Australian economist: Indonesia’s future depends on decisions over the next few years

The kind of growth Indonesia will have over the long term depends on the decisions policymakers will make over the next few years, according to Chris Tinning, the chief economist for development at Australia’s Department of Foreign Affairs and Trade.

Speaking at the first Indonesia Development Forum in Jakarta on 9 August 2017, Tinning explained that the next few years are crucial because of the country’s demographics.

“After 2030, as Indonesia’s population ages, the number of people who enter the workforce will be less than the number who are leaving to retire. And that will make it much harder for Indonesia to grow,” he told a crowd of over 1,000 government officials, development professionals, and representatives of civil service organizations.

“Japan and Italy are experiencing that right now. So the decisions made over the next few years will really matter for Indonesia’s future.”

Making the right decisions is not easy, he acknowledged, but added that certain measures to grow the economy make a difference.

To start with, he recommended Indonesia work on enhancing the competitiveness of its services industry. While the country has made moves to open it up to foreign investors, he said it remained closed by global standards.

To illustrate the impact of the lack of liberalization in the services sector on Indonesia’s growth, Tinning cited the logistics sector. Logistics make up 20 percent of the cost of goods sold in Indonesia – one of the highest in the region.

“If Indonesia is able to improve the competitiveness of its logistics, it would reduce prices – which would obviously help the poorest – and it would also help the economy to grow in the long run,” he said.

Tinning also recommended Indonesia boost the participation of women in the workforce, such as through better child care, maternal leave, and encouraging employers to offer flexible working hours.

“There are 86.3 million Indonesian women who are not in paid work, and the proportion of women in Indonesia’s labor force is 51%. That proportion hasn’t improved since 1998,” he said.

A second major area of policy reform is taxation to boost the government’s revenue, which is needed to finance infrastructure, education and health – services that provide critical underpinnings of long-term growth.

“Indonesia’s tax-to-GDP ratio is low by global standards. It’s around 11 percent, and it’s been at that level for the past 6 years,” Tinning said, pointing out that there are only 12.7 million taxpayers out of the country’s 120-million-strong workforce.

According to the World Bank, Indonesia can increase its tax-to-GDP ratio by 2.1 percent just by tightening up tax administration. “But there will need to be further changes to broaden Indonesia’s tax base, if Indonesia is to get to a tax-to-GDP ratio that will enable it to deliver the services it wants to,” he added.

The third area he recommended policymakers focus on is better targeted government spending. While Indonesia has made progress on this front, especially with its significant reductions in fuel subsidies, he said other measures were needed.

“Indonesia’s agricultural subsidies stand at about 4 percent of GDP. That’s very high by global standards, and high subsidies lead to high prices,” Tinning said, adding that Indonesians pay much more for rice than people in Vietnam, Cambodia and Myanmar.

He said two things would make a big difference: A more open trade policy that would reduce prices through increased competition, and improved domestic productivity by diverting some of the money spent on subsidies towards agricultural extension services.

“There is absolutely no doubt about Indonesia’s potential to be a prosperous society in which wealth is broadly shared,” Tinning said. “But whether or not that potential can be realized will really hinge on the decisions that are made by policymakers over the next two years.”