74488 INDONESIA ECONOMIC QUARTERLY Policies in focus December 2012 INDONESIA ECONOMIC QUARTERLY Policies in focus December 2012 Preface The Indonesia Economic Quarterly reports on and synthesizes the past three months’ key developments in Indonesia’s economy. It places them in a longer-term and global context, and assesses the implications of these developments and other changes in policy for the outlook for Indonesia’s economic and social welfare. Its coverage ranges from the macroeconomy to financial markets to indicators of human welfare and development. It is intended for a wide audience, including policy makers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. This Indonesia Economic Quarterly was prepared and compiled by the macro and fiscal policy cluster of the World Bank’s Jakarta office, under the guidance of Sector Manager and Lead Economist, Jim Brumby, Economic Advisor and Lead Economist, Ndiame Diop and Senior Economist, Ashley Taylor. The team included Magda Adriani (commodity prices), Shakira Jones (real sector), Fitria Fitrani (trade), Faya Hayati (prices), Brendan Coates (capital account and financial sector), Ahya Ihsan (fiscal) and Alex Sienaert. Additional contributions were received from Kiyoshi Taniguchi (Food Law), Moez Miaoui and Stefan Handoyo (corporate governance), Edgar Janz, Vivi Alatas and Astrid Savitri (minimum wages), Fook Chuan Eng and Iwan Gunawan (Jakarta flood mitigation), Jon Jellema (village infrastructure survey), David Lawrence (disaster recovery), Djauhari Sitorus, Neni Lestari (banking) and The Fei Ming (Corporate sector). Alex Sienaert, Arsianti, and Ashley Taylor shared the editing and production. Yue Man Lee, Soekarno Wirokartono, Chris Manning, Sjamsu Rahardja, Bill Wallace, Arlan Rahman, Anita Kendrick, Shamima Khan, Sudarno Sumarto and Mark Vothknecht provided detailed comments and input. Dini Sari Djalal, Farhana Asnap, Indra Irnawan, Jerry Kurniawan, Nugroho, Marcellinus Winata and Randy Salim organized the dissemination and Titi Ananto, Sylvia Njotomihardjo, and Nina Herawati provided valuable administrative support. This report is a product of the staff of the International Bank for Reconstruction and Development / The World Bank, supported by funding from the Australian Government - AusAID under the Support for Enhanced Macroeconomic and Fiscal Policy Analysis (SEMEFPA) program. The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent, AusAID or the Australian Government. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Cover and chapter photographs are copyright PT. Unilever. All rights reserved. For more World Bank analysis of Indonesia’s economy: For information about the World Bank and its activities in Indonesia, please visit www.worldbank.org/id In order to be included on an email distribution list for this Quarterly series and related publications, please contact madriani@worldbank.org. For questions and comments relating to this publication, please contact asienaert@worldbank.org. Table of contents   Executive Summary: Policies in focus iv A.   ECONOMIC AND FISCAL UPDATE 1  1.  Global economic growth remains weak, likely improving only modestly in 2013 1  2.  Indonesia’s economy continues to grow robustly, moderating slightly in Q3 2  3.  Exports are still under pressure but capital inflows have been strong 6  4.  Inflation softness continues but cost-push pressures emerge for 2013 8  5.  Foreign investor portfolio flows return while credit growth moderates 11  6.  Fiscal deficit widens on rising subsidy spending and subdued revenue growth 14  7.  Policymakers face an array of external and domestic risks in 2013 19  B.   SOME RECENT DEVELOPMENTS IN INDONESIA’S ECONOMY 21   1.  Will rising minimum wages affect job creation in Indonesia 21  a.  Minimum wage level and employment protection legislation in Indonesia.............................. 22  b.  Effects of minimum wage increases on job creation ................................................................. 24  c.  Changes in the process for setting minimum wages ................................................................. 25  d.  Adopting a long-term view on job creation and worker protection .......................................... 25  2.  Building Jakarta’s resilience to frequent flooding 27  a.  The severity of flooding has increased, imposing significant costs ........................................ 27  b.  Weather patterns, urbanization, subsidence and climate change all play a role… ................. 28  c.  …but actions can be taken to improve Jakarta’s resilience to floods ...................................... 30  C.   INDONESIA 2014 AND BEYOND: A SELECTIVE LOOK 32   1.  Indonesia’s successes in disaster reconstruction and preparedness 32  a.  The challenges posed by the Aceh, Nias and Java disasters were unprecedented ................ 32  b.  Multi-donor funds supported Government-led relief and reconstruction efforts .................... 33  c.  Applying the lessons that Indonesia has learned on disaster recovery....................................... 35  2.  Village infrastructure for basic service delivery 37  a.  What is the Village Infrastructure Census and why is it necessary? ........................................ 37  b.  The VIC combines a range of indicators to provide Supply Readiness Indices ...................... 37  c.  Health Service Supply Readiness is highest in Java and Bali .................................................. 39  d.  …with similar spatial patterns for Education Supply Readiness… .......................................... 40  e.  …and both are highly correlated with Transportation Supply Readiness ............................... 41  f.  Extensions and policy applications ............................................................................................. 43  APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS 44   LIST OF FIGURES Figure 1: Investment growth has so far remained resilient to the downturn in commodity prices and exports .................................................................................................................... vi  Figure 2: Increases for 2013 may well push minimum wages higher relative to regional neighbors ..................................................................................................................... viii  Figure 3: Improved conditions in the US and a bottoming-out in China but no upturn yet for the Euro Area or Japan ........................................................................................................ 2  Figure 4: Commodities remain well off their highs, though some have gained in recent months 2  Figure 5: Real GDP growth moderated to 6.2 percent year-on-year in the third quarter of 2012… 2  Figure 6: …while nominal GDP growth dipped to its lowest level since September 2009 as GDP deflator growth slowed .................................................................................................. 2  Figure 7: Private consumption and investment continue to be the key drivers of growth............. 4  Figure 8: Manufacturing continued to perform strongly in the third quarter while services growth moderated .......................................................................................................... 4  Figure 9: Inventory levels appear elevated ......................................................................................... 4  Figure 10: The balance of payments returned to a small surplus in the third quarter of 2012 ...... 6  Figure 11: Exports remain under pressure… ..................................................................................... 7  Figure 12: …while portfolio inflows have picked up again ................................................................ 7  Figure 13: Headline and core inflation remain at historically low levels .......................................... 8  Figure 14: The Rupiah has weakened considerably, though less so on a trade-weighted basis 11  Figure 15: The bond market rallied strongly this quarter while equities have fluctuated since mid-October… .............................................................................................................. 12  Figure 16: …and Rupiah depreciation has been moderate in real terms and compared with other commodity exporters ................................................................................................... 12  Figure 17: Credit growth has slowed since May............................................................................... 12  Figure 18: The Budget deficit through October expanded on higher energy subsidy spending . 14  Figure 19: Revenue collection has moderated on the back of continued weaker income tax and non-tax revenue receipts ............................................................................................. 14  Figure 20: The volume of subsidized fuel continues to rise in the absence of fuel subsidy reform ............................................................................................................................ 16  Figure 21: Excess subsidized fuel use relative to quota is centered in densely populated cities, mining, and border areas............................................................................................. 16  Figure 22: After 10 months of 2012, some of the budget allocations remaining to be spent are significant ..................................................................................................................... 17  Figure 23: Capital and subsidies spending set to increase in 2013 ............................................... 18  Figure 24: Increases for 2013 will likely push Indonesia’s minimum wages above regional neighbors ...................................................................................................................... 21  Figure 25: Indonesia’s workforce is highly informal… .................................................................... 23  Figure 26: …but for those in the formal sector, minimum wages signal increases for all ........... 23  Figure 27: Non-compliance tends to increase with rising minimum wages… ............................... 24  Figure 28: …and small-sized firms tend to be less compliant ........................................................ 24  Figure 29: The 2007 flood caused sizeable financial damage but much greater economic losses…......................................................................................................................... 28  Figure 30: …and these economic losses were focused on larger industrial firms ....................... 28  Figure 31: Densely-populated slum areas were heavily affected by the 2007 flood ..................... 29  Figure 32: The 2007 flood would have been less severe if existing facilities were fully functioning .................................................................................................................... 30  Figure 33: A strategic framework for effective disaster reconstruction......................................... 34  Figure 34: Health Supply Readiness is higher in Java and Bali and falls in eastern Indonesia... 39  Figure 35: The spatial pattern of Education Supply Readiness is similar to that for health ........ 40  Figure 36: Areas with poor supply of health or education services tend to also have poor accessibility by public transport ................................................................................. 42  Figure 37: Half of the sub-districts in the Papuan provinces do not have any mobile phone signal ............................................................................................................................. 42  Figure 38: The quality of primary school teachers can vary markedly even within sub-districts 42  LIST OF APPENDIX FIGURES Appendix Figure 1: Quarterly and annual GDP growth ................................................................... 44  Appendix Figure 2: Contributions to GDP expenditures ................................................................. 44  Appendix Figure 3: Contributions to GDP production..................................................................... 44  Appendix Figure 4: Motor cycle and motor vehicle sales ............................................................... 44  Appendix Figure 5: Consumer indicators ......................................................................................... 44  Appendix Figure 6: Industrial production indicators ....................................................................... 44  Appendix Figure 7: Real trade flows ................................................................................................. 45  Appendix Figure 8: Balance of Payments ......................................................................................... 45  Appendix Figure 9: Goods trade balance ......................................................................................... 45  Appendix Figure 10: Reserves and capital inflows .......................................................................... 45  Appendix Figure 11: Indonesia’s major term of trade indices and other commodities ............... 45  Appendix Figure 12: Inflation and monetary policy ......................................................................... 45  Appendix Figure 13: Monthly breakdown of CPI .............................................................................. 46  Appendix Figure 14: Inflation among neighboring countries ......................................................... 46  Appendix Figure 15: Domestic and international rice prices .......................................................... 46  Appendix Figure 16: Poverty and unemployment rate .................................................................... 46  Appendix Figure 17: Regional equity indices ................................................................................... 46  Appendix Figure 18: Dollar index and Rupiah exchange rate ......................................................... 46  Appendix Figure 19: 5-year local currency government bond yields ............................................. 47  Appendix Figure 20: Sovereign USD Bond EMBI spreads .............................................................. 47  Appendix Figure 21: International commercial bank lending ......................................................... 47  Appendix Figure 22: Banking sector indicators ............................................................................... 47  Appendix Figure 23: Government debt ............................................................................................. 47  Appendix Figure 24: External debt .................................................................................................... 47  LIST OF TABLES Table 1: Commodity prices remain historically high in nominal terms but recent performance has been mixed .............................................................................................................. v  Table 2: Under the baseline scenario Indonesia’s growth is projected at 6.3 percent in 2013 .... vii  Table 3: Under the baseline scenario GDP growth of 6.1 percent is projected for 2012, rising to 6.3 percent in 2013 ......................................................................................................... 5  Table 4: Budget disbursement rates through end-October remain relatively low......................... 15  Table 5: The fiscal deficit will expand in 2012 on higher energy subsidy spending and a moderation in revenue collection ............................................................................... 19  Table 6: Worker productivity lags behind ......................................................................................... 21  Table 7: The composite Supply Readiness Indices include a range of indicators for health, education and transportation ...................................................................................... 38  Table 8: Some of the gaps in Health Service Supply Readiness are striking, such as access to secondary health care.................................................................................................. 40  Table 9: The Education Supply Readiness Gaps indicates the need for to improve physical quality of supply ........................................................................................................... 41  LIST OF APPENDIX TABLES Appendix Table 1: Budget outcomes and projections..................................................................... 48  Appendix Table 2: Balance of Payments .......................................................................................... 48  Appendix Table 3: Indonesia’s development indicators at a glance .............................................. 49  LIST OF BOXES Box 1: Indonesia’s new Food Law ....................................................................................................... 8  Box 2: Why has the depreciating Rupiah not had a greater impact on inflation? ........................ 11  Box 3: Developments in Indonesia’s corporate governance framework ....................................... 13  Box 4: Labor regulations: a “plateau� effect .................................................................................... 24  Box 5: The impact of the major 2007 flood on Jakarta .................................................................... 28  Box 6: Rekompak – community-led reconstruction of settlements after disaster ........................ 34  Box 7: A note on reliability in the Supply Readiness Rankings ...................................................... 38  Executive summary:  Policies in focus  Global economic As 2012 draws to a close, global economic conditions appear to be improving, but at a conditions have been slow and uneven pace. In the third quarter, growth in the US picked up, while China’s weak and are improving economy continued to slow, though its GDP still expanded 7.4 percent year-on-year. The only slowly economies of the Euro Area and Japan contracted. More recent data, for the fourth quarter, are mixed. Manufacturing data and purchasing managers’ indices have disappointed in the US and indicate continued sluggishness in Europe, notably in Germany and France. But there are also encouraging indications that China’s economy and export-oriented industrial production across Asia are now gathering pace. This mixed economic backdrop, suggesting a slow improvement in the global economy but not by enough to call into question accommodative monetary policy across high income economies, has kept financial markets generally well supported. Emerging market equities and sovereign credit spreads have fluctuated since September, but the overall trend since mid-year has been towards higher stock prices and tighter spreads. This weakness has hurt Like other commodity exporters, Indonesia has clearly felt the effects of the weaker global Indonesia’s export economy in 2012 through the trade channel. Exports in the year to October were down 6.2 performance… percent in USD terms compared with the same period in 2011, while import demand has continued to grow. Consequently, the cumulative goods trade balance in 2012 through October reached a deficit of USD 500 million, compared with a surplus of USD 26 billion in the first ten months of 2011. This deterioration has weighed on the Rupiah, which is down 6.0 percent on a trade-weighted basis in 2012. …with commodity-related Much of the decline in exports Table 1: Commodity prices remain historically high in exports affected by can be attributed to weaker nominal terms but recent performance has been mixed continued weakening in commodity prices, many of (USD dollar commodity prices, percentage change; export global prices share, percent) which remain under pressure (Table 1). Palm oil prices have Change to November Export dropped particularly sharply in 2012 from: share* recent months, with average Jan- Dec- Sept- prices in November down 16 05 11 12 percent from September. Crude Coal 56.6 -24.3 -6.6 14.0 oil and natural gas prices have Natural 49.7 4.6 8.8 11.6 gained since mid-year. There gas are some signs that the marked Palm oil 102.5 -20.7 -15.8 9.0 decline in coal prices, down 24 percent since end-2011, has Crude oil 147.7 1.7 -3.2 6.5 stabilized but past declines may Rubber 151.3 -12.1 -2.1 4.5 still weigh on future export Copper 143.3 1.9 -4.7 2.5 performance. Industrial metal prices, notably copper, have Note: Australian coal, World Bank global natural gas recovered from their mid-year index, Malaysia palm oil, Brent crude, Singapore-traded lows, but weakened somewhat rubber, London-traded copper; *Export share is for in November. January-July 2012 Source: BPS, World Bank and staff calculations However, economic Global economic weakness and elevated uncertainty in 2012 have not prevented growth as a whole has Indonesia’s economy from growing robustly. This was evident in the third quarter, when proven robust real GDP rose by 6.2 percent year-on-year. This was only slightly lower than 6.4 percent year-on-year in the second quarter, though the pace of expansion was also down on a quarter-on-quarter seasonally adjusted basis. Growth continues to be powered by strong private demand, with private consumption, a consistent source of growth, expanding 5.7 percent year-on-year in the third quarter, up from 5.2 percent in the second quarter. Investment has been Perhaps the most notable Figure 1: Investment growth has so far remained resilient particularly strong over feature of growth in 2012 has to the downturn in commodity prices and exports 2012 but the momentum been the strength of fixed (percentage year-on-year change in real investment, USD weakened somewhat in investment, which for some commodity prices and export value) the third quarter time has grown faster than Percent Percent other expenditure categories. 90 18 As a result, investment now Investment (RHS) accounts for a third of nominal 60 12 GDP, up from 25 percent in 2007. Investment growth has so far shrugged off the 30 6 downturn in commodity prices and exports, with which it has been linked in the past (Figure 0 0 1). However, in the third Exports quarter the momentum appeared to weaken, as real -30 -6 investment contracted relative Indonesia commodity to the previous quarter (down export price basket* -60 -12 0.4 percent on a seasonally- Nov-04 Nov-06 Nov-08 Nov-10 Nov-12 adjusted basis), although remaining up 10 percent year- Note: *Weighted price index of 6 main commodity exports on-year. Inventories also rose Source: BPS, World Bank and staff calculations for the third consecutive quarter, which could indicate weaker than anticipated demand. Should this impact on production in coming quarters, as businesses draw down existing high stock levels, this could drag materially on growth. Inflation remains Despite the robust pace of growth, in the absence of sharp rises in food or administrative moderate… prices, headline consumer price pressures remain subdued. Headline and core inflation stood at 4.3 percent and 4.4 percent year-on-year in November respectively, with the recent modest decline of the former helped by significant food price disinflation since June. The World Bank projects CPI inflation to rise, to 5.4 percent in the fourth quarter of 2013 (Table 2), on the back of strong consumer demand, high levels of consumer credit growth and ongoing pass-through from the depreciating Rupiah over 2012. High minimum wage increases for 2013 and the impact of electricity price reforms will add to cost-push price pressures. The direct inflationary impacts of these developments should be low, but it will be important to guard against less easily quantifiable second round effects taking hold. …and, at the aggregate Turning to public finances, the World Bank projects a full year 2012 deficit of 2.5 percent, level, the fiscal position is higher than the Government’s revised Budget target of 2.2 percent of GDP. This is still a sound, albeit weakened relatively small deficit and the fiscal trajectory at the aggregate level remains sound, with by fuel subsidies the 2013 Budget targeting a narrower deficit of 1.7 percent of GDP. The government debt stock remains low (likely to be less than 24 percent of GDP in 2012) and financing progress is strong. Revenue growth has moderated on the back of slowing nominal GDP growth, weaker commodity-related income, and static crude oil production levels, though VAT revenues have benefited from strong private consumption. Expenditures overall are projected to come in around the revised Budget levels. However, outturns over 2012 continue to highlight the challenges of improving the allocation and quality of spending. Such enhancements can play an important role in improving service delivery outcomes, not just at the aggregate level but also to address spatial inequalities in basic service provision, as highlighted by the recent Village Infrastructure Census. vi Budget disbursements of capital and material expenditures are still behind their targets, despite strong nominal growth. Most notably, the opportunity cost of energy subsidies continues to rise. World Bank projections are that fuel subsidies will exceed IDR 200 trillion for 2012 (or 20 percent of total government spending, excluding regional transfers). This is significantly above the IDR 165 trillion cost of fuel subsidies in 2011. Strong domestic consumption has pushed up the quota of subsidized fuel and costs have been driven up by the rise in Rupiah-denominated fuel prices. Subsidies are also adding to pressures on the trade balance through the imports of refined products. Strong growth of above 6 The World Bank projects GDP growth for 2012 as a whole of 6.1 percent, rising marginally percent is the base case to 6.3 percent in 2013 (Table 2). This base case assumes continued strong consumption for 2013 but risks remain and, particularly, investment growth, supported by a modest recovery in exports on the skewed to the back of gradually improving global growth conditions and somewhat firmer commodity downside… prices. Table 2: Under the baseline scenario Indonesia’s growth is projected at 6.3 percent in 2013 2010 2011 2012 2013 Gross domestic product (Annual percent change) 6.2 6.5 6.1 6.3 Consumer price index* (Annual percent change) 6.3 4.1 4.4 5.4 Budget balance** (Percent of GDP) -0.6 -1.1 -2.2 -1.7 Major trading partner growth (Annual percent change) 6.8 3.6 3.3 3.6 Note: *Q4 on Q4 inflation rate, **Budget balances for 2012 and 2013 are official Government projections Source: BPS via CEIC, Consensus Forecasts Inc. and World Bank staff …both externally, with The risks to this base case remain skewed to the downside. Uncertainties over the ongoing uncertainties international outlook remain elevated and there are material risks of more negative over economic external shocks buffeting the economy. These could include a severe fiscal drag or shock developments in high to private sector confidence in the US depending on the outcome of negotiations over the income economies and China… “fiscal cliff�, a re-intensification of the Euro Area’s sovereign debt and banking sector challenges and, in particular, a further slowdown of the Chinese economy. An additional uncertainty is the future path of portfolio inflows, which have picked up recently to emerging market local currency bonds, including to Indonesia, with November seeing record net purchases by non-resident investors of around USD 2 billion. Should global economic data continue to improve and monetary policy remain loose internationally, a return of the strong inflows seen in 2010 is possible and would raise policy challenges. …and domestically, with Domestically, there are risks to the strong investment growth that has been an important investment facing ingredient in Indonesia’s rapid economic expansion since the global financial crisis. possible headwinds Investment has historically tended to be closely correlated with global commodity prices. As these remain well off their post financial crisis highs, it is possible that investment will begin to be weighed down as reduced commodity-related earnings spill over into the wider economy. Given the “lumpy� nature of investment spending, and important differences in the commodity-dependence of regional economies across Indonesia, current aggregate- level statistics may be subject to lags and obscure significant localized impacts from the loss of the positive commodity price impulse seen in recent years. Such effects are supported by some anecdotal evidence from the banking and corporate sectors. Elevated uncertainties The private sector has played a crucial role in Indonesia’s recent solid economic place a premium on performance, by driving the rapid growth in domestic and foreign investment spending. maintaining a stable This investment often requires making long-term commitments, which depends on policy framework… confidence and the ability to plan ahead effectively. A number of legal and regulatory announcements over the course of 2012 have raised concerns amongst investors over the domestic business and investment policy environment, which may build ahead of national elections in 2014. In this context, and with investor risk appetite globally remaining fragile, maintaining the clarity and consistency of the regulatory framework, and effectively managing communication concerning any new reforms, may make a decisive difference for the investment, and the broader economic, outlook. vi i …which balances the Labor market issues have come Figure 2: Increases for 2013 may well push minimum welfare of different to the fore over the past quarter wages higher relative to regional neighbors groups of workers and during the contentious and (monthly minimum wages, USD, East Asian countries) the outlook for complicated annual process of USD USD employment and 300 300 investment minimum wage setting. This year’s round of negotiations has Malaysia triggered major labor protests 250 250 and resulted in some large increases in minimum wages for 200 200 2013. This includes a 44 percent Philippines rise to IDR 2.2 million per month 150 150 in Greater Jakarta. Increases on China Indonesia this level may move Jakarta’s minimum wages towards the 100 100 Thailand higher end of those in developing Asia (Figure 2). To the extent 50 50 Vietnam that these increases affect wages and relative unit labor 0 0 costs more broadly they may 2007 2008 2009 2010 2011 2012 2013 impact the appeal of Indonesia Note: Indonesia minimum wages based on DKI Jakarta as a regional production base, (assuming USD exchange rate in 2013 is IDR 9,500); particularly for those industries other countries based on the minimum wage in major heavily reliant on labor inputs. cities or the capital region. These wages are not adjusted for productivity differences across countries While minimum wages are Source: World Bank Doing Business, 2013, and press necessary to address labor and regulations for 2013 market failures that can result in inefficient or inequitable outcomes, beyond a certain threshold they do carry adverse, potentially unintended risks. These include reducing incentives for formal employment and reinforcing segmentation that limits job and social mobility. In addition, the mechanisms for setting minimum wages, and their levels, cannot be viewed in isolation. Rather, they are one of many inter-related factors affecting the quantity and quality of jobs and business profits, including non-wage remuneration, severance pay, social security provision, and regulations governing contract work. Much could be gained from moving towards a more holistic and inclusive approach to bargaining in the labor market, ensuring that all stakeholders, including informal sector workers, are represented, and from making the process of minimum wage setting more transparent and informed by technical inputs. Any near-term policy While the above near-term risks have dominated the recent policy debate, it is important uncertainties should not not to lose focus on the need for, and momentum in delivery of, progress on addressing detract from the need to medium-term development challenges. In some areas, such as disaster reconstruction continue improving and preparedness, there has been marked progress, with the Government having been public service delivery and access across highly successful in planning and executing the physical reconstruction of homes, Indonesia, and further buildings and infrastructure, and in restoring economic livelihoods. It has also established enhancing the resilience proven approaches and models that can be used when future disasters strike, both in of the country to the Indonesia and in other countries at risk of natural disasters. multiple natural risks that it faces In other areas, there is still considerable work to be done. For example, while steady progress towards meeting the Millennium Development Goals has been made at the national level, the above-mentioned Village Infrastructure Census, commissioned by the Government, highlights a more troubling regional picture: individual provinces, districts, and villages are not all progressing at the same rate in terms of delivery of, or access to, infrastructure, health or education services. However, assembling the detailed information of this study is a first step towards remedying the inequality of progress through a better identification of needs and improved planning and targeting of resources. Finally, the recent localized flooding in Jakarta that comes with the rainy season is a reminder of the challenges of urbanization and future risks from the impacts of climate change. Flood mitigation measures are being undertaken, from river dredging and canal improvement through to community preparedness and contingency planning, helping the city adapt to the increasing frequency and intensity of flooding. Indeed, with additional systematic and comprehensive flood mitigation investments, and an effective information dissemination and contingency system, Jakarta could emerge as a flood resilient city. vi i i Indonesia Economic Quarterly Policies in focus A. ECONOMIC AND  FISCAL UPDATE 1. Global economic growth remains weak, likely improving only modestly in 2013 Global economic As the end of 2012 approaches, the modest firming in global economic conditions momentum is improving, anticipated in the October IEQ appears to be underway, but the improvement continues to but slowly and unevenly be slow and uneven. In the US, third quarter GDP growth rose to 2.7 percent at a seasonally adjusted annualized rate (saar), sharply higher than 1.3 percent (saar) in the second quarter and a significant upward revision from the initial estimate of 2 percent. In contrast, China’s economy continued to slow in the third quarter on a year-on-year basis, but still grew by 7.4 percent year-on-year, and there are encouraging signs, such as from industrial output, that some acceleration in growth is underway. Less positively, however, the Euro Area is still struggling to emerge from its shallow but protracted recession, with third quarter GDP flat-lining at -0.2 percent (saar) amidst concerns that both Germany, the regional growth engine, and France, are slowing. Japan’s economy also shrank by 3.5 percent (saar) in the third quarter of 2012. Coupled with Economic data have been mixed since the October IEQ and are certainly not pointing to a accommodative policies, strong enough near-term pickup in global growth to call accommodative monetary policy this has been enough to into question (Figure 3). Meanwhile, the debt crisis in the Euro Area lingers on but fears support financial markets over an imminent sovereign funding and banking crisis have abated since August, following policy action by the European Central Bank. This mix has capped most developed-market bond yields at historically low levels, stabilized financial conditions in the Euro Area, and been quite supportive for risk appetite, triggering significant inflows to emerging market debt and equities. Consequently, while financial markets have fluctuated since the October IEQ, equity prices remain well above their mid-year lows and sovereign credit spreads have tightened back to levels last seen in mid-2011. Commodity price In line with the hesitant nature of the global growth recovery, the recent performance of movements have been international commodity prices has been mixed, and the prices of many of Indonesia’s key mixed exports remain under pressure (Figure 4). Palm oil prices have dropped particularly sharply, with average prices in November down 16 percent from September, to bring the decline for 2012 through November to 21 percent. Crude oil and natural gas prices have gained since mid-year and there are some signs that the marked decline in coal prices has stabilized, though prices remain on the order of 20 percent lower in 2012. Industrial metal prices, notably copper, have recovered somewhat from their mid-year lows, but tended to give up some gains in November. 2013 should be a better Looking ahead to 2013, the outlook remains for a gradual improvement in the global year for global growth, economy, with the World Bank expecting growth in Indonesia’s major trading partners to but perhaps not by much, rise by 0.3 percent from 2012, to 3.6 percent. The pace of the recovery from the financial and downside risks crisis in high income economies, many of which are still weighed down by high debt remain burdens, resulting in private sector deleveraging and fiscal consolidation, is expected to remain slow. Much therefore depends on China, where the risk of a further slowdown, while not the base case, remains. In both the US and the Euro Area there is also a clear chance of more adverse scenarios unfolding, as negotiations continue in the US over avoiding the tax increases and spending cuts imposed by current legislation (the “fiscal cliff�), and Europe treads a difficult path towards debt sustainability in the periphery. The T H E W O R L D B AN K | B AN K D U N I A December 2012 1 Indonesia Economic Quarterly Policies in focus base case of improving yet still tepid global growth in 2013 therefore continues to be subject to downside risks, as discussed in the final section of Part A. Figure 3: Improved conditions in the US and a bottoming-out Figure 4: Commodities remain well off their highs, though in China but no upturn yet for the Euro Area or Japan some have gained in recent months (OECD composite leading indicators, 100 = long term trend) (USD commodity price indices, November 2007=100) Coal Natural gas Index Index 104 104 Palm oil Rubber China Copper Crude oil Index Index 102 US 102 280 280 Japan 100 100 220 220 Euro area 98 98 160 160 96 96 94 94 100 100 92 92 40 40 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: OECD Note: Australian coal, World Bank global natural gas index, Malaysia palm oil, Singapore-traded rubber, London-traded copper, Brent crude Source: World Bank and staff calculations 2. Indonesia’s economy continues to grow robustly, moderating slightly in Q3 Growth of the Indonesian Indonesia’s real GDP growth has proven robust to the weakness in external demand in economy moderated 2012. Real GDP rose by 6.2 percent year-on-year in the third quarter. This was slightly slightly to 6.2 percent lower than the 6.4 percent growth seen in the second quarter and was the eighth year-on-year in the third consecutive quarter of above 6 percent growth. On a seasonally-adjusted (sa) quarter-on- quarter of 2012 quarter (qoq) basis the economy grew by 1.3 per cent in the third quarter, down from 1.6 percent in the second quarter (Figure 5). While real GDP growth eased only slightly, nominal GDP growth slowed significantly in the third quarter, falling to 9.9 per cent year-on-year, from 12.5 percent year-on-year in the second quarter. This outcome was the lowest nominal growth rate in three years, largely reflecting a significant moderation in growth of the GDP deflator (Figure 6). Figure 5: Real GDP growth moderated to 6.2 percent year- Figure 6: …while nominal GDP growth dipped to its lowest on-year in the third quarter of 2012… level since September 2009 as GDP deflator growth slowed (real GDP growth, percent) (nominal GDP growth qoq sa, percent) 4 Percent Percent 8 12 Percent Percent 12 Price Year on year (RHS) Volume 10 10 Nominal GDP 3 6 8 8 Average (LHS)* QoQ seas. adjust (LHS) 6 6 2 4 4 4 2 2 1 2 0 0 0 0 -2 -2 Sep-05 Jun-07 Mar-09 Dec-10 Sep-12 Sep-00 Sep-03 Sep-06 Sep-09 Sep-12 Note: * Average quarter-on-quarter growth since Q2 2002 Source: BPS and World Bank staff calculations Source: BPS and World Bank staff seasonal adjustment T H E W O R L D B AN K | B AN K D U N I A December 2012 2 Indonesia Economic Quarterly Policies in focus Growth in domestic In real terms, growth in domestic demand moderated in the third quarter to 6.1 percent demand moderated but year-on-year, down from 7.4 percent year-on-year in the second quarter. Private remained strong… consumption and investment continue to be the engines of Indonesia’s solid economic growth performance (Figure 7). Government consumption registered a surprisingly large fall in the quarter, down 3.2 percent year-on-year, driven by weakness in government material expenditures. …with investment growth The level of investment spending remained high, up 10 percent year-on-year in the third moderating… quarter. However, investment did contract in seasonally adjusted quarter on quarter terms by 0.4 percent. This sequential contraction was largely driven by falls in spending on foreign transportation, machinery and equipment, consistent with the weakness in capital goods imports seen in the quarter. Building investment (which accounts for 84 percent of total investment) continued to grow solidly in the third quarter, up 8.0 per cent year-on- year, in line with the solid growth seen in cement sales. …and private In contrast to the sharp drop in government consumption and moderation in investment, consumption picking up private consumption growth picked up in the third quarter, increasing by 5.7 percent year- on-year. There were strong increases in both food and non-food consumption. Bank Indonesia surveys indicate that consumer confidence hit all-time highs during the quarter. Exports remained under In contrast with previous quarters, net external demand actually supported quarterly pressure and imports growth in the third quarter; net exports added 2.3 percentage points to seasonally contracted sharply adjusted quarter-on-quarter growth. However, this was because continuing weakness in exports was more than offset by a sharp fall in imports in the third quarter. Exports of goods and services remained under pressure, falling by 2.4 percent in seasonally- adjusted quarter-on-quarter terms. Imports contracted unexpectedly sharply, dropping 8.7 percent in seasonally-adjusted quarter-on-quarter terms. This drop in imports was the first quarterly fall in imports since the first quarter of 2009 and is likely the result in part of the recent weakness in exports, as weaker exports tend to reduce the need to import capital and intermediate inputs (see July 2012 IEQ). Growth on the production On the production side, the manufacturing sector performed strongly, while growth in the side was driven by the service sectors moderated (Figure 8). Growth in the manufacturing sector picked up to 6.4 manufacturing sector… per cent year-on-year in the third quarter, compared to 5.5 per cent year-on-year in the second quarter. This was supported by strong performances from domestic-oriented sectors such as food, beverages and tobacco (up 10.4 percent year-on-year) and fertilizers, chemicals and rubber (up 15.4 percent year-on-year). Oil and gas manufacturing, however, fell by 5.0 percent year on year. The mining sector, excluding oil and gas, grew by only 4.6 percent year-on-year and contracted in sequential terms (-3.5 percent qoq sa). …while the performance Growth in the services sectors moderated somewhat but was still solid at 7.3 percent of the services sector year-on-year, compared to 8.1 year-on-year in the second quarter. Communications and was mixed transport remained one of the strongest of the service sectors (up 10.5 per cent year-on- year). There was some moderation in the trade, hotel and restaurant sector in the quarter. High frequency indicators High frequency indicators are broadly consistent with continued robust growth. There has are consistent with been sustained strong growth in motor vehicle sales. Motor cycle sales, which have been continued robust growth under pressure since the start of the year, stabilized in September and October. On the production side, cement sales and industrial production have shown some signs of improvement in recent months, although the data remain noisy. T H E W O R L D B AN K | B AN K D U N I A December 2012 3 Indonesia Economic Quarterly Policies in focus Figure 7: Private consumption and investment continue to Figure 8: Manufacturing continued to perform strongly in the be the key drivers of growth third quarter while services growth moderated (year-on-year real GDP growth, percent) (year-on-year services and manufacturing GDP growth, percent) Private cons. Investment Gov cons. Percent Percent 10 10 Net Exports Discrepancy GDP Percent Percent 10 10 8 8 Services 8 8 6 6 6 6 4 4 4 4 2 2 Manufacturing 0 0 2 2 -2 -2 -4 -4 0 0 Sep-09 Sep-10 Sep-11 Sep-12 Sep-05 Sep-07 Sep-09 Sep-11 Source: BPS and World Bank staff calculations Source: BPS and World Bank staff calculations GDP growth is forecast at The World Bank’s projection for GDP growth in 2012 is 6.1 percent (Table 3), unchanged 6.1 percent for 2012 and from the October IEQ. The recent composition of growth has differed somewhat from 6.3 percent for 2013… previous expectations. Domestic demand has been weaker than expected due to a large fall in government consumption and a slight fall in investment in the third quarter, but net exports exceeded expectations with an even larger correction in imports than anticipated. The outlook for 2013 is for a slight rise in growth to 6.3 percent, as the external environment firms. This is the same as in the October IEQ, with a slightly stronger outlook for consumption offset by a slightly weaker net exports outlook. …but risks remain The risks to the outlook Figure 9: Inventory levels appear elevated skewed to the downside continue to be skewed to the (quarterly change in stocks and rolling 4-quarter sum of downside and in the event of change in stocks, current prices, percent of GDP) more severe adverse shocks to international financial markets, Percent of GDP Percent of GDP commodity prices or external 12 30 demand, domestic growth could 4-quarter sum of change in stocks come in considerably below the (RHS) baseline projections. 8 20 Furthermore, while private consumption is proving resilient, Change in stocks (LHS) investment could yet be 4 10 impacted by lower commodity prices and a more uncertain regulatory environment, as discussed further below. In 0 0 addition, there has been a notable buildup in inventories as measured in the national -4 -10 accounts in recent quarters Sep-02 Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 (Figure 9), which could indicate Source: BPS and World Bank staff calculations weaker than anticipated demand. Should this impact on production in coming quarters as businesses draw down existing high stock levels, this could drag materially on growth. T H E W O R L D B AN K | B AN K D U N I A December 2012 4 Indonesia Economic Quarterly Policies in focus Table 3: Under the baseline scenario GDP growth of 6.1 percent is projected for 2012, rising to 6.3 percent in 2013 (percentage change, unless otherwise indicated) Revision to Annual Year to December quarter Annual 2011 2012 2013 2011 2012 2013 2012 2013 1. Main economic indicators Total Consumption expenditure 4.5 5.1 5.3 4.6 5.3 4.6 -0.3 0.0 Private consumption expenditure 4.7 5.4 5.1 4.9 5.7 4.6 0.4 0.1 Government consumption 3.2 3.2 6.1 2.8 3.7 4.6 -5.1 -0.4 Gross fixed capital formation 8.8 10.3 11.2 11.5 9.1 10.7 -2.0 0.0 Exports of goods and services 13.6 1.1 3.8 7.9 -1.9 7.3 -1.7 -1.8 Imports of goods and services 13.3 3.9 3.1 10.1 -1.8 9.1 -3.2 -1.6 Gross Domestic Product 6.5 6.1 6.3 6.5 5.6 6.5 0.0 0.0 Agriculture 3.0 4.2 3.5 1.9 4.2 3.1 0.3 0.0 Industry 5.3 5.2 5.0 5.5 4.8 4.9 0.3 0.0 Services 8.5 7.6 8.0 8.5 7.3 8.0 -0.2 0.0 2. External indicators Balance of payments (USD bn) 11.9 -0.8 5.5 n/a n/a n/a 6.2 2.2 Current account balance (USD bn) 1.7 -19.9 -14.2 n/a n/a n/a 1.3 2.2 Trade balance (USD bn) 24.2 1.3 7.7 n/a n/a n/a 1.1 0.9 Financial account balance (USD bn) 13.5 20.6 19.7 n/a n/a n/a 4.7 0.0 3. Other economic measures Consumer price index 5.4 4.3 4.9 4.1 4.4 5.4 -0.1 -0.2 Poverty basket Index 8.2 6.5 5.7 6.3 5.3 6.8 -0.3 -1.4 GDP Deflator 8.4 4.9 6.0 7.5 4.1 7.5 -1.6 -1.9 Nominal GDP 15.4 11.3 12.7 14.5 10.0 14.5 -1.7 -2.0 4. Economic assumptions Exchange rate (IDR/USD) 8773 9400 9500 9024 9550 9500 50.0 100.0 Indonesian crude price (USD/bl) 112 115 105 111 112 105 0.0 5.0 Major trading partner growth 3.6 3.3 3.6 2.6 3.3 4.0 0.0 0.0 Note: Projected trade flows relate to the national accounts, which may overstate the true movement in trade volumes and understate the movement in prices due to differences in price series. Revisions are relative to projections in October 2012 IEQ Source: MoF, BPS, BI, CEIC and World Bank projections. T H E W O R L D B AN K | B AN K D U N I A December 2012 5 Indonesia Economic Quarterly Policies in focus 3. Exports are still under pressure but capital inflows have been strong The overall balance of Indonesia’s relatively rapid pace of Figure 10: The balance of payments returned to a payments returned to economic growth and continued small surplus in the third quarter of 2012 surplus in Q3 2012 weaker demand for its exports have (USD billion) taken a toll on the external Current account Net other capital accounts. Nevertheless, the Net portfolio Net direct investment quarterly overall balance of Overall balance Basic balance payments returned to surplus in the USD billion USD billion 16 16 third quarter for the first time since mid-2011, albeit to a modest USD 12 12 800 million. This was helped by a 8 8 sharp reduction in imports and in turn a smaller current account 4 4 deficit, as well as by the ongoing 0 0 strength of capital inflows (Figure 10). -4 -4 -8 -8 However, the basic balance remains in deficit, as the FDI -12 -12 surplus was more than offset by the Sep-09 Sep-10 Sep-11 Sep-12 current account deficit. Indonesia thus remains exposed to a Note: Basic balance = current account balance + net direct investment reduction in shorter-term capital Source: BPS and World Bank staff calculations flows in the event of heightened uncertainty on global financial markets. With the current account deficit expected to shrink further, but not to return to surplus, as the economy continues to expand faster than that of Indonesia’s major trading partners, and with domestic investment needs remaining high, it will be important to sustain and increase hitherto strong levels of FDI. Exports remained weak in Weak external demand and lower prices, particularly for commodities, have continued to Q3 weigh on Indonesia’s exports. Exports were USD 46 billion in the third quarter, their lowest level in the last eight quarters and down by 5 percent compared with the second quarter. The decline was broad-based but was particularly pronounced for mining and minerals, and oil and gas, exports. This weakness persisted in October, when exports declined slightly further from September and were 7.6 percent lower year-on-year. Imports fell sharply… Having grown robustly in the first half of 2012, imports contracted sharply in the third quarter to USD 45.5 billion, down over USD 5 billion from the second quarter and by 2 percent in nominal USD terms compared with 3Q 2011 (Figure 11). This was the first quarterly drop in imports in three years. In October, however, imports bounced back strongly, rising 12 percent on September on the back of rising energy and raw material imports. …reflecting reduced The reduced import demand seen in the third quarter likely reflects in part the impact of production over the Ramadhan and Lebaran in July and August. The 10.6 percent qoq drop in imports of raw Ramadhan period and a and intermediate materials was the biggest contributor to the overall decline in imports, fall in demand for export- accounting for 7.8 percent of the 10.2 percent quarter-on-quarter fall in total imports. More related input products disaggregated data available through August suggest that the declines in imported raw and intermediate good demand were broad-based. The continued decline of exports has also dented demand for capital imports. Total capital goods imports fell by 10.9 percent quarter-on-quarter in the third quarter, driving about a quarter of the total quarterly reduction seen in imports. Heavy machinery and transportation imports, which are important for activity in the plantation and mining sectors, have slowed. October trade data show capital imports did pick up and this may be an encouraging sign for exports going forward, but given the volatile nature of monthly trade data it is too soon to draw firm conclusions. Capital inflows remained In contrast to the trade balance, which remains under pressure, Indonesia continues to robust and FDI is well- record sizable financial surpluses, of USD 6.0 billion in the third quarter. The surplus was diversified… driven by continued strong net inward direct investment (USD 3.6 billion), as well as net portfolio investment (USD 3.8 billion). The net other investment deficit shrank to USD 1.5 T H E W O R L D B AN K | B AN K D U N I A December 2012 6 Indonesia Economic Quarterly Policies in focus billion (from USD 2.7 billion in Q3), driving most of the widening financial account surplus, as residents brought foreign currency deposits onshore and lower government loan repayments reduced outflows. The international reserves of Bank Indonesia (BI) rose by USD 3.7 billion over the quarter to USD 110.2 billion, and by a further USD 1 billion in November to USD 111.3 billion. FDI almost doubled from the second to the third quarter, to USD 5.5 billion (though because of relatively high Indonesian direct investment abroad, net direct investment declined marginally on the quarter). According to data from the Investment Coordinating Board (BKPM), while the mining sector remains an important destination for inbound FDI inflows, the share of resource-based sectors fell to 21.5 percent of the total in Q3 from 26.2 percent in H1 2012. By contrast, the share of the manufacturing sector rose to nearly 50 percent in Q3 from 45.4 per cent in H1. In fact chemical and pharmaceutical (USD 1.1 billion) replaced mining as the largest sector for inbound FDI in the third quarter. Strong net portfolio investment inflows were in line with a solid domestic government bond and stock market performance, as well as a recovery in global risk appetite through the end of the third quarter, and loose monetary conditions around the globe (Figure 12). October also saw continued net portfolio capital inflows for both bonds and equities. In November, foreigners switched to being net sellers of Indonesian equities. However, there were very strong net purchases of local currency bonds, lifting foreign investor holdings by nearly IDR 20 trillion (approximately USD 2bn) on the month, to IDR 270 trillion. …and sustaining FDI in Moving into 2013, export performance will likely be dampened by an uneven global 2013 is key to the outlook recovery and the current account deficit is projected to narrow but not to close. Sustaining the positive trend in FDI will therefore be key to maintaining the health of Indonesia’s external balances, as well as for supporting much-needed investment. The growth in FDI seen since 2009 is attributable to the appeal to investors of the relatively rapid growth and long-term promise of Indonesia’s large domestic consumer base, its natural resources, and its relatively low cost base and potential as a regional production hub. While these attributes still hold, the correction in commodity prices globally, prospective rises in minimum wages (see Part B), and regulatory uncertainties, do appear to weaken the last two factors, at least in the near-term. Consequently, there is no room for complacency over the FDI outlook. Figure 11: Exports remain under pressure… Figure 12: …while portfolio inflows have picked up again (goods trade value, USD billion; year-on-year growth of 3 (non-resident investor net inflows to local equities, month moving average goods value, percent) government and BI securities, and international reserves, USD billion) Export value (LHS) Import value (LHS) USD billion USD billion Equities SUN SBI Trade balance (LHS) 150 5.0 Export growth 3mma yoy (RHS) Reserves Import growth 3mma yoy (RHS) (LHS) USD billion Percent 125 2.5 20 80 10 40 100 0.0 0 0 75 -2.5 -10 -40 50 -5.0 -20 -80 25 -7.5 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Nov-09 Nov-10 Nov-11 Nov-12 Source: BPS and World Bank staff calculations Note: “Flows� for SUN (IDR government securities) and SBI (BI certificates) indicate changes in holdings Source: BI, CEIC and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A December 2012 7 Indonesia Economic Quarterly Policies in focus 4. Inflation softness continues but cost-push pressures emerge for 2013 Headline and core year- Subdued price pressures, despite Figure 13: Headline and core inflation remain at on-year inflation solid economic growth, have been a historically low levels remained subdued in notable feature of the economy in (price inflation, percent) November, at 4.3 percent 2012. Headline CPI inflation Percent Percent and 4.4 percent remained contained at 4.3 percent 3 24 year-on-year in November 2012, the same level recorded in Food inflation yoy September (Figure 13). Core (RHS) 2 16 inflation, a better measure of Core inflation Headline underlying consumer price yoy (RHS) inflation yoy pressures, remains relatively low (RHS) and stable, moving up slightly from 1 8 the recent low in September to 4.4 percent in November (Figure 13). The stability of headline inflation, 0 0 amidst still robust economic growth, suggests that inflation expectations Headline inflation mom (LHS) have been anchored in the absence -1 -8 of large administered price shocks Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 and commodity price shocks. Source: BPS and World Bank staff calculations Food price inflation The continued low year-on-year headline inflation was mainly due to the fall in food price continues to ease as inflation to 5.7 percent in November from 7.4 percent in August. Stable domestic rice domestic rice prices are prices are a major factor behind the easing in food inflation with rice price growth over the set to record the lowest first 11 months of 2012 at 3.6 percent, set to be the lowest of any calendar year since annual growth in 8 years 2004. The fall in food price pressures led the poverty basket inflation rate down from 5.9 percent in September to 5.3 percent in November. Although rice price growth has been subdued throughout 2012, the price level remains at a record high and is 50 percent higher than 2010 which saw large price shocks at the end of that year. In addition to the outlook for production, changes in the policy framework, such as the new Food Law (see Box 1) are also likely to affect the future path of food prices. Box 1: Indonesia’s new Food Law Indonesia’s Parliament (DPR) passed a Food Law on 18 October 2012, revising the 1996 Law on Food Supply. The new Law was initiated by parliamentarians, and preparation began as early as the beginning of 2011. At the initial preparatory stage, the DPR and the Government shared a vision to establish a new food security agency. Since food security issues had been managed by numerous ministries and agencies, policy decisions had been often delayed due to bureaucratic procedures and coordination difficulties. Hence, the new food security entity was expected to streamline the decision making process. Currently, three main bodies exclusively focus on food security issues: the Food Security Council (Dewan Ketahanan Pangan, DKP), the Food Security Agency (Badan Ketahanan Pangan, BKP), and Bulog (Badan Urusan Logistik). The DKP, chaired by the President, supports policy formulation for national food security. The BKP works on food security issues under the Ministry of Agriculture. Bulog is a Perum (Perusahaan Umum), a non-profit state-owned enterprise, which manages rice procurement, reserves, and distribution. The envisaged new entity would integrate these three agencies into one. Creation of the new food security entity was thought to be beneficial for policy making, but there was considerable debate on which functions should be attached to the new entity. The Parliament reportedly expected the new entity to be the regulator and executor of general food regulations, while the Government preferred that these two responsibilities not be combined in a single entity. Due to a wide variety of views and opinions, discussions for the new Law were prolonged. When the new Law was passed, the new food security entity was not created. Instead, there are time-bound provisions of articles to create the new food security entity and to accord it roles. The main provision is Chapter XII: Food Institution. Some key features are that the new entity will be under the President and is mandated to implement food security policies as a Government institution. Furthermore, the new entity will make proposals to the President to give assignments to the state-owned enterprise in the food sector to produce, procure, store, and distribute staple and other foods. The new entity is required to be formed no later than three years after the law is passed. The unique feature of the Indonesia Food Law is that food sovereignty, food self-sufficiency, food security, and food safety are all integrated in a single piece of legislation. The concepts of food sovereignty and self-sufficiency originated from the concept of food resilience in the 1996 Law on Food Supply. Food sovereignty, defined as the right of the state and nation to independently establish food policy that guarantees the right to food for people and the society and establishes the appropriate food system, is a new concept; hence, there is no internationally agreed definition. For many countries, food safety issues are dealt with under separate legislation. Using different legislation to deal with food security and food safety issues has some merit, because different ministries and agencies deal with T H E W O R L D B AN K | B AN K D U N I A December 2012 8 Indonesia Economic Quarterly Policies in focus food security and food safety. The new Law’s strong focus on food safety is inherited from the 1996 Law on Food Supply. The new Law mandates the Government to intervene significantly in the food market and food sector to achieve self-sufficiency and food security. For example, Article 23 stipulates the Government to manage national food reserves. Article 51 obliges the government to regulate food trading to stabilize staple food supply and prices. Article 55 further mandates the Government to stabilize supply and prices of staple food at the producer and consumer level. This contrasts with the 1996 Law, in which the Government’s involvement for food trade, particularly food imports, is mostly limited to food safety issues. While it remains to be seen how the legislation will be implemented, these are roles associated with potentially sizable government interventions in the food market for the sake of food security. Consumers’ welfare could be undermined due to higher food prices if there was an attempt to achieve food security and food self-sufficiency through government intervention to limit food trade and increase reserves. In fact, the international experience suggests that increasing agricultural productivity and investment are the keys to achieving sustainable food security. Note: For more information, see OECD Review of Agricultural Policies: Indonesia 2012 (October 2012) Near-term price Consumer price expectations measured in October 2012 have edged up since recent lows expectations have risen in August. According to BI’s survey, more respondents compared to last month believe following the decision of prices in three and six months will rise, largely due to the Government’s decision to the government to increase electricity prices in 2013. Meanwhile retailers reported milder inflationary increase electricity tariffs in 2013 pressures following the festive season, with their index of expectations for prices 3- months ahead in September falling to the lowest point since late 2011. Given the recent announcements on minimum wage increases (see below and Part B), upcoming survey results for November and December are likely to reflect a pick-up in price expectations. The planned increase in The welcome move in the 2013 budget to increase subsidized electricity tariffs by an electricity tariffs in 2013 average of 15 percent is expected to have a temporary, one-off impact on CPI inflation. is expected to have a The precise details are yet to be announced but Parliament has mandated that the modest impact on increase apply only to household users on connection types not typically used by poor or inflation as the majority of households are not even middle class households (i.e. excluding 450V and 900V connection types). The affected, similar to the affected households account for 15 percent of household users but 35 percent of increase in 2010 household electricity consumption. The direct impact of such a reform on the CPI is likely to be limited. Household electricity expenses make up 2.8 percent of households’ consumption bundle according to the CPI consumption weights, so even a full 15 percent increase for all households would directly raise CPI inflation by only 0.42 percentage points. The actual direct impact will be lower as the reform will exclude the 85 percent of the population with unaffected connection types. The indirect impact will be limited too by the relatively small share of electricity in firms’ costs. Electricity bills make up about 5 percent of most medium and large manufacturing firms’ total costs (according to the 2006 Industry Survey). A 15 percent higher electricity bill thus increases typical total costs by less than 1 percent. The bigger, less easily quantifiable, risk for inflation is if firms use the reforms to reset their prices. Large increases in As discussed in more detail in Part B, provinces across Indonesia have commenced minimum wages across announcing increases to the minimum wage for 2013 with increases of up to 50 percent in Indonesia’s provinces are some provinces such as East Kalimantan and 44 percent in Jakarta (the biggest increase being awarded for 2013… in a decade). These increases across Indonesia are likely to have a larger impact on broader cost-push pressures than their immediate, direct effect on the CPI. Direct impacts are limited by the fact that the CPI only includes the wages for some labor (such as housekeeping services) which are categorized as being in the informal sector, and to which the minimum wage therefore does not apply. The proportion of products within the CPI that may directly be exposed to formal sector minimum wage rises is likely to be small, and even for the firms producing these products, the share of total costs attributable to laborers on minimum wages is likely to be limited. According to the 2006 Industry Survey of Manufacturing Firms in Indonesia, about 76% of all firms have the minimum wage as less than 10% of the firm’s average wage. Consequently, the direct impact of the minimum wage rise on total costs will generally be small, although the impact may be more sizable in certain sectors. Finally, any pass-through to consumers of the impact on their operating costs will also be affected by the degree of competition in the market, their exposure to imports and their profit margins. T H E W O R L D B AN K | B AN K D U N I A December 2012 9 Indonesia Economic Quarterly Policies in focus …and there is a risk these The largest risk to inflation comes from increased wage demands of employees across rises feed into increased the informal and formal sectors, should well-publicized minimum wage increases filter into wages across the wage-setting in the rest of the economy. As highlighted in Part B, a 10 percent increase in informal and formal the minimum wage is associated with a 3 percent increase in average wages for all sectors, causing cost- push inflation employees in the same year. Should general wage levels respond in a similar fashion to prior minimum wage increases, there may be a more pervasive impact on business costs, leading to upward retail price adjustments. In addition, the large rise in the purchasing power of those employees who benefit from significant pay increases could boost demand for retail consumables such as food, processed food, clothing and tobacco. CPI inflation is projected With only one month remaining to be reported for CPI inflation in 2012, the final quarter is to ease to 4.4 percent likely to see inflation easing relative to the previous quarter to 4.4 percent year-on-year, year-on-year in the final reflecting falling food inflation on the back of low rice price growth and slower consumer quarter of 2012, around credit throughout 2012. The forecast will place year-end CPI inflation in 2012 around the the center of BI’s target range of 4.5 ± 1 percent, center of Bank Indonesia’s target range of 4.5 ± 1 percent. CPI inflation for whole-year and to move slightly 2012 is projected to be 4.3 percent. higher in 2013 where the upside risks have In 2013, inflation is projected to move up to 4.9 percent for the year as a whole, on the increased back of strong consumer demand, still high levels of consumer credit growth and ongoing pass-through from the depreciation to date of the exchange rate. Box 2 provides more detail on the potential cost-push impact of the exchange rate on inflation. Minimum wage and electricity tariff rises add upside risks to the inflation outlook. The slated increase in administered electricity tariffs will lead to a measureable direct impact on inflation in 2013 with the composition and staging of its introduction key in determining the overall inflationary impact on the CPI and GDP deflator in 2013. At this stage, awaiting full details of the implementation of the electricity tariff increases, its impact is not included in these baseline forecasts. Poverty basket inflation forecasts are lower than in the October IEQ, at 5.3 percent year-on-year in Q4 2012 and 6.8 percent year-on-year in Q4 2013. GDP deflator growth has In the third quarter, for the first time in over 8 years, the broad level of prices in the fallen to lows last seen in economy, as measured by the GDP deflator, rose at a slower pace than CPI inflation. 1999 as price growth GDP deflator inflation grew by 3.5 percent year-on-year in Q3 2012, the slowest rate since eased across most 1999. Most sectors saw a slowdown in inflation or were flat, with the largest falls in the sectors services sector which dropped from 15 percent year-on-year in Q2 to 1.8 percent year-on- year in Q3. Mining sector inflation fell from 13.6 percent to 7.8 percent year-on-year over the same period on the back falling commodity prices. Following two consecutively low quarters of growth, GDP deflator inflation in 2012 is projected to only grow by 4.9 percent for the year as a whole, the slowest since the series commenced in 1993, contributing to the notable reduction in nominal GDP growth highlighted above. In 2013, annual GDP deflator growth is expected to pick up from its current lows, reaching 6.0 percent on the back of faster economic growth and continued strong credit conditions, but remaining well below the 14 percent average seen in the 4 years prior to the global financial crisis. T H E W O R L D B AN K | B AN K D U N I A December 2012 10 Indonesia Economic Quarterly Policies in focus Box 2: Why has the depreciating Rupiah not had a greater impact on inflation? Exchange rate movements affect domestic prices to the extent that Figure 14: The Rupiah has weakened considerably, consumers are purchasing imported products and businesses that though less so on a trade-weighted basis produce consumer goods domestically rely on inputs from (cumulative depreciation since July 2011, percent) overseas. However, the inflation pass-through from exchange rate movements depends on a range of factors and may take place Cumulative growth, percent Cumulative growth, percent with a time lag. Indeed, the depreciation of the Rupiah, down 12.9 15 15 Exchange rate percent from July 2011 to November 2012 has not been (IDR per USD) 12.9 associated with a pick-up in CPI inflation. All else being equal, this scale of depreciation is estimated to be associated with an 12 12 increase in the inflation rate of around 1 percentage point. While the counterfactual is unknown, there are several factors that help 9.0 explain why the depreciation has not generated a sizeable impact 9 9 on inflation, at least to date. NEER 6.6 First, the Rupiah to USD exchange rate is not the best guide for 6 6 the impact of a weaker domestic currency on CPI inflation, as only 6 percent of Indonesia’s imports are from the US. A better REER measure is the Nominal Effective Exchange Rate (NEER), a trade- 3 3 weighted index of exchange rates with Indonesia’s major trading partners. Since July 2011 this index has depreciated by 9 percent, significantly less than the USD per IDR exchange rate. 0 0 Second, up until July of 2012, the NEER had only depreciated by Jul-11 Nov-11 Mar-12 Jul-12 Nov-12 5.2 percent in the preceding 12 months, and it has only been in Source: BIS and CEIC recent months that it weakened more significantly (Figure 14). World Bank estimates suggest that the impact of a change in the NEER on CPI inflation is typically felt in the subsequent 3-6 months. This means that the impact from the recent depreciation on CPI inflation should be expected to be seen towards the end of 2012 and beginning of 2013. Third, the direct impact on CPI may be limited and the indirect effects may take time to emerge. Consumer goods are a small share of Indonesia’s imports, accounting for an average of 6 percent of the total over the last 3 years. Most of the inflationary impact of a depreciation is thus likely to come from rising Rupiah-denominated costs for imported inputs and intermediate goods as these filter into some consumer prices. The World Bank’s estimation is that a 10 percent depreciation in Indonesia’s NEER is associated with roughly a 0.5 percentage point rise in headline inflation. 5. Foreign investor portfolio flows return while credit growth moderates Financial market After following global equities markets higher into October, the rally in the JCI equity index performance has been stalled in November, reflecting some weakening in global market sentiment and solid… accompanying foreign equity portfolio outflows. As of 7 December, the JCI index was up just 0.6 percent on the quarter. However, government bond yields remain near historic lows on the back of strong foreign investor interest and the subdued inflation outlook (Figure 15). …and the Rupiah The Rupiah hit a three-year low in mid-November and remains down 6 percent for the depreciated slightly year against the US Dollar as of 7 December. With Indonesian inflation running stronger against the US Dollar… than its major trading partners, the pace of depreciation remains modest in real terms, consistent with the experience of other commodity exporters, although real depreciation has accelerated recently (Figure 16). …against a backdrop of Interbank interest rates have risen marginally since BI last tightened the lower bound of low interest rates the overnight deposit rate in August. Interest rates are low by historical standards and relative to current and projected CPI inflation, suggesting that monetary policy remains accommodative. T H E W O R L D B AN K | B AN K D U N I A December 2012 11 Indonesia Economic Quarterly Policies in focus Figure 15: The bond market rallied strongly this quarter Figure 16: …and Rupiah depreciation has been moderate in while equities have fluctuated since mid-October… real terms and compared with other commodity exporters (equity index, 1 August 2011=100; IDR per USD; (real effective exchange rate index, 2010 = 100) yield, percent) 1 Aug 2011=100 Percent, 000 IDR per USD 2010=100 2010=100 105 11 115 115 IDR 000 per USD 100 (RHS) 10 Brazil China 110 110 95 9 JCI equity 105 105 (LHS) Thailand 90 8 100 100 85 7 5-yr IDR government bond yield Indonesia (RHS) 95 95 80 6 South Africa 75 5 90 90 India 70 4 85 85 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Sources: CEIC and World Bank staff calculations Sources: BIS and World Bank staff calculations Credit growth, although Lending growth continues to slow Figure 17: Credit growth has slowed since May still relatively high, has from its near-term peak in May (year-on-year growth, percent) come down from its 2012, with nominal credit growth recent peaks Percent Percent slowing to 22.8 percent year-on- 40 40 year in October. Real credit growth (adjusted for contemporaneous Nominal inflation) has also slowed to 17.4 30 30 percent yoy from a peak of 21 percent in May, reflecting, among other factors, the weaker external 20 20 environment and recent BI policy measures (Figure 17). Real (deflated Investment loans continued to grow 10 by CPI) 10 strongly, up 30.3 percent in the year to October, around the highest in 9 months. Growth in working capital 0 0 loans slowed to 22 percent year-on- Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 year in October from 29 percent in Source: BI and World Bank staff calculations May, and consumer loan growth slowed modestly to 18.9 percent. The fact that much credit is directed towards working capital and investment, combined with prudential measures by BI (such as increasing loan-to-value requirements for certain loans) has allayed concerns over the sustainability of credit growth. However, it will be important to watch for early signs of overheating in capital and property markets, which could lead to a deterioration of credit quality. Commercial office sale prices across greater Jakarta soared to a new high (since the series began in 2008) in the third quarter of 33 percent year-on-year, though a large new supply of office space is expected in the beginning of 2013 which may help cap further gains. Banking sector indicators Bank profitability has declined marginally since mid-year, with the return on banking remain sound assets falling to 3.1 percent in October (from 3.2 percent in June), while return on equity increased slightly to 18.3 percent (from 18.2 percent in June). The financial system continues to expand its intermediation role; the loan-to-deposit ratio rose to 83.8 percent in October, up from 82.6 percent in the second quarter. Bank solvency, as measured by the Capital Adequacy Ratio (CAR) remained high, despite falling marginally to 17.3 percent in October (from 17.5 per cent in June), while non-performing loans were unchanged at 2.2 percent from Q2. T H E W O R L D B AN K | B AN K D U N I A December 2012 12 Indonesia Economic Quarterly Policies in focus Corporate profit growth Strong domestic consumption continues to buoy corporate sector profitability as remains strong, except in household purchasing power rises. However, with the outlook for resource sectors the mining sector remaining subdued, bank and leasing companies have been reducing their exposures to the mining sector in recent months, with year-on-year credit growth to the sector slowing to 20 percent in October, from 50 percent in January. Box 3: Developments in Indonesia’s corporate governance framework A number of initiatives currently underway in Indonesia may lead to major enhancements in corporate governance practices in the near 1 future. These enhancements will contribute to financial stability and could boost investor confidence. The need for improvement is clear. For example, the 2012 Corporate Governance Watch report, issued by the Asian Corporate 2 Governance Association (ACGA) indicated that Indonesia continues to lag behind its neighbours in the area of corporate governance, with Indonesia’s ranking falling back to the last place among the eleven Asian countries surveyed. 3 As stated by Mr. Mas Achmad Daniri, Chairman of KNKG, the National Committee on Governance , the challenge for Indonesian companies to address this relatively poor performance is to make corporate governance principles part of their corporate culture, since businesses still tend to follow a compliance or check-list based approach. On the other hand, Mr. Daniri indicated “companies interact with other stakeholders, including regulators. Therefore, it is very important that corporate governance and public governance reform must go 4 hand-in-hand�. Major developments in corporate governance have occurred in the past ten years as demonstrated, says Mr. Daniri by the “The Annual Report Award (ARA), an annual initiative started in 2001, [for awarding] improved reporting standards. The annual reporting standard in Indonesia can now be considered on par with international best practices. So far, ARA has attracted about 180 companies, both listed and non-listed companies from the banking and non-banking institutions as well as state-owned enterprises (SOEs), to compete for prestigious awards for the best annual report in various categories�. As the national producer of global and sector-wide Good Corporate Governance codes with a mandate to propagate the acceptance and application of good corporate governance principles in Indonesia, KNKG has undertaken a major update of the banking Code of Good Corporate Governance which was initially issued in 2004. The updated format is expected to be released in January 2013. At the regional level, the Indonesian government, together with five other ASEAN member countries (Malaysia, the Philippines, Singapore, Thailand and Vietnam) under the ASEAN Capital Market Forum (ACMF), has agreed to launch and adopt a common questionnaire that will be used for an ASEAN Corporate Governance Scorecard which has been supported by the Asian Development Bank since 2010. This move anticipates the eventual inter-connection of the participating ASEAN stock exchanges. The scorecard may be used not only as a benchmark for listed companies on the regional level but also as an instrument for policy makers to identify weaknesses and enhance the regulatory framework. For example, this scorecard has been the basis of a CG Conference Award in Indonesia organized by the IICD, Indonesia Institute for Corporate Governance Directorship on the 22 November 2012. 5 On the regulatory level, the Ministry of Finance has issued a new regulation on good corporate governance for insurance companies aimed at improving the governance structure and practices of the industry. In addition, as discussed in previous IEQs, OJK (Otoritas Jasa Keuangan), a new integrated supervisory authority, will take over the supervision and regulator function of Bapepam-LK, the current capital market regulator, on 31 December 2012, as well as the banking supervisory functions of Bank Indonesia on 31 December 2013. This new regulatory setup provides an opportunity to scale up the promotion and implementation of good corporate governance practices. BI announces a number On the regulatory front, Bank Indonesia has initiated a number of banking sector reforms of new banking intended to support financial system stability, the resilience and competitiveness of banks, regulations and promote intermediation. Among the most significant changes, BI announced the introduction of a multiple licensing regime linking banks' ability to expand banking services to the level of their Tier-1 capital base. The rules will be implemented from March 2013 with a transition period of 3 years for commercial banks and 5 years for regional development banks, and are expected to trigger more consolidation in the banking sector. All banks will also be required to lend at least 20 percent of their portfolios to micro, and small- and medium-scale firms. These lending requirements could impact lending growth as banks adjust to the new regulations. However, the lead time of six years for full implementation should mitigate this, and micro and SME lending is required to reach only 5 percent of total lending by end-2013. 1 OECD Economic Outlook, Volume 2011/2 2 CG Watch 2012: Market Ratings. September 2012, ACGA Ltd 3 www.knkg-indonesia.com 4 Extracts from an interview held in October 2012 with the International Finance Corporation (IFC) Corporate Governance Team 5 Ministry of Finance regulation No: 152/PMK.010/2012, 3 October 2012 T H E W O R L D B AN K | B AN K D U N I A December 2012 13 Indonesia Economic Quarterly Policies in focus Following the introduction of loan-to-valuation (LTV) regulations for various classes of loans financing cars, motorcycles and residential mortgages in mid-2012, BI is also set to introduce similar LTVs for Islamic banking effective 1 April 2013. This follows strong growth in Shariah-compliant lending products. Shariah lending for consumption has risen 46 percent over the past year, outpacing banking consumption loan growth of 19 percent. BI also announced that foreign bank branches must hold regulatory capital onshore in government or corporate bonds, new regulations on trustee services, and relaxed restrictions on holding stakes in multiple banks in Indonesia. There are also new bank ownership rules that will limit any financial institution to own only a maximum of 40 percent of a commercial bank's capital, or 30 per non-financial institution and 20 percent for individuals. Ownership limits for Shariah banks will be set at 25 percent across the board. The regulation will apply equally to domestic and foreign owners of commercial banks. However, bank ownership stakes of greater than 40 percent will be allowed selectively, subject to BI approval. The final review of financial strength and corporate governance of the banks is expected to be completed by end-2013. Box 3, above, provides a short review of Indonesia’s evolving framework for overall corporate governance. 6. Fiscal deficit widens on rising subsidy spending and subdued revenue growth The fiscal deficit has Indonesia’s aggregate fiscal position remains solid but the burden of high energy subsidy expanded in the year to spending has been very visible in 2012. In the year to end-October, the overall fiscal date on the back of high balance booked a deficit of IDR 76 trillion (40 percent of the full-year revised Budget target energy subsidy spending of IDR 190 trillion), reflecting higher energy subsidy spending and weaknesses in and a moderation in revenue collection revenues (Figure 18). This is significantly higher than the comparable figures in 2010 and 2011, when the fiscal balance remained in surplus from January to November (as expenditures tend to be back-dated, the deficit tends to rise at the end of the year). The fiscal deficit for 2012 The 2012 full year fiscal deficit is likely to exceed that in the revised Budget, as the as a whole is set to Government still needs to disburse one third of budgeted total spending in the remaining exceed that in the revised two months of the year, while revenue has continued to moderate. However, Indonesia’s Budget overall fiscal position does remain strong, with the government debt-to-GDP ratio set to continue declining, to below 24 percent of GDP in 2012. Financing has remained on track, with 90 percent of gross securities issuance needs for the year met by end-October. Figure 18: The Budget deficit through October expanded on Figure 19: Revenue collection has moderated on the back of higher energy subsidy spending continued weaker income tax and non-tax revenue receipts (cumulative monthly budget balance, IDR trillion) (percentage point contributions to annual revenue growth) 2009 2010 2011 NTR-Others NTR-Non oil&gas 2012 2008 NTR-Oil&gas TR-Others TR-Trade TR-VAT IDR trillion IDR trillion TR-Income oil & gas TR-Income (non oil & gas) 100 100 Total Percent Percent 40 40 50 50 20 20 0 0 -50 -50 0 0 -100 -100 -20 -20 Jan Mar May Jul Sep Nov 2003 2004 2005 2006 2007 2008 2009 2010 20112012* Source: MoF and World Bank staff calculations Note: *2012 data are October to October. TR is tax revenue and NTR is Non-Tax Revenue Source: MoF and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A December 2012 14 Indonesia Economic Quarterly Policies in focus Weaker external demand In the year to end-October, total revenue stood at 73 percent of the full-year revised and lower export- and Budget target (IDR 997 trillion), up only 11 percent compared to 19 percent growth in the commodity-related same period last year (Table 4). Weakness in revenue collection growth was seen across receipts weighed on most major revenue streams, with the exception of Value Added Tax (VAT) (Figure 19). revenues Tax revenue, which accounts for two thirds of total revenue, grew by only 14 percent relative to 20 percent over the same period in 2011. Income tax revenues (non- oil-and- gas), accounting for one third of total revenue, grew by only 8 percent compared to 19 percent in the same period last year, hit by weakness in corporate income tax revenue as weak external demand and low commodity prices compressed profit earnings. Export taxes continued to decline through October and dropped by 26 percent compared to the same period in 2011. On the other hand, VAT continued to perform strongly, supported by robust private consumption and strong import growth through the second quarter. The general moderation in revenue growth is in line with the slowdown in nominal economic growth highlighted previously. However, non-tax revenues, constituting a quarter of total revenues and consisting mainly of oil and gas receipts, also contracted on the back of lower than expected oil production. Table 4: Budget disbursement rates through end-October remain relatively low (2012 Budget realization by end-October) Nominal value by end As share of full year Year-on-year nominal October (IDR Trillion) revised Budget levels growth Jan - Oct (percent) (percent) 2010 2011 2012 2010 2011 2012 2010 2011 2012 State revenue and grants 754 899 997 75.9 76.8 73.4 18.2 19.2 10.9 Tax Revenues, of which 560 674 768 75.4 76.8 75.6 14.5 20.4 13.9 Non-oil & gas income tax 241 287 311 78.4 78.2 69.8 13.0 19.2 8.4 Value added tax 172 204 259 65.2 68.3 77.0 16.9 18.8 27.0 Export tax 5 25 18 82.6 97.3 79.2 719.2 449.4 -25.8 Non Tax Revenue 193 223 228 77.9 77.7 66.7 30.9 15.6 2.2 Expenditure 732 894 1,073 65.0 67.7 69.3 7.1 22.1 20.0 Central Government, o/w 463 578 681 59.2 63.7 63.7 4.7 25.0 17.9 Personnel 122 146 169 74.8 79.8 79.4 8.8 19.9 15.5 Material 62 73 86 55.5 50.9 46.2 21.8 16.2 18.7 Capital 39 54 74 41.3 38.4 43.7 -11.1 37.8 36.3 Energy subsidy 90 165 184 62.2 84.4 90.8 69.4 83.8 11.6 Social assistance 47 38 53 65.9 46.7 96.3 -6.2 -18.4 39.5 Transfers to regions 270 316 391 78.3 76.6 81.7 11.2 17.1 23.8 Source: MoF and World Bank staff calculations The fiscal costs of energy Through end-October, total expenditure disbursement stood at 69 percent of the revised subsidies continue to Budget total, up by 20 percent over the same period last year. However, this level of rise budget disbursement was largely driven by higher energy subsidy spending, which reached over 90 percent of the revised Budget by the end of October, and belied weak capital and material spending relative to targets (Table 4). New measures to control fuel consumption introduced earlier in the year, such as restricting government, state owned, and industry vehicles from using subsidized fuels, have not so far proven to be effective. In addition, a plan to restrict private cars from using subsidized fuel that was to be piloted in Jakarta and surrounding areas was also delayed due to supporting infrastructure not being ready. T H E W O R L D B AN K | B AN K D U N I A December 2012 15 Indonesia Economic Quarterly Policies in focus The Government and The widening price differential Figure 20: The volume of subsidized fuel continues to rise Parliament have agreed between the subsidized and in the absence of fuel subsidy reform to a further increase in market prices of fuel and the (subsidized fuels volume, million kiloliters, KL) the subsidized fuel quota rapid increase in vehicles Million KL Million KL for 2012 have led to strong subsidized 46 46 fuel consumption in 2012, 2nd addition, 1.2 million KL beyond what was initially 44 44 projected in the budget. In 42 1st addition, 4 million KL 42 response, the Government recently increased the quota 40 40 volume of subsidized fuels by 4 million kiloliters (KL) to 44 38 38 million KL for the full year 2012. However, even this 36 36 6 Budget additional volume is projected 34 quota 34 to be insufficient (Figure 20). By the end of September, 32 32 subsidized fuel consumption exceeded the initial quota for 30 30 the January to September 2010 (Actual) 2011 (Actual) 2012 period by 15 percent. Further, Source: Ministry of Energy and Mineral Resources (ESDM) regional data indicate that and World Bank staff calculations high consumption relative to quota is most evident in densely populated cities, provinces that operate mining and plantation activities, and provinces that border with neighboring countries, pointing to increasing urban demand and potential leakages (Figure 21). The Government and Parliament have recently agreed to the addition of another 1.2 million KL in subsidized fuel volume to ensure adequate supply until the end of the year.7 Figure 21: Excess subsidized fuel use relative to quota is centered in densely populated cities, mining, and border areas (difference between realization of subsidized fuel volume and quota from Jan-Sep, percent - map; thousand kiloliter - bar chart ) Source: BPH Migas and World Bank staff calculations 6 http://www.esdm.go.id/berita/migas/40-migas/5961-kuota-bbm-bersubsidi-naik-404-juta-kiloliter.html 7 http://www.esdm.go.id/berita/migas/40-migas/6086-dpr-ri-dan-pemerintah-sepakat-tambah-kuota- bbm-bersubsidi-12-juta-kl.html T H E W O R L D B AN K | B AN K D U N I A December 2012 16 Indonesia Economic Quarterly Policies in focus Capital and material Capital spending reached Figure 22: After 10 months of 2012, some of the budget expenditures have IDR 74 trillion through allocations remaining to be spent are significant recorded strong nominal October, up 36 percent over (2012 Budget, revised Budget, WB December Projection, and growth, though they are 2012 realization by end-October, IDR trillion) the same period last year, still behind target while realized materials Budget Revised Budget expenditure was IDR 86 trillion, up 19 percent on the WB Projection Realization by end October same period last year. IDR trillion IDR trillion Despite this strong growth, 400 400 capital and material spending has not kept pace 300 300 with increasing budget allocations. In the year to end-October, disbursements 200 200 for capital and materials stood at 44 percent and 46 percent of the revised 100 100 Budget, respectively, leaving more than half of the 0 0 allocation to be spent in the Personnel Material Capital Subsidy Social remaining two months of the year (Figure 22). Source: MoF and World Bank staff calculations Efforts to address capital Despite strong nominal spending growth, the significant under-spending on capital budget disbursement expenditures is an impediment to the Government achieving its infrastructure issues are ongoing development targets. Although efforts to improve budget execution led by TEPPA (the budget execution monitoring committee) indicated an improvement in H1 2012, long- standing structural challenges such as weak budget preparation and complex procurement procedures remain. However, the new regulations on procurement and land acquisition which were issued in mid-2012 are expected to improve budget execution in 2013. To further accelerate budget preparation in 2013, the Ministry of Finance (MoF) has recently introduced a new policy to further streamline the budget preparation process by integrating and automating line ministries’ work plan documents (RKA-KL) with budget warrants (DIPA), and centralizing the approval process in the Directorate General of Budget. In contrast, the Directorate General of Treasury, which used to authorize the budget warrant, will no longer be involved in budget preparation, but will focus on budget implementation and disbursement. The World Bank’s On the back of continued higher spending on energy subsidies coupled with a further projection for the budget moderation in revenue collection, the World Bank has increased its fiscal deficit projection deficit in 2012 is 2.5 for 2012 to 2.5 percent of GDP, up slightly from 2.4 percent in the October IEQ and above percent of GDP, slightly the revised Budget level of 2.2 percent of GDP. However, as discussed in the October above the revised Budget level IEQ, Indonesia’s overall fiscal position remains solid and the Government has the necessary cash to finance a modest overshooting of the fiscal deficit. Contingency funds, which amount to IDR 40 trillion, allocated for energy subsidy risks and compensation programs if the subsidized fuel price were to increase, can be used to finance the additional deficit. The Government also still holds IDR 35 trillion accumulated unspent balance (SAL) which can also be used to finance this higher deficit. Moreover, the Government can also carry forward additional financing needs arising from higher fuel subsidy spending in 2012 to the 2013 Budget. T H E W O R L D B AN K | B AN K D U N I A December 2012 17 Indonesia Economic Quarterly Policies in focus The 2013 Budget, which The Parliament approved the Figure 23: Capital and subsidies spending set to increase was approved by 2013 Budget in late October. in 2013 Parliament in late Overall, revenue is projected (IDR trillion) October, is broadly in line to grow by 9 percent and 2012 revised Budget with the proposal 2013 proposed Budget expenditure is expected to rise submitted by the 2013 Budget IDR by 13 percent relative to the IDR Government Trillion 2012 revised Budget. A 400 Trillion 400 Budget deficit of 1.7 percent of GDP, or IDR 153 trillion, is 300 300 targeted, lower than the 2012 revised target of 2.2 percent of GDP (Table 5). The 200 200 assumptions and expenditure compositions of the approved 100 100 Budget are broadly in line with the proposed budget (Figure 0 0 23). Nonetheless, there are five aspects worth highlighting. First, the Government will increase the threshold for Source: MoF and World Bank staff calculations income tax exemption from IDR 15.8 million to IDR 24.3 million to support the purchasing power of lower income earners. Second, the 2013 Budget foresees a 28 percent increase in capital expenditure relative to the 2012 revised Budget, to support infrastructure development. Third, as discussed in the above prices section, an electricity tariff hike for customers with greater than 900 VA meters, of 15 percent on average, was approved. However, fourth, spending on energy subsidies will remain substantial as the Budget does not include fuel subsidy reform. The Law does provide flexibility for the Government to increase subsidized fuel prices without the need obtain Parliamentary approval, conditional on macroeconomic developments or subsidy parameters deviating substantially from Budget assumptions. Fifth, as in the 2012 Budget, the 2013 Budget Law allows the Government to quickly respond to emergency conditions, subject to Parliamentary approval within 24 hours. 2013 financing needs will The Government’s net financing needs for 2013 of IDR 153 trillion, or 1.65 percent of be met largely from the GDP, will largely be financed by the issuance of government securities. The gross issuance of government securities issuance needs for 2013 are projected to be IDR 282 trillion. In 2013, the securities government’s debt management strategy will entail issuing a wider variety of bond tenors, and will prioritize issuing longer maturity bonds (10 years and above), issuing USD- denominated bonds in the domestic market, and conducting more debt switching for liquidity management purposes. In the medium term, the Government also aims to increase the share of domestic debt through the issuance of government securities and domestic loans, while at the same time reducing the proportion of external debt. T H E W O R L D B AN K | B AN K D U N I A December 2012 18 Indonesia Economic Quarterly Policies in focus Table 5: The fiscal deficit will expand in 2012 on higher energy subsidy spending and a moderation in revenue collection (IDR trillion, unless otherwise indicated) 2011 2012 2012 WB December 2012 2013 2013 (p) forecast Difference relative (f) to: Outcome Revised WB Revised MoF WB Budget WB Budget* Dec Budget Semest October Dec 2012** er I 2012 2012** report A. State revenue and 1,211 1,358 1,329 -29.5 -33.6 -10.9 1,530 1,493 grants 1. Tax revenue 874 1,016 1,193 -22.1 -22.8 -7.3 1,193 1,148 2. Non-tax revenue 331 341 332 -7.3 -10.8 -3.7 332 340 B. Expenditure 1,295 1,548 1,539 -9.4 -14.2 -2.5 1,683 1,631 1. Central 884 1,070 1,059 -10.3 -11.6 -2.5 1,154 1,112 government, o/w Personnel 176 212 204 -8.3 -2.2 0.0 241 232 Materials 125 187 159 -27.9 -11.3 -1.5 167 150 Capital 118 169 143 -25.2 -9.9 -2.4 216 195 Subsidies, o/w 295 245 346 100.4 -1.4 0.7 317 326 Fuel subsidy 165 137 216 79.0 -0.4 1.9 194 205 Social 71 55 54 -1.7 5.8 0.0 63 62 2. Transfers to the 411 479 480 0.9 -2.6 0.0 529 518 regions C. Primary balance 9 -72 -92 -20 -14 -8 -40 -25 D. SURPLUS / DEFICIT -84 -190 -210 -20 -19 -8 -153 -138 As percent of GDP -1.1 -2.2 -2.5 -0.3 -0.2 -0.1 -1.7 -1.5 Key economic assumptions/outcomes Economic growth 6.5 6.5 6.1 -0.4 N.A 0.0 6.8 6.3 (percent) CPI (percent) 3.8 6.8 4.4 -2.4 -0.4 0.0 4.9 5.1 Exchange rate 8,779 9,000 9,400 400 150 50 9,300 9,500 (IDR/USD) Crude oil price 112 105 115 10.0 5.0 0.0 100 105 (USD/barrel) Oil production ('000 900 930 900 -30.0 0.0 0.0 900 900 barrels/day) Note: *the revised Budget includes the option of a IDR 1,500 fuel price increase provided the ICP price is on average, over a six month period, 15 percent above the revised Budget assumption of USD 105 per barrel . **World Bank revenue estimates are based on a different methodology than the Government to derive projections for nominal GDP (see Part C of the June 2010 IEQ for a full discussion). Source: MoF and World Bank staff calculations 7. Policymakers face an array of external and domestic risks in 2013 Negative external demand As emphasized in the July and October editions of the IEQ, global economic conditions shocks remain a remain weak and there is a clear ongoing risk that Indonesia will face negative external danger… shocks. In particular, while the near-term risk of an intensified sovereign debt and banking crisis in the Euro Area appears reduced, economic conditions in the world’s largest economic bloc remain extremely challenging. In the US, current legislation, unless modified, would impose a drag of around 5 percent of US GDP (although World Bank baseline forecasts assume a smaller cut of around 1 percent of GDP). It will be important for the US to avoid this “fiscal cliff� if global growth is to stage the modest recovery assumed in the base case for 2013. China appears to have avoided a hard landing, but it remains to be seen how its economy will adapt to a slower sustainable pace of growth than in the past and to a changing mix of growth sources. Should conditions in these major trading partners deteriorate, Indonesia, along with other emerging economies, will likely be impacted by reduced demand for its exports and reduced foreign investment inflows, or even outflows. T H E W O R L D B AN K | B AN K D U N I A December 2012 19 Indonesia Economic Quarterly Policies in focus …and there are also Domestically, investment spending has been a potent source of growth. It is not yet clear homegrown risks to whether the moderation in investment in the third quarter marks the start of a cooling demand trend, as investment tends to be a volatile component of GDP and capital imports did pick up slightly in October. However, there are risks to the currently high rate of investment spending. First, investment has historically tended to be closely correlated with global commodity prices and, as these remain well off their post financial crisis highs, it is possible that investment will begin to be weighed down as reduced commodity-related earnings spill over into the wider economy. Second, a number of policy announcements over the course of 2012 have raised some concerns over the domestic business and investment policy environment. These concerns may intensify in the lead-up to national elections in 2014, particularly since investor risk appetite globally remains fragile. Policy could be tested Even if these negative risks to domestic demand do not materialize, economic even if the growth developments in 2013 may still test policymakers. In particular, should strong growth environment remains continue in 2013, it will be important to watch for signs that the economy is overheating. supportive As with the negative risks to demand, the catalysts for an excess of demand may be external or local. Strong portfolio investment inflows, which have picked up towards the close of 2012, may continue to increase on the back of loose monetary policy in major economies and the global search for yield. Domestically, some increased cost-push inflationary pressures can be foreseen, including from high minimum wage increases, ongoing pass-through from the Rupiah depreciation which has occurred in 2012, and the temporary impact of electricity subsidy reform. Given the ongoing strength of domestic demand, which in the past has received an additional impulse from pre-election spending, it will be important to respond proactively to nascent inflation risks or to signs that the investment needed to expand the economy’s productive capacity is not keeping pace. International and The base case sees solid GDP growth in Indonesia in 2013, as global economic domestic uncertainties conditions turn mildly more supportive. Yet uncertainties over the international outlook remain elevated, placing remain elevated and there are material risks of more negative external shocks buffeting the focus on the quality the economy. In light of the continued downside risks to the outlook, and scope for more of policy making… political noise in the run-up to the 2014 elections, there is a need for continued efforts to support improvements in the quality of policy making. This includes a continued focus on crisis mitigation policies, building on the considerable progress Indonesia has already made in securing sources of contingent financing and formulating crisis response protocols for use in times of acute market stress. It is also raises the importance of continuing to tackle the more structural constraints to growth, notably by working to close the large infrastructure gap and improve the efficiency of public spending, thus raising the resilience and sustainable growth rate of the economy. …especially with regard Supporting the private sector is also crucial, since rapid growth in investment spending to the investment climate has been a major driver of the recent robust pace of growth, which is lifting living standards in Indonesia. Investment requires making long-term, irreversible commitments, and doing this requires confidence and the ability to effectively plan ahead. Maintaining the clarity and consistency of the regulatory framework, and effectively managing communication concerning any new reforms, may make a decisive difference for investment, and hence for the overall economic outlook. T H E W O R L D B AN K | B AN K D U N I A December 2012 20 Indonesia Economic Quarterly Policies in focus B. SOME RECENT  DEVELOPMENTS IN  INDONESIA’S  ECONOMY  1. Will rising minimum wages affect job creation in Indonesia? Minimum wage In recent months, there have been a series of labor demonstrations to demand higher negotiations for 2013 minimum wages and that the costs of future social security benefits be borne by triggered labor protests employers. Workers are seeking to receive what they consider a fair share of company and debates about rising profits at a time of strong economic growth. In response, the newly elected Governor of labor costs in Indonesia Jakarta, Joko Widodo, agreed to raise minimum wages from IDR 1.53 million in 2012 to IDR 2.2 million in 2013. Other local governments across the country are following suit. There are concerns, however, that increases in minimum wages may feed into increases for all wage and salary workers, driving up labor costs in Indonesia. Employer groups argue that this will affect Indonesia’s competitiveness and may discourage investments in labor-intensive industries, including in manufacturing. What will be the impact of rapidly rising minimum wages on Indonesia’s labor market? This section provides a brief review of the evidence that is available to answer this question. Figure 24: Increases for 2013 will likely push Indonesia’s Table 6: Worker productivity lags behind minimum wages above regional neighbors (minimum wage [MW], average wage, and value added per (minimum wage levels, USD, select East Asian countries) worker per month in select East Asian countries, 2008) Ratio of USD USD Value Mini- Avera- Ratio of MW to 300 300 added mum ge MW to value per wage wage average added Malaysia worker 250 250 (USD) (USD) wage per (USD) worker China 119.4 302.9 276.5 0.39 0.43 200 200 Philippines Indonesia 95.3 159.9 207.3 0.60 0.46 150 150 Philippines 149.7 163.8 223.9 0.91 0.67 China Indonesia Thailand 66.6 235.4 401.2 0.28 0.17 100 100 Thailand Vietnam 26.1 n/a 100.4 n/a 0.26 50 50 Vietnam 0 0 2007 2008 2009 2010 2011 2012 2013 Note: Indonesia minimum wages based on DKI Jakarta Source: Doing Business; average wage from ILO (assuming USD exchange rate in 2013 is IDR 9,500); LABORSTA. other countries based on the minimum wage in major cities or the capital region. These wages are not adjusted for productivity differences across countries Source: World Bank Doing Business, 2013, and press and regulations for 2013 T H E W O R L D B AN K | B AN K D U N I A December 2012 21 Indonesia Economic Quarterly Policies in focus Minimum wages are Minimum wage policies and employment protection legislation (including regulations about necessary but the severance pay and the usage of fixed contracts) are necessary to address labor market challenge is finding the failures that can result in inefficient or inequitable outcomes.8 Uneven market power, in a right level situation where there are relatively few formal employers given the size of the workforce, can enable firms to set wages that are lower than would be agreed upon under more competitive conditions. The challenge that policymakers face, however, is setting minimum wages and other employment protection regulations at the right levels. If too low, then workers face excessive risks and low-income security. If too high, then it can negatively affect the investment climate and constrain job creation. a. Minimum wage level and employment protection legislation in Indonesia Minimum wage increases The recently negotiated minimum wage levels are a marked departure from previous for 2013 in Indonesia are years. Between 2006 and 2012 minimum wages in Indonesia grew, on average, by 7.6 the steepest in recent percent per year. These increases were moderate in comparison with regional neighbors history… and other emerging middle-income countries. Relative to 2012, minimum wage levels for 2013, however, have been raised by as much as 43.9 percent in Jakarta and 49.7 percent in East Kalimantan. The increases, however, are not consistent across all regions in Indonesia since minimum wages are set at the provincial, and sometimes also district and municipality, levels of government. Minimum wages in North Sumatra, for example, will rise by 8.8 percent and in Papua by 7.9 percent. … and the introduction of In addition to rising minimum wages, some of the labor protests also focused on the issue social security benefits of who will pay for social security benefits promised to workers under the National Social will raise labor costs Security System (SJSN) Law (No. 40/2004). The Law states that each participant must further pay his/her contributions, determined either as a percentage of salary or a certain nominal amount. While work accident and death benefits must be fully employer-paid, according to the law, cost sharing applies to the pension, old age savings and health benefit programs. Since informal workers have no employer, they must pay the full cost for all of the SJSN programs, except health contributions for the poor must be paid by the government. Unions, however, are demanding that employers bear the full cost of all the programs for formal sector workers. Not only would meeting unions’ demands require amending both the SJSN Law and the Social Security Administrative Bodies Law (No. 24/2011), but it could undermine the financial sustainability of the future system and the extent of benefit coverage. The challenges extend beyond who will pay the contribution. The level of required contributions, regardless of the question of who pays, will also have an impact on labor costs and Indonesia’s competitive advantage. While Indonesia’s Employers may respond to rising labor costs by downsizing staff. Indonesia’s severance employment protection 9 rates, however, are the highest in the East Asian region, making reducing permanent legislation is among the staff in response to steep minimum wage increases a costly option. At the same time, most rigid in the region options to employ temporary contract workers have been limited, and regulations concerning usage of fixed-term contracts are among the most restrictive in the region. In addition, the Ministry of Labor and Transmigration recently issued a regulation on outsourcing of work, which is the contracting out of services and business processes to a separate company, and outsourcing of labor.10 According to the regulation, only “supplemental� work can be contracted to a service provider and must be registered with the local Manpower office. This may limit employers’ flexibility to adjust to rising labor costs or to implement efficient manufacturing practices that rely on supply chains through which component production is outsourced to smaller firms. Outsourcing of labor is now limited to only five activities: cleaning, employee catering services, security services, support services in the mining and oil sector, and employee transportation services. There has been limited Each of these labor issues has been debated separately through tri-partite negotiations debate about the long- between the Government, unions and employer groups. Less attention, however, has term impact of these been devoted to how these issues are interlinked and contribute collectively to rising labor policy changes costs and the pace of job creation in Indonesia in the long run. These concerns affect not only those included in the tri-partite discussions, but also the majority of the workforce 8 World Bank, 2013 World Development Report on Jobs. http://go.worldbank.org/TM7GTEB8U0 9 World Bank, 2013 Doing Business Report. http://www.doingbusiness.org/ 10 Regulation No. 19 of 2012 on Conditions for Outsourcing the Implementation of Work to Other Companies. T H E W O R L D B AN K | B AN K D U N I A December 2012 22 Indonesia Economic Quarterly Policies in focus whose interests are not represented. Indonesia’s workforce is currently 110.8 million workers strong (Sakernas, 2012), 40 percent of which are working in the formal sector. Approximately 90 percent of this workforce, however, consists of workers who are employed without a contract or work in the informal sector (Figure 25). In 2007, unions directly represented approximately 11 percent of the workforce (Sakernas, 2007). The voices of these “outsider� workers that are not represented by unions should also be included in the policy dialogue around minimum wages and social security benefits, since they have potentially the most to lose through labor policies that may have a negative impact on the pace of job creation, particularly in labor-intensive manufacturing. In Indonesia, minimum Countries have adopted a variety of approaches to setting minimum wages. Some wages influence all countries set them at a low level in order to protect low-wage workers and guarantee them wages a basic level of income. Some countries use minimum wages as the primary mechanism to set wages for as many formal sector workers as possible. In other countries, even if there is no formal mechanism linking formal wage setting with the minimum wage, the latter may act as a benchmark for negotiations over all wages. In Indonesia’s case, it does appear that increases in minimum wages are linked to increases in the average wage. Regression analysis on the period from 1993 to 2007 found that a 10 percent increase in the minimum wage was associated with a 3 percent increase in average wages for all 11 wage and salary workers in the same year. Increasing minimum wages have raised concerns in Indonesia, therefore, because this may trigger increases in wages and salaries for all contracted workers, not only for low-wage workers. The steep minimum wage increases for 2013, could thus significantly drive up total labor costs in Indonesia. Figure 25: Indonesia’s workforce is highly informal… Figure 26: …but for those in the formal sector, minimum (distribution of active workforce by employment status, 2007) wages signal increases for all (minimum wages and average employee wages) Employers Permanent IDR 2007 IDR 2007 Average employee wage 2% contract prices prices Average minimum wage employees 7,000 7,000 3% Fixed-term 6,000 6,000 Informal contract agricultural employees 5,000 5,000 27% 3% 4,000 4,000 3,000 3,000 Employees with no 2,000 2,000 contract 38% 1,000 1,000 Informal non- 0 0 agricultural 27% Source: Indonesian Family Life Survey (IFLS) Source: Sakernas … because collective Relatively few firms negotiate the terms of conditions of employment with employees bargaining mechanisms through collective labor agreements or company regulations. In fact, Indonesia ranks at the company level are among those countries with the lowest rates of workers who are covered by collective weak 12 bargaining agreements. Unions, therefore, see the minimum wage setting process as one of the few opportunities to negotiate wages with employers. The level of increase in the minimum wage sets expectations for all workers across the wage spectrum. 11 World Bank, Indonesia Jobs Report, 2010. http://documents.worldbank.org/curated/en/2010/06/12711439/indonesia-jobs-report-towards-better- jobs-security-all-vol-2-2-main-report 12 World Bank, World Development Report 2013: Jobs. http://econ.worldbank.org/external/default/main?contentMDK=23044836&theSitePK=8258025&piPK =8258412&pagePK=8258258 T H E W O R L D B AN K | B AN K D U N I A December 2012 23 Indonesia Economic Quarterly Policies in focus b. Effects of minimum wage increases on job creation Rises in minimum wages Increases in the minimum wage are associated with a decrease in formal sector are associated with employment. Regression analysis from the period 1993-2007 shows that while minimum reduced hiring of new wage increases had no apparent effect on overall employment or unemployment rates, workers in the formal there are indications that employers responded by hiring fewer employees, leading to a sector contraction of job creation in the formal sector. The research results showed that a 10 percent increase in minimum wages, on average, was associated with a 1 percent decline 13 in both formal and industrial sector employment. The direction of the causality is not clear; increases in employee wages may by buoyed by strong economic growth that, in turn, triggers subsequent increases in minimum wages. Nevertheless, these effects were felt most strongly the year following the minimum wage increase, but weakened after two years. It is difficult to know to what extent the 2013 minimum wages increases may affect formal sector job creation since they are almost four times as high as the largest minimum wage increases during the period covered by the research. Box 4: Labor regulations: a “plateau� effect New data and more rigorous methodologies have spurred a wave of empirical studies over the past two decades on the effects of labor regulations and minimum wages on employment, wages, the distribution of wages, and productivity. Based on this wave of new research, the majority of minimum wage studies find negative employment effects, especially on young workers, but the magnitude tends to be small. In countries with large informal sectors, the generally modest impact of employment protection legislation (EPL) and minimum wages may stem, in part, from poor coverage and weak enforcement. Many countries set EPL and minimum wages in a “plateau� range where impacts on employment and productivity are modest. However, when the edge of the plateau is reached (either too-strict or too-loose), the impacts can be more negative. Large increases in the minimum wage in Colombia during the late 1990s, for example, led to significant employment losses, exacerbated by weak demand at the time. Source: World Bank, World Development Report 2013: Jobs But even after increases Not all employees benefit from minimum wages. This is due to high rates of non- are set, not all employees compliance with minimum wage policies. In 2008, approximately one-third of all receive the minimum employees reported that they earned less than the minimum wage. Regression analysis wage… of historical data from 1993-97 shows that non-compliance increased by 2.6 percent when minimum wages were raised by 10 percent.14 Non-compliance is more common among micro- and small-sized firms that are typically informal (i.e., not incorporated) and are more likely to fall under the radar of labor inspectorates. Further research is needed to see whether non-compliance has increased or decreased since 1997, and which workers are more likely to be affected by non-compliance. Figure 27: Non-compliance tends to increase with rising Figure 28: …and small-sized firms tend to be less compliant minimum wages… (share of workers earning less than minimum wages, percent, (minimum wages and share of workers earning less than by firm size, 2008) minimum wage levels, 1990-2011) Percent Percent 60 Percent IDR 5,000 70 70 Average hourly 62.7 50 60 60 4,000 Non-compliance rate 50 50 40 40.9 35.2 3,000 40 40 30 28.2 30 30 2,000 15.9 20 20 20 1,000 10 10 10 0 0 0 0 1-4 5-19 20-100 >100 Total 1990 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 people people people people Company size Source: Sakernas Source: Sakernas 13 World Bank, Indonesia Jobs Report, 2010. http://documents.worldbank.org/curated/en/2010/06/12711439/indonesia-jobs-report-towards-better- jobs-security-all-vol-2-2-main-report 14 Ibid. T H E W O R L D B AN K | B AN K D U N I A December 2012 24 Indonesia Economic Quarterly Policies in focus …which tends to affect Poor households benefit less from minimum wage increases. First, many of the poor do low-wage workers more not work in the formal sector and do not earn regular wages. Second, the majority (55 percent in 2006) of poor workers with salaried jobs report that they earn less than the 15 minimum wage. This is mostly likely because they tend to work in micro-firms that are more likely to be non-compliant in paying minimum wages. c. Changes in the process for setting minimum wages Indonesia revised the The current process for setting minimum wages was first laid out in the 2003 Manpower process for setting Law in which local tripartite wage councils prepared a proposed level that was based on a minimum wages in decent standard of living for workers. Governors (for provinces) and heads of districts and 2006… mayors (for district and municipalities) finalize the level and set the new minimum wage. In 2005, the Minister of Manpower and Transmigration decreed that local wage councils were required to use a new standard for calculating the cost of living for workers (Kebutuhan Hidup Minimal, KHL), which was to be used as an input for determining minimum wages. The KHL, calculated from a basket of 47 basic commodities and 16 services, was on average 38 percent higher than the previous living standards measure. … but the process needs In 2007, the authority for calculating the KHL shifted from Statistics Indonesia (BPS) to the to become less political tripartite local wage councils (Dewan Pengupahan). Unions and employer groups conduct and more technically separate surveys to calculate the KHL, which is then negotiated and a compromise figure driven is agreed upon. Recent research indicates that this method overstates the real increase in prices; during 2007-2011 KHL increases were almost double the estimated increase in the rate of inflation.17 Nevertheless, the influence of the KHL on minimum wages – although positive – is relatively small. The other factors considered by the wage councils are not publicly released. The shift from a technical to negotiated approach partly explains the large variation in minimum wage increases across regions. Revisions to the Since the process of determining minimum wages is mostly based on negotiations, and minimum wage setting only weakly linked to technical assessments of cost of living increases, the process has process are needed to become highly contentious. A more technical approach to setting minimum wages can reduce the risk of future improve the transparency and perceived fairness of the process while, at the same time, labor unrest minimizing business uncertainty and output losses. The appropriateness of the KHL bundle should be re-assessed, and a single transparent process to re-calculate the annual KHL should be agreed to in advance. This revised KHL should become the primary determinant for proposing minimum wage increases; other factors that contribute to the calculation should be standardized and made available for public scrutiny. Shifting towards such a transparent, technically-driven approach will help to ensure that the minimum wage setting process will not be subject to interference by local politics or the interests of employers or unions. This will also improve the transparency and predictability of future minimum wages, which will help boost investor confidence in Indonesia by facilitating business planning and potentially reducing the risk of labor unrest. d. Adopting a long-term view on job creation and worker protection Broader dialogue is also Minimum wage policies are closely linked to other employment protection measures: needed on a long-term severance pay, restrictions on fixed-term contracts and outsourcing, and the introduction reform strategy that of social security benefits such as pensions and accident insurance. There has been works for all workers… strong and vigorous debate on each of these issues, but workers and employers remain trapped in a “lose-lose� situation. Little effort has been made to consider how the policies and regulations work in tandem to protect workers, or their effect on job creation. There is a need for the Government, workers (represented not only by unions but also considering the interests of the large population of informal workers) and employers to shift towards a long-term view of labor policy reform in Indonesia and find “win-win� solutions that work for all. Together, these stakeholders should consider what blend of policies and instruments can be applied to provide real protection for workers without compromising investment in labor-intensive industries and the pace of quality job creation in Indonesia. Such a discussion will also require addressing and resolving some of the issues related to establishing the national social security systems. This will include how to expand 15 Ibid. 16 Chris Manning and Raden Muhamad Purnagunawan, 2012. 17 Ibid. T H E W O R L D B AN K | B AN K D U N I A December 2012 25 Indonesia Economic Quarterly Policies in focus coverage, designing the right benefit package, ensuring that the future system will be financially sustainable in the long-run, transforming the institutions responsible for the delivery and oversight of the social security system, and synergizing the labor law with the introduction of the social security employment programs. …and is driven more by This section has briefly reviewed the evidence to inform the discussion on minimum research-based evidence wages, drawing on the findings of the 2010 World Bank Jobs Report, which reviewed than short-term politics Indonesia’s labor market over the last two decades. However, further work is required by all stakeholders to build the body of knowledge needed for evidence-based policy making. To this end, in early 2013 the World Bank will release an update of the report, which will expand on some of the most pressing issues, notably social security benefits for workers and skills development. At the same time, the World Bank’s 2013 World Development Report is focusing on the issue of jobs and will provide global learning on how to provide more jobs and improve effective protection for all workers. T H E W O R L D B AN K | B AN K D U N I A December 2012 26 Indonesia Economic Quarterly Policies in focus 2. Building Jakarta’s resilience to frequent flooding Jakarta is Indonesia’s As the main commercial hub of Indonesia, the capital city of Jakarta contributes about 13 preeminent urban center, 18 percent, or USD 112 billion, of the country’s total GDP. As the economic and political one of the largest center of Indonesia, regional urbanization has also contributed to making Jakarta one of metropolitan areas in the the largest metropolitan areas in the world. The Special Capital District of Jakarta (DKI) world, and the source of almost one sixth of the covers an area of approximately 650 km2 with a population of about 10 million (2010). The 2 country’s GDP… population of Greater Jakarta (covering about 7,300 km ) stands at just under 30 million. Population growth rates are far above the national average and the population is projected to exceed 35 million people by 2020. Up to 250,000 rural-urban migrants are estimated to move to Jakarta every year, contributing to the increase in informal settlements where people live without the benefit of public services (e.g., transportation, water supply, sanitation and waste management). …but it suffers from a Due to its location and rapid population growth, coupled with under-development of public perennial flood problem services, the city has become known for a range of problems, the most severe of which are manifested in disastrous perennial flooding. Jakarta was built on a low lying coastal area. It sits on fluvial sediments on the lowest lying areas of a basin that is surrounded by several dormant volcanoes whose slopes form the upstream catchment areas of the 13 major rivers that flow through the basin on their way to the Java Sea. Today, about 40 percent of the city (including most of north Jakarta) lies at, or below, sea level. Perennial floods have been a fact of life in Jakarta since its foundation. Major and destructive 19 incidences have been recorded as far back as 1621, 1654, and 1918. As the current rainy season has brought localized flooding to parts of the city, this section provide a timely overview of the severe economic and human impact of such flooding and its determinants. While recognizing the policy challenges, it then outlines some immediate actions that can help to alleviate flood impacts and improve the city’s resilience in the near and medium term. a. The severity of flooding has increased, imposing significant costs Flood incidences have Flood incidences have been increasing in severity during the past decades, with been increasing in especially devastating floods recorded in January 1996, February 2002, and February severity in recent times… 2007. The 2007 event alone inundated 235 km2 (about 36 percent) of the city, by up to seven meters in some areas. It affected more than 2.6 million people and forced 340,000 people to flee their homes. Over 70 people died and outbreaks of disease affected over 200,000 people. In 2008 a flood event closed the airport toll road, cancelling over 1,000 flights and causing serious disruptions for the city. Floods in 2009 also occurred at high intensity and continued into 2010. The actual and perceived risk of flooding results in human suffering, direct financial and economic damage, and affects the incentives of businesses and investors to make investments in affected areas. …inflicting a severe The estimated financial and economic losses from a 10-day flood event in 2002 were over economic, financial and USD 1 billion, whereas the 6-day 2007 flood cost about USD 900 million. The human toll… consequences of severe flooding to Jakarta are even more alarming if assessed by their sectoral impacts. Unlike rapid onset disasters, like earthquakes or tsunamis (the impact and reconstruction from which are discussed in the following section), the direct damage caused by inundation is relatively small compared to the economic losses caused by interruptions in city services and mobility, and hence productive economic activities (see Box 5 on the 2007 flood). 18 Calculations based on 2011 GDP and regional GDP figures from CEIC. 19 Laporan Perkiraan Kerusakan dan Kerugian Pasca Bencana Banjir Awal Februari 2007 di Wilayah JABODETABEK (Damage and Losses Estimate of February 2007 Flood), http://www.bappenas.go.id/node/111/995/laporan-perkiraan-kerusakan-dan-kerugian-pasca- bencana-banjir-awal-februari-2007-di-jabodetabek/ T H E W O R L D B AN K | B AN K D U N I A December 2012 27 Indonesia Economic Quarterly Policies in focus Box 5: The impact of the major 2007 flood on Jakarta The 2007 flood, which inundated nearly 36 percent of the city, blocked many major access roads, disrupting supplies of goods and production materials from, into or through the city. The same flood inundated 2,465 electricity distribution transformers which had to be shut down. Similarly five water treatment plants were affected, while damages to mains distribution from upstream sources in Bogor reduced clean water supply of 400 liters/second for more than one week.The Indonesian Association of General Insurance estimated that the claims that had to be paid to private individuals amounted to USD 400 million. The impact of the flood was relatively well documented. A damage and loss assessment was immediately carried out by BAPPENAS. This provided a breakdown of the sectoral effects of the disaster in the form of direct damage to assets and economic losses from disruption to economic activities. While direct damage to private homes and public infrastructure reached more than USD 160 million, the economic impact caused by loss of opportunity for trade and commerce was much larger at USD 680 million. Figure 29: The 2007 flood caused sizeable financial Figure 30: …and these economic losses were focused on damage but much greater economic losses… larger industrial firms Million Million Large Industry SMEs USD Damage Losses USD Informal Sector Trade (traditional markets) 1,000 1,000 Agriculture/Fishery 6.45 3.28 4.84 100 100 76.74 10 10 210.53 1 1 Source: Bappenas 2007 Source: Bappenas 2007 A closer look at the economic losses also reveals that large industry, such as major factories, was impacted the most, since supplies for their production were disrupted and factories had to be shut down as workers could not come to work. The second largest impact was for Small and Medium Enterprises (SMEs), which typically employ more people. With major industrial cities like Jakarta increasingly playing an important role as regional production bases for ASEAN, flood occurrences such as these raise major concerns of supply disruptions for regional economic players such as car and part manufacturers (with similar concerns raised following the major floods in Thailand in 2011). …affecting the poor While major flood events such as in 2007 impact both the richer and the poorer disproportionately populations of Jakarta, the poor, who tend to live in low lying areas or along waterways, are disproportionately impacted (Figure 30). As a large metropolitan area, Jakarta offers many economic opportunities and attracts in-migration from surrounding areas. In the absence of adequate affordable housing for day laborers and people working in the informal sectors which help provide the city with much needed workers, informal settlements typically occupying public spaces in hazard-prone areas have grown. This trend not only increases the vulnerability of the community, but also creates the burden on already aging and often not properly maintained infrastructure such as canal and river embankments. b. Weather patterns, urbanization, subsidence and climate change all play a role… Climate and weather The Jakarta region experiences high annual average rainfall. The climate and weather in patterns contribute to Indonesia is influenced by the convergence of tropical and continental influences, and the make Jakarta prone to monsoon seasons, that determine distinct weather patterns such as the rainy and dry floods... seasons. Around Jakarta, the complex land and mountain range formation creates an ascent of humid air masses that result in powerful cloudbursts affecting regional weather systems. Annual rainfall typically ranges between 1,500 to 2,500 mm per year, but reaches up to 4,000 mm per year in the higher elevation upstream areas, leading to high intensity, high volume water runoff flows through the Jakarta basin area. T H E W O R L D B AN K | B AN K D U N I A December 2012 28 Indonesia Economic Quarterly Policies in focus …but this is exacerbated Overall urbanization trends are central to the causes of Jakarta flooding. The population of by massive urbanization Greater Jakarta has more than tripled over the last four decades, recording the levels of and the inability of 8.4 m in 1971, 11.5 million in 1980, 17.1 million in 1990, 20.4 million in 2000, and 27.9 infrastructure to cope million in 2010. The net population density of Jakarta city is about 140 persons per hectare, with central Jakarta by far the most densely populated area in Indonesia. (Figure 31) Figure 31: Densely-populated slum areas were heavily affected by the 2007 flood Source: Jakarta Urban Challenges in a Changing Climate. Mayors’ Task Force On Climate Change, Disaster Risk and The Urban Poor (2010) Urbanization has led to a The intensification of urbanization is linked to the increasing severity of flooding events. reduced capacity for There has been encroachment and development on critical catchment areas and rainfall absorption and increased solid waste generation and sedimentation. As urbanization spreads upstream, retention, overwhelming land-use patterns change and competition for water resources increases, which severely the flood control system design affect downstream areas. Peak water flows have increased (increased flow volumes and flow velocity), an outcome of the reduced rainfall absorption and retention capacity, overwhelming flood control system design. The flow capacities of flood control designs have also decreased due to the lack of adequate operations and maintenance and the existence of bottlenecks (e.g., low-clearance bridges, pipes, and other obstacles) resulting in sedimentation. About 17.9 percent of all solid waste ends up in the drainage system, 3 3 amounting to about 1,067 m /day, of which about 921 m /day is generated from within DKI 3 Jakarta, while the remaining 146 m /day travels from upstream areas. Land subsidence and In the meantime, continuing land subsidence threatens the overall functioning of the flood climate change control system and increases risks of tidal floods, and climate change is expected to compound the problem, cause higher intensity rainfall conditions and rising sea-levels. Recent studies of land with some parts of subsidence have found typical subsidence rates of 7.5 to 10 cm per year particularly Jakarta are sinking by up to 25 cm per year… affecting areas of north Jakarta. However, in localized areas of north Jakarta subsidence in the range of 15 to 25 cm per year have been observed, which if sustained, would result in them sinking to 4 to 5 m below sea level by 2025. Land subsidence results in increased vulnerability to flooding due to the reduced gravitational capacity to channel storm flows to the sea, and the increased risk of tidal flooding. Land subsidence also increases the necessity for pumping, dikes and sea defenses. The most prominent cause of land subsidence in Jakarta is intensive deep groundwater abstraction – a common source of water supply for individual households and businesses in the city. The deep wells drill into the aquifer and extract high volumes of water, collapsing the aquifer structure and allowing sea water intrusion. T H E W O R L D B AN K | B AN K D U N I A December 2012 29 Indonesia Economic Quarterly Policies in focus …while climate models Region-based climate models released as part of a climate change vulnerability mapping predict both rising sea study for Southeast Asia (2009) have identified Jakarta as the most vulnerable region in levels and increasing 20 Southeast Asia to the risks of climate change . Climate change could impact Jakarta's frequency and intensity floods in two ways - through a rise in sea levels and an increase in both the frequency and of rainfall intensity of rainfall. An increase in sea-level, combined with drastic land subsidence, will greatly affect populations living in low lying coastal areas in north Jakarta. An increase in rainfall is also a source of concern. The Inter-governmental Panel for Climate Change (2008) report stated that Jakarta will be vulnerable to both an increase in the number of wet days in the new century, indicating an increase in the frequency of rainfall, and an increase in the intensity of precipitation events, particularly in tropical and high latitude areas that already have high mean precipitation. The most devastating flooding scenario for Jakarta would be an event whereby high tide conditions concurrently occurred with high rainfall upstream – a flood event risk that is increasingly worrisome with the additional factors of climate change in the region. c. …but actions can be taken to improve Jakarta’s resilience to floods Comprehensive flood Regional spatial planning regulations stipulate flood management implementation and mitigation is complicated coordination across local governments, but, as in other countries, such cross-coordination and hampered by the will continue to pose difficulties, especially when requiring upstream regions to make difficulties of investments (such as upland retention facilities and management) to protect downstream coordination across the Jakarta basin area… areas. Without ensuring the protection of remaining green spaces and retention functions in the Greater Jakarta basin (known as the Jabodetabekpunjur), future flood risks remain significant for the city of Jakarta. … but there are practical Nevertheless, a sequence of staged interventions could enable authorities to address the immediate actions that issues in a practical manner. The first priority would be rehabilitating existing can help alleviate flood infrastructure, addressing flow and retention capacities. The second phase would include impacts in the short to the improvement of infrastructure, especially realigning the flood control systems affected medium term by subsidence and inter-connecting the existing major East and West flood canals. In parallel, there should be efforts to build consensus and multi-stakeholder action on the issue of upstream management and coastal protection, which will require long-term preparation and implementation. Restoring flood systems Hydraulic modeling studies have unanimously suggested that the most immediate to their original design beneficial response for flood mitigation is to take steps to return the system to its original and capacity will have the design. Comprehensive simulations of the 2007 flood event predict that the disruption to most immediate impact… more than one million people, or 40 percent of the flood impact, could have been avoided if the existing system was operating at original intended capacity (Figure 32). Returning the systems to their original design should also be complemented by a strong focus on routine future maintenance and the mobilization of the community at large to provide additional household and community level assistance to mitigate floods. Figure 32: The 2007 flood would have been less severe if existing facilities were fully functioning (left panel: actual extent of flooding; right panel: simulated extent of flooding with fully-functioning flood systems) Source: Indonesia Ministry of Public Works (2012) Source: Indonesia Ministry of Public Works (2012) 20 “Climate Change Vulnerability Mapping for Southeast Asia". Yusuf, A.A. and H. Francisco, 2009. Economy and Environment Program for Southeast Asia (EEPSEA). See: http://web.idrc.ca/uploads/user-S/12324196651Mapping_Report.pdf T H E W O R L D B AN K | B AN K D U N I A December 2012 30 Indonesia Economic Quarterly Policies in focus …while reconfiguring key The recently completed East flood canal offers the possibility to divert excess flows of the canal networks at main Ciliwung river. The building of a diversion system for the Ciliwung river at the strategic locations existing main control gate in south Jakarta or further upstream, connecting both the East strengthens the system and West flood canals, and improvements to adjoining canals, would provide further to cope with recent urban and physical changes safeguards to the heavily populated city center. Coupled with the normalization of the existing system to original design, an additional 600,000 people could have escaped the direct effects of the 2007 flood event. In the meantime, better Despite the various ongoing and planned efforts to mitigate flood risks in Jakarta, these preparation and risks will continue to threaten the city for the foreseeable future. Contingency planning and systematic contingency investing in flood preparedness are critical to increase the resilience of the city and its planning can help population to cope with, adapt to and prepare for the recurring flood events, thereby improve resilience reducing their vulnerability to these risks. Sophisticated In recent months, a more sophisticated contingency planning tool has been introduced contingency planning through an initiative led by the Indonesian National Agency for Disaster Management tools are being developed (BNPB) to develop a practical tool to support sub-national disaster management agencies and introduced to help (BPBDs) during emergency contingency planning. A partnership between the BNPB, the city managers and planners… Australia-Indonesia Facility for Disaster Reduction (AIFDR), and the Global Facility for Disaster Reduction and Recovery (GFDRR) has developed a contingency planning tool based on hazard impact modeling. This tool is aimed at providing planners with prior knowledge of who will be impacted and what will be damaged in the event of a particular natural disaster event. This tool – named the Indonesia Scenario Assessment for 21 th Emergencies (InaSAFE) – was officially launched at the 5 Asian Ministerial Conference on Disaster Risk Reduction (AMCDRR) in October 2012. …which would Through answering a series of questions about a potential disaster scenario, the InaSAFE significantly increase hazard impact modeling tool can be used to produce maps and reports to estimate resilience and reduce potential damage, along with recommended actions for emergency managers. This tool vulnerability, if they are was tested during the 2011-2012 Jakarta flood season and proved effective in providing mainstreamed and constantly augmented on an understanding of hazard impacts and communicating them to support disaster risk with ever improving and management decisions. Participatory mapping tools (e.g., OpenStreetMap) have been accurate data used to collect high resolution baseline data of critical infrastructure in Jakarta through collaboration between the Jakarta Provincial Disaster Management Agency (BPBD), the Humanitarian OpenStreet Team (HOT) and University of Indonesia, supported by several international development organizations. These, together with hazard data from technical agencies and demographic data from the national census, were used to produce visualizations of the impact of different flood scenarios on critical infrastructure (e.g., roads, schools or hospitals) and populations in flood prone areas across Jakarta. The tool calculates the number of structures or areas that could be flooded under different scenarios, giving the exact location of the affected areas and infrastructure to support contingency planning. The tool can also be used to support risk-based land-use planning, determining priorities for infrastructure retrofitting, real-time impact forecasts, or for a Post Disaster Needs Assessment (PDNA). Through a combination of As Jakarta continues to undertake flood mitigation both through structural measures, such these different measures as river dredging, canal improvement or construction of retention basins, and non- Jakarta can be made structural measures such as catchment rehabilitation, community preparedness and more resilient to flood contingency planning, the city will better adapt to the increasing frequency and intensity of risks, supporting the economic development of flooding. While the poor have always been disproportionately affected, they also show the the city and the most resilience, mainly out of necessity and the lack of choices that they can make. But, livelihoods of its through increased awareness of flood risk, early warning and prediction, as well as real- population time flood information dissemination including through the social media, all inhabitants of Jakarta, be they individuals, corporations or public agencies, can adapt their lives and make their respective contingency planning to ensure safety, business continuity and secured livelihood. Jakartans have shown extreme patience in dealing and coping with problems on a daily basis. With a few more systematic and comprehensive flood mitigation investments, and an effective information dissemination and contingency system, Jakarta could emerge as a flood resilient city. 21 For more detail information, please visit : www.inasafe.org T H E W O R L D B AN K | B AN K D U N I A December 2012 31 Indonesia Economic Quarterly Policies in focus C. INDONESIA 2014  AND BEYOND: A  SELECTIVE LOOK  1. Indonesia’s successes in disaster reconstruction and preparedness The Indonesian Within the last decade, Indonesia has faced a series of natural disasters that have taken a Government and its significant toll in terms of human life, damage to buildings and infrastructure, and partners have been highly economic disruption. In responding to these disasters, the Indonesian Government has successful in their been highly successful in planning and executing the physical reconstruction of homes, reconstruction efforts after devastating natural buildings and infrastructure, and in restoring economic livelihoods. It has also established disasters in Aceh, Nias proven approaches and models that can be used when future disasters strike both in and Java Indonesia and other countries at risk of disaster. These accomplishments were achieved in partnership with donors, international institutions, local and international non- government organizations (NGOs), regional and local governments, and communities affected by the disaster. Two multi-donor funds, the Multi Donor Fund for Aceh and Nias (MDF) and the Java Reconstruction Fund (JRF), contributed to these processes. With these programs coming to a close, this section provides a brief overview of this experience and the lessons it holds for future post disaster recovery efforts and for building resilience against natural disasters, both in Indonesia and elsewhere around the world.22 a. The challenges posed by the Aceh, Nias and Java disasters were unprecedented A series of recent natural The earthquake and tsunami of December 2004 took the lives of over 200,000 people in disasters in Indonesia Aceh and North Sumatra and left over 600,000 homeless. It also destroyed infrastructure, caused enormous buildings, and disrupted the economy. This was followed by a devastating earthquake that casualties and damage in struck the island of Nias in March 2005, destroying about 30 percent of its buildings. In Aceh, Nias and parts of Java May 2006, an earthquake in Yogyakarta Special Region and Central Java claimed more than 5,700 lives; later that year another earthquake triggered a tsunami causing widespread damage along the southern coast of West Java. Further destruction occurred in 2010, when Mount Merapi, a volcano located between Yogyakarta and Central Java, erupted repeatedly, causing serious damage to housing and infrastructure. Some of the affected Since 1976, a rebel movement in Aceh had fought intermittently against the Indonesian areas were already Government. The conflict had a devastating impact on Aceh. Nearly 15,000 people were fragile, compounding the killed over the course of the conflict. Aceh province became economically isolated as the impact of the disasters conflict deterred both foreign and domestic investors, limited access to markets, and increased the costs of inputs. The island of Nias, located off the western coast of North Sumatra, suffered from isolation, poor infrastructure, and a lack of economic advantages. It was poorly positioned to compete with other parts of the country, leaving much of the population in poverty. 22 This section draws upon the knowledge notes and other materials prepared for an international conference on “Lessons from Indonesia’s Experiences in Disaster Reconstruction and Preparedness� held in Jakarta in November 2012 to mark the closing of the MDF and JRF. See www.multidonorfund.org and www.javareconstructionfund.org for more details. T H E W O R L D B AN K | B AN K D U N I A December 2012 32 Indonesia Economic Quarterly Policies in focus Managing the generous Both Indonesia and the international community were generous in providing aid in contributions in aid response to the disasters. Supplies, funding, and expertise were mobilized to support presented challenges in relief and reconstruction efforts. Total contributions from the Indonesian Government and the recovery process international donors reached USD 6.7 billion for the reconstruction of Aceh and Nias. Hundreds of organizations established themselves in Aceh and Nias. While this assistance was both needed and welcomed, managing such huge resources presented major challenges for government, which led the reconstruction effort. Defining a clear reconstruction strategy, directing resources to support it, and managing funds in an efficient, transparent way was critical for the success of the overall reconstruction effort. Coordination of the many players on the ground was also essential to avoid duplication of effort and ensure an efficient usage of resources. b. Multi-donor funds supported Government-led relief and reconstruction efforts The Indonesian The Government of Indonesia managed each stage of the relief and recovery process. Government led and Given the scale of the disaster in Aceh and Nias, it established the Agency for the coordinated the relief and Rehabilitation and Reconstruction of Aceh and Nias (BRR) to coordinate and manage the reconstruction process in process until its closure in 2009. It also requested the establishment of a multi-donor fund Aceh and Nias with support from the MDF with the World Bank acting as trustee to support the overall reconstruction effort. This led to the formation of the MDF, which pooled USD 655 million in contributions from 15 23 donors, representing nearly 10 percent of total reconstruction funds. This approach was designed to simplify the management of funds, focus resources where they were most needed in line with government strategy, and ensure funds would be used in a transparent, cost-efficient way. As such, it was in line with the Paris Declaration on Aid Effectiveness of 2005, which calls for national governments to develop their own development strategies which are then supported by donors towards well-defined goals. The MDF model was In response to the 2006 earthquakes in Java a National Transition Team was established successfully replicated in for initial coordination until 2008. Later, this role was assumed by the National Java Development Planning Agency (Bappenas) in coordination with provincial governments and line agencies. Seven donors set up the JRF using the same inclusive governance structure as the MDF, pooling USD 94.1 million.24 The program was expanded in 2010 to address reconstruction efforts following the Merapi eruptions. With the MDF in operation for over a year by the time the Java earthquakes struck, the value of the model as a vehicle for managing aid to support reconstruction had been demonstrated. The multi donor funds The MDF and JRF contributed to the reconstruction efforts by providing an inclusive contributed to the governance mechanism that provided government, donors, and other key players a reconstruction efforts by platform for discussing issues and making decisions quickly. A Steering Committee providing a framework for consisting of representatives from the Indonesian Government, the World Bank as trustee, government-led partnerships… donors and civil society coordinated stakeholders, formulated a strategy, developed procedures, and allocated funds to proposed projects. …adopting a phased In support of the Government’s reconstruction agenda, the MDF program implemented a approach… strategy using a phased approach to meet the evolving needs of survivors throughout the reconstruction process. After their immediate needs were addressed by the Government, reconstruction support focused on rebuilding homes and communities. As rebuilding progressed, the focus was on major infrastructure to restore transportation links, ensure availability of safe water, provide sanitation, and manage waste. The third phase of the MDF laid the groundwork for long-term development by strengthening key economic sectors, such as coffee, cacao, fisheries and rubber. This approach reflected and reinforced the government’s strategy. The reconstruction efforts in Java also took this approach, starting with housing reconstruction before working on restoring livelihoods. 23 The MDF’s donors were the European Commission, the Netherlands, the United Kingdom, the World Bank, Sweden, Denmark, Norway, Germany, Canada, Belgium, Finland, the Asian Development Bank, the United States, New Zealand and Ireland. 24 The JRF’s donors were the European Commission, the Netherlands, the United Kingdom, Canada, Finland and Denmark. T H E W O R L D B AN K | B AN K D U N I A December 2012 33 Indonesia Economic Quarterly Policies in focus …emphasizing The MDF adopted an approach to housing reconstruction which proved highly effective - community-based involving local communities in the process, from planning to actual construction. In Aceh development… and Nias, community leaders and groups had direct input at all stages of the process. Block grants and training provided to these groups enabled them to rebuild thousands of high-quality earthquake-resistant houses at low cost (see Box 6). This approach was also effective for building local infrastructure. Community groups, including women, made decisions on what infrastructure was most needed and contributed to the rebuilding of roads, wells, and irrigation channels and other projects, and managed funds in a transparent manner. The community-led approach was successfully replicated in Java, and has been adopted as policy by the Indonesian Government for future post-disaster reconstruction of settlements. Box 6: Rekompak – community-led reconstruction of settlements after disaster Rekompak is the name of a community-based program for reconstruction of homes and local infrastructure that was pioneered in Aceh. What distinguished Rekompak from other post-disaster reconstruction projects was its approach, which puts responsibility - and funding - for rebuilding housing and local infrastructure directly into the hands of communities, ensuring ownership and transparency. Community members identified beneficiaries and developed a spatial plan for each village to serve as a guide for rebuilding. Groups of ten to fifteen families were formed to take charge of rebuilding their own houses. These groups were accountable for the funds and all group members contributed to the rebuilding process. Facilitators trained by the Ministry of Public Works provided technical support to community groups in earthquake-resistant construction methods. Because beneficiaries provided much of the labor and recycled materials, Rekompak houses cost 30 percent less than those built through contractors, with a high level of satisfaction. The Rekompak model was further adapted in Java following the 2006 earthquake and eruptions of Mount Merapi. Altogether, Rekompak rebuilt 35,000 high-quality homes and over 10,000 local infrastructure projects and created a replicable model for post-disaster community reconstruction that can be applied in Indonesia and other countries. …and employing cross- A number of core elements Figure 33: A strategic framework for effective disaster cutting elements to were designed into all MDF reconstruction deliver a comprehensive, and JRF projects, to sustainable recovery enhance the quality of effort reconstruction (Figure 33). Organizational These included disaster risk Structure reduction, which ensured Make partnerships the that new construction would basis of the organization be resistant to earthquakes and trained people, including Economic Development schoolchildren, so that they Gender and Safeguards • Livelihoods Capacity Development would know how to respond Disaster/Conflict Risk • Capacity Building during disasters. Another key element was gender Reconstruction inclusiveness, which gave a • Infrastructure voice to women in making • Environment Reduction decisions affecting their communities. Environmental Immediate Recovery protection was another • Housing important element. Former • Logistics combatants and illegal Base phasing on speed, Establish baseline and loggers were trained to quality &sustainability strategy at the start protect forest areas, and modern landfills were constructed to manage Source: MDF Secretariat, World Bank waste safely. Capacity building supported all these investments by providing individuals and institutions with essential knowledge and improved technical skills needed to maintain infrastructure, improve management and increase productivity. T H E W O R L D B AN K | B AN K D U N I A December 2012 34 Indonesia Economic Quarterly Policies in focus c. Applying the lessons that Indonesia has learned on disaster recovery Indonesia’s experience Over an eight-year period from 2004, the Indonesian Government responded to a series over the past decade has of natural disasters including, for example, earthquakes and tsunamis, landslides and generated a body of volcanic eruptions. It was able to apply freshly-learned lessons from one disaster to the critical knowledge on next. In this way, it built up a body of knowledge related to disaster response and disaster recovery preparedness. Its experience with the MDF and JRF enabled it to replicate and improve models and approaches to disaster response and preparedness. In the process, Indonesia is now well-positioned to contribute to the global body of knowledge on these issues, so that others can benefit from these lessons and experience to better manage future disasters and reduce their impact. The experience also Following the experience of the disasters in Aceh, Nias and Java, the Indonesian prompted the Government has put in place a number of new policies to improve disaster management, Government of Indonesia preparedness and response. In 2008 the National Disaster Management Agency (BNPB) to make policy changes was established. Its role includes formulating disaster management policy, coordinating in disaster planning and response, including the the government’s response to disasters, disaster preparedness, and providing information establishment of the relevant to disasters. It operates at both national and regional levels. The BNPB National Disaster coordinated the development of the National Disaster Management Plan for 2010-2014, Management Agency… which includes a number of components drawn from the MDF and JRF. These include the integration of disaster risk reduction in development programs, capacity building, community-based disaster management, and enhancing the role of government 25 partners. …and the Indonesia In 2010, the Government also established the Indonesia Disaster Fund (IDF). The IDF Disaster Fund was established to fund and coordinate disaster recovery efforts and disaster preparedness with international support. This donor trust fund operates through two windows, one administered by the World Bank and the other by the United Nations. The IDF also incorporates a number of features successfully employed by the MDF and JRF, including alignment with government strategy, a steering committee, technical committee, and focus areas including housing, livelihoods, and capacity building. Some of the key lessons A number of important lessons for reconstruction efforts can also be drawn out from include the fact that Indonesia’s experience. In terms of overall strategies, a framework for reconstruction reconstruction efforts based on three interrelated strategies of strong partnerships, effective implementation, benefit from an over- and cross-cutting elements was found to be successful. Overarching organizational arching strategic framework… structures, such as those provided by the MDF and JRF, enable a government and its partners to make effective program decisions, design appropriate projects and execute them efficiently. In addition, a mix of partners and implementers brought together core competencies and comparative advantages to address a wide range of needs. For donor- funded support it is important to have solid monitoring and evaluation, regular reporting, clear communications, and good funds management to ensure that each project supports the Government’s reconstruction strategy. ...community-led The evidence from Indonesia shows that community-driven approaches can be adapted development delivers… effectively for post-disaster reconstruction to deliver cost-effective, equitable and sustainable local level recovery. As discussed in Box 6 on the Rekompak program, the experiences of community recovery projects implemented under the MDF and JRF demonstrate that disaster-affected communities are able to manage reconstruction resources and projects to high-levels of quality and satisfaction while benefitting from increased confidence and capacities brought by the consultative and participatory approaches. At the same time, the community driven approach encourages faster social recovery and builds capacities that will last well beyond the reconstruction. …building capacity Capacity building proved to be crucial in the sustainability of investments made in service should be an integral provision and economic development. Capacity-building strategies ranged from feature for sustainable empowering communities to participate in the rebuilding of housing and community results… infrastructure to strengthening skills and systems for local governments to manage reconstruction assets, to organizational development for local government to better 25 Indonesia National Agency for Disaster Management. Disaster Management Plan / 2010-2014, pp. 80-83. http://www.bnpb.go.id/website/file/pubnew/99.pdf T H E W O R L D B AN K | B AN K D U N I A December 2012 35 Indonesia Economic Quarterly Policies in focus address public sector management. Capacity building was found to be most effective when woven into each project and program initiative at entry, with its design and intensity reflecting the challenges of sustainability and the exit strategy of the supporting actors. …post-disaster The experiences in Aceh and Nias demonstrate that a sequenced approach to reconstruction of infrastructure investments, and, indeed, to overall reconstruction, based on balancing the infrastructure can benefit need for urgency with the need for quality and ownership, can be highly effective in from a sequenced managing short-term expectations while delivering long lasting results. For example, the approach… MDF’s initial infrastructure investments focused on immediate logistics needs to restore vital transport links and provide access to affected areas. Once these were established, the MDF redirected attention to large scale infrastructure reconstruction. Investments in large infrastructure have critical quality and ownership requirements that may supersede speed considerations, and care needed to be taken to balance the cost of speed against the cost of delay. Later, the scope of this work expanded to provide training to agencies responsible for managing the newly created assets. …and gender equality Another important lesson that can be drawn from the experiences of the MDF and JRF and women’s was that supporting gender equality and women’s empowerment in reconstruction efforts empowerment improves led to better results and increased resilience. Women’s participation improved quality, cost results efficiency and increased satisfaction, and sped up economic recovery. Women benefited from stronger legal and land ownership rights, which in turn gave women entrepreneurs better access to credit. Their active participation in local decision-making processes increased social cohesion and improved outcomes, such as an increase in the provision of public goods such as water, sanitation and health clinics. Valuable knowledge As mentioned, the experience over nearly eight years of responding to a series of generated through disasters, and applying lessons learned, have given the Indonesian government extensive Indonesia’s experience experience and knowledge in disaster management. Much of this has been embedded in on disaster its policies and newly-formed government bodies, such as the BNPB, and in educational reconstruction and preparedness has been institutions such as the Gadjah Mada University in Yogyakarta and the Tsunami Research delivered back to the Center in Banda Aceh. Other countries, including Haiti and Pakistan, have studied global community… Indonesia’s disaster response methods in designing their own post-disaster strategies. Indonesia, which has benefitted from international support in the wake of disasters, is now able to give back to the global community lessons for the future. …including through In November 2012, the closing of the MDF and JRF were marked by an international knowledge-sharing conference in Jakarta on “Lessons from Indonesia’s Experiences in Disaster events across disaster- Reconstruction and Preparedness� which shared global experiences in post-disaster prone countries… reconstruction and preparedness. The conference drew over 500 participants including dignitaries from disaster prone countries including Japan, Pakistan, and Haiti. It covered many aspects of post-disaster reconstruction and preparedness, including the community- led approach to housing reconstruction, post-disaster livelihoods recovery, gender and capacity development, mainstreaming disaster risk reduction, and knowledge sharing. …with the aim of Indonesia has set a new standard for disaster response through its experiences in Aceh, delivering a legacy of Nias and Java. This is critical in a country which, by virtue of geography, will face natural further improvements in disasters again. But the Indonesia government’s successful approach to natural disaster disaster response, response and preparedness will save countless lives in the future. Its approach is proven resilience and preparedness into the and has been successfully replicated to address different kinds of disasters and contexts. future As a significant contributor to the reconstruction results, the MDF and JRF programs have been documenting their models, approaches, and experiences. The lessons Indonesia has learned through its massive recovery efforts will ensure that a legacy of improved response, resilience and preparedness will endure into the future. T H E W O R L D B AN K | B AN K D U N I A December 2012 36 Indonesia Economic Quarterly Policies in focus 2. Village infrastructure for basic service delivery Positive trends in Since the turn of the millennium, Indonesian real incomes have grown rapidly and reliably Indonesia’s while steady progress towards meeting the Millennium Development Goals has been socioeconomic made. However, robust national averages and trends hide a more troubling regional development over the picture: individual provinces, districts, and villages are not all progressing at the same high past decade hide significant region-by- rate. While there are many likely factors behind this unequal distribution, an impossible-to- region inequality which is ignore constraint to better performance in all Indonesian regions lies in the availability of in part due to a lack of the human and physical capital necessary for basic service provision. Using the findings human and physical of the recent Village Infrastructure Census this section highlights some of the key spatial capital for basic services divergences in health, education and infrastructure service delivery across the country and discusses how this new highly disaggregated data may be used to inform future policies to address this inequality of progress. a. What is the Village Infrastructure Census and why is it necessary? The VIC provides insights A recent Village Infrastructure Census (VIC), commissioned by the Vice President’s Office into a more equitable, for the Acceleration of Poverty Reduction (TNP2K), developed in collaboration with the targeted and potentially 26 PNPM Support Facility (PSF), and undertaken by the Central Statistics Agency (BPS), more rational system of demonstrates the size and shape of the deficiencies in the ability to provide basic health, resource transfers from the central government to education, and transportation services across different villages. The VIC is regarded by local governments… TNP2K and the Government as the first step toward remedying the inequality of progress. The insights from the VIC can be used to inform the development of a plan for spending resources more equitably; for improving the targeting of development spending priorities, and potentially for pointing the way towards a more rational system of resource transfers (from central to local governments) to better match needs and capacities. The portrait of basic service supply readiness in Indonesian regions drawn from the VIC can also be used to quantify the remaining gaps in health, education, and transportation, i.e. the investments required to meet basic service standards, and estimate the cost of filling those gaps. …by collecting detailed The VIC provides detailed facility-level information on public health and education facility-level information... facilities, covering a total of 166,506 health facilities and 164,561 schools across the country. The 2011 PODES (Potensi Desa) core survey (also a village-by-village census) is used to complement the VIC data by providing observations on the quantity and quality of intra- and inter-village transportation and the quantity of health and education providers. The resulting combined database provides in-depth information on the quantity, quality, and accessibility of existing basic, public service-oriented infrastructure. …and assesses supply- Combined with further analyses and reports, commissioned jointly by TNP2K and PSF, side weaknesses to this information provides a comprehensive assessment of the local-level availability of quantify the cost of basic facilities and services in health, education, and transport. The database is rich remedying them enough to generate a nuanced picture of “supply readiness� through the construction of indices combining several different indicators of the human and physical capital necessary for the provision of services. The indicators entering the supply readiness indices are available at the village level, which provides a very high resolution picture and will enable policy recommendations to be tailored to any level of regional disaggregation. b. The VIC combines a range of indicators to provide Supply Readiness Indices The VIC provides Indicators entering the VIC-based supply readiness indices can be grouped into roughly information on three three categories, according to the type of information they provide, namely on the rough categories of basic availability and accessibility of facilities, on the presence and qualification of personnel, service supply quantity and on the physical characteristics of facilities. Table 7 provides more detail on the and quality… selected indicators for health , education, and transportation services, respectively. As a general rule, the selected indicators of supply readiness take a value between 0 and 1, reflecting the share of the population, facility or geographic area that meet a supply readiness norm or threshold. 26 The PNPM Support Facility (PSF) was established by the Government of Indonesia and supported by multi-donor grants provided by the Governments of Australia, Denmark, the Netherlands, United Kingdom, United States, and the European Union. The grants are administered by the World Bank. The VIC final report will be made available on both the TNP2K and PSF websites beginning February 2013. For more details see http://pnpm-support.org/. T H E W O R L D B AN K | B AN K D U N I A December 2012 37 Indonesia Economic Quarterly Policies in focus Table 7: The composite Supply Readiness Indices include a range of indicators for health, education and transportation (indicators included in composite index) a. Health Supply Readiness Indicators Indicator Description Share of population that can easily reach a polyclinic, Puskesmas, Puskesmas Access to primary care Pembantu, or physician’s practice Access to secondary care Share of population that can easily reach a hospital Share of population that can easily reach a hospital, maternity hospital, Puskesmas, Access to delivery facility Polindes or midwife’s practice Physician at Puskesmas Share of Puskesmas with at least one physician present Midwife in the village Share of population living in villages with a midwife present Water supply Puskesmas Share of Puskesmas with water installation within facility or 10 min walk Electrification Share of health facilities with electricity (excluding Posyandu) b. Education Supply Readiness Indicators Indicator Description Share of population in villages with early childhood education post (PAUD) in village or Access to early childhood education kindergarten within 1 km of village Access to junior secondary school Share of population in villages with SMP within 6 (3) km (SMP) Teacher qualification, primary school Share of SD with at least 2 teachers holding advanced S1 degrees (SD) Teacher qualification SMP Average share of SMP teachers holding advanced S1 degrees Laboratory in SMP Share of SMP with laboratory Water Supply Share of schools with water in student bathroom Electrification Share of schools with electricity c. Transportation Supply Readiness Indicators Indicator Description Share of villages with main road surface being either asphalt/concrete or gravel/stone Surface of main road etc. Condition of main road Share of villages with main road with no or minor damages Condition of bridges Share of villages with bridges with no or minor damages Need for new bridges Share of villages that report no need for new bridge(s) Share of villages with public transport with fixed route to the office of the sub-district Public trans. to Camat head Public trans. to regent/mayor Share of villages with public transport with fixed route to the office of the regent/major …while composite The indices constructed from these indicators manage to absorb the immense amount of indices combine this information contained in the VIC – within which individual variables provide a breakdown information to create “at of various aspects of service delivery – and combine it into summary indicators allowing a glance� readability for an easy grasp of the overall situation (see Box 7 below for more detail on the index construction). Index construction in the VIC report also preserves the very high resolution of the VIC and PODES data and therefore the indices can provide the “at a glance� summary capability all the way down to subdistrict-level for policy makers. Box 7: A note on reliability in the Supply Readiness Rankings In the construction of any indicator that combines a number of separate, but not necessarily independent, observations on variables that are themselves proxies and are often measured in different units, there is always a worry that the system of implicit or explicit weights – or the share any one variable has in the determination of the final index score – that accompany such a combination will unfairly disadvantage one region or another and misrepresent the true distribution of performance. In the analysis accompanying the VIC, six different weighting schemes are suggested to combine the underlying variables into a composite index. Three of these weighting schemes are chosen formulaically to represent (1) a focus on access, (2) equal weights for each of three categories (availability and accessibility of facilities; presence and qualification of personnel; and physical characteristics of facilities), and (3) equal weights for each indicator. Another three weighting schemes were derived empirically through (4) a principal components analysis, (5) an OLS regression of utilization on all seven indicators, and (6) a T H E W O R L D B AN K | B AN K D U N I A December 2012 38 Indonesia Economic Quarterly Policies in focus measure of each of the seven indicators’ contributions to inequality (measured by a concentration index) in service utilization. There are merits to each of these six weighting schedules, but of greater importance is that the ranking and relative position of sub-districts or districts does not depend on which weighting scheme is used. In other words, the correlations between the six different indices created from six different weighting schemes are positive and close to one, indicating that the information contained in the seven indicators tells a consistent story no matter how it is combined. For example for health the pairwise correlations between the composite indices calculated using these six methods ranged from 0.92 to 1.00. Further circumstantial confirmation of the value of information contained in the VIC is available in the high and positive spatial correlations between indices. For health, education, and transportation similar spatial patterns of supply readiness emerge across the sectors’ different dimensions. Positive correlations are visible also across the individual indicators of health, education and transportation infrastructure. The last two weighting schemes – OLS and inequality contributions – combine VIC information with an independently collected household survey (the Susenas household survey). The addition of an independent data source provides an outside reliability check on the PODES data itself. If PODES/VIC indicators of supply readiness are correlated with (and explain some of the variation in) utilization of the same services as measured by independent interviews of households, then there is good reason for believing that the VIC measures as constructed are good proxies for actual supply. c. Health Service Supply Readiness is highest in Java and Bali Health service supply The VIC data demonstrate the very wide variation in health service supply readiness readiness varies widely across provinces, districts, sub-districts, and village by village. Taking some rough-and- and generally decreases ready island groupings, Figure 34 shows that sub-districts in Bali (0.99) and Java (0.96) with distance from Java have achieved very high levels of health supply readiness; subdistricts in Sumatra (0.87), and Bali Sulawesi (0.82), Kalimantan (0.80), and Nusa Tenggara Timur (NTT) and Nusa Tenggara Barat (NTB) (0.77) exhibit approximately average scores; while the Molukas (0.68) and especially Papua and Papua Barat (0.42) indisputably lag the rest of the country. The national gap between urban (0.96) and rural (0.75) sub-districts in the supply and quality of basic services is substantial; on a regional level, the urban-rural dichotomy is most evident in areas with an overall low level of infrastructure supply readiness. For example, in Sulawesi and Kalimantan, urban areas are clearly much more reliable providers of health care service than are their rural hinterlands; while even urban areas in Papua have a very high risk of health service supply unavailability; and even primarily rural areas in Java and Bali enjoy high levels of health supply readiness. Figure 34: Health Supply Readiness is higher in Java and Bali and falls in eastern Indonesia (composite Index of Health Service Supply Readiness) Note: Index varies from 0 to 1 with higher value indicating higher supply readiness Source: PODES 2011 and the Village Infrastructure Census and Report The VIC report calculates The VIC analysis contains a “gap� calculation – or the distance of each indicator to its the investments maximum value – in order to quantify the minimum investment needed to achieve basic necessary to fill the gaps health service standards throughout Indonesia. Table 8 gives an overview of total national in supply readiness gaps, defined as the sum of sub-district gaps, for select health-service supply readiness indicators. A striking finding demonstrates that as many as 15 percent of Indonesians (approximately 36 million citizens) have no easy access to secondary health care facilities T H E W O R L D B AN K | B AN K D U N I A December 2012 39 Indonesia Economic Quarterly Policies in focus or services, leaving them essentially no alternatives should basic primary care be incapable or unequipped to treat their case. A concerted, multi-year investment in the physical and human capital necessary for secondary health care services is likely the only way to close this gap and provide all Indonesians access to a reliable and comprehensive health care system. This will be crucial for the next phase of Indonesia’s universal health insurance plan as embodied in the national social security system plans and associated legislation. Table 8: Some of the gaps in Health Service Supply Readiness are striking, such as access to secondary health care (Overall gaps in Health Service Supply Readiness for select indicators) Indicator and Associated Gap Total National Gap Number of citizens without access: primary care 6.2 million Number of sub-districts without Puskesmas 383 Number of citizens without access: secondary care 36 million Number of districts without hospital 42 Number of citizens without access: delivery facility 6.8 million Number of sub-districts without delivery facility 222 Number of Puskesmas without physician 732 (8 percent of all Puskemas) Number of villages without midwife 14,842 (population: 12 million) Number of Puskesmas without water installation 852 (9 percent of all Puskemas) Number of health facilities without electricity 10,629 (14 percent of all health facilities) Source: PODES 2011 and the Village Infrastructure Census and Report d. …with similar spatial patterns for Education Supply Readiness… As for health, education The VIC data demonstrate that regional patterns in education supply readiness look much supply readiness is much the same as those in health, with sub-districts in Bali (0.96) and Java (0.94) achieving the weaker in Eastern highest levels; Sulawesi (0.81), Sumatra (0.80), Kalimantan (0.74), and NTT & NTB (0.72) Indonesia... again in the middle of the distribution; while the Molukas (0.60) and, in particular, Papua and Papua Barat (0.30) lag far behind. The overall gap between urban (0.93) and rural (0.70) sub-districts is again significant. Here, the urban-rural dichotomy suggest there may be four distinct service delivery profiles currently common in Indonesia, In Java and Bali both urban and rural areas are relatively well-served while in the Molukas/Papua both urban and rural areas are noticeably under-served. For the rest of Indonesia, urban areas present a substantial advantage over the final profile of rural areas. Figure 35: The spatial pattern of Education Supply Readiness is similar to that for health (composite Index of Education Supply Readiness) Note: Index varies from 0 to 1 with higher value indicating higher supply readiness Source: PODES 2011 and the Village Infrastructure Census and Report T H E W O R L D B AN K | B AN K D U N I A December 2012 40 Indonesia Economic Quarterly Policies in focus …while the VIC Table 9 below gives an overview of total national gaps in education supply readiness. demonstrates that even While Indonesia has already achieved near-universal access to, and approximately when physical supply is universal enrollment in, primary schooling, the gap analysis indicates that over 16 million adequate, quality may be citizens lack access to early childhood education (ECED) services and over 9 million will low not have access to junior secondary school. Furthermore, many existing schools would benefit from capital upgrades, maintenance, and modernization: between 13 and 36 percent of all public schools lack modern amenities like electricity, running water, or a science or skills laboratory. The size and distribution of these gaps limits access for some of the population to basic education while also indicating significant short- and medium- term challenges for students already participating. Without sustained efforts to address these gaps in supply it may be difficult to achieve a modern education system that produces graduates with the experience, skills, and motivation necessary to contribute to the development of an entrepreneurial, creative, and flexibly-deployed labor force. Table 9: The Education Supply Readiness Gaps indicates the need for to improve physical quality of supply (Overall Gaps in Education Supply Readiness for select indicators) Indicator and Associated Gap Total National Gap Number of citizens without access: ECED 16.6 million Number of villages without ECED 19,052 Number of citizens without access: SMP 9.5 million Number of sub-districts without SMP 230 Number of ‘S1’ teachers needed: SD 32,586 Number of ‘S1’ teachers needed: SMP 14,675 Number of SMP without laboratory 8,000 (36 percent of all SMP) Number of public schools without electricity 21,653 (13 percent of all public schools) Number of public schools without water in bathroom 30,207 (18 percent of all public schools) Source: PODES 2011 and the Village Infrastructure Census and Report e. …and both are highly correlated with Transportation Supply Readiness Patterns in transportation Patterns in the quantity and quality of transport infrastructure likely exacerbate the supply readiness run shortcomings in the provision of health and education services. Figure 36 below illustrates parallel to the health and one of the metrics of the availability of public transport and demonstrates that in those education sectors areas where health and education services are poorly supplied, households and communities often lack a low-cost option for accessing neighboring areas where the supply may be more reliable or accessing administrative centers to report service interruptions or lobby for better services. The VIC report findings make clear that there are unambiguous positive correlations between transportation indicators and those for health and education availability. This suggestion of the presence of common determinants for infrastructure investments (across sectors) indicates that addressing any individual gap or adopting a piecemeal approach may not substantially change the overall public service delivery environment that households and communities face. A combined index across The VIC report combines the health and education indices into a large meta index based health, education, and on all 14 sub-indicators (not shown here). Conclusions drawn from this larger index are transportation indicators similar in quality to conclusions from the sub-indices: in general, the islands of Java and shows similar patterns as Bali perform best with respect to the quantity and quality of available infrastructure. the sub-indices However, local needs for investment still exist, in particular in the provinces of West Java and Banten (as discussed below). Overall, the largest gaps in infrastructure supply readiness are found for the Papua region, the Maluku islands, NTT, as well as for the interior of Kalimantan. T H E W O R L D B AN K | B AN K D U N I A December 2012 41 Indonesia Economic Quarterly Policies in focus Figure 36: Areas with poor supply of health or education services tend to also have poor accessibility by public transport (share of villages with public transport to Regent or Mayor’s office) Source: PODES 2011 and the Village Infrastructure Census and Report The VIC also allows The VIC’s very high resolution enables policymakers at any level to plan for development examination of the spending based either on locally appropriate targets or with reference to national targets. indicators or underlying For example, Figure 37 below shows that there is no mobile phone signal whatsoever in components all the way almost half of the sub-districts in the Papuan provinces. This indicator – which is included down to the village level. in the PODES database and which can be overlaid on VIC data – suggests that ICT- based solutions for improving service delivery may be less effective in Eastern Indonesia and Papua provinces. Figure 38, which provides a village-by-village summary of primary school teacher quality in West Java province, suggests that a unit of basic education may vary widely in quality and effectiveness, even within a subdistrict. Both indicators and both resolutions indicate that a “one size fits all� development plan will not work within provinces or districts any better than for Indonesia as a whole. Figure 37: Half of the sub-districts in the Papuan provinces Figure 38: The quality of primary school teachers can vary do not have any mobile phone signal markedly even within sub-districts (share of population with any mobile phone signal in Papua (share of SD teachers with S1 degree in Java Barat Province and Papua Barat Provinces at subdistrict resolution) at village resolution) Source: PODES 2011 and the Village Infrastructure Census and Report T H E W O R L D B AN K | B AN K D U N I A December 2012 42 Indonesia Economic Quarterly Policies in focus f. Extensions and policy applications The village-level The primary impetus behind the VIC (and associated report) was the need for more and resolution of the VIC better evidence-based strategies for financing, management, and targeting in the combined with its Government of Indonesia’s “Cluster 2� or community-driven development programs (of generality make it useful which the National Community Empowerment Program or PNPM Mandiri is perhaps the for pro-poor development planning in all sectors best-known). For example, for the competitively-awarded and community-managed block and at all levels… grants that are delivered through the PNPM program, the VIC data can be used to find and prioritize regions that would benefit from larger block grants or from eligibility for and receipt of more than one type of PNPM block grant. As PNPM block grants are most frequently used by communities to increase the infrastructure asset base – roads, irrigation and drainage structures, clean water facilities, etc – providing extra financing through PNPM for areas that face large supply readiness gaps could produce a substantial impact, even in the short-term. Policy planners involved with the PNPM- Generasi initiative – a PNPM variant targeted to the poorest regions where block grants are tied to spending on health and education services – are taking advantage of the VIC database to decide which regions will receive Generasi block grants over its 2013-2015 scale-up phase. …and its public The VIC’s native resolution means that any of the potential applications – for example, availability means that it using the VIC to revise public resource spending to better match needs and capacities or can be used by any user to improve the targeting of priority development initiatives in any sector – can be pursued to benchmark regional at any regional level and by any motivated politician or authority no matter his or her performance location. The VIC as developed also supports this evidence-based analysis with regard to local, regional, or even national comparisons, so any user will be able to determine his region’s performance against all relevant benchmarks and standards. By supporting the development of a database and tool that is applicable throughout Indonesia, TNP2K and the Government have provided a significant public service; by continuing to support the VIC’s dissemination and adoption outside of its own walls, TNP2K will be responsible for bringing one of the first widely-applicable, easy-to-use, and up-to-date methodologies for pro-poor policy planning to all regions and all sectors interested in evidence-based processes and outputs. Extensions of the VIC, to A number of ongoing extensions of the VIC analysis, which are being developed by the link it to measures of Monitoring and Evaluation (M&E) team in the PNPM Support Facility (PSF), can provide isolation and multi- additional insights into other dimensions of service provision. The first extension aims to dimensional poverty, are indicate relative levels of isolation in order to provide another Indonesia-wide layer of in process to inform further future policy relevant information for evidence-based targeting strategies for all government making development spending. As the maps above indicate, many supply-deficient regions are either surrounded by poor-performing regions or are situated a considerable distance away from the next-closest region with good performance. This type of isolation can impede progress on its own as there may be no best practices to learn from or high- performing neighbors to absorb internal migrants. A second extension is to link the VIC with data on multi-dimensional poverty (MDP). As the VIC data was collected by BPS as an add-on to one of its regularly produced products (the PODES village census, which is produced every 3 years), the VIC database is easy to merge with other BPS-produced datasets such as the 2010 Population Census and the quarterly Susenas household socioeconomic welfare survey. Data on MDP captures expenditures and outcomes within households and so provides a good demand-side counterpart to the supply-side information that the VIC contains. Combining the two databases should allow researchers and policymakers to see the entire economy of basic services in one place, facilitating analysis to discover areas where demand-side outcomes exceed expectations despite supply-side impediments, and their determinants. T H E W O R L D B AN K | B AN K D U N I A December 2012 43 APPENDIX: A SNAPSHOT OF INDONESIAN ECONOMIC INDICATORS Appendix Figure 1: Quarterly and annual GDP growth Appendix Figure 2: Contributions to GDP expenditures (real GDP growth, percent) (contribution to quarter-on-quarter seasonally-adjusted real GDP growth, percent) Percent Percent Percent Percent 4 8 4 4 Year-on-year (RHS) 3 3 3 6 2 2 1 1 QoQ seas. adjust (LHS) 0 0 2 4 Average (LHS)* -1 -1 -2 -2 1 2 -3 -3 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Discrepancy Net Exports Investment 0 0 Sep-05 Jun-07 Mar-09 Dec-10 Sep-12 Gov cons. Private cons. GDP Note: *Average QoQ growth between Q3 2002 – Q3 2012 Source: BPS via CEIC and World Bank staff calculations Source: BPS, World Bank seasonal adjustment Appendix Figure 3: Contributions to GDP production Appendix Figure 4: Motor cycle and motor vehicle sales (contribution to quarter-on-quarter seasonally-adjusted real (monthly sales) GDP growth, percent) Percent Percent '000 '000 3 3 900 130 Motor cycles (LHS) 2 2 110 700 1 1 90 500 0 0 70 -1 -1 300 Motor vehicles (RHS) 50 Sep-09 Jun-10 Mar-11 Dec-11 Sep-12 Other (incl services) Trade, Hotel, & Rest. 100 30 Comm and Trans. Manufacture Oct-09 Oct-10 Oct-11 Oct-12 Mining and Const Agriculture Source: BPS via CEIC and World Bank staff calculations Source: CEIC Appendix Figure 5: Consumer indicators Appendix Figure 6: Industrial production indicators (index levels) (year-on-year growth, percent) Index Index Percent Percent 160 160 15 60 BI Retail sales index Manufacturing production index (LHS) 140 140 10 40 BI Consumer Survey 120 Index 120 5 20 100 100 0 0 80 80 Cement sales (RHS) 60 60 -5 -20 Oct-09 Oct-10 Oct-11 Oct-12 Oct-09 Oct-10 Oct-11 Oct-12 Source: BI via CEIC Source: CEIC Indonesia Economic Quarterly Policies in focus Appendix Figure 7: Real trade flows Appendix Figure 8: Balance of Payments (quarter-on-quarter real growth, percent) (USD billion) Percent Percent USD billion USD billion 20 20 16 16 Overall Balance 12 12 10 Imports 10 Current account 8 8 0 0 4 4 Exports 0 0 -10 -10 Errors and omissions -4 -4 -20 -20 -8 Capital and financial account -8 Sep-09 Sep-10 Sep-11 Sep-12 Sep-09 Sep-10 Sep-11 Sep-12 Source: BPS (National Accounts) Source: BI Appendix Figure 9: Goods trade balance Appendix Figure 10: Reserves and capital inflows (USD billion) (USD billion) USD billion USD billion USD billion USD billion 20 5.0 150 5.0 Trade balance International Exports (RHS) Reserves (LHS) (LHS) 125 2.5 10 2.5 100 0.0 0 0.0 75 -2.5 -10 -2.5 50 -5.0 Non-resident portfolio inflows (RHS) Imports (LHS) -20 -5.0 Oct-09 Oct-10 Oct-11 25 Oct-12 -7.5 Nov-09 Nov-10 Nov-11 Nov-12 Source: BPS Source: BI, CEIC and World Bank staff calculations Appendix Figure 11: Indonesia’s major term of trade indices Appendix Figure 12: Inflation and monetary policy and other commodities (month-on-month and year-on-year growth, percent) (index 2007=100) Index Jan 2007 = 100 Index Jan 2007 = 100 Percent Percent 3 12 280 280 Headline inflation, YoY (RHS) 240 240 Core inflation, YoY (RHS) Indonesia's Major Export Energy 2 8 Commodities BI policy rate (RHS) 200 200 160 160 1 4 Food 120 120 0 0 80 80 Metals and Minerals Headline inflation MoM (LHS) 40 40 Jan-07 Jun-08 Nov-09 Apr-11 Sep-12 -1 -4 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Source: BPS and World Bank staff calculations Source: BPS and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A December 2012 45 Indonesia Economic Quarterly Policies in focus Appendix Figure 13: Monthly breakdown of CPI Appendix Figure 14: Inflation among neighboring countries (percentage point contributions to monthly growth) (year-on-year, November 2012) Percent Percent Percent 1.8 Volatile 1.8 -1 0 1 2 3 4 5 Administered Indonesia Core 1.2 Headline 1.2 Singapore * Philippines * Thailand 0.6 0.6 China USA* 0.0 0.0 Korea* Malaysia* Japan * -0.6 -0.6 Nov-09 Nov-10 Nov-11 Nov-12 -1 0 1 2 3 4 5 Percent Source: BPS and World Bank staff calculations *October is latest available month Source: National statistical agencies via CEIC, and BPS Appendix Figure 15: Domestic and international rice prices Appendix Figure 16: Poverty and unemployment rate (Wholesale price, in IDR per kg) (percent) IDR/Kg IDR/Kg Percent Percent 11,000 11,000 25 25 Medium quality: Muncul I (domestic) 9,000 Thai 100% B 2nd grade 9,000 20 20 (international) Poverty rate 7,000 7,000 15 15 5,000 5,000 10 10 Low quality: Unemployment rate 3,000 IR 64 III (domestic); 3,000 5 5 Thai A1 Super (international) 1,000 1,000 0 0 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 2002 2004 2006 2008 2010 2012 Note: Dashed: international Thai rice (cif) prices. Solid: Note: Labor data from February Sakernas domestic wholesale rice Source: BPS Source: PIBC, FAO and World Bank Appendix Figure 17: Regional equity indices Appendix Figure 18: Dollar index and Rupiah exchange rate (daily, index January 2009=100) (daily, index and levels) Index (Jan 2009=100) Index (Jan 2009=100) Index (5 Jan 2009=100) IDR per USD 350 350 120 8,000 JCI IDR/USD (RHS) 300 300 110 9,000 250 250 SET IDR Appreciation 200 BSE 200 100 10,000 150 150 SGX 90 11,000 100 100 Shanghai Dollar Index (LHS) 50 50 80 12,000 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Source: CEIC and World Bank staff calculations Source: CEIC and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A December 2012 46 Indonesia Economic Quarterly Policies in focus Appendix Figure 19: 5-year local currency government bond Appendix Figure 20: Sovereign USD Bond EMBI spreads yields (daily, basis points) (daily, percent) Percent Percent Basis points Basis points 15 15 1000 250 Indonesia 750 125 10 10 Indonesia spreads less overall EMBIG Index spreads (RHS) Philippines 500 0 5 5 Malaysia 250 -125 Thailand United States Indonesia EMBIG bond spreads (LHS) 0 -250 0 0 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Source: CEIC and World Bank staff calculations Source: JP Morgan and World Bank staff calculations Appendix Figure 21: International commercial bank lending Appendix Figure 22: Banking sector indicators (monthly, index January 2009=100) (monthly, percent) Index (Jan 2009=100) Index (Jan 2009=100) Percent Percent 200 200 100 10 Loan to Deposit Ratio 180 180 (LHS) India 80 8 Indonesia 160 160 60 6 Singapore 140 140 Non-Performing Loans Malaysia (RHS) Return on Assets Ratio 40 (RHS) 4 120 120 Thailand 20 2 100 100 USA Capital Adequacy Ratio (LHS) 80 80 0 0 Jan-09 Dec-09 Nov-10 Oct-11 Sep-12 Source: CEIC and World Bank staff calculations Source: BI Appendix Figure 23: Government debt Appendix Figure 24: External debt (percent of GDP; USD billion) (percent of GDP; USD billion) Percent USD billion Percent USD billion 50 250 50 250 Government debt ratio to GDP (LHS) External debt ratio to GDP (LHS) 40 200 40 200 30 150 30 150 20 100 20 100 10 50 10 50 0 0 0 0 2006 2007 2008 2009 2010 2011 2012* 2006 2007 2008 2009 2010 2011 2012* External debt, RHS Private external debt, RHS *September *September Domestic debt, RHS Public external debt, RHS Source: MoF, BI and World Bank staff calculations Source: BI and World Bank staff calculations T H E W O R L D B AN K | B AN K D U N I A December 2012 47 Indonesia Economic Quarterly Policies in focus Appendix Table 1: Budget outcomes and projections (IDR trillion) 2009 2010 2011 2012 2012 (p) 2013 MoF Budget Outcome Outcome Outcome Semester I Budget Revision projections A. State revenue and grants 849 995 1,211 1,358 1,362 1,530 1. Tax revenue 620 723 874 1,016 1,017 1,193 2. Non-tax revenue 227 269 331 341 345 332 B. Expenditure 937 1,042 1,295 1,548 1,553 1,683 1. Central government 629 697 884 1,070 1,071 1,154 2. Transfers to the 309 345 411 479 482 529 regions C. Primary balance 5 42 9 -72 -79 -40 D. SURPLUS / DEFICIT -89 -47 -84 -190 -191 -153 (percent of GDP) -1.6 -0.7 -1.1 2.2 -2.3 -1.7 Note: * MoF estimates based on MoF Semester I 2012 report Source: MoF Appendix Table 2: Balance of Payments (USD billion) 2010 2011 2012 2009 2010 2011 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Balance of Payments 12.5 30.3 11.9 11.3 7.7 11.9 -4.0 -3.7 -1.0 -2.8 0.8 Percent of GDP 2.3 4.3 1.4 6.0 3.9 5.6 -1.8 -1.7 -0.5 -1.3 0.4 Current Account 10.6 5.1 1.7 0.9 2.9 0.3 0.8 -2.3 -3.1 -7.7 -5.3 Percent of GDP 2.0 0.7 0.2 0.5 1.5 0.1 0.3 -1.1 -1.4 -3.5 -2.4 Trade Balance 21.2 21.3 24.2 6.4 7.4 6.1 7.1 3.5 1.7 -2.1 0.6 Net Income & Current Transfers -10.6 -16.2 -22.5 -5.6 -4.5 -5.8 -6.4 -5.8 -4.9 -5.6 -5.9 Capital & Financial Accounts 4.9 26.6 13.5 9.7 4.8 11.6 -3.3 0.4 2.4 5.1 6.0 Percent of GDP 0.9 3.8 1.6 5.2 2.4 5.5 -1.5 0.2 1.1 2.3 2.7 Direct Investment 2.6 11.1 11.5 4.4 3.8 2.5 2.1 3.1 1.6 3.7 3.6 Portfolio Investment 10.3 13.2 4.0 1.4 3.3 4.9 -4.7 0.4 2.7 4.0 3.8 Other Investment -8.2 2.3 -2.1 3.8 -2.3 4.2 -0.8 -3.2 -1.9 -2.7 -1.5 Errors & Omissions -3.0 -1.5 -3.4 0.7 -0.1 0.0 -1.4 -1.8 -0.3 -0.2 0.2 Foreign Reserves* 66.1 96.2 110.1 96.2 105.7 119.7 114.5 110.1 110.5 106.5 110.2 Note: * Reserves at end-period Source: BI and BPS T H E W O R L D B AN K | B AN K D U N I A December 2012 48 Indonesia Economic Quarterly Policies in focus Appendix Table 3: Indonesia’s development indicators at a glance 1990 1995 2000 2005 2010 2011 2012 1 Demographics Population (million) 184 199 213 227 240 242 .. Population growth rate (%) 1.7 1.5 1.3 1.2 1.0 1.0 .. Urban population (% urban to total) 30.6 35.6 42.0 45.9 49.9 50.7 .. Gender ratio, female (% of total) 50.0 50.0 50.0 50.1 50.1 50.1 .. Dependency ratio (% of working-age population) 67.3 60.8 54.7 51.2 48.3 47.8 .. 2 Labor Force Labor force, total (million) 75 84 98 106 117 117 .. Male 46 54 60 68 72 72 .. Female 29 31 38 38 45 45 .. Agriculture share of employment (%) 55 43 45 44 38 36 .. Industry share of employment (%) 14 19 17 19 19 21 .. Services share of employment (%) 31 38 37 37 42 44 .. Unemployment, total (% of labor force) 2.5 7.0 8.1 11.2 7.1 6.6 .. Male 2.5 5.4 7.2 9.3 6.1 5.9 .. Female 2.7 9.8 9.6 14.7 8.7 7.6 .. 3 Poverty and Income Distribution Median household consumption (IDR 000) .. .. 104 211 374 421 446 National poverty line (IDR 000) .. .. 73 129 212 234 249 Poor (million) .. .. 38 35 31 30 29 Poverty (% of population below national poverty line) .. .. 19.1 16.0 13.3 12.5 12.0 Urban (% of population below urban poverty line) .. .. 14.6 11.7 9.9 9.2 8.8 Rural (% of population below rural poverty line) .. .. 22.4 20.0 16.6 15.7 15.1 Male-headed households .. .. 15.5 13.3 11.0 10.2 9.5 Female-headed households .. .. 12.6 12.8 9.5 9.7 8.8 GINI index .. .. 0.30 0.35 0.38 0.41 0.41 Percentage share of consumption: lowest 20% .. .. 9.6 8.7 7.9 7.4 7.5 Percentage share of consumption: highest 20% .. .. 38.6 41.4 43.5 46.5 46.7 4 Public expenditure on social security and welfare (% of GDP) .. .. .. 4.4 3.9 3.9 4.2 1 Health and Nutrition Physicians (per 1,000 people) 0.1 0.2 0.2 0.1 0.3 .. .. Hospital beds (per 1,000 people) 0.7 .. .. .. 0.6 .. .. Child malnutrition (% of children under 5) .. 27 25 24 18 .. .. 5 Under five mortality rate (per 1000 children under 5 year) 98 .. 46 .. 44 .. .. 5 Neonatal mortality rate (per 1000 live births) 27 .. .. .. 19 .. .. 5 Infant mortality (per 1000 live births) 67 .. 35 .. 34 .. .. Maternal mortality ratio (modeled estimate, per 100,000 live births) 600 420 340 270 220 .. .. Life Expectancy at birth (total years) 62 64 66 67 69 69 .. Skilled birth attendance (% of total births) 36 .. 66 .. 82 .. .. Measles vaccination (% of children under 1 year) 0 .. 72 .. 76 .. .. Total health expenditure (% of GDP) .. 1.8 2.0 2.1 2.6 .. .. Public health expenditure (% of GDP) .. 0.6 0.7 1.0 1.3 .. .. 1 Water and Sanitation Access to an improved water source (% of population) 70 74 78 80 82 .. .. Urban (% of urban population) 91 91 91 91 92 .. .. Rural (% of rural population) 61 65 68 71 74 .. .. Access to improved sanitation facilities (% of population) 32 38 44 50 54 .. .. Urban (% of urban population) 56 60 64 69 73 .. .. Rural (% of rural population) 21 26 30 35 39 .. .. 1 Others Disaster risk reduction progress score (1-5 scale; 5=best) .. .. .. .. .. 3.3 .. 6 Proportion of seats held by women in national parliament (%) .. .. 8.0 11.3 18.0 18.2 18.6 Source: 1 World Development Indicators, 2 BPS (Sakernas), 3 BPS (Susenas) and World Bank, 4 MoF and World Bank staff calculation and only includes spending on Raskin, Jamkesmas, BLT, BSM, PKH and actuals except 2012 which is from revised budget. 5 Indonesia Demographic and Health Survey, 6 Inter-Parliamentary Union. T H E W O R L D B AN K | B AN K D U N I A December 2012 49