Indonesia 2010 : [special feature: energy subsidies - infrastructure social policies]

169 Pages·2010·2.91 MB·English

by  OECD

OECD Economic Surveys V
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SPECIaL FEaTURES: EnERgy SUbSIDIES – InFRaSTRUCTURE 0
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SOCIaL POLICIES 8
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OECD (2010), OECD Economic Surveys: Indonesia 2010, OECD Publishing.
http://dx.doi.org/10.1787/eco_surveys-idn-2010-en
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Volume 2010/18
november 2010 ISSn 0376-6438 n
2010 SUbSCRIPTIOn (18 ISSUES) o
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e Volume 2010/18
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www.oecd.org/publishing ISbn 978-1902 -26041-00 81384 10 -P0 20 november 2010
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OECD Economic Surveys:
Indonesia
2010
Please cite this publication as:
OECD (2010), OECD Economic Surveys: Indonesia, OECD Publishing.
http://dx.doi.org/10.1787/9789264000000-en
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Series: OECD Economic Surveys
ISSN 0376-6438 (print)
ISSN 1609-7513 (online)
OECD Economic Surveys Indonesia
ISSN 2072-5116 (print)
ISSN 2072-5108 (online)
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TABLE OF CONTENTS
TTaabbllee ooff ccoonntteennttss
Executive summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Assessment and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Chapter 1. Achieving sustainable andinclusivegrowth. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Recent economic developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Key challenges over the longer term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Macro-economic policy framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Financial markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Labour markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Climate change and deforestation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Governance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Summary of policy recommendations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Annex 1.A1. Explaining inflation in Indonesia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Annex 1.A2. Estimation and projection of Indonesia’s potential outputgrowth . . . 69
Chapter 2. Phasing out energy subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Energy subsidies are large by international standards . . . . . . . . . . . . . . . . . . . . . . . . 72
Energy subsidies entail significant costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Removing subsidies will enhance Indonesia’s long-term prospects . . . . . . . . . . . . . 80
Policy considerations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Chapter 3. Tackling the infrastructure challenge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
The state of infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Financing investment in infrastructure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
Comparing Indonesia’s regulatory framework with OECD countries . . . . . . . . . . . . 102
Selected infrastructure sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
Chapter 4. Enhancing the effectiveness ofsocialpolicies. . . . . . . . . . . . . . . . . . . . . . . . . . 129
Education. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Health care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Social protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
Annex 4.A1. The effect of school infrastructure development
oneducation attainment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
Annex 4.A2. Health insurance and utilisation in Indonesia. . . . . . . . . . . . . . . . . . . . . 159
Annex 4.A3. The determinants of poverty in Indonesia. . . . . . . . . . . . . . . . . . . . . . . . 162
OECD ECONOMIC SURVEYS: INDONESIA © OECD 2010 3
TABLE OF CONTENTS
Boxes
1.1. A snapshot of the Indonesian economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
1.2. Policy response to the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
1.3. The response of lending rates to policy rate cuts. . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.4. The impact of the ASEAN-China Free Trade Agreement on Indonesia . . . . . . . 31
1.5. The Medium Term Development Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
1.6. Forest losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
1.7. Summary of policy recommendations: Macroeconomic andstructural policies. . 59
2.1. Past reforms to energy subsidies in Indonesia. . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2.2. Summary of policy recommendations: Energy subsidies. . . . . . . . . . . . . . . . . . . 86
3.1. Infrastructure and economic growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
3.2. Public Private Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
3.3. Regulatory environment and infrastructure outcomes. . . . . . . . . . . . . . . . . . . . . 103
3.4. The establishment of regulatory authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.5. Rural electrification programme in Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
3.6. The experience of private-sector participation in the water sector inJakarta . . . . 113
3.7. State revolving funds: The USexperience. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
3.8. Summary of policy recommendations: Infrastructure . . . . . . . . . . . . . . . . . . . . . 123
4.1. Indonesia’s education system: An overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
4.2. The Indonesia health-care system: An overview. . . . . . . . . . . . . . . . . . . . . . . . . . 140
4.3. Indonesia’s experience with health insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
4.4. Indonesia’s social-assistance programmes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
4.5. Summary of policy recommendations: Social policies . . . . . . . . . . . . . . . . . . . . . 153
Tables
1.1. Selected macroeconomic indicators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
1.2. Long-term pass-through from policy to lending rates and mean lag . . . . . . . . . . 31
1.3. Indonesia’s tariff rates on imported goods by trade agreement,
simpleaverage, per cent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
1.4. Short-term economic forecasts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
1.5. Actual and potential output growth and contributions to growth . . . . . . . . . . . 35
1.6. Government budget outcomes,1990-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.7. Key development targets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.8. One-year-ahead headline CPI inflation and contributions. . . . . . . . . . . . . . . . . . 45
1.A1.1. Regression results of backward-looking Phillips curve
(two-quarter-ahead inflation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
1.A1.2. Regression results of backward-looking Phillips curve
(four-quarter-ahead inflation) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
1.A1.3. Regression results of backward-looking Phillips curve
(eight-quarter-ahead inflation). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
1.A1.4. Pseudo out-of-sample forecasting results for CPI inflation . . . . . . . . . . . . . . . . . 68
2.1. Pass-through of international prices to domestic retailprices
(taxinclusive): 2004-08. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2.2. Selected studies on the impact of subsidy removal. . . . . . . . . . . . . . . . . . . . . . . . 81
2.3. Compensating programmes for fuel subsidy elimination . . . . . . . . . . . . . . . . . . 83
3.1. Selected infrastructure indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
3.2. Presence of at the least one regulatory authority . . . . . . . . . . . . . . . . . . . . . . . . . 104
3.3. Independence of the regulatory authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
3.4. Powers of regulatory authorities in infrastructure industries . . . . . . . . . . . . . . . 106
3.5. Degree of price regulation in infrastructure industries. . . . . . . . . . . . . . . . . . . . . 107
4 OECD ECONOMIC SURVEYS: INDONESIA © OECD 2010
TABLE OF CONTENTS
3.6. Investment planning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
3.7. Sources of light by income levels, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
3.8. Access to telecommunications services by income levels, 2008 . . . . . . . . . . . . . 120
4.1. Basic education indicators: International comparisons . . . . . . . . . . . . . . . . . . . . 131
4.2. Education and health care: Total spending by province,2008. . . . . . . . . . . . . . . 132
4.3. Educational attainment by income level, 1996and2008 . . . . . . . . . . . . . . . . . . . 134
4.4. Educational attainment by province,2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
4.5. Teacher qualifications and school conditions, 2001-02and2007-08 . . . . . . . . . 136
4.6. Household expenditure on education and health care, 1996and2008 . . . . . . . 136
4.7. Basic health indicators: International comparisons . . . . . . . . . . . . . . . . . . . . . . . 139
4.8. Health indicators by social group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
4.9. Utilisation rates in rural and urban areas, 1997and2006. . . . . . . . . . . . . . . . . . . 142
4.10. Coverage of health insurance by income level,2008. . . . . . . . . . . . . . . . . . . . . . . 144
4.11. Access to water and sanitation infrastructure by income levels,2008. . . . . . . . 145
4.12. Poverty and income-inequality indicators, 1996and2008. . . . . . . . . . . . . . . . . . 150
4.13. Poverty headcount by province,2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
4.A1.1. Impact of school construction on educational attainment . . . . . . . . . . . . . . . . . 157
4.A2.1. Descriptive statistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
4.A2.2. Health insurance and utilisation: Probit regressions. . . . . . . . . . . . . . . . . . . . . . . 161
4.A3.1. Descriptive statistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
4.A3.2. The determinants of poverty: Probit regressions, 2002and2008 . . . . . . . . . . . . 163
4.A3.3. Poverty incidence decomposition, 2002and2008 . . . . . . . . . . . . . . . . . . . . . . . . . 164
4.A3.4. Poverty incidence decomposition coefficients, 2002and2008. . . . . . . . . . . . . . . 165
Figures
1.1. The global economic crisis in Indonesia, OECD and Asia. . . . . . . . . . . . . . . . . . . 24
1.2. Impact of the fiscal package on real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1.3. Monetary policy, inflation and exchange rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.4. Labour-market indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
1.5. Credit outstanding by type of bank and loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.6. Lending rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.7. Share of local currency government bonds held by foreign investors . . . . . . . . 34
1.8. Income gap vis-à-vis the OECD countries in OECD’s Enhanced
Engagement countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
1.9. Projections of population and potential output growth . . . . . . . . . . . . . . . . . . . . 36
1.10. The effect of age structure on the ratio of private saving to GDP . . . . . . . . . . . . 37
1.11. Gross debt and fiscal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
1.12. Tax-to-GDP ratio and GDP per capita,2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
1.13. Inflation and monetary policy target range . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.14. CPI inflation rate and volatility,2001-09 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
1.15. Indicators of financial market depth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
1.16. Banking soundness indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
1.17. Actual and structural unemployment rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
1.18. Employment protection legislation,2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
1.19. Ratio of minimum wage to average wage by country,2008. . . . . . . . . . . . . . . . . 51
1.20. Average and minimum monthly wage by province,2008. . . . . . . . . . . . . . . . . . . 52
1.21. CO emissions intensity by country,2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
2
1.22. Deforestation rates in Indonesia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
1.23. Governance indices and GDP per capita in OECD andEnhanced
Engagement countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
OECD ECONOMIC SURVEYS: INDONESIA © OECD 2010 5
TABLE OF CONTENTS
1.A2.1. Potential output growth in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
2.1. Energy subsidies in selected countries,2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
2.2. Evolution of subsidies and their composition over time. . . . . . . . . . . . . . . . . . . . 75
2.3. Retail gasoline, diesel and kerosene prices in USD, 2008orlatestavailable date. . 76
2.4. Share of selected sources in central government revenue, per cent. . . . . . . . . . 79
2.5. Fuel subsidies by income,2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
2.6. Effect of fuel price increase on monthly rates of inflation . . . . . . . . . . . . . . . . . . 82
2.7. Effect of a decrease in fuel subsidies on the differences between
energy revenues and subsidies for different levels of oil price . . . . . . . . . . . . . . 83
3.1. Size of infrastructure sectors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
3.2. Quality of national, provincial and district roads, 2006. . . . . . . . . . . . . . . . . . . . . 94
3.3. Public infrastructure spending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
3.4. Central government budget deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
3.5. Value and number of PPP projects over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
3.6. Sector share of total investment commitments and number of projects . . . . . 100
3.7. FDI legislation in selected infrastructure sectors, 2009. . . . . . . . . . . . . . . . . . . . . 109
3.8. Private and captive power plant production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
3.9. Distribution of productivity levels of water-supply establishments
across provinces . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
3.10. Total length of road networks and share of paved roads. . . . . . . . . . . . . . . . . . . 118
3.11. Share of ships by type of ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
4.1. The effect of decentralisation on educational enrolment at the provincial level. . 137
4.2. Decentralisation and health-care indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
This Survey was prepared in the Economics Department by
AnnabelleMourougane, MauroPisu and LuizdeMello under the supervision of
PeterJarrett.
Research assistance was provided by AnneLegendre and secretarial assistance
by Mee-LanFrank.
The Survey was discussed at a meeting of the Economic and Development Review
Committee on 16September2010.
The Survey is published on the responsibility of the Secretary-General of the
OECD.
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6 OECD ECONOMIC SURVEYS: INDONESIA © OECD 2010
BASIC STATISTICS OF INDONESIA
(2009unless noted)
THE LAND
Area (thousands sq. km) 1911
POPULATION
Total (millions, 2010) 237.6
Inhabitants per sq. km 124.3
Net average annual increase during2000-10 (in per cent) 1.49
Urbanisation rate (2008, in per cent) 51.5
Age distribution (2010, in % of total population)
0-14 26.7
15-64 68.2
65+ 5.2
EMPLOYMENT
Working-age population (2010, in millions) 171.0
Total employment (2010, in millions) 107.4
Labour force participation rate (2010, in per cent) 67.8
Open unemployment rate (2010, BPS definition, in per cent) 7.4
Informality rate (BPS, in per cent, 2010) 68.6
Headline CPI inflation (average over previous 5years) 8.9
GROSS DOMESTIC PRODUCT
GDP at current prices and current exchange rate (USD billion) 540.3
Per capita GDP at current prices and market exchange rate (USD) 2349.4
Average annual real growth over previous 5years (in %) 5.6
PUBLIC FINANCES (% of GDP)
Revenue 15.4
Nominal balance –1.6
Gross public debt 28.3
Public infrastructure spending 1.7
INDICATORS OF LIVING STANDARDS
Upper-secondary educational attainment (2007, inper cent of 10+population) 23.4
Literacy rate (2008, inper cent of 10+population) 93.1
Doctors per 1000inhabitants (2003) 0.13
Infant mortality per 1000live births (2008) 26.8
Life expectancy at birth (2008) 70.8
Human Development Index (2008) 71.2
Income inequality (2008, Gini coefficient) 0.35
Poverty incidence (March2010, national poverty line, per cent) 13.3
Internet users per 1000inhabitants (2008) 79.1
Improved sanitation facilities (% of population with access) 52.0
FOREIGN TRADE
Current account (USD billion) 10.7
In % of GDP 2.0
Exports of goods (USD billion) 118.0
In % of GDP 26.9
Average annual growth over previous 5years (%) 14.9
Imports of goods (USD billion) 85.3
In % of GDP 19.5
Average annual growth over previous 5years (%) 19.6
Outstanding external debt (USD billion) 172.3
In % of GDP 32.0
EXECUTIVE SUMMARY
Executive summary
I
ndonesia’s economy withstood the recent global crisis very well, thanks to appropriate stabilisation
policies and increased economic and financial resilience. Major social and economic progress has
been achieved over the last decade, leading to several upgrades of its sovereign rating toward
investment grade. Nevertheless, a number of institutional reforms and policy changes will be needed
to deal with several cross-cutting challenges of decentralisation, capacity building at the local level
and improved economic governance. Only with such reforms can Indonesia hope to meet its
ambitious medium-term targets for growth and poverty reduction and to move to an
environmentally sustainable development path.
The macroeconomic framework has improved
Real GDP growth was the third highest in theG20in2009and is projected to accelerate to
around 6% this year and next. However, inflation pressures may re-emerge, and the monetary
authorities should thus start to raise the policy rate before the end of2010. The policy framework –
which combines inflation targeting, a flexible yet not completely freely floating exchange rate and
rules-based fiscal management– is sound. Bank Indonesia has also sought to strengthen monetary
transmission mechanisms. Finding the fiscal room to finance the expansion of growth-enhancing
programmes, such as investment in infrastructure and education at the secondary level, and the
increase in coverage of formal social protection and health insurance will require enhancing tax
enforcement and eliminating energy subsidies. Greater ambition with respect to price stability by
bringing down the inflation target range in the medium term closer to those in regional peers would
signal a move to a low-inflation environment, reduce uncertainty and allow markets to function
better.
Phasing out energy subsidies will free up fiscal resources
Energy subsidies fail to achieve their social objectives and entail significant economic, fiscal and
environmental costs. The government should stick to its commitment to eliminate those on fossil
fuels by2014but needs to go further and cut back on electricity subsidies as well, since these share
most of the weaknesses of those on fossil fuels. Widespread communication of the benefits of subsidy
removal and recourse to existing well-targeted cash-transfer schemes will help to overcome
resistance to reform. Fiscal support for biofuels should be reviewed, given the limited knowledge on
their net life-cycle benefits.
Boosting investment in infrastructure would overcome obstacles to faster
potential growth
At Indonesia’s current stage of economic development, returns to financing investment in
infrastructure are likely to be large. Public outlays on infrastructure could be moderately increased
without endangering fiscal sustainability. Attracting sufficient private investment will be
challenging and will require establishing independent sectoral regulators, strengthening the powers
8 OECD ECONOMIC SURVEYS: INDONESIA © OECD 2010