expenditures Percent 5 4 3 2 2 1 1 0 2005 2006 2007 2008 2009 2010 2011* 0 Note: * is preliminary outcome. Sources: MoF and CEIC 31
Priorities for a rising Indonesia Turning quantity into quality in education (Share of students by level of PISA math performance, %) Note: * is preliminary outcome. Sources: MoF and CEIC 32
Priorities for a rising Indonesia Enhancing government effectiveness Pre-1998 under the New Order Post -1998 in a democratic and decentralized Indonesia Coordination in decision making regarding policy formulation and implementation Highly centralized decision-making Multiple stakeholders and multiple axes along which coordination needed Accountability structures within government Vertical and hierarchical structure, strong incentives Dispersed and multiple vertical and horizontal lines of accountability, weak incentives Capacity in terms of policy formulation, implementation, and service delivery Adequate given centralized state and tasks at hand Needs strengthening in context of decentralized state and second-generation challenges 33
Indonesia rising: 2012 and beyond Indonesia s potential and the challenges to realizing it Shubham Chaudhuri Indonesia Lead Economist World Bank April 16, 2012 Jakarta, Indonesia www.worldbank.org/id www.worldbank.org/indonesia