Indonesia Economic Quarterly, July 2014 Hard choices Ndiamé Diop Lead Economist
The new administration will face major near-term challenges Fiscal pressures External Economic pressures growth Poverty and inequality reduction Ending extreme poverty and achieving shared prosperity? OR Persistent pockets of extreme poverty and many Indonesians left behind? Hard choices 2
International backdrop High-income economy growth is …but most global commodity prices, strengthening… except oil, continue to decline (manufacturing PMI, +50=expansion) (index, January 2012 = 100, 3mma) 60 120 58 110 56 Brent oil US 100 54 90 52 Copper 80 50 Palm oil 70 Japan 48 60 46 Coal Euro area Rubber 44 50 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Source: Markit Source: World Bank Hard choices 3
Economic growth - Will Indonesia return to 6% growth? (annual growth, percent) East Asia Pacific (excl. China & Indonesia) Indonesia 8 Forecast 7 6 5 4 3 2 1 0 -1 2001 2003 2005 2007 2009 2011 2013 2015 Source: BPS; World Bank staff calculations Hard choices 4
Fiscal risks are building up steeply Significantly weaker revenue growth … and contributed to a substantial has added to expenditure-side rise in government financing needs pressures… (contributions to overall nominal revenue (IDR trillion) growth, percentage points) Fiscal deficit Debt payments All other revenues 500 23 Intl. trade taxes 400 Oil and gas revenues (tax and 18 non-tax) Income tax (non-oil and gas) 300 13 200 8 100 3 0 2009 2010 2011 2012 2013 2014 2014 (1) (2) 2011 2012 2013 -2 Note: 2014 (1) is initial Budget (APBN), (2) is revised Source: Ministry of Finance; World Bank staff calculations Budget (RAPBN-P) Hard choices Source: Ministry of Finance; World Bank staff calculations 5
External balance still in focus despite macro stabilizing measures After successful macro stabilization, …which have been hit by ongoing focus now on weak exports… commodity sector challenges (export and import USD values, yoy (contributions to export value growth growth, 3mma) yoy, percentage points) Non commodities 50 10 Commodities 40 5 30 0 20 -5 Imports 10 -10 0 -15 -10 Exports -20 -20 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Source: CEIC; World Bank staff calculations Source: CEIC; World Bank staff calculations Hard choices 6
Moderate pace of growth expected to continue Previous July IEQ (March IEQ) 2012 2013 2014p 2015p 2014p 2015p Real GDP (% change) 6.2 5.8 5.2 5.6 5.3 5.6 Consumer price index (% change) 4.3 6.9 5.8 4.9 6.2 5.2 Current account balance (% of GDP) -2.8 -3.3 -2.9 -2.4 -2.9 -2.1 Budget balance (% of GDP) -1.9 -2.2 -2.8 n.a. -2.6 n.a. Source: BI; BPS; Ministry of Finance; World Bank staff projections Hard choices 7
Assessing the hard policy choices ahead …AFFECTS THE CAPACITY TO DELIVER ON KEY STRUCTURAL REFORMS: - SUPPLY-SIDE REFORMS Infrastructure Skills Addressing near- …and achieve key Functioning of markets term macro development - REFORMS TO ENSURE challenges outcomes SHARED PROSPERITY Reinvigorating growth Faster poverty Local access to services reduction Fiscal pressures Social protection Reduced inequality External pressures Management of disaster risks & resilience FISCAL REFORMS Redirecting spending Mobilizing revenue Hard choices 8
Inequality is a growing problem in Indonesia Inequality on the rise in recent years… …and increasing faster in Indonesia than in its neighbors (percent, LHS; percentage points, RHS) (1990-2011 annual average change in Gini coefficient, percentage points) 0.8 Inequality (Gini coefficient, 25 50 RHS) 0.6 20 40 0.4 0.2 15 30 0.0 Official poverty rate (LHS) 10 20 -0.2 -0.4 5 10 China Indonesia Laos India Vietnam Cambodia Philippines Malaysia Thailand GDP (LHS) 0 0 2000 2003 2006 2009 2012 Note: Poverty rates are March BPS estimates; 2014 GDP Source: Kanbur, Rhee and Zhuang, 2014, “Inequality in growth: World Bank projection Asia and the Pacific”; World Bank staff calculations Source: BPS; World Bank staff calculations 9 Hard choices
Why does inequality matter for Indonesia? Inequality can slow down economic growth Preliminary research comparing districts in Indonesia indicates that high levels of inequality hurt growth. Inequality slows down poverty reduction If all households received growth equally, poverty would have fallen from 17.4 percent in 2003 to 0 percent by 2010 . Inequality can trigger conflict and social tension Districts with Gini coefficients of 40 experienced 60 percent more conflict than districts with Gini coefficients of 20. The majority of Indonesians believe that the country is more unequal than they’d like it to be 10 Hard choices
What is causing the rise in inequality? Children are born with unequal Returns from jobs favor the rich and opportunities well-educated (lack of access, percent) (wage and consumption premiums compared to workers with primary education, percent) 120 Decile 10, urban Decile 1, rural 2003 100 No proper sanitation 80 No clean drinking water 60 16-18 year olds not 40 enrolled 20 Not fully immunized 0 Unskilled birth attendant 0 20 40 60 80 100 Worker Wage Household Source: Susenas; DHS; World Bank staff calculations Source: Sakernas; Susenas; World Bank staff calculations 11 Hard choices
What is causing the rise in inequality? The rich benefit from greater returns The poor are more vulnerable to to capital shocks to their income (annual change in real terms, percent) All households face risks, for example 100 Real formal wages health, cost of living shocks, and Real informal wages 80 natural disasters, that can affect their Real JCI price return 60 income 40 20 The rich have access to more efficient 0 coping mechanisms to respond to -20 shocks (savings, insurance, good jobs, etc.); the poor often do not -40 -60 The poor are less able to take risks to -80 2002 2004 2006 2008 2010 2012 increase their income Source: Indonesia Stock Exchange; BPS; Sakernas; World Bank staff calculations 12 Hard choices
What can be done to address rising inequality? 83% of Indonesians believe it is “urgent” for the new government to tackle inequality Distribution: improve spending and taxation policies (for example, eliminate regressive fuel subsidies, enhance tax compliance) Opportunities: increase poor households’ access to high quality education and health Mobility: support labor mobility for high-quality job creation Safety nets: adequate and well-targeted, to reduce the vulnerability of the poor to shocks 13 Hard choices
Thank you July 2014 IEQ Contents: Regular update on economic developments and the outlook New purchasing power parity-adjusted estimates of Indonesia’s economy Inequality is growing in Indonesia and it matters for policy El Niño, forest fires and haze: the imperatives for concrete action On the web: http://www.worldbank.org/en/news/feature/2014/07/21/indonesia- economic-quarterly-july-2014
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