BIES Interactive

Author: Terence Hull

Since the announcement of preliminary results from the 2010 population census, various observers and commentators have emphasised the threat of a population explosion, complaining about the reduced emphasis on family planning since the main responsibility for this was devolved to local governments in 2001. For example, simple extrapolation of the current apparent growth rate suggests a doubling of the population to nearly 470 million people in the next 50 years. Before becoming carried away by these alarmist concerns, it is necessary to ask whether the most recently estimated growth rate is accurate, and whether it is sensible to assume that the current growth rate, whatever it may be, will in fact be maintained so far into the future.

Terry Hull’s note provides a critical perspective on the preliminary results of the 2010 population census, which were announced by President Yudhoyono on 16 August 2010. It explores the concepts of population used and the adjustments made to increase the accuracy of census estimates. The assumptions underlying various official population projections in the last decade produced estimates for mid-2010 that were substantially below the figure of over 237 million persons counted in May. The note argues that, far from reflecting a ‘population explosion’, this is due to the achievement in the 2010 census of greatly increased coverage of people residing in Indonesia on the census date. It is to be hoped that this success will not have the perverse effect of encouraging a large, unwarranted increase in spending on family planning. (Ed.)

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Authors: Thee Kian Wie and Siwage Dharma Negara

Among other things, this Survey addresses the issue of traffic congestion in Jakarta, focusing on a set of recommendations that would, if implemented, do much to address this problem. The group called for the introduction of electronic road pricing; the construction of six new elevated toll roads in the city and quick completion of the Jakarta Outer Ring Road; expansion of the express busway network; separation of tracks for commuter trains and long-distance trains, so that the former would no longer have their operations interrupted by the latter; and construction of a mass rapid transit system. All of this would be complemented by the provision of extensive parking facilities to allow commuters to park their cars close to bus and train stations and complete their journeys by public transport. But this ambitious program was quickly undermined by the president himself, who proposed the alternatives of either shifting the centre for government administration to a different location, or even an entirely new capital city. It is hard to imagine that any of the many government agencies involved will make a start on its commitments until a choice has been made between these three radically different alternatives. Unfortunately, the Boediono group’s very fast train appears to have been derailed almost as soon as it left the station.

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Authors: Budi Setiyono and Ross H. McLeod

Soeharto era concern about corruption was deflected by the establishment of toothless anti-corruption committees, and by suppression of anti-corruption activism and media comment. With Soeharto’s demise, activists began to publicise their concerns more openly — at first speaking in general terms, but later making increasingly specific allegations. The sporadic activism of the Soeharto years was consolidated, first through cooperative action among similarly motivated informal groups, and later through establishment of formal civil society organisations (CSOs) intent on rolling back corruption. The CSOs have played a key role in pushing for new laws and institutions to help eradicate corruption, and many corrupt officials have been imprisoned. This paper finds little evidence, however, that corruption has declined significantly. It argues that further progress depends on CSOs gaining a better understanding of the underlying causes of corruption, and that these are to be found in public sector personnel management practices.

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Author: Colin Hunt

In this second contribution to the Policy Dialogue, Colin Hunt emphasises the large contribution that oil palm plantations and the pulp and paper industry have been making to Indonesia’s economic growth in recent years, notwithstanding the environmental consequences of such activities. The implication is that avoided deforestation can be expected to have a significant negative impact on segments of the population who would benefit from the business and employment opportunities that would otherwise be generated, directly or indirectly. Palm oil companies typically spend about three dollars on goods, services and labour for every dollar of profit. The author argues that any compensation package for avoided deforestation needs to include all the potential beneficiaries of palm oil production, not just the palm oil companies, and to generate economic activity similar to that being replaced. (Ed.)

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Author: Adam Schwarz – Adam Schwarz is a senior adviser to McKinsey & Company

Indonesia has responded to worldwide concern about climate change by committing to significant carbon emissions reductions over the next decade. Achievement of this goal will face significant practical obstacles, and the opportunity cost of avoided deforestation is considerable. In our second Policy Dialogue, two climate change experts present contributions to the debate. This exchange could not be more timely, given Norway’s recent offer of substantial development assistance to Indonesia in return for reductions in deforestation and forest degradation.

In this first contribution, Adam Schwarz canvasses abatement options and outlines barriers to abatement and its measurement. These include capacity and data constraints, obstacles posed by decentralisation, and problems in identifying and measuring the costs of abatement measures. The author urges Indonesia to embrace the opportunity a lower carbon growth trajectory presents, and argues that this will require substantial additional funding, including from developed countries, and sustained leadership. (Ed.)

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Author: Ranjan Shrestha

Indonesia introduced over 50,000 midwives into villages in the 1990s to provide primary care to women lacking easy access to health facilities. It seems plausible to argue that the significant reduction in infant mortality that occurred from about 1993-94 was a consequence of this. The paper estimates the village midwife program’s impact on infant mortality, using data from the Indonesia Family Life Survey. Regressing mortality outcomes against choice of services would lead to biased estimates because of the correlation between service choice and unobserved individual characteristics. Furthermore, non-random placement of midwives could bias estimates of their impact on infant mortality. This study overcomes such endogeneity problems by aggregating mortality outcomes and program prevalence at district level and taking account of district fixed effects in estimating the program’s impact. Surprisingly, the results do not support the hypothesis that the midwife program was responsible for the observed decline in infant mortality.

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Authors: Mark Baird; Maria Monica Wihardja

Sri Mulyani’s resignation as finance minister in May disturbed markets and aroused concern about the government’s commitment to reform. This concern was partly alleviated by the appointment of two well-respected individuals as finance minister and deputy finance minister. Further progress with reform will depend heavily on this new team and other key officials. Strong presidential support will also be needed to resist attempts by parliament to interfere excessively with the finance ministry’s work.

The economy continued its steady recovery from the impact of the global financial crisis (GFC), but the recovery could still be jeopardised if sovereign debt concerns in Europe persist and block the rebound in global trade and commodity prices. Inflation continues to accelerate, suggesting little room for complacency on monetary policy. Fiscal policy, on the other hand, remains conservative. The higher deficit in the revised 2010 budget is not excessive, and is unlikely to be realised in any case. The real budget challenge is to spend budgeted amounts fully and well. The new five-year plan is also conservative and does little to clarify spending priorities, including for the president’s ‘connectivity’ agenda.

Despite the GFC, poverty continued to decline, thanks largely to the uninterrupted expansion of GDP and to cash transfers to the poor. Unemployment also continued to fall, although particular groups suffered slight increases in unemployment (young workers 15-25 years old) and somewhat larger reductions in working hours (urban, non-poor, and male-headed households). Nevertheless the large and sustained deceleration of manufacturing growth and the closely related dramatic shift of employment from the formal to the informal sector provide cause for concern. Distortionary labour market policies may help to explain both.

A new mining law significantly alters the legal environment for firms in this industry, and also introduces long discredited policies intended to ‘increase value added’ by requiring the domestic processing of minerals. A new law on local government taxes attempts to reduce uncertainty for citizens and investors, but the nature of overall spending by local governments is of much greater importance for the investment climate. The central government has recently been seeking to restore the role of the ‘missing intermediate’ level of government and to boost the centre’s indirect control over local governments through provincial governments and governors. This strategy is unlikely to succeed, but it highlights the conflicting requirements for provincial governors to act as agents of the central government while also being accountable to their provincial electorates.

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Recalling the cataclysmic impact of the Asian Financial Crisis on Indonesia in the late 1990s, it came as something of a surprise that Indonesia weathered the storm of the Global Financial Crisis so easily in 2008-09. We in Australia were pleasantly surprised to find that our economy also suffered very little from the GFC.

The explanations typically put forward to explain Australia’s good fortune focus on the role of the strong Chinese economy as a key export market, and on the fiscal stimulus policies implemented by the government in response to the seemingly impending crisis.

In Indonesia’s case, however, it seems clear that the attempt at fiscal stimulus had little impact, mainly because of the inability of the bureaucracy to increase spending quickly. Rather, the explanation has been found in Indonesia’s relatively low reliance on export demand—which, it is argued, meant that there was not much of a reduction in aggregate demand as a consequence of the GFC. Even at a superficial level this argument is somewhat implausible, because the decline in export demand was very large—even if smaller relative to GDP than in other countries.

Moreover, as Mark Baird and Monica Wihardja point out in their new Survey of recent developments, this view suffers from its failure to take into account changes in the level of imports. The national income accounts data show that net exports were rising at the relevant time, because imports were falling more rapidly than exports. It was this that set Indonesia apart from its neighbours.

It turns out that the same is true of Australia, as pointed out by Tony Makin in an article just published in The Australian newspaper: ‘… it was a dramatic turnaround in Australia’s trade balance that mainly offset falling private investment… not extra government spending, or household consumption assisted by federal cash handouts at the time’.

Another parallel between the Indonesian and Australian experiences with the GFC relates to exchange rate policy. In both cases the exchange rate was permitted to perform its function of signalling changes in external circumstances. Both currencies underwent large depreciations, which helped to increase net exports and to prevent currency speculation from running wild. After all, such speculation is driven by the expectation of depreciation: once depreciation has occurred, it is too late to speculate. Sound monetary policy subsequently in the case of both countries has seen their exchange rates recover to previous levels.

All of this calls into question the recent decision of Bank Indonesia to introduce limited controls on so-called hot money flows (imposing a minimum one month holding period on its own certificates, SBIs). The central bank handled monetary and exchange rate policy remarkably well at this time of upheaval, as discussed in an earlier Survey, and the results speak for themselves. It seems astonishing that BI simply does not realise that it already has all the ammunition it needs to deal with an imminent balance of payments crisis.