Indonesian investment in social development low

Indonesian investment in social development low

Alex Arifianto, Jakarta

The United Nations Support Facility for Indonesia Recovery (UNSFIR) and the National Development Planning Agency (Bappenas) unveiled the 2004 Indonesia Human Development Report (IHDR) on Tuesday. This is the second time a human development country report has been produced for Indonesia -- the first one was released in 2001 and it received enormous praise both from within Indonesia and abroad.

The theme of this year's IHDR is Financing Indonesia's Human Development. It calls on the government to increase its social development spending on health, education and public infrastructure so as to bring our spending on these sectors up to a par with other Southeast Asian countries, such as Malaysia, the Philippines and Thailand.

Indonesia's social development spending is considered to be one of the lowest in the region. In the past, the government has relied more on economic growth and private sector spending to improve the country's human development indicators rather than using public spending to fund investment in this area. Some have attributed the fact that Indonesia's Human Development Index (HDI) is stagnant (ranked 111 out of 177 countries this year) and is lower compared to our Southeast Asian counterparts to this lack of public spending.

To help alleviate the problem, the report recommends that public social spending should be increased in the areas of food security, primary health care, basic education, and physical security (by hiring new police officers and increasing their salaries). To fund this new spending, the report recommends that Indonesia should improve tax collection, and increase taxes on upper-income Indonesians. If no additional revenue sources are available, the government could also pursue deficit financing.

The report is correct in its main premise that during past decades the Indonesian government has spent very little on the areas of social development. This has resulted in the lower human development indicators achieved by Indonesia compared to its Southeast Asian neighbors, and has made our efforts to reduce poverty grind to a standstill.

Thus, it might be necessary for the government to increase its spending on social development as an investment to improve Indonesia's human development indicators.

However, there should be clear and reliable revenue sources to help fund such spending. While the government could raise new revenue through increased taxation, we should first make efforts to improve the efficiency of tax collection and the management of the tax and customs' services.

As for deficit financing, while a small budget deficit might not adversely affect the economy in the short run, in the long run a country cannot continue relying on deficit financing to fund its development.

This is because in the process, it will incur new debts that will cripple economic growth and increase poverty in the country. With this in mind, we need to pursue other revenue options before turning to deficit financing as a source of funding for new social spending.

Instead of financing this new social spending by incurring additional budget deficits, additional revenues for it should come through civil service restructuring to reduce the amount of the government budget devoted to paying the salaries and needs of civil servants, tax simplification and increased efficiency in tax collection, and through the further rescheduling of some of Indonesia's outstanding debts to reduce the amount of the budget allocated for servicing our debts.

The imposition of additional tax burdens on individuals and businesses to help pay for this new social spending should be avoided as much as possible.

We should also point out that personal and corporate income tax rates in Indonesia are already some of the highest in the region.

Thus, it might be necessary for the government to consider simplifying these taxes and reducing the rates at which they are charged, perhaps by consolidating them into a single flat-rate income tax scheme, in order to generate more economic growth and raise more revenue in the long run.

At the same time, since the Indonesian private sector (both for-profit and non-profit institutions) has for decades supplemented social development spending in the above areas using funds from their own resources, they should continue to play a major role in helping cover the investment costs that the government is unable to afford.

Incorporating the private for-profit and non-profit sectors into social development is consistent with the goal of involving non-governmental stakeholders in the development process, and, therefore, their participation in providing better social services to Indonesians should be fully encouraged.

Finally, it should also be noted that while it is important for us to increase our investment in the area of social development, it is more important to ensure that the resources spent in this area are spent effectively, and that the leakage and misuse of funds allocated for social development be minimized.

In other words, a successful poverty reduction strategy requires the implementation of good governance practices and the making of the government more accountable to the public. Without these, such strategies will be ineffective.

In conclusion, the IHDR's focus on new investment in the social sector as being essential if our country's human development indicators are to be improved should be supported.

However, such investment should not be financed through an increased budget deficit, but instead through increasing the efficiency of our tax collection and public expenditure. The necessary investment should also involve the private sector and civil society so as to maximize its effectiveness in improving the welfare of all Indonesians and achieving lasting poverty reduction in this country.

The writer (aarifianto@smeru.or.id)is an economist with the SMERU Research Institute, a Jakarta-based public policy think tank. The views expressed here are strictly personal.