INCLUSIVE ECONOMIC DEVELOPMENTFOR INDONESIA

Minister of National Development Planning/Head of National Development Planning Agency

Presented at Paralel Event of Annual IMF-WB Meetings on

‘Inclusive Economic Growth: Reducing Poverty and Inequality’

Bali, 10 October 2018

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Outline

I. Background: Growth, Poverty and Inequality

II. Inclusive Growth

III.Strategies and Policies

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I. SOME BACKGROUNDS: GROWTH, POVERTY AND INEQUALITY

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Indonesia is a huge potential market in Asia

Largest economy in the world15th

5th Largest emerging market with thebest middle class potential

4th Most Populous country in the world

± 5% Private consumptiongrows steadily

Indonesia is projected tobe the largest economyin the world by 2050

4th

High & stable economic growth Progressive infrastructure development

Source: World in 2050, PWC

Source: BPS, Team Analysis

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Indonesia Maintains High and Stable Economic Growth

5,0

4,9

5,05,1

2014 2015 2016 2017

Economic Growth of Indonesia

Source: BPS

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Source : Indonesia’s Central Statistics Agency (BPS)

The Poverty rate has reached single digit in 2018

Although the rate of poverty rate has been declining, the absolute number of the vulnerable issignificant. They are prone to back again to be poor in a chance of any risk such as sick, loss job,food price inflation, natural disaster, and economic crisis.

28,28 27,73 28,59 28,51 28,01 27,76 27,77 26,58 25,95

11,25

10,96

11,2211,13

10,86

10,7010,64

10,12

9,82

9

9,5

10

10,5

11

11,5

23

24

25

26

27

28

29

30

March2014

Sept 2014 March2015

Sept 2015 March2016

Sept 2016 March2017

Sept 2017 March2018

Number of poor people (million) Percentage of poor people (%)

Pe

rce

nt

(%)

Mil

lio

np

eo

ple

72 million people are vulnerable

(1-1.5 National Poverty Line)

25.95 million people under poverty line

* National poverty line 2018 = Rp.401.220 per capita per month (≈ USD2.5 PPP)

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Poverty is higher in rural areas and Eastern Indonesia

Sumber: BPS, Maret 2018

Sumatera 10.39%

(5.98 million people)

8.65%(2.1 million

people)

11.66%(3.9 million

people)

Jawa8%

(13,3 million people)

6.82%(6.6 million

people)

12.81%(6.8 million

people)

Bali-Nusra14.02%

(2.05 million people)

9.18%(0.59 million

people)

17.77%(1.5 million

people)

7.02%(10.14 million people)

URBAN

13.2%(15.8

million people)

RURAL

Maluku-Papua21.2%

(1,5 million people)

5.03%(0,12 million

people)

29.15%(1,4 million

people)

Sulawesi10.64%

(2,06 million people

5.83%(0.44 million

people)

13.68%(1,62 million

people)

Kalimantan6.09%

(0,98 million people)4.3%

(0.32 million people)

7,6%(0.66 million

people)

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Several causes of the slow decline in poverty and inequality

28,5745,35

20,71 20,7919,28

24,8129,77

26,06

38,9845,66

22,9525,17

18,5920,65

28,4230,72

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2014 2007 2014 2007 2014 2007 2014

Urban Rural Rural-D1 Rural-D10

BMT

Bank Pemerintah/SwastaKoperasi

KUD

LKD

BPR

BRI

Need to Improve telecommunications networks

The majority of land is controlled by residents with the highest level of welfare of 20%

Distribution of land holding96% of households in rural areas have experienced more than one type of natural disaster

Number of rural villages by type of natural disaster, 2014

The 10% majority of the lowest welfare level only reaches informal financial services

% People in the village who can access financial sevices

Source : Podes and Susenas

0

0,2

0,4

0,6

0,8

1

0 10 20 30 40Pro

po

rtio

n o

f vil

lage

s h

avin

g

goo

d s

ign

al (

Po

de

s 2

01

4)

Rural poverty rate by province (Susenas 2018)

13 of 34 provinces have bad telecommunications signals in rural areas (below average)

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Gini Ratio of National, Urban, and Rural

0,3

6 0,3

7

0,3

08

0,3

29

0,3

2

0,3

2

0,3

63 0

,37

6

0,3

68

0,3

67 0,3

78

0,4

1

0,3

88

0,4

10

0,4

13

0,4

13

0,4

06

0,4

06

0,4

14

0,4

08

0,4

02

0,3

97

0,3

94

0,3

93

0,3

91

0,3

89

0,422

0,396

0,4250,4250,428

0,4240,428

0,4330,428

0,419

0,41 0,4090,4070,404

0,401

0,34

0,329 0,330,327

0,3190,324

0,319

0,3360,3340,3290,327

0,3160,32 0,32

0,324

0,3

0,32

0,34

0,36

0,38

0,4

0,42

0,44

Ind

ex

The Gini ratio has slowly decreased.

The decline in the national was caused mainly by the decline in the urban area.

Gini ratio in the rural area has increased by 0.004 Gini Points in 2018.

1 2 3

Source: BPS 2014-2018

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Employment Inequality(the less skilled are trapped in jobs with low productivity and wages)

Inequality of access to basic services(e.g. education, health, house, clean

water, sanitation, and electricity)

Lack of social safety nets when shocks occur (illness, job loss, price increases, natural

disasters)

Inequality of Income and Assets(high concentration of wealth in a

small group of people)

1 2 3 4

Main Driving Factors of Inequality in Indonesia

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II. INCLUSIVE GROWTH

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Poverty Reduction, Equity, and Inclusive Growth

Anti povertyprograms

IncreasedPurchasing

Power

multiplier effects

Good Health

Bettereducation

Better nutrition

Higher Productivity & competitiveness

ReducedPoverty

Higher & sustained

Growth

Political stability

ReducedInequality

IncreasedDomestikDemand

More jobopportunity

Source: Rook, 2014

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Inclusive Economic Development for Indonesia

PILLAR III: Improving Access and

Opportunity

PILLAR I :Economic

Growth

PILLAR II :Income Equality

and Poverty Reduction

Sub-Pillar:1. Economic Growth 2. Employment Opportunity3. Infrastructure in Economy

Sub-Pillar: 1. Inequality2. Poverty

Sub-Pillar:1. Human Capability2. Basic Infrastructure 3. Financial Inclusion

Economic development that provides equitableaccess and opportunities to all segment of

society, improves welfare and reducesdisparities between groups and regions.

Each Province in Indonesia from

2015-2017

(34 PROVINCES)

DATA

21TOTAL INDICATOR

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Inclusive Economic Development Index at National Level in 2011-2017

4,83 4,895,08

5,165,29

5,42 5,47

2011 2012 2013 2014 2015 2016

INCLUSIVE ECONOMIC

DEVELOPMENT INDEX

• Note: In general, a score of 1–3 is mentioned as unsatisfactory progress, a score of 4–7 as satisfactory progress, and a score of 8–10 as excellent progress.

4,8

2

4,9

0

4,9

7

4,9

9

5,0

8

5,1

4

5,1

7

2011 2012 2013 2014 2015 2016 2017

Pillar 1: Economic Growth

6,2

4

6,1

5

6,1

7

6,2

6

6,3

6

6,4

4 6,6

4

2011 2012 2013 2014 2015 2016 2017

Pillar 2:Income Equality and

Poverty Reduction

3,7

5 3,8

9

4,3

5 4,5

6 4,7

7

5,0

5

5,0

5

2011201220132014201520162017

Pillar 3:Improving Access and Opportunity

2017

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High economic growth

Low manufacture sector share

Low poverty rate

High human capabilities and access to opportunities

High gender equality and low economic inequality

Bali is the 4th most inclusive province in Indonesia (2017)

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What makes Bali unique?

What makes Bali vulnerable

Internal shocks: • Disasters surrounds island and in the

island (ex: Mt. Agung eruption)• Security issues (Bali Bombing)

External shocks:• Global economic crisis• Travel warning as a result of disaster

and security situation Number and spending of tourists decline Economy is weakening

• Based on this vulnerability assessment, Bali should have growth strategy that mitigate risk of tourism sector

• Revitalize agriculture sector to back up the tourism sector

• Agricultural products must be encouraged to be further processed so that medium and small industries grow and advance

• Tourism as an engine of growth

• Cultural attraction is the backbone of tourism

• Balinese culture is mainstreamed in all aspect of life

• High concern on affirmative policies for the poor

What should be done?

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III. STRATEGIES & POLICIES

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3 MAIN STRATEGIES

Basic Services Development

Comprehensive Social Protection System

Sustainable Livelihoods

Improved Access and Quality of Basic Services for the 40% lowest income households: civil registration, education, health, housing, water, sanitation, and electricity

Productive Economic Community Empowerment Access to credits and micro insurance Vocational trainings Facilitation and partnership

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Strategies For Reducing Poverty, Vulnerability & InequalityIn National Medium-term Development Plan (RPJMN) 2015-2019

2

3

1

8.5-9.5 %

Gov’t Annual Plan Target

2019

0.380 – 0.385

Gov’t Annual Plan Target

2019

Social Assistance: Smart Indonesia Card (KIP), Health Indonesia Card (KIS), Family Welfare Card (KKS) for food voucher and Conditional Cash Transfer, and Assistance for Children, Elderly, Disability, and indigenous people

Social Security: Health and employment Insurance

WELFARE IMPROVEMENT

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Social Protection Budget, 2010-2018

Significant subsidy reduction (from 3.4% to 0,8% PDB) between 2015 and 2018 has been allocated for SP: • Premium of National Health Insurance for the poor.• Social Assistance Programs has been scaled up.

In 2018, significant budget goes to infrastructure and economic investment.

Budget Allocation Based on Intervention and share from Central Government Spending (in Rp Trilion)

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17

733.773

573.703

-

1.770.562

286.385

643.835

20.766

1.984.150

174.227

663.578

46.679

1.864.275

168.877

697.667

58.200

2.111.364

156.228

706.163

60.000

2.220.657

- 500.000 1.000.000 1.500.000 2.000.000 2.500.000

Subsidy

Transfer to Region

Village Fund

Total State Expenditures

2018 2017 2016 2015 2014

Distribution of State Expenditures (Billion Rupiah)

Fuel subsidy allocation decreased significantly in 2015.

The subsidy allocation was transferred for the village fund and regional transfers to reduce inequality.

Subsidy Reform has continued to ensure:• Right targeting• Fiscal sustainability• Energy diversification

Source: Financial Note, various yearsSource: Bappenas

52,7 61,9 69,282 90,1 98,4 99,6 99,6 99,6

121,826,130,6

38,7

60,957,8

76,7 78,3 81,49 85,99

88,7

11,30%10,50%

10,10%

12,60%

12,40%

13,30%

13,60%

13,50%12,80%

13,70%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

0

50

100

150

200

250

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Bantuan Sosial Jaminan Sosial % Terhadap Belanja Pemerintah PusatSocial Assistance Social Insurance % of the total Central Gov’t spending

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Significant in supporting sustainable national development

Enhancing social welfare

Improving social services

Supporting real sector development

Developing funding sources outside the national and regional budget for the

welfare development of people

Encouraging the emergence of a breakthrough model in poverty

alleviation;

Generating the people’s economy

Moderating the social gap

THE ROLE OF ZAKAT & WAQF: Reducing poverty and inequality

ZAKAT WAQF

The potential of

zakat in 2015:

286 Trillion Rp

Only 66 percent of waqf land In

Indonesia is certified

Source: Indonesia Zakat Outlook (2018) Source: Indonesian Waqf Board

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Productive waqf land for VIP rooms. This was a pilot project on productive waqf from grants provided by the Ministry of Religious Affairs. In less than 7 years, the VIP building has reached BEP (break event point).

ISLAMIC HOSPITAL OF MALANG

ZAKAT WAQF

TOWER 165

Tower 165 in Jakarta is

a commercial building

built over mortmain

properties under waqf.

1550 Jabon trees was planted on a waqf

land of 2.5 ha in Bogor, Indonesia. The

value of the harvest that flows its benefits

reaches 750 million rupiah per 6 years.

AGRICULTURE

Micro Hydro Power Plant (PLTMH) in Jambi

Zakat has supported the

construction of Micro

Hydro Power Plant

(PLTMH) to provide

electricity for a total of 806

households from 4 villages,

benefiting approximately

8,000 people.

Empowered Villages based on

Zakat Infaq Sadaqah have been

established and located in 1056

Desa Berdaya. The number

beneficiaries in 2017 reached

almost 2 million people.

EMPOWERED VILLAGE

PROGRAM

THE ROLE OF ZAKAT & WAQF: Reducing poverty and inequality

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Less than

2.3 percent of

its potential

National Collection and Distribution of ZIS in 2014 – 2017 (Billion Rp)

Source: Indonesia Zakat Outlook

The zakat distribution needs to becontinuously improved…

0

1.000

2.000

3.000

4.000

5.000

6.000

7.000

2014 2015 2016 2017

Collection Distribution

Source: Indonesia Zakat Outlook (2018)

National Allocation of ZIS in 2016

5.017,296.060,00

2.931,16

4.007,54

2016 2017

Collection

58.42%66.13%

The absorption rate is increasing, and it isconsidered as “quite effective” in terms of theabsorption of zakat funds used.

The Development of Zakat In Indonesia

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Source: Indonesia Zakat Outlook (2018)

National Allocation of ZIS based on Distribution Sector in 2016

16%

18%

27%

31%

Social Humanities

Dakwah

Education

Economy

8% Health

By 2016, the largest proportion of zakat disbursements was distributed in the education sector, which amounted to nearly 843 billion rupiahs.

The Development of Zakat and Waqf In Indonesia

By 2016, the number of waqf land in

Indonesia reached 4.4 billion m2, spread

over in 435.768 locations throughout

Indonesia….

Use of Waqf Lands

8.4%

10.6%

28.17%

45.02%

Prayer Room

Others

Mosque

School

4.6% Graveyard

3.23%Islamic Boarding School

Source: Indonesian Waqf Board

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Enhancing Village Fund to the lowest economic group:a. Development of basic infrastructures through cash for works programsb. Improvement of basic services c. Local economic development

Developing growth centers outside Java Island through:a. Strengthening infrastructure to connect between economic centers and supporting

areasb. Strengthening local product development and supply chain products for export

Strengthening aspire middle income group through:a. Easiness to get business licensesb. Strengthening micro and small enterprises as well as empowering cooperativesc. Enhancing labor expertise and skill certification

Further Improvement on Inclusive Development

The utilization of information technology to:a. Extend the outreach and better public basic servicesb. Stimulation of innovation and creative ideas that can be enjoyed by all levels

of society

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THANK YOU

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