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2016 OECD Economic Surveys: Indonesia 2016

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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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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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