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  Basic statistics of indonesia
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  Executive summary
  Indonesia’s economy withstood the recent global crisis very well, thanks to appropriate stabilisation policies and increased economic and financial resilience. Major social and economic progress has been achieved over the last decade, leading to several upgrades of its sovereign rating toward investment grade. Nevertheless, a number of institutional reforms and policy changes will be needed to deal with several cross-cutting challenges of decentralisation, capacity building at the local level and improved economic governance. Only with such reforms can Indonesia hope to meet its ambitious medium-term targets for growth and poverty reduction and to move to an environmentally sustainable development path.
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  Assessment and recommendations
  Indonesia weathered the global crisis very well. At 4.6%, real GDP growth in 2009 was the third highest in the G20, after China and India, and the economy is on track to achieve growth of around 6% this year and next. Lower international commodity prices, a sharp currency appreciation and a slowdown in domestic demand growth caused inflation to decelerate to a nine-year low of an average 4.4% in 2009 (2.8% year-on-year in December). Strong aggregate performance can be attributed to successful macroeconomic management, combining accommodative monetary policy and a moderate but timely fiscal impulse. But it also underlines the increased resilience of the economy in the face of external shocks, which stems from substantial macroeconomic and structural reforms undertaken since the Asian crisis. Indeed, the tremendous improvement in economic fundamentals over the last decade has led rating agencies to upgrade Indonesia’s sovereign rating, with an investment grade in prospect. The country has also benefited from its increasing integration with other ASEAN economies, and more recently with China. At the same time, low reliance on international trade with OECD countries and under-developed capital markets, together with low exposure to toxic assets, made the economy less vulnerable to advanced economies’ financial and economic developments. In addition, losses in formal-sector employment were absorbed by an expanding informal labour market. While the overall impact of the crisis was muted, the poorest appear to have been more affected, notwithstanding government assistance programmes.
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  Achieving sustainable and inclusive growth
  Indonesia’s economic performance in 2009-10 has been impressive. The country has come out of the global crisis relatively unscathed when compared both with previous episodes of economic distress and with other emerging markets. Appropriate macroeconomic management, a low exposure of financial markets to toxic assets and a high reliance on domestic demand, rather than on international trade, explain this strong performance. Macroeconomic and structural reforms have also improved the country’s capacity to withstand adverse economic shocks. But progress have been more rapid in some areas than in others, and potential output growth is expected to slow in the coming decade, when the effects of population ageing will begin to kick in. Over the long term, reforms will be needed to realise the government’s economic growth targets, as set out in its Medium Term Development Plan (Rencana Pembanginan Jangka Menengah Nasional, RPJMN), and to speed up economic progress.
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  Phasing out energy subsidies
  The oil price hike in 2007-08 underlined the vulnerability of Indonesia’s energy subsidy policy to oil price volatility. In addition to entailing significant economic and environmental costs, energy subsidies put pressure on the public budget and benefit mostly rich households. Phasing them out would benefit both the economy and the environment. At the same time, past experience in Indonesia and elsewhere suggests that such a reform is likely to face stiff opposition and will therefore need to be carefully designed and communicated. Compensation in the form of targeted cash transfers will help to shield low-income households from attendant rise in energy prices.
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  Tackling the infrastructure challenge
  Indonesia’s infrastructure is in poor shape, having suffered from protracted underinvestment since the Asian financial crisis of the late 1990s, and constraints growth potential. This chapter focuses on the current state of the regulatory framework and discusses different options for improvement in order to attract needed private investment. It recognises the ambitious reforms undertaken by the government thus far, but suggests that further efforts are needed. The authorities should establish a simple regulatory environment based on effective regulatory agencies resulting in lower regulatory uncertainty and realign prices to cost-recovery levels.
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  Enhancing the effectiveness of social policies
  Indonesia has made considerable progress over the years in improving the social conditions of its population, especially among disadvantaged groups, not least by raising government spending and strengthening social protection programmes. Nevertheless, in some respects social outcomes remain sub-par in relation to regional peers. In particular: – A rapid increase over the years in government expenditure on education has yet to deliver marked improvements in student performance, which is somewhat weaker than in comparator countries. Enrolment is particularly low in secondary education, suggesting the need to improve the transition from primary to higher levels of education. Efforts are also needed to enhance the quality of teaching. Indonesia will need to at least sustain current levels of education spending in relation to GDP over the longer term to ensure durable improvements in outcomes. – Government spending on health care and utilisation rates are lower than in comparator countries. Outcomes are also comparatively poor. As in the case of education, regional discrepancies in the health status of the population are narrowing, possibly due in part to the decentralisation of service delivery since the early 2000s. A publicly funded health insurance plan was launched in 2005 to protect vulnerable individuals against the risk of falling into poverty as a result of illness. The programme is being expanded to cover the entire targeted population of very poor, poor and near-poor individuals. – Indonesia has a number of social-assistance programmes for protecting vulnerable groups against adverse income shocks in periods of crisis. These programmes are reasonably well targeted, but there is considerable room for improvement. Social protection has been strengthened since 2005 with the implementation of government-funded conditional cash transfers and communitybased development programmes. Emphasis is now shifting from crisis mitigation towards an extension of the coverage of unconditional and conditional income support. The main challenge in this area is to extend social protection, especially through social security, to informal-sector workers, while strengthening coordination and seeking synergies among the existing programmes.
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