Download Reducing Poverty: A Challenge

The World Bank Group in Indonesia
Investing in Institutions for Inclusive, Sustainable and
Competitive Indonesia
Shubham Chaudhuri
World Bank, Indonesia
Jakarta, June 4, 2008
Page 1
Outline
• Indonesia 2008 : Doing Well, But Could Do Even Better
• Indonesia 2012 and Beyond: The Development Agenda
• World Bank Country Partnership Strategy: Investing in
Institutions for Inclusive, Sustainable and Competitive
Indonesia
Page 2
Indonesia 2008: Doing Well,
But Can Do Better
Page 3
Indonesia: Doing Well - An Emerging Dynamic
Middle Income Country
• Major Political transformation over the last 10 years…
-
Democratization
Big Bang Decentralization
Historic Aceh peace agreement (2005) is largely sustaining
Commitment to good governance
Growing sense of confidence
• Macroeconomic policies and related reforms have been
conducted well
- Growth and macroeconomic performance have been increasingly
strong
- Prudent Fiscal Management
- The financial sector is on a much stronger footing and Indonesia is
now accessing alternative sources of finance
- Investment is still low but rising fast
Page 4
Robust Growth…
16%
120
Real GDP grow th rate (LHS)
12%
8%
5.4%
4.7%
4%
3.8%
GDP per capita index (RHS)
4.4%
4.7%
5.0%
115
110
5.7%
105
-13.1%
0%
100
5.5%
0.8%
2007
2006
2005
80
2004
-16%
2003
85
2002
-12%
2001
90
2000
-8%
1999
95
1998
-4%
1997
Page 5
6.3%

In 2005, per-capita real GDP for the first time exceeded the high that had
been reached in 1997, before the peak of the crisis

…and, in 2007, growth accelerated to a ten-year high of 6.3%, despite a
slowing global economy
Prudent Macroeconomic Management …
Public debt (% of GDP) (LHS)
120.0
Budget deficit (% of GDP)(RHS)
3.0
100.0
2.5
80.0
2.0
60.0
1.5
102.5
40.0
77.1
1.0
76.4
45.6
58.3
80.0
65.4
20.0
55.2
38.6
34.9

Page 6
2007
2006
2005
2004
2003
2002
2001
2000
1999
0.0
1998
0.0
0.5
Lower budget deficits, a much lower debt-to-GDP ratio, and manageable
inflation (though rising recently)
….but Slower Progress on Other
Dimensions….
Page 7
Stability And Growth Are Delivering Less
Poverty Reduction
• The poverty rate has been declining, but many are near poor
and remain sensitive to shocks (including recent increase in
soy price, palm oil, rice)
Income Distribution
Poverty Head Count
Distribution of
2007 per capita expenditure
45
.6
40.1
40
33.3
.4
Crisis
28.6
30
Density
26.9
23.4
.2
25
21.6
20
17.6*
17.4
15.1
15
18.2
17.4 16.7
16.0
17.8
16.6
13.7
11.34*
0
Poverty Headcount (%)
35
0
10
200,000
400,000
600,000
800,000
Per Capita Expenditure ('07 rp / month)
* Revised Method
5
Expenditure distribution
National poverty line
0
1976
Page 8
1978
1980
1981
1984
1987
1990
1993
1996*
1999
2002
2003
2004
2005
2006
2007
$1 per day poverty line
$2 per day poverty line
Delivering Fewer Jobs as the Demography
Shifts the Labor Force Rapidly
•
Unemployment fell slightly in 2007,
Changes in Labor Force (,000)
but remains high with increasing high
2002-04
2004-06
school and university graduates
Youth (15-24)
coming into the labor force
HS & >
751
921
-212
123
HS & >
1,477
2,529
< HS
1,178
-1,1158
HS & >
2,229
3,451
966
-1,035
< HS
Unemployment
10.26
10.5
10.28
9.86
10.0
Adults
9.80
9.50
9.5
9.06
Total
Percent
9.0
8.5
8.10
8.0
< HS
7.5
7.0
6.5
6.0
2001
Page 9
2002
2003
2004
2005
2006
2007
Education Remains A Challenge
Access: While Indonesia has
achieved nearly universal primary
education at 93.5%, junior secondary
net enrollment is still low at only
65.2% and for the poorest quintile it
is at only 50%
Junior Secondary Net Enrollment
0.9
Enrollment Rate
•
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
2003 PISA Math Results
1
(Poor)
2
3
4
5
0
Hong Kong, China
Japan
Korea
1998 1999 2000 2001 2002 2003 2004
Brazil
Indonesia
60
55
50
45
40
35
30
25
Mexico
Thailand
Poland
Greece
Spain
Russian Federation
Portugal
Reading 2000
Reading 2003
Math 2000
Math 2003
Page 10
Source: Various years of Susenas
•
Quality: The 2003 PISA math
exam results indicate that
Indonesia scores low and lags
behind in student learning
Transitions To Secondary & Tertiary Education
Are Lagging..
Distribution of educational attainment, by cohort
100
Ever attended
school
Percent
80
Completed primary
school
60
Completed low er
secondary school
40
Completed upper
secondary school
20
0
1940
1950
1960
1970
Year of birth
Page 11
1980
1990
Under-performing On Some Critical Health Outcomes
Per-capita
GNI
(2006 USD)
Cambodia
Vietnam
India
Indonesia
Philippines
China
Thailand
Malaysia
Infant
Under-5
Measles
Life mortality mortality
DPT vaccination
expectancy
rate
rate vaccination rate
rate
(years) (per 1000) (per 1000)
(% )
(%)
480
690
820
1420
1420
2010
2990
5490
57
70.7
63.5
67.8
71
71.8
70.9
73.7
68
16
56
28
25
23
18
10
87
19
64
36
33
27
21
12
82
95
59
70
79
87
98
90
79
95
58
72
80
86
96
90
% of children under five w ho are underw eight
35
30
25
20
15
10
5
0
1998
Page 12
1999
2000
2001
2002
2003
2004
2005
2006
2007
Maternal
mortality rate
(per 100,000)
540
150
450
420
230
45
110
62
Environmental Degradation and Unsustainable
Depletion Of Resources
•
two-thirds of Indonesians live in rural areas and are directly or indirectly
dependent on common land, coastal, and environmental resources that are
being rapidly depleted
•
the other third is affected by environmental conditions in urban areas, from
water and air pollution, congestion and noise
•
deforestation rates in Indonesia are amongst the highest in the world and
Indonesia is arguably the third largest source of greenhouse gas emissions,
behind only the U.S. and China
•
health and other costs attributable to water pollution and limited access to
safe water and sanitation have been estimated to be roughly 2 percent of
GDP annually
•
annual costs of air pollution to the Indonesia economy have been calculated
at around $400 million per year
Page 13
….and There Are Emerging Risks….
Page 14
Risks from Turmoil in Global Financial Market..
120
Em erging m arket spreads (January 2003 = 100)
100
Indonesia
governm ent
bond spread
80
U.S. high-yield
spread
60
40
EMBI Global
20
0
2003

Page 15
2004
2005
2006
2007
turmoil in global financial markets is raising the costs of meeting
Indonesia’s financing needs, despite its strong fundamentals
2008
Risks from Continued Increases In Fuel & Food Prices
Energy subsidies dominate 2008
central government expenditure
2008; trillion rupiah
180
120
60
Electicity
Fuel
0
Subsidies
Capital investment
Social programs
Source: Ministry of Finance, 2008 RAPBN-P. Assumes oil at US$83.
180
180
160
160
Rice
(BULOG)
Chicken
140
140
Salt
Flour
120
120
Sugar
Cooking
oil
100
80
2005
Page 16
100
80
2006
2007
2005
2006
2007
Indonesia 2012 and Beyond: The
Development Agenda
Page 17
Indonesia 2012 and Beyond:
The Development Agenda
•
Government’s development agenda is articulated in the medium-term
strategy (RPJM) for 2004-2009, which specifies three broad and multifaceted goals:
1.
2.
3.
A safe and peaceful Indonesia;
A just and democratic Indonesia;
A prosperous Indonesia
•
The process of drafting the 2010-2014 RPJM has begun and early
•
However, the upcoming 2009 presidential and legislative elections
Page 18
indications show that the unfinished agenda of the current plan will frame the
broad priorities of the next one
necessarily make any statements about the next government’s development
agenda somewhat speculative
Indonesia 2012 and Beyond:
The Development Agenda (cont’d)
• ACCELERATING growth by making Indonesia more
COMPETITIVE
• Building a more INCLUSIVE Indonesia by making growth more
BROAD-BASED, improving service delivery, and enhancing voice
• Working towards a GREENER Indonesia by making growth more
SUSTAINABLE through better management of natural resources
and the environment
• Making Indonesia more RESILIENT by better planning for and
management of risks
Page 19
Accelerating growth: The Potential
•
Indonesia has the potential to achieve the rates of growth it achieved
prior to the crisis……
•
GNI per-capita (USD) trajectories
3500
Thailand
(1986-1996)
3000
Indonesia
"rising"
2500
2000
1500
elsewhere
•
1000
500
2014
2012
2010
2008
2006
2004
2002
1998
1996
1994
1992
1990
2000
Indonesia
(1990-2007)
0
Page 20
competitive clusters
Indonesia
"floating"
Tunisia
(1988-1998)
..by making the most of
Indonesia’s resource
endowments …while
developing globally
…by relieving infrastructure
bottlenecks and remedying
weaknesses & inconsistencies,
and reducing uncertainty in the
regulatory and policy
environment
Making growth Inclusive: The challenges
• Raising the returns to the main asset of the poor—labor
• …by revitalizing agriculture and the rural economy
• …and facilitating the transfer of labor from low-productivity
activities in agriculture to higher value-added activities elsewhere
• Poor quality and limited access remain areas of concern for
basic education, healthcare, water and sanitation services
• Improving the allocation and efficiency of expenditures is the
main challenge
Page 21
Raising the returns to the main asset of the
poor—their labor
Index of real value-added per w orker: Indonesia agriculture 1988 = 100
2100
THA-industry
1700
THA-services
1300
900
IDN-industry
IDN-services
500
THA-agriculture
IDN-agriculture
•
Page 22
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
100
Per-worker productivity in Indonesia is low, regardless of sector and not
increasing very rapidly
Facilitating the transfer of workers out of lowproductivity agriculture
70
Share of the labor force in agriculture (%)
60
THA
50
IDN
40
PHL
30
20
MYS
10
KOR
•
Page 23
…while the movement of workers out of agriculture, the lowest
productivity sector, has stalled in Indonesia since the crisis
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
0
Making Growth Inclusive:
Providing Quality Education For All
•
Remarkable progress in primary and secondary enrollment rates;
but challenged in improving quality and increasing access across the
country:
• Uneven spatial distribution and quality of teachers (through remedial
efforts in place)
• Positive outcome from the BOS system of direct transfers to schools
• Recently introduced CCT program is aiming to improve education
access for the poor
•
Page 24
Overall progress is hindered, however, by the unfinished
decentralization agenda, which has left responsibility and
accountability for many education areas vague
Making Growth Inclusive:
Restructuring the Health System
•
Transformation to a more sophisticated health system in the medium term needed
•
The immediate challenge is to improve quality, increase access for the poor and
reduce spatial disparities
•
Accountability of health care workers is hindered by civil service and
decentralization regulations, which limit the authority local governments to
manage their staff
•
Inefficiencies and poor quality in the health sector have resulted in low utilization
rates of both public and private facilities, and high rates of self-treatment, and is a
major source of inequity in healthcare access
•
Public health spending for secondary care tends to be regressive, although the
Askeskin program of subsidized healthcare for the poor is attempting to change
this
Page 25
Financing Is Not The Only
or Even The Main Challenge…
•
Improving the allocation and efficiency of expenditures and providing
adequate services in the context of decentralized Indonesia is…
% of total governm ent expenditure
18.0%
16.0%
Education
14.0%
12.0%
10.0%
8.0%
6.0%
Health
4.0%
2.0%
0.0%
2001
Page 26
2002
2003
2004
2005
2006
2007
Ensuring Growth Is Sustainable: The Challenges
• Working towards a GREENER Indonesia by making growth
more SUSTAINABLE through better management of natural
resources, and the environment
• Managing Indonesia’s forestry and marine resources
sustainably while providing adequate livelihoods
• Meeting Indonesia’s energy needs without sacrificing its
environment
• Making Indonesia’s rapidly growing towns and cities livable
Page 27
Building Resiliency: The challenges
•
Making Indonesia more RESILIENT by better planning for and
management of risks
• Preparing for climate change
• Strengthening institutions and capacity for planning for managing
disasters
• Designing social protection schemes that buffer the population from
the adverse impacts of shocks
• Enhancing the capacity of and coordination mechanisms among
financial sector regulatory and supervision institutions to deal with
systemic shocks from either external or internal sources
Page 28
Why It Will Take Time And Commitment
•
•
Page 29
Because of the dramatically changed circumstances Indonesia finds itself in, and
its own ongoing and as yet incomplete transition, there is no one single policy
that could quickly help Indonesia to complete its transition to modern economy
•
Democratization and decentralization have fundamentally changed decisionmaking processes and accountability structures within government and the
broader public sphere
•
The tasks facing the government have themselves become more difficult, in part
because of Indonesia’s own past successes –The Middle Income Transition
•
The changed global economic environment implies a different, though equally
important, role for the state than in the past
These changes reveal weaknesses in the processes and capacity for formulating
and implementing policy and have made the process of implementing reforms a
more challenging and time-consuming task
Strengthening Public Institutions And Processes
• Restructuring and strengthening the core processes, human
resources and institutions for formulating and implementing policy
 Reform of public sector systems – procurement, financial management and budget
execution, project design, audit, M&E …
 Clarify institutional responsibility for civil service reform, improve incentives and
governance and revise the legal framework
•
Making the most out of decentralization
 Improve the framework (and its implementation) for the division of responsibilities
between national and local governments
 Improve local government capacity and accountability
• Sustaining the focus on Governance
 Build on the new institutions created (KPK, Judicial and Police Commissions, etc.) that
have begun to deliver tangible results
 Raise the focus on the deeper structural reforms needed in the Judicial and Legal
system
 Replicate existing success stories at the local and national level (MoF, LG reformers,
etc)
Page 30
The World Bank:
Investing in Institutions for an Inclusive,
Sustainable and Competitive Indonesia
Page 31
Changing Role of International Development
Partners in a Middle Income Country (MIC)
• New partnership model required: with Indonesia’s exit from IDA
and the post-CGI environment as a MIC
• We are moving to adjust our paradigm:
 From Aid Agency to Development Bank
 From WB projects to GOI programs
 From trying to solve Indonesia’s problems to helping Indonesia
find and implement the solutions
 From managing transactions to managing relationships
Page 32
Strengthening and Using Country Systems
• World Bank financing represent a
small portion of Government budget
– focus on leveraging impact
through strengthening institutions:
 Public institutions grow by delivering
services and policies effectively and
thus gaining trust of the citizens
 The World Bank works in support of
institutions that have effective
leadership and are able to improve
performance
 WB’s aim is not to fill in Indonesia’s
development challenges, rather to
support Indonesian institutions that
would fill this challenge
Page 33
% of total official foreign
borrowing to budget 1995 - 2008
18%
16.9%
16%
14%
12%
10%
8%
5.5%
6%
4%
2%
0%
1995
2008
The World Bank new Country Partnership Strategy:
Investing in Institutions for an Inclusive,
Sustainable, and Competitive Indonesia:
Aim:
The World Bank helps accelerate transition to modern
governance through investing in Indonesian institutions
– help create replicable success stories at national
government, local government, and public sector levels
Approach:
1. Building supply of better governance - Investing in country
systems (supply side)
2. Stimulating demand for better governance – building on CDD
approaches
Page 34
Indonesia CPS:
Direction for Future Program
Development Outcomes
Government Programs
Institutional Lens
WBG Support
Page 35
Outline
• Indonesia 2008 : Doing Well, But Could Do Even Better
• Indonesia 2012 and Beyond: The Development Agenda
• World Bank Country Partnership Strategy: Investing in
Institutions for Inclusive, Sustainable and Competitive
Indonesia
Page 36
Thank You!
Page 37