OECD Economic Surveys: Indonesia

English
Frequency
Irregular
ISSN: 
2072-5108 (online)
ISSN: 
2072-5116 (print)
DOI: 
10.1787/20725108
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OECD's periodic reviews of Indonesia's economy.  Each review examines recent economic developments, policies and prospects, and presents a series of recommendations.
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OECD Economic Surveys: Indonesia 2016

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Author(s):
OECD
24 Oct 2016
Pages:
136
ISBN:
9789264265066 (PDF) ; 9789264265073 (EPUB) ;9789264265059(print)
DOI: 
10.1787/eco_surveys-idn-2016-en

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This 2016 OECD Economic Survey of Indonesia examines recent economic developments, policies and prospects. The special chapters cover: Regional Development and Public Spending.

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  • Basic statistics of Indonesia, 2015

    This Survey was prepared in the Economics Department by Petar Vujanovic and Patrice Ollivaud, with the assistance of Agung Raden, under the supervision of Peter Jarrett.Research assistance was provided by Anne Legendre. The Survey was discussed at a meeting of the Economic and Development Review Committee on 14 September 2016.The Survey is published on the responsibility of the Secretary-General of the OECD.

  • Abbreviations
  • Executive summary
  • Assessment and recommendations

    Over the past half century Indonesia has made remarkable progress across a broad range of economic and social dimensions. In general, health, education and other social outcomes have never been better, and higher standards of living are being enjoyed by more and more Indonesians. Over the past two decades democracy has taken hold, and bold strides in decentralisation have brought government closer to the people. As a member of the G20, Indonesia is actively engaged in world affairs, and economic integration with regional ASEAN (Association of Southeast Asian Nations) partners is moving ahead. Indonesia has strong growth potential: its population is young, the domestic market is large, it has a rich endowment of natural resources, public debt is low, and its political system is broad-based and stable.

  • Progress in structural reform

    This table reviews action taken on recommendations from previous Surveys. Recommendations that are new in this Survey are listed at the end of the relevant chapter.

  • The ore export ban and mining sector divestment rules

    In January 2014 the Indonesian government imposed a ban on the export of unprocessed minerals, including nickel, bauxite, copper and iron. As discussed in the previous Survey, the intention was to force companies to add value domestically before exporting, thereby stimulating activity and employment in the ore processing and smelting sector. The ban was legislated in 2009, but, in the face of strong resistance from industry, the government hesitated to pull the trigger until the end of the term of the previous president. The timing was particularly unfortunate, coinciding with a substantial decline in global demand and the end of the commodity super cycle.

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  • Expand / Collapse Hide / Show all Abstracts Thematic chapters

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    • Decentralisation to promote regional development

      In 1998 Indonesia embarked on an ambitious course of decentralisation. Over a period of a few years, facilitated by financial transfers from the central government, responsibility for many public services and administrative tasks were devolved to local authorities. This process is continuing. Regional development is now very much in the hands of the four sub-national tiers of government. However, the speed of the devolution means that much is being done without the required accompanying skills, technical capacities, resources and oversight. As a result, while good progress has been made nationally along a number dimensions, outcomes in health, education, infrastructure, corruption and the provision of other social services have not improved as quickly as was hoped, and the variance in results across the regions has been enormous. Rather than simply devolving more and more responsibilities to sub-national authorities, the central government needs to take a more strategic view of regional economic development. This includes monitoring the performance of sub-national governments, providing them with technical assistance where needed, encouraging them to emulate the best performers and in the short- to medium-term using grants to direct spending to priority areas. The inter-governmental transfer framework also would benefit from better oversight and a strategic vision. Moreover, the perverse incentives it embodies are driving rent-seeking and the fragmentation of local jurisdictions. In the longer term the objective should be tax autonomy and transfers based exclusively on block grants although this should be conditional on adequate oversight and administrative capacities within the sub-national authorities. Conflicting and overlapping laws and regulations across levels of government are also inhibiting regional development by obstructing private business development and investment.

    • Improving the allocation and efficiency of public spending

      Indonesia's fiscal position is generally sound and policy making prudent. However, the country still faces important challenges in terms of economic and social development. Infrastructure, education, health and social security are all spending areas that the government is trying to improve further, because the nation has yet to converge to the superior outcomes achieved by other countries at a similar level of development. The government's size is small, and raising more revenues will take time, which forces the authorities to get the most out of existing resources and prioritise enhancing the efficiency of public spending. To achieve such an improvement a whole-of-government approach is required, including in the budgeting process and in the establishment of medium-term goals. A key element of Indonesia's recent history lies in the tremendous efforts as from the late 1990s to go from a very centralised system of governance towards one with several nested levels of government. According to some metrics it was a success. Nonetheless, despite the considerable resources already devoted to decentralisation, there is still ample room for improvement in terms of coordination, transparency, accountability and service provision. More broadly, moving away from spending objectives and adopting performance-based incentives would lift outcomes. At the national level, Indonesia would also benefit from scrapping a certain number of inefficient expenditures, such as energy and fertiliser subsidies, and from concentrating on those policies with the highest payoffs, like filling infrastructure gaps and expanding conditional cash transfer schemes. While public employment, especially by some subnational governments, could be streamlined, improving its capacity should be the focus, including for teachers. The fight against corruption should continue by all available means, in particular with a more generalised use of electronic public procurement.

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