Policy Reform in Indonesia:
Agenda and Challenges
Mohamad Ikhsan
Advisor to Coordinating Minister for Economic Affairs Republic of Indonesia and
Senior Research Associate at the Institute for Economic and Social Research
University of Indonesia
Presented at The First OECD-Southeast Asia Regional Forum: Peer Review
Mechanism for Policy Reform
Hotel Nikko Jakarta, Indonesia
23-24 January 2007
1
Outlines
• Overview on the state of Economy since the crisis time
• Policy Uncertainty Issues in Indonesia
– Macro Uncertainties
– Micro Uncertainties
• The Impact of Policy Uncertainties on Performances
– TFP
– Investment
– Employment
• Major Causes for Uncertainties
• Policy Reform Agenda
• Conclusion
2
Overview of State of Economy
Grafik 2: GDP/Kapita
1400
1200
1000
800
600
400
200
0
2001
2002
2003
2004
2005 E)
Debt GDP Ratio for Several Emerging Countries
120
100
Percent
80
60
40
20
0
Korea
China
India
Taiwan
2000
M alaysia
2004(Est)
Thailand
P hilippines
Indo nesia
• Indonesia’s economy has
steadily improved since the
crisis time.
• Per capita income has been
backed to pre crisis level since
2004 and growth rate now
accelerating to a 6 % p.a
• More balance and sustainable
sources of growth
• Macroeconomic risks improved
significantly indicated by a
sharp reduction in public and
external debt ratio and short
term debt over international
reserve
2005(proj)
3
But many (economic) problems
remain
Table 2.1: Growth accounting
Growth in Contribution to growth of:
output per
Physical
Human
worker
capital
capital
TFP
Indonesia
1961-03
2.9
1.7
1967-80
5.0
2.0
1981-97
3.8
2.5
1998-99
-8.8
0.9
2000-03
2.1
0.4
Comparator economies 1961-03*
East Asia (5)
3.6
1.9
Korea
4.7
2.7
Malaysia
3.6
2.2
Philippines
1.0
0.8
Thailand
4.1
2.3
2.4
1.0
OECD
1.4
0.8
All developing
0.5
0.5
0.5
0.5
0.4
0.6
2.4
0.8
-10.0
1.2
0.5
0.7
0.6
0.4
0.4
1.2
1.3
0.8
-0.2
1.4
0.4
0.3
1.0
0.3
Source: Bosworth and Collins (2003) and World Bank staff
estimates. * Simple averages for comparator groups. OECD
and All Developing are 1961-00.
• Our productivity remains
lagging behind pre crisis
period or other regional
competitors.
• Unemployment both open
and under employment
are still higher than pre
crisis.
• Poverty trends are
moving away of the
paths.
4
Firm and industry level data amplify
those fundamental problems
5
In short, mostly caused by policy
uncertainties
Macro Uncertainty
Pol & Reg Uncertainty
Corruption local
Corruption national
Tax rates
Costs of Finance
Legal system
Lab reg national
Tax admin
Lab reg local
Electricity
Crime
Business permits local
Skills and education
Access to Finance
Anticomp
Business permits national
Transport
Customs & trade national
Customs & trade local
Access to Land
Telecom
0
10
20
30
40
50
60
Percentage of firms reporting constraint
to be severe or very severe
70
80
6
Sources of Uncertainties
•
Political transition to democratic
regime
•
– No clear majority and expected to
continue up to the next 10 year
•
– Debt intolerance in Indonesia is
about 35% of GDP. It implies
focusing on reducing debt burden
still the agenda over 1-2 years
ahead.
– Vulnerability in financial sector
have forced the government to
take another burden on contingent
liability.
Bigbang decentralization.
– Authority vis a vis responsibility
•
Financial crisis has limited the
central government power.
– Crisis increases government debt
services cost and limit the power
of central government
•
Most of regions rely on central
government transfers.
– Inducing regional government to
take progressive and in many
cases unnecessary new tax and
retribution.
High debt also rises the country’s
risks and degree of vulnerability.
•
The crisis also reduced the ability
of the state to up grade
infrastructures.
– Government spending on
infrastructures reduced to only 3-4
% of GDP compared to 7% during
the pre crisis time
7
Improving investment climate
Structural and
institutional
reforms
Increase
competition
Raise
efficiency
Lower risk
Low
costs
Better risk
x return
Lower taxes
and cost of
capital
Macro
adjustment
Greater
demand
and output
More
investment
Quality of public
spending
8
Policy Reform Constraints
•
Political constraints hinder the ability for GOI to eliminate political
uncertainties except for the areas where all parties and/or interest groups
relative have common ground.
– Improving one areas may open the other Pandora.
•
Lack of trusts and lack of responsibility
– Regional government regulation
•
Some dilemmas:
– Need to focus on the process rather than outcomes (but at the cost of relative
slow of implementing and results)
– High expectation ( partly due to the past memories) also increases the demand
for quick outcomes.
– Inherent dilemmas: look example in fiscal trilemmas.
•
PR Problem
– “Take it for granted” behavior on the government sides.
– Intermediary problem
– Asymmetric problems of reform: cost of reform always up front while benefit
usually appear in the medium term. Benefit per capita in many cases always less
than cost per capita.
9
A reform agenda
• Macro reform:
– Fiscal Policy trilemma
– Stabilization policy
• Micro Reform: Three Pillars
– Investment Climate
– Infrastructure Acceleration
– Financial Sector Reform
10
Fiscal policy trilema
Reduce public
debt/GDP
Lower
taxes
Increase public
investment
11
Fiscal reform
• Reduce public debt / GDP ratio:
– Sustain a high primary surplus
– Lower the cost of debt
• Restructure public spending to accommodate rise in
public sector investment
• Reduce tax burden
• Develop a medium-term fiscal framework that lowers
political risk.
• Gradually reduce contingent liability
– Abolish the financial sector blanket system while introducing
new deposit insurance companies
– State Owned Companies Restructuring including initiating
new law on Regional State Owned Companies
• Most of them have been achieved and further reforms
are underway.
12
Three Policy Packages
Investment
Climate
Improvement
Infrastructure
Financial
1
Investment Law & Procedure
2
Tax & Custom Reform
3
Labor & Immigration
4
Trade Licenses
5
Cross Sector Strategic Policy Reform
6
Sector Restructuring, Corporatisation and Policy Reform
7
Regulation on natural monopoly & investment protection
8
Clear separation on the role of policy maker, regulator,
contracting agency, and operator
9
Coordination Monetary & Fiscal Authority
10
Financial Institution (Banking & Non Banking)
11
Capital Market and SOE Privatization
13
Milestones For Improving
Regulatory Environment for PPP
Institutional
Cross Sector - PPP
Regulatory
Framework
Strengthening
KKPPI - Interministerial Committee
for Infrastructure Development
Issuance of
Presidential Regulation No.67 /2005 (Perpres 67/2005)
Project Preparation
Establishment of
Project Development Facility - PDF
Government
Issuance of
Support
Minister of Finance Regulation No.38/2006
14
Infrastructure Policy Package
One important theme in these laws is the phasing out of the monopoly position of the
SOEs in infrastructure services…..
Wider opportunities will be open up for private investments in railways, harbors and
airports and other sectors.
Energy & Power
Telecommunication
GR on electiricity procurement
& utilization
GR No. 3/2005
Establishment New Electricity
Law
Submitted to
parliament
Draft New Energy Law
Submitted to
parliament
Road & Toll Road
Road Law
Law No.
38/2004
GR on toll
road
GR
No.15/2005
Interconnection
regulation
MCI regulation
No. 8/2006
Regulation on
Retain Revenue
GR No. 28/2005
Water & Sanitation
Law on
Water
Resources
Law
No.7/2004
Water
Supply
GR
No.16/2005
Transportation
Draft new laws
on sea, air,
land, and rail
transport
Submitted to
parliament
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Investment Climate Improvement
General
Tax
 Strengthening service
institutions
 Transparency
 Equal treatment
 Settlement
mechanisms
 Synchronization of
regulations
Draft Investment
law
Submitted
to
parliament
Simplified Trade
licenses
Done
Model for National
Single Window
Done
Delegation
authority of
licenses
Done
Supervision Cent &
Regional Regulation
On going
Customs
 Clear and
transparent criteria
on tax
 Service desks on
Large Tax Office
 Improving processing
time
 Implementation of EDI
system to improve
efficiency
 Revision of VAT
Draft Tax Law
Submitted
to
parliament
, expected
to be
passed on
2007
Custom law
Passed
Regulations to
simplify
customs
process
done
Draft of other
regulations
On going
Labor
 Review of Labor Law
no.13/2003,
 Development of
Employment Dispute
Information System
 Development of an
online job search
comprehensive
study on Review
of Labour Law
On going
16
Financial Policy Package
Launched June 2006,
as joint effort between GOI and BI
Strengthening banking institutions and policy
on improving the performance of SOE Banks
Strengthening non bank financial
institutions (insurance, pension funds,
finance companies & venture capital firms)
Improving the liquidity, efficiency and
integrity of the capital market
Clarify Government privatization policy direction
Strengthen the
coordination between
fiscal and monetary
authorities
•
The establishment of
Mediation Agency for
Indonesia Insurance in
September 2006.
•
The establishment of road
map pension fund program in
September 2006.
•
The issuance Bank Indonesia
regulation regarding
incentive for banks merger
and consolidation.
•
The establishment of
Committee for Privatisation
of State Enterprise. A clear
legal ruling on separate
maintenance of state assets
in regard to the management
of non-performing loans 17
at
state-owned banks
New Initiatives: 2007-2008
• Continue to implement three previous packages
– Carry over some delay policy actions
– Refocusing on some important issues
– Eliminate some irrelevant policy actions
• Take special actions for several important issues
– Employment Creation and Poverty: SME, CCT,
Poverty Community Development, and Urban
Housing Programs
– Energy: Deregulation in Oil and Gas and Energy
Alternative
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Conclusion: How to create an
effective and do-able agenda
•
It must start with credible and feasible agenda
– Taking to account political constraint is necessary
– Consider all possible negative side effects
•
•
Priority is essential
Need to manage expectation
– Reform should not be oversold
•
Setting the pace and sequence of reform is really art.
– Need to have a full knowledge on all constraints and opportunities
– Crisis in many times opens the opportunity.
•
•
In many cases, establishing oversight mechanism will help the credibility of
reform
Educating the public is the part of success element of reform.
– Broadening the base of reform supporters part of the objective of the PR.
•
Need to have a champion of reform.
– Role of bureaucracy is important.
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