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Policy Reform in Indonesia: Agenda and Challenges . Mohamad Ikhsan Advisor to Coordinating Minister for Economic Affairs Republic of Indonesia and Senior Research Associate at the Institute for Economic and Social Research University of Indonesia.

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Policy reform in indonesia agenda and challenges l.jpg

Policy Reform in Indonesia: Agenda and Challenges

Mohamad Ikhsan

Advisor to Coordinating Minister for Economic Affairs Republic of Indonesia and

Senior Research Associate at the Institute for Economic and Social Research University of Indonesia

Presented at The First OECD-Southeast Asia Regional Forum: Peer Review Mechanism for Policy Reform

Hotel Nikko Jakarta, Indonesia

23-24 January 2007

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  • Overview on the state of Economy since the crisis time

  • Policy Uncertainty Issues in Indonesia

    • Macro Uncertainties

    • Micro Uncertainties

  • The Impact of Policy Uncertainties on Performances

    • TFP

    • Investment

    • Employment

  • Major Causes for Uncertainties

  • Policy Reform Agenda

  • Conclusion

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Overviewof State of Economy

  • Indonesia’s economy has steadily improved since the crisis time.

  • Per capita income has been backed to pre crisis level since 2004 and growth rate now accelerating to a 6 % p.a

  • More balance and sustainable sources of growth

  • Macroeconomic risks improved significantly indicated by a sharp reduction in public and external debt ratio and short term debt over international reserve

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But many (economic) problems remain

  • Our productivity remains lagging behind pre crisis period or other regional competitors.

  • Unemployment both open and under employment are still higher than pre crisis.

  • Poverty trends are moving away of the paths.

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Firm and industry level data amplify those fundamental problems

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In short, mostly caused by policy uncertainties

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Political transition to democratic regime

No clear majority and expected to continue up to the next 10 year

Bigbang decentralization.

Authority vis a vis responsibility

Financial crisis has limited the central government power.

Crisis increases government debt services cost and limit the power of central government

Most of regions rely on central government transfers.

Inducing regional government to take progressive and in many cases unnecessary new tax and retribution.

High debt also rises the country’s risks and degree of vulnerability.

Debt intolerance in Indonesia is about 35% of GDP. It implies focusing on reducing debt burden still the agenda over 1-2 years ahead.

Vulnerability in financial sector have forced the government to take another burden on contingent liability.

The crisis also reduced the ability of the state to up grade infrastructures.

Government spending on infrastructures reduced to only 3-4 % of GDP compared to 7% during the pre crisis time

Sources of Uncertainties

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Increase competition

Raise efficiency

Lower risk

Greater demand and output

Low costs

Better risk x return

Structural and institutional reforms

More investment

Lower taxes and cost of capital

Macro adjustment

Quality of public spending

Improving investment climate

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Policy Reform Constraints

  • Political constraints hinder the ability for GOI to eliminate political uncertainties except for the areas where all parties and/or interest groups relative have common ground.

    • Improving one areas may open the other Pandora.

  • Lack of trusts and lack of responsibility

    • Regional government regulation

  • Some dilemmas:

    • Need to focus on the process rather than outcomes (but at the cost of relative slow of implementing and results)

    • High expectation ( partly due to the past memories) also increases the demand for quick outcomes.

    • Inherent dilemmas: look example in fiscal trilemmas.

  • PR Problem

    • “Take it for granted” behavior on the government sides.

    • Intermediary problem

    • Asymmetric problems of reform: cost of reform always up front while benefit usually appear in the medium term. Benefit per capita in many cases always less than cost per capita.

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A reform agenda

  • Macro reform:

    • Fiscal Policy trilemma

    • Stabilization policy

  • Micro Reform: Three Pillars

    • Investment Climate

    • Infrastructure Acceleration

    • Financial Sector Reform

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Fiscal policy trilema

Reduce public debt/GDP

Increase public investment

Lower taxes

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Fiscal reform

  • Reduce public debt / GDP ratio:

    • Sustain a high primary surplus

    • Lower the cost of debt

  • Restructure public spending to accommodate rise in public sector investment

  • Reduce tax burden

  • Develop a medium-term fiscal framework that lowers political risk.

  • Gradually reduce contingent liability

    • Abolish the financial sector blanket system while introducing new deposit insurance companies

    • State Owned Companies Restructuring including initiating new law on Regional State Owned Companies

  • Most of them have been achieved and further reforms are underway.

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Investment Law & Procedure


Tax & Custom Reform


Labor & Immigration


Trade Licenses


Cross Sector Strategic Policy Reform


Sector Restructuring, Corporatisation and Policy Reform


Regulation on natural monopoly & investment protection


Clear separation on the role of policy maker, regulator,

contracting agency, and operator


Coordination Monetary & Fiscal Authority


Financial Institution (Banking & Non Banking)


Capital Market and SOE Privatization

Three Policy Packages






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Milestones For Improving Regulatory Environment for PPP



KKPPI - Interministerial Committee for Infrastructure Development

Cross Sector - PPP



Issuance of

Presidential Regulation No.67 /2005 (Perpres 67/2005)

Project Preparation

Establishment of

Project Development Facility - PDF



Issuance of

Minister of Finance Regulation No.38/2006

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Infrastructure Policy Package

One important theme in these laws is the phasing out of the monopoly position of the SOEs in infrastructure services…..

Wider opportunities will be open up for private investments in railways, harbors and airports and other sectors.

Energy & Power


Road & Toll Road

Water & Sanitation


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Investment Climate Improvement





  • Review of Labor Law no.13/2003,

  • Development of Employment Dispute Information System

  • Development of an online job search

  • Strengthening service institutions

  • Transparency

  • Equal treatment

  • Settlement mechanisms

  • Synchronization of


  • Clear and transparent criteria on tax

  • Service desks on Large Tax Office

  • Revision of VAT

  • Improving processing time

  • Implementation of EDI system to improve efficiency

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Financial Policy Package

Strengthen the coordination between fiscal and monetary authorities

Launched June 2006,

as joint effort between GOI and BI

  • The establishment of Mediation Agency for Indonesia Insurance in September 2006.

  • The establishment of road map pension fund program in September 2006.

  • The issuance Bank Indonesia regulation regarding incentive for banks merger and consolidation.

  • The establishment of Committee for Privatisation of State Enterprise. A clear legal ruling on separate maintenance of state assets in regard to the management of non-performing loans at state-owned banks

Strengthening banking institutions and policy on improving the performance of SOE Banks

Strengthening non bank financial institutions (insurance, pension funds, finance companies & venture capital firms)

Improving the liquidity, efficiency and integrity of the capital market

Clarify Government privatization policy direction

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New Initiatives: 2007-2008

  • Continue to implement three previous packages

    • Carry over some delay policy actions

    • Refocusing on some important issues

    • Eliminate some irrelevant policy actions

  • Take special actions for several important issues

    • Employment Creation and Poverty: SME, CCT, Poverty Community Development, and Urban Housing Programs

    • Energy: Deregulation in Oil and Gas and Energy Alternative

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Conclusion: How to create an effective and do-able agenda

  • It must start with credible and feasible agenda

    • Taking to account political constraint is necessary

    • Consider all possible negative side effects

  • Priority is essential

  • Need to manage expectation

    • Reform should not be oversold

  • Setting the pace and sequence of reform is really art.

    • Need to have a full knowledge on all constraints and opportunities

    • Crisis in many times opens the opportunity.

  • In many cases, establishing oversight mechanism will help the credibility of reform

  • Educating the public is the part of success element of reform.

    • Broadening the base of reform supporters part of the objective of the PR.

  • Need to have a champion of reform.

    • Role of bureaucracy is important.

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