Further reforms will promote a more inclusive and resilient Indonesian economy

This article is brought to you in association with OECD.

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A steady economic expansion in Indonesia is boosting living standards, curbing poverty and offering millions of people greater access to public services. Reforms that boost growth, improve the business environment for small and medium-sized enterprises and increase government revenues will allow investment in infrastructure and increased spending on health and social services, which would ensure a brighter future for all Indonesians, according to two new reports from the OECD. The latest OECD Economic Survey of Indonesia looks at the current expansion, as well as the challenges facing the country moving forward. The Survey projects growth of 5.2% this year and 5.3% in 2019, and lays out an agenda for making the economy more resilient and more inclusive. The Survey, presented in Bali by OECD Secretary-General Angel Gurría and Indonesian Finance Minister Sri Mulyani Indrawati, highlights the importance of policies to increase resilience as global risks rise. It also underlines the potential for tax reforms that increase government revenues to meet financing needs in a growth and equity-friendly manner, as well as how tourism can contribute to sustainable regional development. “As the OECD launches the latest Economic Survey of Indonesia today in Bali, our heartfelt sympathies go out to the Government and the people of Indonesia over the tragic loss of life from the earthquake and tsunami in Central Sulawesi. This Economic Survey promotes policies designed to improve Indonesia’s resilience to global risks. Efforts already underway to recover from this natural disaster and rebuild for the future offer a powerful illustration of resilience in action,” Mr Gurría said. “The Indonesian economy is growing at healthy rates, and a demographic dividend will further boost growth in the coming years,” Mr Gurría said. “The challenge going forward will be to create the conditions to ensure that future generations have the opportunities for a better life. Infrastructure, education, health and job quality still pose important challenges that must be addressed to ensure that Indonesia achieves sustainable and inclusive growth.” To make the economy more resilient and inclusive, the Survey calls for improved targeting of social assistance, deepening domestic financial markets, better transparency and governance of state-owned enterprises, reforms to employment regulations to bring more workers into formal employment and further simplification of business regulations. To raise greater revenues to meet spending needs, the Survey proposes Indonesia increase investment in tax administration, make greater use of information technology to strengthen monitoring and facilitate compliance, broaden the tax base for both income tax and value-added taxes, and work with local governments to increase revenues from recurrent property taxes. To develop a stronger and more sustainable tourism sector, the Survey points out the need to include infrastructure in new development plans, expand tourism skills training and consider opening new areas for appropriate tourism use. Improving conditions for SMEs and entrepreneurs will also be key for future economic development, according to the first-ever OECD SME and Entrepreneurship Policy Review of Indonesia 2018. Mr Gurría presented the Review in Bali with Minister of Cooperatives and SMEs Anak Agung Gede Ngurah Puspayoga and Minister of National Development Planning Bambang Brodjonegoro. The Review examines the performance of SMEs and entrepreneurship and provides tailored recommendations for improving the business environment and framework conditions, the strategic policy context, national programmes and the coherence between national and provincial policies. “In Indonesia, small companies employing less than 20 people account for more than three-quarters of national employment, more than in any OECD country,” said Mr. Gurría. “This is why policies to boost SME development should remain a priority for the Indonesian Government.” To strengthen productivity growth in SMEs, the OECD suggests increasing government spending on skills upgrading and innovation in SMEs. The Review finds that Indonesia spends less than 0.1% of GDP on R&D, compared with the OECD average of 2.3%, and that standard innovation policies such as R&D tax credits are relatively underdeveloped. To reduce the budgetary impact of this policy, the OECD also suggests reducing the cost of some large-scale programmes, such as KUR (Kredit Usaha Rakyat, People’s Business Credit) – a loan guarantee with an interest rate subsidy – by increasing focus on targeted groups, such as first-time borrowers and SMEs from lagging regions. To improve the overall coherence of Indonesian SME policy, the Review recommends the integration and merger of programmes that offer very similar services but are operated by different ministries, for example in the field of business development services and business incubators. Mr Gurría and Minister Indrawati also launched a new OECD – Indonesia Joint Work Programme (2019-21) that will cover a range of national studies, policy advice and capacity building, while placing greater emphasis on bringing Indonesia closer to OECD bodies and instruments. “Aligning Indonesia to OECD standards can lead to a more dynamic economy and a more inclusive and sustainable growth model,” Gurría said.