Oecd amro s2 02_indonesia dr prasetijono widjojo

Ministry of National Development Planning/ National Development Planning Agency

Indonesia’s Agenda: How to Address the Middle Income Trap

Presented at 2nd OECD-AMRO Joint Asian Regional Roundtable

Singapore, 19 July 2013

Dr. Prasetijono Widjojo MJ, MA Deputy Minister for Economic Affairs

KEMENTERIAN PPN/ BAPPENAS

1. Middle Income Countries: An Overview 2. Indonesia’s Priority in Addressing Middle Income Trap 3. MP3KI: Masterplan for Acceleration and Expansion of Poverty Alleviation 4. MP3EI: Masterplan for Acceleration and Expansion of Indonesian

Economic Development 5. Financial Inclusion 6. Conclusion

Outline


Middle Income Countries: An Overview


Middle Income Countries: An Overview

16.3%

26.0%

25.1%

18.6%

14.0%

Low IncomeLower middle incomeUpper middle incomeHigh income: nonOECDHigh income: OECD

• 51.1 percent (or 110 out of 215 countries ) are classified as lower and upper middle income countries. 32.6 percent of the countries in the category of high income countries; whereas only 16.3 percent of it is classified as low income.

• Contribution of Middle income countries’ GDP (nominal) to the world is 33.2%

• Therefore, middle income countries’ are very important in supporting the global development and as the engines of world economic growth:

• contribute to global economic resilience • Attractive investment location

Category: • Low income: $ 1,005 or less • Lower middle income: $ 1006 - $ 3975 • Upper middle income: $ 3,976 - $ 12,275 • High income: $ 12,275 or above

Distribution of Country Category (based on income, number of

countries)


Indonesia: A Low Middle Income Country 44

9 51

5 57

8 64

1 70

5 75

2 84

0 92

6 10

41

1154

10

78

470

680

790

757

910

1076

11

61

1273

16

01

1871

21

78

2272

29

47

3471

35

57

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

USD

per

Cap

ita

low income high income Indonesia

Middle income

High income Income per Capita

Other Countries’ Experiences: Development of Income Per Capita

0

5,000

10,000

15,000

20,000

25,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD

per

cap

ita low income

high incomeKorea

Korea

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD

per

cap

ita

Brazil low incomehigh incomeBrazil

02,0004,0006,0008,000

10,00012,00014,00016,00018,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD

per

cap

ita Chile

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

USD

per

cap

ita

South Africa

Korea and Chile have succeeded to mitigate from the middle income trap, but Chile took longer time than Korea did

On the other hand, Brazil and South Africa are still struggling in middle income category for quite a long time


Other Country Experiences: Korea and Chile

• Korea did investments in infrastructure and education.

• Korea has proven that building a high-quality education system which encourages creativity and supports breakthroughs in science and technology is key.

The biggest challenge is moving from resource-driven growth that is dependent on cheap labor and capital to growth that is based on high productivity and innovation

KOREA • Chile was transforming its

economic development with pursuing more balanced income distribution

• Chile over the past decades has restricted government power and relentlessly fought corruption

CHILE


A Risk of Middle Income Trap: Does Indonesia need to be worried?

Source: Statistics Indonesia (modified by Bappenas)

5.0 5.7 5.5

6.3 6.0

4.6

6.2 6.5 6.2 6.3 6.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014*

%

Average growth =5.9

projection Indonesian Ecoomic Growth Effect of

Global Crisis

• It is noticed that Emerging Asia, including Indonesia, is potentially susceptible to the ‘middle-income trap,’ a phenomenon where economies are stagnant at middle-income levels and fail to graduate into the high income economy.

• However, the history of Indonesian economic growth shows that Indonesia has been experiencing a quite stable growth over the time. Furthermore, after 2009, Indonesia can maintain its economic growth at the rate of above 6%.


A Risk of Middle Income Trap: Does Indonesia need to be worried?

Source: World Development Indicator (projection calculation by Bappenas)

3,881 4,238

0

500

1000

1500

2000

2500

3000

3500

4000

4500

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

*20

14*

Inco

me

per

Capi

ta (U

SD)

Income per capita of Indonesia is increasing

• Since 2002, Indonesia has been experiencing a significant increase of its income per capita. This trend seems to continue in the next period

• The income per capita of Indonesia in 2013 and 2014 is projected to be around USD 3881 and USD 4238.

projection


Indonesia’s Priority in Addressing Middle Income Trap


Indonesia’s Vision

“Propelling Indonesia to become a high-income country, to be one of the 10 world largest economies by 2025, and to be one of the 6 world largest economies by 2050 through accelerated, sustainable, and inclusive economic growth”

2011-2014: 6,4 – 7,5 %/year 2015-2025: 7,5 – 9 %/year

~ 10 world largest economies

~ 6 world largest economies

2050


The most important problem to be addressed

Source: Statistics Indonesia

0.32

0.36 0.33

0.36 0.35 0.37 0.38 0.39

0.41

0.2

0.25

0.3

0.35

0.4

0.45

Gini index is increasing, showing the inequality problem is rising…

16.66 15.97 17.75

16.58 15.42

14.15 13.33 12.49 11.66

9.86 11.24

10.28 9.11 8.39 7.87 7.14 6.56 6.14

02468

101214161820

2004 2005 2006 2007 2008 2009 2010 2011 2012*

Poverty Rate Unemployment Rate

Poverty Rate and Unemployment Rate is decreasing , but the decreasing rate is getting slower…..


Indonesia’s Agenda to Address the Risk of Middle Income Trap: Sustainable Growth with Equity

Addressing the Risk of Middle Income Trap:

SUSTAINABLE GROWTH WITH

EQUITY

Addressing the inequality problem

Macroeconomic Stability

1. Improving infrastructure 2. Improving the quality of human

capital through: • Training of skilled labour • Formal education

3. Improving Research and Development (Technological Innovation)

4. Improving Health of the society

Improving Productivity to sustain growth

Affirmative Actions

1

2

3

1. Exchange Rate Stability 2. Inflation Stability


Macroeconomic Stability


Exchange Rates and Inflation Stability

• Indonesia apply managed- floating exchange rate policy and inflation targeting framework

• Bank of Indonesia keeps stabilizing the rupiah exchange rate to make sure that it moves around its fundamental value to maintain inflation and to support economic growth.

Inflation Rates

3.7

3.6 4.0 4.5

4.5

4.5

4.6

4.6

4.3 4.6

4.3

4.3 4.6 5.3 5.9

5.6

5.5 5.9

0.0

5.0

10.0

15.0

Jan

Feb

Mar

Apr

Mei

Jun Jul

Agu Se

pO

ktN

op Des Jan

Feb

Mar

Apr

Mei

Jun

2012 2013

Inflation y-o-y (%)

Nominal Exchange Rates


MP3KI: Masterplan of Acceleration and

Expansion of Poverty Alleviation


DESIGN FRAMEWORK

PROSPEROUS, FREE FROM ABSOLUTE POVERTY AND HAS HIGH CAPABILITY TO SUSTAIN THE LIVELIHOOD

• To create national social protection system

• To increase basic services for the poor and the vulnerable

• To develop the livelihood of the poor and the vulnerable

Preparation of the

institutionalization of

BPJS (social protection

implementation agency)

and the supply side

support

Expansion of targeted

programs

Development of

corridors of islands and

special zones in growth

center and non-growth

center areas

• Requirements of MP3KI Supporting Institution and Implementation • Requirements on economic condition: growth and economic stability

INDEPENDENT, ADVANCED, FAIR AND PROSPEROUS

MP3KI Vision

Main Strategy

Implementation Strategy

MP3KI Mission


- Strengthening the integrated Poverty Alleviation Program; - Universal coverage of Social Safety Program.

SUSTAINABILITY (YEAR 2021-2025)

- Poverty Alleviation Program transformation; - Expand the coverage of social safety to reach universal coverage; - Completion of BPJS of employment security sector; - Strengthening sustainable livelihood.

TRANSFORMATION AND EXPANSION (YEAR 2015-2020)

- Reduce Poverty Rate to 8% - 10% in 2014; - Synergize existing Poverty Alleviation Programs - Implementation of Sustainable livelihood and its link with the MP3EI - Completion of BPJS of health sector in 2014 .

RECONSOLIDATION (YEAR 2013-2014)

STAGES OF MP3KI IMPLEMENTATION

SCENARIO TO ACCELERATE AND TO EXPAND POVERTY REDUCTION IN INDONESIA (P3KI)

Outlook of Economy and

Poverty Target

Poverty Alleviation

Strategy

2012 2015 2020 2025

PDB/ capita (US$) Poverty Level

3.543

6.097

10.278

14.963

10,5-11,5 %

8-10%

6-7%

4 - 5 %

Strategic Program

Target Groups

Near poor HH, poor HH and very poor House Holds (HH) (the lowest 40 % of PPLS 2011)

The lowest 30 % of PPLS 2014/2017

The lowest 20 % of PPLS 2017/2020

The lowest 10 % of PPLS 2023

EXISTING POVERTY ALLEVIATION

PROGRAMS Cluster I Social Protection/ Security and Social Assistance Cluster II Community Empowerment Klaster III Credits for Small and Medium Entreprises

Klaster IV Pro-People Programs

SOCIAL PROTECTION PROGRAM

Social Security: Health Insurance Death Insurance Old-Aged Security Pension Plan Accident Insurance

Social Assistance: Temporary (economic crisis, natural

disaster) Reguler (food security, scholarship the

poor, etc.)

TRANSFORMATION OF SOCIAL PROTECTION PROGRAM

467

DEVELOPMENT OF SUSTAINABLE LIVELIHOOD OF THE POOR/ THE VULNERABLE

Empowerment/Human Resources Capacity Building Financial Access f(or micro entrepreneurs)

Mainstreaming Programs/Activities


THE WAY FORWARD: CONTINUING SUSTAINABLE POVERTY REDUCTION

1. Continuing more integrated and well coordinated poverty reduction programs within each clusters and among clusters

2. Promoting pro-poor economic growth: • Promoting growth in sectors that have significant impact on poverty reduction; • Utilization of local resources to promote local economic activities; • Improve the capacity of pro-poor planning and budgeting;

3. Improve the effectiveness of poverty reduction program at the local levels, including: • Empowerment of informal sector, SMEs, and cooperatives at the local level • Diversification of businesses in rural areas through agroindustry supported by

utilization of local resources and rural infrastructure • Promoting development in the remote and border areas

4. Carefully design the expansion: • PNPM: refocus the intervention toward the poor (incl. the marginalized groups). • PKH: prioritize areas where health & education indicators are low

5. Promote greater involvement—and responsibility—of other stakeholders (LGs, NGOs, CSR)


MP3EI: Masterplan of Acceleration and Expansion of

Indonesian Economic Growth

MP3EI Objective : Accelerated Growth with Equity Goal : Achieving GDP per capita USD 14.000-16.000 in 2025 Approach : - Increase in value-added corridor-based

flagship commodities - Involvement of Government, State-

Owned Enterprises, and Private Sector Strategies : - Economic Corridor Development - Human Resources and Technology

Development - Strengthening National Connectivity

MP3KI Objective: Accelerated Poverty Alleviation Goal : Reducing poverty rate to 4 -5% in 2025 Approach: - The fulfillment of basic services/needs and

increase in income - Involvement of Government, State-Owned

Enterprises, Private, People (P4: Public-Private-People Partnership).

Strategies: - Comprehensive Social Safety Net - Improving basic services to the poor and

vulnerable - Improving the livelihood of the poor and

vulnerable

LONG-TERM NATIONAL DEVELOPMENT PLAN

Main Strategy: Pro-Growth, Pro-Job, Pro-Poor, Pro-Environment

MEDIUM-TERM NATIONAL DEVELOPMENT PLAN

The Alignment of MP3KI and MP3EI: Integrated Planning Documents

Slide 22


Framework Design Of Mp3ei

THEME OF EVERY ECONOMIC CORRIDOR

Denpasar

Mataram

Jakarta

Medan

Pekanbaru

Jambi

Lampung

Semarang

Banjarmasin

Palangkaraya

Pontianak

Makassar

Manado

Kendari

Gorontalo

Manokwari

Jayapura

Serang

Mamuju

Surabaya

Merauke

Kupang

Samarinda

Ternate

Wamena

Sorong

Ambon

Palu

Padang

Palembang

Bengkulu

Jogjakarta

Banda Aceh

Pangkal Pinang

Batam

KALIMANTAN : center for

production and processing of

national minning & energy reserves"

SUMATERA: center for production and

processing of national resources as nation’s energy

reserve

JAVA: Driver for national industry

and service provision

BALI: gate way for tourism and supporting national

food support

PAPUA – MALUKU: Center for development of food

production, fisheries, energy and national

minning”

SULAWESI: center for production and

processing of national agricultural, plantation, fisheries, oil and gas, &

minning.

24


Progress of MP3EI Implementation

Groundbreaking Projects in 2011

In 2011, 111 projects have been groundbreaking, which consist of: • Government: Rp77,14 trillion (22 projects), • SOEs: Rp80,24 trillion (37 projects), • Private: Rp159,78 trillion (42 projects) • PPP: Rp94,46 trillion (10 projects)

Groundbreaking Projects in 2012

In Sulawesi, 7 of 11 projects have been groundbreaking; but the rests are the high-valued projects.

Some projects that havent been groundbreaking in Sumatera and Papua-Maluku are high-valued investment

In 2012, 71 projects have been groundbreaking, which consist of: • Government: Rp42 trillion (21 projects), • SOEs: Rp41,65 trillion (20 projects), • Private: Rp115,56 trillion (28 projects), • PPP: Rp11,97 trillion (2 projects).


Financial Inclusion


27

SUPPLY SIDE: Information asymmetry Dealing with small customers is not very profitable Some financial products are designed for people with a certain

minimum amount of income DEMAND SIDE: Some customers face a complexity in dealing with financial institutions Some poor households believe that financial institutions are intended

for modern and progressive people Other demand-side barriers such as low level of financial literacy, lack of

formal identification system, and inability to track an individual’s track history

Some Issues in Financial Inclusion


Financial Inclusion

Financial Education

Financial Eligibility

Policy and Regulation

Distribution Channel

Public Finance

Consumer Protection

Six Pillars of Financial Inclusion


• Financial literacy and financial capability improvement

– National campaign “Let’s go to the Bank”

• Potential customers identification – Financial Identity Number (FIN) is a unique number for unbanked community

(poor households and SMEs) to reduce information asymmetry issue

• Saving services provision – TabunganKu which has less requirements and administrative costs

•Credit services provision – Kredit Usaha Rakyat – Perusahaan Penjaminan Kredit Daerah (Local Credit Guarantee Corporations) which

guarantee credit for SMEs – Credit rating services for SMEs which enables banks to select potential customers for

loans

Some Examples: Initiatives to Promote Financial Eligibility


Conclusion

1. Indonesia’s economic growth is still maintained at the high rate

2. To address the risk of Middle Income Trap, Indonesia will focus on promoting Sustainable Growth with Equity; aiming at solving the inequality problem and in the same time to sustain the economic growth

3. For this, Indonesia seriously implements MP3EI,MP3KI, and promotes financial inclusion, as well as maintaining stability of macroeconomic condition.


THANK YOU


ATTACHMENT

THE MAIN ECONOMIC ACTIVITIES IN EACH CORRIDOR

Sumatera

Jawa

Kalimantan

Sulawesi

Bali – Nusa Tenggara

Papua – Kep. Maluku

Palm oil Ruber

Coal

Shipping Steel Region Strait Sunda

Textile Food- beverage

Equipment and

machine Telematics

Main tools of weapon

systems Shipping

Jakarta Metropolitan

Area

Palm oil Timber Oil & gas Steel Bauxite

Coal

Food estate Cocoa Fishery Nickel Oil & Gas

Tourism Livestock Fishery

Food agriculture Fishery Cooper Nickel Oil &

gas

33


TRANSFORMATION TO SUSTAINABLE LIVELIHOOD

2012

Cluster II, III, IV

•PNPM •Small Credit •Housing for the poor •Clean water for the people •Low cost electricity for the

poor •Provide public transportation

for the people • Increase coastal livelihood • Increase livelihood for urban

poor

2025

Sustainable Livelihood

• Credit assistance, Training for small enterprise, and market integration (financial asset)

• Labor worker training (in collaboration with Industry, Certification, Universal Education (human asset)

• Village improvement, easy to use electricity and clean water system (infrastructure asset)

• Environment protection and pollution overcome (natural asset)

• Participatory planning for community (social asset)

Oecd amro s2 02_indonesia dr prasetijono widjojo

Technology

kementerian ppn bappenas

middle income trap

social protection program

middle income countries

poverty alleviation

financial inclusion

supply side

local resources