the bureaucratic reform imperative - indonesia presentation april 19.pdf · australia indonesia...

Australia Indonesia Partnership

for Economic Governance

Delivering on Indonesia’s Potential the Bureaucratic Reform Imperative

William Wallace Director, AIPEG

April 2013



Indonesia's growth and development challenges

Indonesia in 2013: an emerging dynamic middle-income economy • Democratic consolidation, and increased regional autonomy, • A track record of macroeconomic and fiscal management, • natural endowments and • a growing international profile.

Indonesia 2013 and beyond: the potential to rise into the ranks of leading upper middle-income economies

Domestic and global trends will continue to offer opportunities, but also bring

challenges which we will look at but in particular • Complacency is a risk –the converse of the Indonesian saying that “bad

times make good policy” is equally true. • There are, as always a number of other challenges to be faced • but managing the governance transition, including bureaucratic reform

matters more than ever. NOTE: Most of this material was developed while I was at the World Bank and I owe a debt of gratitude to my colleagues there. The mistakes are mine.

2



Indonesia experienced three decades of sustained growth… … one of a select few countries

3

Indonesia is one of only 12 countries that enjoyed 25 years or more of sustained growth at an average annual rate of above 7% - “Commission on Growth and Development” 2008



A pattern reestablished in the aftermath of the twin political-economic crisis in 1998

4



The last decade has seen a remarkable performance including weathering the GFC

5



Re-establishing growth has been done in parallel with a democratic transition

Constitutional reforms mandating direct elections to all levels of government have created greater electoral accountability

• In 2009 Indonesia conducted its second direct presidential election, and its fourth presidential transition since the crisis

A free albeit noisy press and vocal civil society and free elections have contributed to Indonesia being considered one of the “free” societies in Asia

An extensive system of institutional checks and balances has been introduced..

… with apex government oversight and accountability agencies established

6

% of local government heads appointed vs. directly elected

Appointed

Appointed

Directly

elected

Directly

elected

0%

20%

40%

60%

80%

100%

2002 2007 2009



A dramatic shift from centralized to decentralized control

“Big bang” decentralization in 2001 (and again in 2005) devolved substantial funds and authority to local governments…

7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

0

10

20

30

40

50

60

70

80

`98 `99 `00 `01 `02 `03 `04 `05 `06 `07 `08 `09 `10

% G

DP

% o

f to

tal g

ove

rnm

en

t sp

en

din

g

Central spending, % of total spending (left axis)

Sub-national, % of total spending (left axis)

Sub-national spending, % of GDP (right axis)

Note: Central spending excludes transfers, subsidies and interest payments. Sub-national data are estimated for recent years.

Sources: WB staff estimates based on SIKD data and Central Government Financial Report (Laporan Keuangan Pemerintah

Pusat, LKPP), Ministry of Finance and Ministry of Home Affairs



The elimination of a debt overhang

8

Sources and notes: IMF Public Debt database plus IMF Fiscal Monitor, BPS and GoI-MoF.



…supported by a balanced economic structure.

9

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

GFCF Householdconsumption

Governmentconsumption

Net exports

China India Indonesia

Note: Components in figure may not sum to 100% as contributions of changes in stocks and

discrepancy not included

Source: WDI



Overall Governance is improving

10



As is the business environment, with some notable exceptions

11

Source: World Bank-LPEM-UI firm-level investment climate surveys.



while the poverty rate is declining… …though,again, not in line with expectations.

12

19.1 18.4 18.2

17.4 16.7 16.0

17.8 16.6

15.4 14.2

13.3 12.5

0

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Poverty rate, percent



Indonesia's growth and development challenges The potential

13



Global growth and high commodity prices … have been instrumental in Indonesia’s success

14

50

60

70

80

90

100

110

2006 2007 2008 2009 2010 2011 2012f 2013f

Energy

Agriculture

Food

Raw Materials

Metals & Minerals

International USD commodity prices (2011=100)

Source: World Bank, Global Economic Prospects, 2012A.



Although Indonesia isn’t making the most

of its resource endowment

15

Indonesia, or parts of Indonesia, have the potential to be a leading

commodity economy like Australia



Meanwhile, commodity driven growth is reinforced by demographics

… as Indonesia’s demographic dividend plays out

16

A large and growing labor force create the potential to make Indonesia a

hub of labor-intensive industry as China rebalances



And rising urbanization … All net population growth is now “urban”

17



And an emerging middle class Changes consumption patterns…

18



Indonesia's growth and development challenges The policy challenges

19



Infrastructure investment remains the key challenge

20

0

2

4

6

8

10

0

2

4

6

8

10

1995- 1997 1998- 2000 2001- 2006 2007- 2009 2010- 2011

Transport Energy Telecom Irrigation WSS

Percent of GDP

While Indonesia needs more of everything special challenges are

Accommodating urban growth through mass transport, housing,

water and sanitation) in the cities that drive competitiveness

Easing transport and logistics bottlenecks that integrate

domestic and regional markets…



Something we are all feeling on a daily basis

Source: Jabodetabek Urban Transport Policy Integration Study, Coordinating Ministry for

Economic Affairs of Indonesia (2012)



Indonesia will also need to better

connect its “two” economies

22

Commodity intensive Indonesia will need to be better connected to manufacturing cluster Indonesia

• Manufacturing clusters are concentrated on Java, especially Jakarta, and regional centers

• While the potential for natural resource (farming, mining, energy) activities are largely elsewhere

New manufacturing firms agglomerate



And deliver better quality

23

1 2 3 4 5 6 7

Vietnam (123)

Philippines (113)

India (91)

Indonesia (90)

China (72)

Thailand (46)

Malaysia (27)

Quality of infrastructure index (scale 1-7 where 7 is the best)

And Indonesia ranks poorly on measures of infrastructure quality such as

in the World Economic Forum Global Competitiveness Report

Note: Brackets indicate global ranking

Source: WEF Global Competitiveness Index 2010-2011



While the intergovernmental transfer system needs to better reward growth and service delivery…

24

71%

-59%

-23%

-50%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Personnel Own-source revenue DBH SDA DBH tax

The current DAU formula rewards staffing and penalizes own-source and shared revenues

(2010, Regression coefficients, in percent)



There is good progress on increasing education levels but quality needs to be addressed

quality is not

25

0%

20%

40%

60%

80%

100%

120%

ECED SD SMP SMU Higher ED

2001 2002 2003 2004 2005 2006 2007 2009 0 200 400 600 800

Qatar

Peru

Tunisia

Indonesia

Brazil

Argentina

Jordan

Kazakhtan

Mexico

Chile

Thailand

Non OECD

Turkey

OECD

Australia

Japan

Korea

Singapore

China-Shanghai

Math Scores

0 200 400 600

Qatar

Peru

Kazakhtan

Tunisia

Argentina

Indonesia

Brazil

Jordan

Non OECD

Thailand

Mexico

Chile

Turkey

OECD

Australia

Japan

Singapore

Korea

China-Shanghai

Reading Scores

0 200 400 600 800

Peru

Qatar

Indonesia

Tunisia

Brazil

Kazakhtan

Argentina

Mexico

Jordan

Thailand

Non OECD

Chile

Turkey

OECD

Australia

Singapore

Korea

Japan

China-Shanghai

Science Scores

Good progress on coverage But quality remains a problem

Source: Own calculations using Susenas



And restore momentum on competitiveness Note the difference between air and sea transport

26

GEOGRAPHICAL

distance between major

cities in Indonesia and

Singapore

ECONOMIC distance

within Indonesia based

on SEA transport costs

ECONOMIC distance

within Indonesia based on

AIR transport costs



While addressing the protective barriers and regulatory

constraints that firms small and uncompetitive

27

The proportion of small firms in Indonesia’s manufacturing sector is much higher than other countries

Regulatory environment and business constraints are creating incentives for manufactures to remain small

• Likely to prevent firms to enjoy economies of scale

• Impede consolidation that can increase overall efficiency

65%

60%

37%

93%

28%

27%

46%

5%

7%

13%

17%

2%

0% 20% 40% 60% 80% 100%

Philippines

Vietnam

Brazil

Indonesia

Small (5-19employees)

Medium (20-100employees)

Large (>100employees)

Source: WB staff estimates

The ‘missing middle’ in the firm size structure of

Indonesian manufacturing

Proportion of firms in each size class by country



And get moving on Green Development before it is too late

28

Energy for competiveness

Stewarding resource wealth

ENERGY

INEFFICIENCY

UNSUSTAINABLE

SUBSIDIES

RENEWABLE

POTENTIAL

FOREST LOSS +

FIRE, POOR LAND

MGMT

UNDER VALUED

RESOURCES,

REVENUE LOSS

WEAK ENV MGMT &

LAW ENFORCEMT



And do all this with less resources

29

0

50

100

150

200

250

300

350

400

0

2

4

6

8

10

12

14

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13*

Tax revenues (real 2000=100)Tax to GDP

IDR trillion Within 3-5 years demands on aggregate fiscal

(share GDP) are set to rise significantly • 3-4 % on infrastructure baring turnaround on

PPP • 2-3 % on the social protection agenda,

health, pensions etc. • 2-3% possible on BR • Anything else a new President might want Where will the money come from • 4-5 % locked up in energy subsidies

• but tough to get rid of • 2-3 % in taxes with an effective program

• but history hasn’t been good here either



So will Indonesia get rich before getting old?

30 Source: WDI, UN and World Bank staff calculations

0

10

20

30

40

50

0

10,000

20,000

30,000

40,000

50,000

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

6%

8%

GDP per capita, constant 2011 USD

GDP per capita with different

growth rates (LHS): 10%

Old age

dependency

ratio (RHS)



Well it is already older and more urbanized than most middle income transition countries

Source: United Nations World Population Prospects

0

5

10

15

20

25

30

35

Indonesia Korea Thailand Malaysia China

Average Age of Citizens during Period of Rapid Development

Average Age

0 10 20 30 40 50

Indonesia

Korea

Thailand

Malaysia

China

Average Urban % Ratio in high growth years

Average Urban % Ratio



The Bureaucracy Reform Imperative

Everything comes together around the BR issue as

Rising incomes, a growing middle class and social media increase pressure to deliver more and better services

And the economy becomes increasingly complex, requiring effective institutions and incentivized civil servants

And delivering on Indonesia’s growth and equity agenda will take

Organizational adjustments that foster institutional set-ups with greater flexibility at the K/L level for organizational structures

Reformed pay and grading schemes to provide flexibility and performance

• while harmonizing remuneration and allowing reforming K/Ls to benefit fiscally from improved practices

Better human resources policies and practices to provide K/Ls more flexibility

• Including over staffing levels and reallocation and better integration of staffing and budgets

And pension policies that improve incentives and move from defined benefit to pay-as-you go.

32



“A journey of a thousand miles begins with a single step

And you don’t have to wait for bureaucracy reform to do more to

Deliver on your organizations goals

• In particular on determining and delivering priorities -- we often have more discretion than we think

• Generating feedback and creating improvements by

• Making engagement with stakeholders in government and society more broadly a higher priority

– And this isn’t just telling our story better but at least as much about better understanding the

impact of our (or government) actions

• Pushing for evidence based decision making – • There is a spectrum it can be expensive to get it right, but even in little things we can often bring

evidence to bear on decision making

Be a good colleague

• By sharing information and facilitating learning across your organizations

• Too often we work in our silos and don’t take advantage of the collective resources available

And mentor those coming behind

• Regular discussions on performance with critical, but positive feedback as well as guidance on careers 33



Where does this leave us?

34

Indonesia has solid fundamentals and good momentum

• Indonesia has a history of delivering high growth, including recovery from the Asian Crisis and response to the Global Crisis and is well positioned

– With strong fiscal and financial fundamentals,

– As high commodity prices feed through the economy

– And demographics, urbanization and rising discretionary incomes raise productivity and increase demand.

But it needs to use these advantages wisely to prevent growing old before growing rich

• Complacency is a risk

• And a continued focus on addressing weaknesses is needed

– Including

• Infrastructure, infrastructure, infrastructure

• Education, education, education

• A renewed push on competition policy (regulatory reform),

• And green development

Bringing us to bureaucratic reform

And each of us doing our own part.

the bureaucratic reform imperative - indonesia presentation april 19.pdf · australia indonesia...

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