Oct 23, 2012

Indonesia - Indonesian Economy Needs More Revamping to Turbo Charge Growth

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JAKARTA – With one of the highest economic growth rates in the world, Indonesia is experiencing good times right now but things could be even better if the government did more to revamp its economy, say international analysts.

Southeast Asia’s largest economy needs to do much more to slash bureaucracy and build infrastructure if it wants the party to continue, according to a report from Standard Chartered.

In its report entitled “Economic Reform:  The Unfinished Agenda,” the bank looked at the state of reforms at countries around the world. If Indonesia can push through some of the difficult but necessary changes its economy needs, the report says its citizens will each be more than 40% richer in 2030. “Reform is the key to unlocking faster economic growth in developed countries as much as emerging markets,” said the report, which estimates countries lose between one percentage point and three percentage points of growth per year by delaying reform. “Without reform, economies become stuck in low-growth trajectories.”

Policy makers should take note as a 40% bump in per capita gross domestic product is not small change. The main areas that need work in Indonesia are outdated infrastructure as well as the growing number of bureaucrats and their too often confusing and even contradictory rules. As Indonesia has given more power to local officials, the number of local government bodies across the archipelago has jumped to close to 500 from 341 in 1998, the report said. The country now has around 4.6 million civil servants and 73% of them work at the local level.

Indonesia needs to rein in the spending and regulatory powers of these smaller players if it wants to encourage more investment and growth, analysts say.

“The government must address not only the size of the bureaucracy but also its lack of effectiveness,” in building infrastructure and encouraging investment, the Standard Chartered report said.

Ratings company Standard & Poor’s came out with its own wish list for Indonesia last week. It is the last big agency that rates Indonesia below investment grade. Fitch Ratings and Moody's Investor Service already have an investment-grade rating for Indonesia.

While Indonesia is on the right track, it will need to push through unpopular reforms, such as raising the government-controlled price on fuel, and be cautious about adding further restrictions on foreign investment to stay on track, Standard & Poor’s said.

“There’s a perception that the government’s reform agenda has stalled, due to a lack of policy initiatives to promote long-term growth during President Yudhoyono’s second term and from a slew of measures or policy proposals that appear to be anti-foreign investor, ad hoc in nature, and not conducive to efficient allocation of resources,” the S&P report said.

Indonesian President Susilo Bambang Yudhoyono’s spokesman didn’t immediately respond to a request for a reaction to the reports. In the past, the president has said he is committed to reforms but change often takes time in a diverse democracy like Indonesia.

Standard Chartered predicts that with the right reforms, Indonesia is on track to become the world’s sixth largest economy by 2030. But that will take some bold moves by a government that, with national elections less than two years away, has shown it is reluctant to rock the boat.

Eric Bellman

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