Publication: Indonesia : The Imperative for Reform
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2001-11
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2013-08-28
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In the one hundred days since assuming office, the new administration of Megawati Soekarnoputri has made little progress on structural and governance reforms. The events of September 11 and the slowdown in the global economy worsened the investment climate in Indonesia, adding to the government's already formidable array of challenges. Indonesia's recovery has lagged behind its neighbors and over half its population vulnerable to poverty, more than any other crisis country. Moreover, its fragile banking and corporate sectors, and the precarious state of its government finances, make the country highly vulnerable to risks--with immediate implications for fiscal sustainability. Donors need to be realistic about what is feasible, given strong vested interests, severe institutional weaknesses, the uncertainties arising from decentralization, and a turbulent transition to democracy. Progress is most needed in the key areas of structural reforms, good governance, and empowering and investing in the poor. Together with fiscal sustainability, they are consistent with the premise that stability, growth, and effective government are the key ingredients for long-lasting and sustainable poverty reduction.
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“World Bank. 2001. Indonesia : The Imperative for Reform. © World Bank. http://hdl.handle.net/10986/15466 License: CC BY 3.0 IGO.”
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Publication Indonesia Development Policy Review : The Imperative for Reform(Washington, DC, 2001-12-10)Indonesia's recovery was already slowing several months before the events of September 11. Political instability had raised social tensions and slowed reforms--fueling capital flight, alarming investors, and delaying official external finance for development. Progress on bank restructuring had slowed and the debt of financially strapped corporations remained largely unresolved. Corruption flourished, unchecked by a justice system that itself was corroded. Regional tensions increased even as the country embarked upon an ambitious decentralization program. And, if real wages are any indication, progress on poverty reduction--encouraging in 1999 and 2000-ground to a halt. Although markets initially welcomed President Megawati Soekarnoputri into office, the new administration has made little progress on structural and governnance reforms in her first one hundred days in office, thus renewing nervousness in markets and worrying external donors and creditors. The events of September 11 have emphatically underscored the urgency of Indonesia's reform priorities. but donors need to be realistic about what is feasible, given strong vested interests, severe institutional weaknesses, the uncertainties arising from decentralization, and a turbulent transition to democracy. Progress is most needed in the key areas of structural reforms, good governance, and empowering and investing in the poor.Publication Indonesia Development Policy Report : Beyond Macroeconomic Stability(Washington, DC, 2003-12-04)The year 2004 will mark another crucial step in Indonesia's long-term transition. The country will go to the polls to elect new national and regional Parliaments, and for the first time in the history o f the Republic, to directly elect a President. This milestone in the country's democratization is accompanied by one in economic policy: for the first time since the onset o f the crisis, the Government will not have a program supported by the IMF. The Government's decision to graduate from its IMF program is warranted by the strong improvements in the country's macroeconomic conditions, and has been broadly welcomed by the markets and the international community. The Government's "Economic Policy Package Pre and Post IMF" or White Paper, issued as a presidential instruction on September 15th has helped build confidence in the Government's policies in the election year ahead. The policy package is intended to "bridge the credibility gap." The White Paper is a unique document: it is the first time that the Government commits itself transparently to a time-bound action plan to implement policies. The document shows continuity in macroeconomic policies and financial sector reforms, but also proposes a set of specific policy and institutional measures to address issues that have undermined the country's investment climate. While the timetable for adopting these measures is a short term one - fifteen months - many o f the proposed measures address fundamental longer term problems, and some will take several years to see through fully. The private sector, which has a high " stake in the measures included in the paper, has emerged as an independent monitor of progress. Since the White Paper is so central to Indonesia in the year ahead, much of this brief is devoted to discussing it. Beyond recent developments, the report discusses and analyzes critical policy actions from the White Paper. The report also points at the White Paper measures that may not necessarily be in line with the stated goals of the document. And finally, the report identifies policies that are needed beyond the White Paper to ensure Indonesia builds on the macroeconomic stability achieved to attain more rapid growth and poverty reduction.Publication Indonesia - Accelerating Recovery in Uncertain Times : Brief for the Consultative Group in Indonesia(Washington, DC, 2000-10-13)The study reviews Indonesia's recovery so far, which in spite of only modest growth, is taking hold, and its base has expanded beyond consumption. With inflation under control, real wages are rising again, and poverty declined from a peak of over twenty three percent. The rapid export growth, and high oil prices were factors to offset capital outflows, thus, Indonesia's cushion of international reserves increased, lowering the deficit, and limiting financing needs, which resulted in bank, and corporate emergence. But financial markets were doubtful of the real economic developments, aggravated by political turmoil, and the developments in East Timor, which created market uncertainty. However, the study reflects optimism on the country's agenda, encouraged by the Government's program to accelerate recovery, with broad domestic and international support. The study examines policy options for fiscal sustainability, and the role of donors, and, assesses poverty within a constructive strategy for the future, exploring as well governance improvement through legal and judiciary reforms, suggesting the rule of law is still far from being assured. The study recommends changes within the political process, and to its legal system and civil service, as well as changes from the role of the military, to the way Government handles its finances.Publication Indonesia : Private Sector Development Strategy(Washington, DC, 2001-01-04)The report reviews the Bank's private sector development strategy in Indonesia, stipulating that the country's potential will not be realized without a pattern of private sector activity, - different from the past - but, taking the opportunity offered by the crisis to make fundamental changes in the business environment, and in how business is conducted. The first priority calls for the banking, and corporate sectors to speed up the resolution of corporate debt, and ease financial flows for investment, and working capital to resume. Second, the structural inefficiencies, partly conducive to the crisis, and to its long lasting effect, need to be overcome; therefore, reforms should enable Indonesia to become a modern market economy, able to avoid future crises. This encompasses fighting corruption in the public administration, ensuring the rule of law through the court system, reinforcing property rights, and dispute resolution mechanisms, and, ensuring transparency and corporate governance. Third, broad-based, and sustainable economic growth need to be ensured by measures such as removal of obstacles to small, and medium enterprise (SME) activity, as well as SME development promotion, including physical, and social infrastructure building. Finally, the creation of an infrastructure, and regulatory framework to take full advantage of new information/communications technologies, is paramount.Publication Indonesia : Selected Fiscal Issues in a New Era(Washington, DC, 2003-02-14)Despite the substantial progress in managing its fiscal challenges post-1997 financial crisis, Indonesia's risks to the budget have not disappeared, though the Government continues to be committed to fiscal consolidation. While debt sustainability is improving, the budget remains vulnerable to shocks, and, large non-discretionary spending (interest payments, transfers to the regions, personnel spending) still constrain the use of fiscal policy for macroeconomic stabilization, and social risk protection, and, as the fiscal situation improves, and decentralization proceeds, a rethinking of resource allocation becomes necessary. This report assesses Indonesia's progress in dealing with challenges that have altered the fiscal system since the crisis, and reviews options for fiscal consolidation, as well as sectoral issues in the new decentralized environment, including public expenditure management reforms. Suggestions include an increased revenue mobilization to make the budget more risk proof, and an improved tax administration, rather than streamlining the tax structure alone, while the Government's decision to eliminate the fuel subsidy remains critical for fiscal consolidation (which has little social implications). Moreover, the large interest payments burden incurred during the crisis, is crowding out development spending, and similarly, increased transfers to local governments are limiting discretionary spending (which could be accompanied by a decrease in central development spending in areas of regional responsibilities). A refinement of the budget management system is necessary, where the Finance Law would be instrumental in establishing accountability between the Executive, and Parliament.
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