+

Economic issues facing

Indonesia’s Jokowi-JK

Ari A. Perdana

Pangudi Luhur Alumni Club

29 Nov 2014

+

Part 1 - MacroeconomyIndonesia has been performing well, but challenging task ahead,

especially after the commodity boom ends and the global economy

weakens

1

+Indonesia 20014-2014: not bad!

Q2 2014 Indonesia Brazil India South Africa Turkey

GDP (% yoy) 5.1 1.9 * 4.6 * 1.6 * 4.3 *

Inflation (% yoy) 6.7 6.5 7.3 6.6 9.2

Unemployment Rate (%) 5.7 5.0 8.8 25.5 9.7

Fiscal Balance (% GDP) -2.4 * -3.1 * -4.9 * -4.3 * -1.2

*

*

CA Balance (% GDP) -2.1 * -3.7 * -1.9 * -4.5 * -7.5 *

Exchange Rate (ytd H1 2014) 2.5% 6.7% 2.5% 0.7% 0.5%

International Reserve (US$

bn) 107.7 370.7 315.8 40.6 112.5

Debt (%GDP) 25.9 ** 59.2** ** 51.8 ** 45.4 ** 36.6

*

*

Source: World Bank

2

Economic growth 5-6% p.a. | Per capita GDP growth 4-5% p.a. | Stable

inflation, managed budget deficit | Strong, stable fin. sector |

Foundations for social protection reforms

…mainly due to strong domestic demand and commodity boom

+But…

Growth has been slowing down,

even declining

Budget deficit is increasing

Oil consumption is rising while

production declines

Commodity boom has ended

The era of cheap labor has

ended

US monetary policy may lead to

capital outflow

400

600

800

1,000

1,200

1,400

1,600

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Global prices of commodities

Oil consumption and production3

+

Part 2 – Socio-economicJob creation and investment in skills, promoting social investments

and reducing inequalities

4

+Employment

The good side: unemployment, informal sector is down

However, Every year 2 million more workers competing for less than 1 million good productive jobs

Growth rate of 7% is required to create new jobs. But how to do it while:

The commodity boom has ended

The low wage era has ended?

The manufacturing sector is less significant

Possible ways:

Find new source of employment driver (local ec)

Find new market, take the benefit of AFTA, take advantage of China’s exit from low-wage products

Source: BPS

5

+Employment skills and skills

mismatch

About 2/3 workforce have SMP

or lower education

Skills mismatch is more than

just educational attainment –

many workers have no or less

skills than what the industry

requires

Soft skills

Skills to operate new

technology

Need a reform in skills and

training

Pendidikan tertinggi yang ditamatkan 2012 2013 2014

2014 kumulat

if

SD ke bawah 49.8 48.5 46.8 46.8

Sekolah Menengah Pertama 17.7 17.5 17.8 64.6

Sekolah Menengah Atas 15.1 15.4 16.0 80.6

Sekolah MenengahKejuruan 8.3 8.9 9.2 89.9

Diploma I/II/III 2.7 2.8 2.6 92.5

Universitas 6.4 6.9 7.5 100.0

Source: BPS

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+Labor reform – because nobody

dares doing it in the past 10 years

Labor market is rigid because

cost of firing and hiring is high

(minimum wage, severance

payment, contract workers)

Workers’ productivity is low

Cost of doing business is high

already

Labor dispute solved internally

Protecting workers vs

promoting jobs

Labor market protection as

social protection

High wage to ensure high

productivity

Eliminate illegal payments

without harming workers

Bargaining is collective

Reform options: combine labor

market flexibility with

government investment in new

industrial areas, provide cheap

housing, invest in skills

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+Poverty

Poverty declines, but the decline is slowing down

Most of the poor have been eradicated, we are dealing with the very structural poor

OR: resources are not well-spent due to bureaucracy and ‘sharing the pie’

The good side: poverty and social programs have been quite developed

The role of local governments will be important in making services work for the poor

60.0

11.3

24.2

17.8

11.4 11.3

0

10

20

30

40

50

60

1970

1976

1978

1980

1981

1984

1987

1990

1993

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*

2012

*

2013

*

2014

**

Source: BPS, Susenas

Reform agenda: increase spending for social protection; currently at 0.5% of GDP (from 1.5% average in middle income countries)

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+Income inequality

Growing inequality amidst

strong economic growth

An unprecedented Gini

coefficient >0.40

Higher inequality of land

holding

0.35 0.35

0.38

0.34

0.33

0.32 0.32

0.34

0.355

0.308

0.30

0.329

0.32

0.32

0.363

0.35

0.363

0.35

0.37

0.38

0.41

0.41

0.413

0.28

0.30

0.32

0.34

0.36

0.38

0.40

0.42

1964

1969

1976

1978

1980

1984

1987

1990

1993

1996

1999

2000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

giniindex

35

40

45

50

1963

1964

1967

1970

1976

1978

1980

1981

1984

1987

1999

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Incomeshareofthetop20%

4.87

0.0

2.0

4.0

6.0

8.0

10.0

1 15 29 43 57 71 85 99

An

nu

al g

row

th r

ate

%

Percentiles

2008-2012 growth Growth in mean

Source: BPS, Susenas

Consumption growth by income decile

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+Inequality in income means

inequality in services and

access

Poor (%) Non-poor (%)

Babies delivered without professional medical

workers’ assistance

40,2 22,8

Children aged 7-12 who are not enrolled in

elementary school

6,0 2,5

Children aged 12-15 who are not enrolled in

junior secondary school

22,5 10,9

Household without access to proper sanitation 52,4 32,5

Household without access to safe water 51,8 42,2

Poor Non-poor

Average family size 4.7 3.8

Source: Susenas 2006 (1-5), Dartanto and Nurkholish 2013 (6)

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+Poor kis like Lima has greater

probability of dropping out

Kuantil Pengeluaran 1 (terendah)

Kuantil Pengeluaran 2

Kuantil Pengeluaran 3

Kuantil Pengeluaran 4

Kuantil Pengeluaran 5 (tertinggi)

Sumber: Susenas (2009)

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+Then there is also regional

inequalities…

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DKI Papua

Fertility rate (2012) 2.30 3.60

Electricification rate (%) 99.9 61.44

Household with private toilet (%) 76.6 58.21

Birth attended by doctors/nurse (%) 98.12 48.46

Under 5-yo who had measles vaccine (%) 87.03 67.23

Consuming modern medicine 94.05 66.04

Infant mortality rate (per 1000 birth) 22 74

Under-5 yo mortality rate (per 1000 children) 31 109

Source: BPS, Susenas

+

Summary

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+Challenges ahead

Growth post-commodity boom

and low-wage era

Industrial competitiveness and

business climate

Managing risk from global

economy (incl. AFTA)

Creating jobs

Building a strong social

protection

Manage and reduce inequality

Navigating in the demographic

window

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Macroeconomy Socio-economic

+Reform agenda for Jokowi-JK

Fiscal reform

Reducing fuel subsidy to create fiscal space, but need to combine with a comprehensive energy reform

Optimize revenue without hurting economic activities

Managing the implementation of BPJS and UU Desa to avoid fiscal burden

Invest in infrastructure

Spending for infrastructure is about 2% of GDP (in 1995, it was 9.5%; India and China spends 10%)

The government is only able to spend about 1/5 of required infrastructure spending

Increase competitiveness of the real sector, reduce cost of doing business

Special attention to SMEs

Socio-economic reform: labor market (job creation + protection), invest more in social protection, fix the skills and education system, reduce income and regional disparity

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