Tue, 02 Nov 2010

Jakarta. A policy group has urged Indonesia to renew its efforts to reform the bureaucracy, invest heavily in infrastructure and cut greenhouse gas emissions while the going is good.

“The current environment offers Indonesia a unique opportunity to pursue its reform agenda. But there is no room for complacency,” said Angel Gurria, secretary general of the Paris-based Organization for Economic Cooperation and Development.

The country weathered the global financial crisis well and posted the third-highest real GDP growth in the G-20 group of the world’s largest economies, the OECD said in a report released on Monday.

But Indonesia needs to reform its labor market, which is more restricted compared to those of India, China, Brazil and other OECD countries.

“To address this, we recommend a two-pronged strategy of introducing some form of unemployment benefits while reforming the labor code, particularly by reducing onerous severance payments,” Gurria said.

The report said GDP growth was “projected to accelerate to around 6 percent this year and next,” but warned that “inflation pressures could re-emerge,” so authorities should raise interest rates before the end of the year.

“Greater ambition on inflation is called for to reduce its deleterious effects,” it said.

The OECD also said the government must move toward social policy reform to ensure inclusive economic growth.

“Changes to the policy and institutional framework will be necessary if Indonesia is to achieve its economic growth objective of 7 to 7.7 percent in 2014,” and reach its poverty target of 8 to 10 percent, it said. The poverty rate was 13.3 percent in March this year.

The group also urged President Susilo Bambang Yudhoyono’s government to “rapidly implement bureaucratic reforms to improve both efficiency and governance.”

Echoing recent comments by the International Monetary Fund, the OECD said Indonesia would only fulfill its potential if it tackled “a number of weaknesses still holding back progress.”

The OECD recommended that the state make more room in the national budget by cutting energy subsidies, which account for more than a tenth of total state spending. The total energy subsidy for 2011 is set at Rp 136.6 trillion ($15.3 billion), compared to Rp 143.9 trillion this year.

It also said Indonesia needed to attract massive investment in infrastructure, and that returns on such investments were “likely to be huge.”

Gurria said attracting sufficient private investment would require the state to establish independent sectoral regulators, increase the powers of existing regulators and have better inter-agency coordination to facilitate the smooth conduct of business.

He said the country should also “remove legal obstacles to land acquisition” and further relax barriers to foreign direct investment, such as bureaucratic red tape.

Foreign direct investment jumped by 32 percent during the first nine months of the year, to Rp 111 trillion, including in real estate, mining, telecommunications and agribusiness. The target of Rp 130 trillion for the whole of 2010 should be exceeded, the government said on Sunday.

Indonesia also needs to take strong measures against deforestation and to protect its forests, the third-largest in the world after Brazil and the Democratic Republic of Congo, the report said.