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Indonesia’s moment of great
opportunity
Huge boost in regional spending;
education spending hits 3.8% of GDP. THE World Bank has
declared that the post-crisis transition of the Indonesian
economy is over and the country has sufficient financial
resources to address its development needs.
The bank’s analysis suggests Asia’s third most populous nation
is making a highly successful transition from an authoritarian
government to a more democratic system.
Additionally, there has been reductions in central government
spending and an unprecedented concurrent increase in funding for
regional and district administrations.
The World Bank’s recent Indonesia Public Expenditure Review did
not mention the widespread belief that initial restructuring
efforts demanded by the World Bank and International Monetary
Fund had prolonged the recovery process.
However, it appears that adoption of tough policies designed to
promote structural adjustments and to greatly reduce government
subsidies and improve fiscal management is resulting in
outstanding outcomes.
The report said prudent macroeconomic policies and extremely low
budget deficits had been instrumental in the Indonesian
recovery.
“Now is the time to build on the achievements of the past few
years and to spend its financial resources effectively to
improve the quality of education, expand healthcare and close
critical infrastructure gaps in order to reduce poverty and
build a competitive economy,” according to the report’s
executive summary.
It said there were “three defining moments” in the way public
resources had been managed and allocated, the first of these
being the 1997-98 crisis period when the economy contracted;
public spending fell and debt and subsidies increased.
Next came the “2001 big bang decentralisation” when one third of
central government expenditure was transferred to the regions.
The third “defining moment” in 2006 saw the Indonesian
government with an extra US$15 billion to spend due to
reductions in fuel subsidies in the previous year; debt levels
fell to 41% of gross domestic product; aggregate expenditure
increased by 20% and transfers to sub-national governments grew
by 32%.
The World Bank said the extra financial resources were
equivalent to around 7% of GDP and was “the largest increase in
additional fiscal resources since the 1973-74 oil revenue
windfall, providing a tremendous window of opportunity for
Indonesia to upgrade its public services.
“If Indonesia is to stay competitive, then it is crucial that
some of these precious additional resources are channelled
towards higher quality and more accessible secondary and
tertiary education, an improved and more equitable health system
and better infrastructure provision.”
The bank said US$10 billion had been freed up by the withdrawal
of fuel subsidies though it was not clear how much this might
impact on poverty levels within the country.
It said an additional US$5 billion had been generated from
increasing revenues and declining debt service obligations with
similar amounts likely to be available this year and beyond.
These are possible evidence of a broad-based recovery that could
lift many more people out of poverty for a return to levels
prior to the 1997 economic crisis.
The World Bank report suggests that “this is a moment of great
opportunity” for the sprawling Indonesian republic.
It said despite the reduction in fuel subsidies in the budget
still accounted for US$12 billion – equivalent to 15% of total
expenditure last year.
The report said Indonesia’s oil production had plunged by 40%
since 1996 and the country roughly consumes about the same
amount as it produces, making changes in international oil
prices relatively unimportant in terms of its national budget.
The World Bank said that in terms of spending, Indonesia was one
of the most decentralised countries in the world with
Indonesia’s provinces and districts now spending a record 37% of
public funds.
“This represents a level of fiscal decentralisation higher than
the OECD average and higher than any other East Asian country
except China.”
Government spending on education now accounts for 17.2% of total
spending, the highest share of any sector, and was comparable to
spending in many other low and middle income countries.
Education spending reached 3.8% of GDP last year, up from 2.4%
in 2001. Although this is on par even with OECD countries, it is
considerably less than up to 28% of national budgets allotted to
education by three neighbouring countries – Malaysia, Thailand
and the Philippines.
It said that despite steep increases since 2002, public spending
on health remained below 1% of GDP, while public infrastructure
spending has not recovered from its post-crisis low and is only
3.4% of GDP.
The report said the degree of corruption would determine if
these expenditure changes will produce lasting benefits for the
people.
“With the massive shift in resources to lower levels of
government, fighting corruption at the sub-national level is now
as critical as tackling it at the central level,” it said.
Infrastructure spending also needs a big boost with Indonesia
having fallen behind its neighbours in terms of public access to
water, energy and sanitation services. Some 40% have access to
piped water and one third of Indonesians – over 70 million
people – have no access to electricity.
The World Bank report also commented on regional diversity with
Java being one of the most densely populated islands in the
world and Papua is one of the least densely populated.
“Poverty rates range from less than 3% in some cities (Denpasar
in Bali and Bekasi in West Java) to more than 50% in West Papua
and Papua (Manokwari and Puncak Jaya respectively).”
 
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