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.