Survey of Recent Developments

Daniel Suryadarma, Sudarno Sumarto
Economic Policy
Externally Published Content, August, 2011, Final
Source: Bulletin of Indonesian Economic Studies 47 (2), August 2011, Pages 155-181

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Considerable media criticism has been directed recently at parliamentarians’ enthusiasm for costly overseas ‘working visits’ with little obvious benefit to the nation, and at their plans for a new parliamentary building. The criticism may not be fully justified, especially in relation to the latter, but is symptomatic of a high level of cynicism towards the parliament. Many of its members have been embroiled in corruption, and it is performing poorly in terms of the number of bills passed. Indonesia experienced two bomb explosions in the period covered here, while at least eight other bombs were defused. In contrast with previous patterns, the recent bombings are the work of small, mainly localised groups with only tenuous links to established terrorist organisations. This suggests that terrorism will remain a problem for many years.

Economic growth remains quite healthy, albeit not as strong as had been indicated by the data for the December quarter of 2010. Of greater concern is disequilibrium in the balance of payments, manifested in rapid accumulation of reserves. The current account is strong, and capital inflow is soaring in response to relatively high domestic interest rates, now combined with significant appreciation of the rupiah and the unlikelihood of any depreciation in the near future. The consequence is a rapidly increasing cost to Bank Indonesia (BI), because losses resulting from the negative interest margin between its assets and liabilities are now being exacerbated by the declining value of its foreign assets. On current trends the central bank's capital will be quickly exhausted. There is renewed concern about the fuel subsidy as world oil prices continue to rise, pushing the budget further into deficit and wasting vast sums that could be used for vital investments in infrastructure, education and health. Given that it is not possible to avoid these opportunity costs except by taking the politically difficult decision to raise petrol prices, the government has postponed indefinitely any action to reduce the subsidy.

The government is putting considerable emphasis on efforts to reduce poverty and increase household resilience to shocks. The focus is on the multi-dimensional and long-term nature of poverty reduction, and on shifting from universal subsidies to properly targeted social protection programs. The National Team for Accelerating Poverty Reduction is coordinating many of these efforts, under the guidance of the vice president. Poor quality education inhibits poverty reduction and economic growth, so international mathematics, science and reading assessments showing that Indonesia lags far behind its neighbours are of great concern. The government's flagship program to address educational quality, a teacher certification system initiated in 2007, appears to hold little promise, since policy makers have backed away from any attempt to reward good performance on the part of individual teachers. For comparison, the survey also describes two programs to improve school quality being implemented by non-government organisations.

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