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Indonesia Economic Quarterly, July 2014 Hard choices. Ndiam é Diop Lead Economist. The new administration will face major near-term challenges. Ending extreme poverty and achieving shared prosperity? OR Persistent pockets of extreme poverty and many Indonesians left behind?. - PowerPoint PPT Presentation
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Indonesia Economic Quarterly, July 2014Hard choices
Ndiamé Diop
Lead Economist
The new administration will face major near-term challenges
Hard choices 2
Poverty and
inequality reduction
Economic growth
Fiscal pressures
External pressures
Ending extreme poverty and achieving shared prosperity? OR
Persistent pockets of extreme poverty and many Indonesians left behind?
International backdrop
Hard choices 3
Jan-12 Jul-12 Jan-13 Jul-13 Jan-1450
60
70
80
90
100
110
120
Coal
Palm oil
Brent oil
Rubber
Copper
Source: World Bank
…but most global commodity prices, except oil, continue to decline(index, January 2012 = 100, 3mma)
High-income economy growth is strengthening…(manufacturing PMI, +50=expansion)
44
46
48
50
52
54
56
58
60
Euro area
US
Japan
Source: Markit
Economic growth - Will Indonesia return to 6% growth?
Hard choices 4
(annual growth, percent)
Source: BPS; World Bank staff calculations
-1
0
1
2
3
4
5
6
7
8East Asia Pacific (excl. China & Indonesia)Indonesia
Forecast
2009 2010 2011 2012 2013 2014 (1)
2014 (2)
0
100
200
300
400
500Fiscal deficit Debt payments
Note: 2014 (1) is initial Budget (APBN), (2) is revised Budget (RAPBN-P)Source: Ministry of Finance; World Bank staff calculations
Fiscal risks are building up steeply
Hard choices
5
… and contributed to a substantial rise in government financing needs
2011 2012 2013-2
3
8
13
18
23VAT
Income tax (non-oil and gas)
Oil and gas revenues (tax and non-tax)
Intl. trade taxes
All other revenues
Significantly weaker revenue growth has added to expenditure-side pressures…(contributions to overall nominal revenue growth, percentage points)
Source: Ministry of Finance; World Bank staff calculations
(IDR trillion)
External balance still in focus despite macro stabilizing measures
Hard choices 6
Source: CEIC; World Bank staff calculations
…which have been hit by ongoing commodity sector challenges(contributions to export value growth yoy, percentage points)
After successful macro stabilization, focus now on weak exports…(export and import USD values, yoy growth, 3mma)
Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14-20
-10
0
10
20
30
40
50
Exports
Imports
Source: CEIC; World Bank staff calculations
-20
-15
-10
-5
0
5
10 Non commoditiesCommodities
Moderate pace of growth expected to continue
Hard choices 7
July IEQPrevious
(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
Addressing near-term macro challenges
Reinvigorating growth
Fiscal pressures
External pressures
…AFFECTS THE CAPACITY TO DELIVER ON KEY
STRUCTURAL REFORMS:
- SUPPLY-SIDE REFORMS
Infrastructure
Skills
Functioning of markets
- REFORMS TO ENSURE SHARED PROSPERITY
Local access to services
Social protection
Management of disaster risks & resilience
FISCAL REFORMS
Redirecting spending
Mobilizing revenue
…and achieve key development
outcomes
Faster poverty reduction
Reduced inequality
Assessing the hard policy choices ahead
Hard choices 8
Inequality is a growing problem in Indonesia
9
Inequality on the rise in recent years… …and increasing faster in Indonesia than in its neighbors
Ch
ina
Ind
on
esi
a
La
os
Ind
ia
Vie
tna
m
Ca
mb
od
ia
Ph
ilip
pin
es
Ma
lays
ia
Th
aila
nd
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
Source: Kanbur, Rhee and Zhuang, 2014, “Inequality in Asia and the Pacific”; World Bank staff calculations
(percent, LHS; percentage points, RHS)
Note: Poverty rates are March BPS estimates; 2014 GDP growth: World Bank projectionSource: BPS; World Bank staff calculations
(1990-2011 annual average change in Gini coefficient, percentage points)
Hard choices
20002002
20042006
20082010
20122014
0
5
10
15
20
25
0
10
20
30
40
50
GDP (LHS)
Official poverty rate (LHS)
Inequality (Gini coefficient, RHS)
10
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
Why does inequality matter for Indonesia?
Hard choices
11
Children are born with unequal opportunities
What is causing the rise in inequality?
Source: Susenas; DHS; World Bank staff calculations
Unskilled birth attendant
Not fully immunized
16-18 year olds not enrolled
No clean drinking water
No proper sanitation
Decile 10, urban Decile 1, rural
Returns from jobs favor the rich and well-educated
SMP
SMA
Tertiary
SMP
SMA
Tertiary
0
20
40
60
80
100
1202003
Worker Wage Premium
Household Con-sumption PremiumSource: Sakernas; Susenas; World Bank staff
calculations
(lack of access, percent) (wage and consumption premiums compared to workers with primary education, percent)
Hard choices
12
What is causing the rise in inequality?
The poor are more vulnerable to shocks to their income
All households face risks, for example health, cost of living shocks, and natural disasters, that can affect their income
The rich have access to more efficient coping mechanisms to respond to shocks (savings, insurance, good jobs, etc.); the poor often do not
The poor are less able to take risks to increase their income
The rich benefit from greater returns to capital(annual change in real terms, percent)
Source: Indonesia Stock Exchange; BPS; Sakernas; World Bank staff calculations
Hard choices
-80
-60
-40
-20
0
20
40
60
80
100 Real formal wages
Real informal wages
Real JCI price return
13
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
What can be done to address rising inequality?
Hard choices
Thank youJuly 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