Peter McCawley Visiting Fellow, Indonesia Project, Crawford School, ANU Friday 7 March 2014

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Konferensi Internasional Pelajar Indonesia 2014

Beyond MDGs: Realising Indonesia’s Development Potential

Peter McCawley

Visiting Fellow, Indonesia Project, Crawford School, ANU

Friday 7 March 2014

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Theme: Looking ahead: RPJMN 2015-2019

• RPJMN 2015-2019 will help set the framework for policy(although many other policy events will be important as well)

• There are many key issues … employment, food and energy security,

decentralisation, environment …

• But two key issues are (a) economic growth, and (b) role of the state. … let us discuss these two issues

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Outline --

Growth• Some facts• Four issues

(a) Importance of long-term growth(b) Is slower growth a problem?(c) Good growth(d) Investment

Role of the state• Some facts• Two issues

(a) Operations of state(b) Implications for policy

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Outline --





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Recent GDP growth (% QoQ) – 2009-2013 ( Growth sedang melemah)

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Outline --





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Four issues to consider:

(a) Importance of long-term growth

(b) Is slower growth a problem?

(c) Need for ‘good growth’

(d) Need for investment

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Outline --





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(a) Indonesia: long-term growth – quote (The Economist, 25 May 1996)

“Understanding growth is surely the most urgent task in economics. Across the world, poverty remains the single greatest cause of misery; and the surest remedy for poverty is economic growth. It is true that growth can create problems of its own (congestion and pollution, for instance) ... But such ills pale in comparison with the harm caused by the economic backwardness of poor countries ...”

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(a) Indonesia: long-term growth -- quote

“To its shame, economics neglected the study of growth for many years…. But over the past ten years or so, this has changed. Stars such as Robert Lucas of the University of Chicago, who last year won the Nobel prize in economics, have started to concentrate on growth. As he says of the subject, “the consequences for human welfare ... are simply staggering. Once one starts to think about them, it is hard to think of anything else”.

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(a) Indonesia: long-term growth 1960-2010 (Source: Pierre van der Eng (2010) using adjusted prices)

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Outline --





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(b) Is slower growth a problem?

We must consider:

(1) Is slower growth a problem? Why?

(2) What is the maximum growth rate?

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Why is slower growth a problem?

… See “Economist” quote above! Slow growth will affect:

* Job creation

* National economic capacity to supply all goods – food, housing, schools, hospitals, etc

* Capacity of government itself to function and to respond to national problems (law and

order, many public goods, environment, social, etc)

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What is the maximum growth rate?

• Seems to be around 7% (see earlier graph)

• Other countries (China, India, Japan 1950s/1960s, Korea, Taiwan) have grown faster than 7%

• Key question for policy now: Why is current growth in Indonesia below 7%?

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Outline --





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Need for ‘good growth’

• But ‘growth’ alone is not enough – ‘good growth’ is needed.

• Good growth = growth which creates jobs, helps protect ‘social’ and environmental goods

• And which is fair – which benefits the poor as well as the rich = ‘pro-poor growth’

… consider these points …

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Good growth (i)…

• Jobs … not ‘jobless growth’

• Environment and social factors – “externalities” are a problem in Indonesia … national capacity to control negative externalities is weak

• Also – “public goods” are needed

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Good growth (ii) …

• And ‘fair’ pro-poor growth is not easy.

• The ‘Gini coefficient’ in Indonesia has been rising sharply recently

…. See graph …

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Indonesia: Gini coefficient 2002-2012

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What to do about equality?

(1) Ensure supply of basic goods – but these must be basic because the capacity of the state (kemampuan negara) is limited basic food, water, jobs, schools, housing probably not ‘social programs’

(2) Jobs are very important(3) Improve public finances – taxes and

expenditures (check subsidies!!)

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Outline --





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(d) Need for investment

Must aim for >30% of GDP. But factors to consider are:

• “good” investment is needed.

• total investment is much more than BKPM data on domestic and foreign investment.

• the informal economy is important (50% of workforce)

• investment in infrastructure needs much more attention – recently, much too low, and policy is a problem …

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Investment … and infrastructure

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… but infrastructure is a problem (too low)

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Outline --





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Another topic – Negara dan pasar

• Looking ahead to RPJMN 2015-2019, there seems to be a problem – kemampuan negara terbatas! Issues --

• How limited is the capacity of the state?

• What are the implications?

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Outline --





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State capacity: revenues, expenditures, 2012

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Outline --





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What are the implications? … Consider two implications:

• Implications for the operations of the state (government)?

• Implications for policy? (What should we do?)

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Outline --





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Implications – operation of the state

• The state becomes “stretched” over-promises, and under-delivers

• Budgets are too small; salaries are too low(eg, attendance by teachers at schools is poor)

• … causing cynicism and resentment towards government

• “vicious circle” … resentment of government and reluctance to pay taxes … which in turn weakens the government!

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Outline --





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Implications for policy – what to do (a)?

• Improvements are needed in both quantity and quality (ie., size of the state, and service)

• Increase taxes and charges -- and spend more!

• But also focus; cut unnecessary functions (hard, but necessary)

All of this = wide reform of government

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Implications for policy – what to do (b)?

• Set priorities -- Cut spending in some areas, and increase it in others

• Increase revenues

• Simplify government; streamline government

• Grindle: “good enough governance”

• Government should “steer, not row”

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Conclusion – what we have discussed:

Kata kunci (ringkasan):

RPJMN; economic growth; good growth; jobs; national capacity; supply of goods; public goods; food security; energy security; pro-poor growth; externalities; inequality; Gini coefficient; investment; infrastructure; informal economy; capacity of state; public finance; revenue; expenditure; “vicious circle”; role of state; reform of government; streamline the state; “good enough governance.”

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Peter McCawley Visiting Fellow, Indonesia Project, Crawford School, ANU Friday 7 March 2014