Indonesia must raise ownership ceilings for foreign investment and liberalize state-owned monopolies to resolve infrastructure bottlenecks, the Organization for Economic Cooperation and Development (OECD) has said.
The OECD on its first assessment report on the country's economy said foreign direct investment rules here are more restrictive than in most OECD countries, making Indonesia's ratio of FDI to GDP among the lowest in Southeast Asia.
"We therefore think it would be a good idea to liberalize foreign ownership restrictions further to encourage foreign investment in sectors where barriers remain," said OECD secretary-general Jose Angel Gurria.
OECD is a multilateral forum of thirty countries committed to the free market economy and the principles of representative democracy.
The report is timely as it is linked to the decision of the OECD to strengthen its cooperation with a number of important nonmember countries -- Brazil, China, India, Indonesia and South Africa -- through "enhanced engagement programs" with a chance for membership.
Gurria further said liberalizing state monopolies in key industries would produce a large potential pay-off in the form of more business opportunities for the private sector and help resolve infrastructure bottlenecks.
Despite recent deregulation, he said, the government is currently still the major player in various business sectors, including manufacturing, banking and insurance, transportation and retail distribution.
"Further liberalization will bring more investment and lower prices for consumers," he said.
However, he added, to achieve such goals there had to be an effective regulator framework that combines price liberalization and easy entry with independent regulators that can protect consumer rights.
On the macroeconomic front, the OECD assessment says Indonesia has been able to maintain a degree of stability, essential for sustained growth.
The momentum of the country's economic expansion is expected to be maintained until next year with GDP growth likely exceeding 6 percent annually.
Nevertheless, it says, the current level of growth is insufficient to speed up the pace of reduction in poverty and unemployment.
Higher growth, Gurria said, was needed if the country wants to more quickly lower the poverty rate of 16 percent and an unemployment rate of more than 10 percent.
Gurria praised the government's "bold steps" in reducing liability for rising crude oil prices by cutting fuel subsidies in the state budget.
To further reduce liability, Gurria suggested the government consider the introduction of a formula-based mechanism for setting domestic fuel prices.
"This would have make price changes transparent and less politically charged," he said.
Commenting on the first assessment made by the OECD on the country, Deputy to the Coordinating Minister for the Economy Mahendra Siregar said the government regarded it as invaluable input.
As for the possibility of joining the OECD as a permanent member, he said the government appreciated being placed on par with the other countries in the enhanced engagement programs, "but we have yet to consider joining as an option".(mri)