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Investing in Human Capital for Indonesia’s Economic Transformation

Indonesia has very high benefit-cost ratios for investments in stunting reduction. Every dollar spent generates USD 48 in economic return (Hoddinott et al)

Indonesian children who were stunted in 1993 demonstrated lower cognitive function as young adults in 2014-15, spent fewer years enrolled in formal education, and had lower adult earnings (Lancet)

Stunting is associated with a higher probability of young Indonesian men being either not employed or in school/training (WB 2015)

The cost of Non-Communicable Diseases is expected to be USD 4.47 trillion from 2012-2030 (World Economic Forum)

An increase of 50 points in the PISA test scores would increase the long-term economic growth rate by 0.93 percentage points annually (Hanushek et al).

Child marriage caused a loss of at least 1.7% of GDP in 2014 (UNICEF, 2015).

There is an abundance of evidence

Human Capital is key to Indonesia’s Economic Transformation

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Investments in human capital are directly linked to Indonesia’s future growth, productivity and competitiveness

Investments in early childhood development and nutrition have large dividends for the country, communities and households

A skilled workforce will be able to meet future labor demands across the economy and increase country and individual earnings

Improving gender equity is key to sustainable growth and development

Demographic Trends and Rapid Technological Progress emphasize the Importance of Human Capital

Demographic Dividend Technology

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… But, Indonesia risks growing old before becoming richThe working share of working age population is projected to peak at about 70% in 2031, less than 15 years (IMF, 2018)

Demographic trends are expected to increase annual real GDP growth by close to 1 percentage point of GDP between 2020-2050 (IMF, 2018)…

Reaping the demographic dividend requires human capital, productivity and sufficient quality jobs

Technological advancement doesn’t only require human capital, it also provide great potential to accelerate human capital growth and transformation

Technological progress places a premium on higher-order skills, such as digital and “soft” skillsProjected shortage of 9 million skilled and semi-skilled ICT workers between 2015-2030 (World Bank, 2018)This, along with a focus on lifelong learning, is required to adapt to rapid technological change

Technology is changing the nature of work and providing opportunities to increase growth and productivityDigitalization has the potential to expand Indonesia’s economy by USD 150 billion (10% of GDP) and add 3.7 million jobs, by 2025 (McKinsey, 2016), ie a new driver of growth

However, due to past decades of underinvestments, Indonesia’s human capital stock has limitations…

Unskilled population and labour force

• 55% of secondary school graduates students are functionally illiterate. With current performance,, it will take approximately 50 years to reach the OECD’s average PISA score in Math, while for poorer students it will take 136 years

• Of all new entrants to the labor force in 2017, 11 percent had completed university or higher education (Sakernas, 2017).

• Only 5% of firms provide training for their staff

Gender Inequality

• 50% female labor force participation rate represents a significant loss to the economy

• High child marriage rate, with more than 25% of girls marrying before reaching adulthood.

• Nationally, women are 3.5% less literate than men

• In Indonesia, for every dollar a man earns, a woman earns 70 c (ILO)

Unhealthy population

• Low public health expenditure: 1.4% of GDP

• High TB prevalence (391/100,000)

• Epidemiological transition with increase in non-communicable diseases; 85 million smokers

• High stunting rates

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The World Bank’s Human Capital Index

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SURVIVAL SCHOOL HEALTH HCI

Children who don’t survive don’t grow up

to become future workers

Contribution of quality-

adjusted years of school to

productivity of future workers

Contribution of health (average

of ASR and stunting) to

productivity of future workers

Productivity of a future worker

(relative to benchmark of

complete education and full health)

X X =

Indonesia’sHuman Capital Index

Component 1: Survival

Probability of Survival to Age 5

0.974(2016)

Component 2: Learning

Expected Years of School

12.3(2017)

Harmonized Test Scores

403(2015)

Component 3: Health

Survival Rate from Age 15-60

0.828(2017)

Fraction of Children Under 5 Not Stunted

0.664(2016)

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Index score: 0.53A child born in Indonesia today will be 53 percent as productive

when she grows up as she could be if she enjoyed complete education and full health.

*Does not reflect new 2018 stunting data

Implementing important reforms at scale

Ambitious and successful efforts to address stunting:

o Scaling up National Strategy to Accelerate Stunting Reduction nationwide to 514 districts and 75,000 villages over the next 5 years

o Strong ownership by President and Vice President, and commitment of 22 ministries to achieve annual targets

Expanded Conditional Cash Transfer program from 3.5 mn households in 2016 to 10 mn in 2018; benefit levels will double in 2019

Increased investments in skills reform, including 88% budget increase to improve curriculum and capacity of training institutions to respond to private sector needs

Indonesia’s current efforts are significant and impressive

Investing large sums every year in Indonesia’s future (2018 numbers):

$31.7 billion in Education (20% of the budget)

$2.2 billion in Water and Sanitation

$14 billion in Health

$6.6 billion in Village transfers (to increase to $8.9 billion in 2019)

$1.4 billion in Conditional Cash Transfers (to be doubled in 2019), and $1.4 billion in food assistance for the poor and vulnerable.

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Challenges to improve quality of human capital

KEY COUNTRY STATISTICS:

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Budget Allocation and Efficiency

Low Public Health Expenditure (1.4% of GDP) and Social Protection spending (0.7% of GDP)

Although Indonesia and Vietnam both allocate 20% of their national budget to education, more than 55% of Indonesians who finish secondary education are functionally illiterate, compared to 14% in Vietnam (PISA)

Managerial Capacity

Subnational governments are responsible for services, but lack capacity, authority and incentives

Issues of quality of data on expenditure, inputs and results exist at all levels—this limits the ability to use data for effective policy making

Food Prices

Indonesian consumers pay 70 percent more for rice than do consumers in the Greater Mekong River region

Jakarta is the most expensive capital city in emerging Asia for fruits and vegetables

Trade restrictions measured to increase domestic food prices by 33% (Marks, 2017)

Gender Inequality

Indonesia’s marriage laws do not treat females and males equally—females can be married at 16, while for males the age is 19; rate of child marriage is 23% (2015).

Lack of access to childcare arrangements is correlated with women’s withdrawal from work (Halim et al., 2017).

How can Indonesia transform its human capital?― Provide continued, strong leadership from the top

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Spend more and better –Increase investments and improve quality of public policy to improve human capital outcomes

Embed the commitment to human capital development in the new Medium Term Development Plan (2020-24)

Ensure continued high-level, comprehensive and multi-sectoral commitment across ministries and local governments – building on the highly successful stunting program

Continue to reform Supply and Demand Side Human Development Programs

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Accelerate stunting reduction through nationwide scale-up of ambitious multi-sectoralSTRANAS stuntingEstimates indicate STRANAS Stunting could reduce stunting from to 22% by 2022

Reform health insurance

program (JKN) to address

fiscal sustainability and

ensure equitable access to

quality care

Reform the labor market and skills development system to prepare and upskill workers based on in-time market needs and responding to the demands of workers and industry

Provide an integrated social protection system for all Indonesians that make the poor and vulnerable more resilient to shocks and promote economic mobility

Comprehensive education reform to improve teacher quality and strengthen governance

Implement Public Policy Reforms to Accelerate Human Capital

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Collect More to Spend More and Better

Continue to increase public spending on human capital, in particular health and social protection

Implement earmarked sin taxes, including increased tobacco taxes: Increasing tobacco taxes to the legal limit would raise $650 mn/year

Improve Managerial Capacity

Fix management problems at all levels of government and create a system of accountability

• Use rewards and sanctions to incentivize multi-sectoral and multi-level coordination

• Use the budget to drive change; use results-based fiscal transfers to empower districts to address service delivery challenges

Improve measurement and data quality by strengthening national surveys (accuracy and sample sizes) and establishing high quality administrative data systems on coverage and quality of service delivery at subnational levels

Tackling barriers to

Food Imports

Improve availability and access to nutritiously diverse food for consumers

Reduce barriers to food trade and investment, enhancing competitiveness and efficiency

Improve Gender

Equity

Lower barriers to enter the workforce –access to childcare, parental leave

• Public preschool expansion in Indonesia increases women’s employment by 13.3 percent (Halim et al.,

2018)

Increase financial inclusion and access to credit to promote women’s entrepreneurship and business opportunities

Ensure gender parity in wages

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Use Technology and Innovation to Transform Human Capital

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Use Technology and Innovation to Transform Human Capital

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Use Technology and Innovation to Transform Human Capital

Telemedicine for universal health coverage (Ghana)

Ghana Health Service and Ministry of Health set up teleconsultation centers, allowing nurses, doctors, and specialists to be made digitally available 24 hours a day for patients and community-based health workers

Drone delivery for blood to remote areas (Rwanda)Partnership between Zipline and Rwanda’s health ministry delivered over 5,500 units of blood and reduced delivery times from 4 hours to an average of 30 minutes

“Tusome” -technology to improve education service delivery (Kenya) MOE Curriculum Support Officers use tablets to conduct classroom

observation and student assessments, and enhance teachers' capacity to effectively deliver classroom instruction

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Use Technology and Innovation to Transform Human Capital

Large potential to build on global experiences and Indonesia’s technological innovations to accelerate human capital transformations

Also use Technology and Social media to create a social movement for change

Establish partnerships and engage with the private sector, youth and civil society

Indonesia has an impressive set of innovations in the private sector

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Use Technology and Innovation to Transform Human Capital

Go-Jek Go-Desa

Step by step guidance for each HDW main task

Real time data input for each target 1,000 day household

Automated real-time diagnostic reports by producing stunting convergence data (score cards) at the household and village levels

Links performance payment to task completion.

eHDW

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TERIMA KASIH