Indonesia Economic Quarterly, July 2014 Hard choices Ndiam Diop - - PowerPoint PPT Presentation

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Indonesia Economic Quarterly, July 2014 Hard choices Ndiam Diop - - PowerPoint PPT Presentation

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Indonesia Economic Quarterly, July 2014 Hard choices Ndiam Diop Lead Economist The new administration will face major near-term challenges Fiscal pressures External Economic pressures growth Poverty and inequality reduction Ending

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Indonesia Economic Quarterly, July 2014 Hard choices

Ndiamé Diop Lead Economist

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The new administration will face major near-term challenges

Hard choices 2

Poverty and inequality reduction

Economic growth Fiscal pressures External pressures

Ending extreme poverty and achieving shared prosperity? OR Persistent pockets of extreme poverty and many Indonesians left behind?

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SLIDE 3

International backdrop

Hard choices 3

50 60 70 80 90 100 110 120 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Coal Palm oil Brent oil Rubber Copper Source: World Bank

…but most global commodity prices, except oil, continue to decline

(index, January 2012 = 100, 3mma)

High-income economy growth is strengthening…

(manufacturing PMI, +50=expansion)

44 46 48 50 52 54 56 58 60 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14

Euro area US Japan Source: Markit

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Economic growth - Will Indonesia return to 6% growth?

Hard choices 4

(annual growth, percent)

Source: BPS; World Bank staff calculations

  • 1

1 2 3 4 5 6 7 8 2001 2003 2005 2007 2009 2011 2013 2015 East Asia Pacific (excl. China & Indonesia) Indonesia Forecast

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100 200 300 400 500 2009 2010 2011 2012 2013 2014 (1) 2014 (2) Fiscal deficit Debt payments

Note: 2014 (1) is initial Budget (APBN), (2) is revised Budget (RAPBN-P) Source: Ministry of Finance; World Bank staff calculations

Fiscal risks are building up steeply

Hard choices 5

… and contributed to a substantial rise in government financing needs

  • 2

3 8 13 18 23 2011 2012 2013 All other revenues

  • Intl. trade taxes

Oil and gas revenues (tax and non-tax) Income tax (non-oil and gas)

Significantly weaker revenue growth has added to expenditure-side pressures…

(contributions to overall nominal revenue growth, percentage points)

Source: Ministry of Finance; World Bank staff calculations

(IDR trillion)

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SLIDE 6

External balance still in focus despite macro stabilizing measures

Hard choices 6

Source: CEIC; World Bank staff calculations

…which have been hit by ongoing commodity sector challenges

(contributions to export value growth yoy, percentage points)

After successful macro stabilization, focus now on weak exports…

(export and import USD values, yoy growth, 3mma)

  • 20
  • 10

10 20 30 40 50 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Exports Imports Source: CEIC; World Bank staff calculations

  • 20
  • 15
  • 10
  • 5

5 10 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Non commodities Commodities

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Moderate pace of growth expected to continue

Hard choices 7

July IEQ

Previous (March IEQ) 2012 2013 2014p 2015p 2014p 2015p Real GDP (% change) 6.2 5.8 5.2 5.6 5.3 5.6 Consumer price index (% change) 4.3 6.9 5.8 4.9 6.2 5.2 Current account balance (% of GDP)

  • 2.8
  • 3.3
  • 2.9
  • 2.4
  • 2.9
  • 2.1

Budget balance (% of GDP)

  • 1.9
  • 2.2
  • 2.8

n.a.

  • 2.6

n.a.

Source: BI; BPS; Ministry of Finance; World Bank staff projections

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Addressing near- term macro challenges Reinvigorating growth Fiscal pressures External pressures …AFFECTS THE CAPACITY TO DELIVER ON KEY STRUCTURAL REFORMS:

  • SUPPLY-SIDE REFORMS

Infrastructure Skills Functioning of markets

  • REFORMS TO ENSURE

SHARED PROSPERITY Local access to services Social protection Management of disaster risks & resilience FISCAL REFORMS Redirecting spending Mobilizing revenue …and achieve key development

  • utcomes

Faster poverty reduction Reduced inequality

Assessing the hard policy choices ahead

Hard choices 8

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Inequality is a growing problem in Indonesia

9

Inequality on the rise in recent years… …and increasing faster in Indonesia than in its neighbors

  • 0.4
  • 0.2

0.0 0.2 0.4 0.6 0.8 China Indonesia Laos India Vietnam Cambodia Philippines Malaysia Thailand

Source: Kanbur, Rhee and Zhuang, 2014, “Inequality in Asia and the Pacific”; World Bank staff calculations

(percent, LHS; percentage points, RHS)

Note: Poverty rates are March BPS estimates; 2014 GDP growth: World Bank projection Source: BPS; World Bank staff calculations

(1990-2011 annual average change in Gini coefficient, percentage points)

Hard choices

10 20 30 40 50 5 10 15 20 25 2000 2003 2006 2009 2012 GDP (LHS) Official poverty rate (LHS) Inequality (Gini coefficient, RHS)

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  • Inequality can slow down economic growth

Preliminary research comparing districts in Indonesia indicates that high levels of inequality hurt growth.

  • Inequality slows down poverty reduction

If all households received growth equally, poverty would have fallen from 17.4 percent in 2003 to 0 percent by 2010.

  • Inequality can trigger conflict and social tension

Districts with Gini coefficients of 40 experienced 60 percent more conflict than districts with Gini coefficients of 20.

  • The majority of Indonesians believe that the country is

more unequal than they’d like it to be

Why does inequality matter for Indonesia?

Hard choices

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11

Children are born with unequal

  • pportunities

What is causing the rise in inequality?

Source: Susenas; DHS; World Bank staff calculations

20 40 60 80 100 Unskilled birth attendant Not fully immunized 16-18 year olds not enrolled No clean drinking water No proper sanitation Decile 10, urban Decile 1, rural

Returns from jobs favor the rich and well-educated

20 40 60 80 100 120 2003 Worker Wage Household

Source: Sakernas; Susenas; World Bank staff calculations

(lack of access, percent) (wage and consumption premiums compared to workers with primary education, percent)

Hard choices

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12

What is causing the rise in inequality?

The poor are more vulnerable to shocks to their income

  • All households face risks, for example

health, cost of living shocks, and natural disasters, that can affect their income

  • The rich have access to more efficient

coping mechanisms to respond to shocks (savings, insurance, good jobs, etc.); the poor often do not

  • The poor are less able to take risks to

increase their income

The rich benefit from greater returns to capital

(annual change in real terms, percent)

Source: Indonesia Stock Exchange; BPS; Sakernas; World Bank staff calculations

Hard choices

  • 80
  • 60
  • 40
  • 20

20 40 60 80 100 2002 2004 2006 2008 2010 2012 Real formal wages Real informal wages Real JCI price return

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83% of Indonesians believe it is “urgent” for the new government to tackle inequality

  • Distribution: improve spending and taxation policies (for

example, eliminate regressive fuel subsidies, enhance tax compliance)

  • Opportunities: increase poor households’ access to high

quality education and health

  • Mobility: support labor mobility for high-quality job creation
  • Safety nets: adequate and well-targeted, to reduce the

vulnerability of the poor to shocks

What can be done to address rising inequality?

Hard choices

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Thank you

July 2014 IEQ Contents:

  • Regular update on economic

developments and the outlook

  • New purchasing power parity-adjusted

estimates of Indonesia’s economy

  • Inequality is growing in Indonesia and it

matters for policy

  • El Niño, forest fires and haze: the

imperatives for concrete action

On the web: http://www.worldbank.org/en/news/feature/2014/07/21/indonesia- economic-quarterly-july-2014