The costs of reducing deforestation in Indonesia

5 Aug

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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Low carbon growth in Indonesia

5 Aug

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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The village midwife program and infant mortality in Indonesia

5 Aug

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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Survey of recent developments

5 Aug

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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Why did the GFC have little impact on Indonesia?

28 Jul

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 demandwhich, 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 largeeven 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.

Poverty in Indonesia 1984-2002: the impact of growth and changes in inequality

22 Apr

Author: Riyana Miranti

This paper examines the growth elasticity of poverty across three development episodes in Indonesia between 1984 and 2002, after controlling for inequality. It relies on estimation of panel data from the National Socio-Economic Survey conducted by the central statistics agency. Contrary to expectations, the growth elasticity of poverty was virtually indistinguishable across the three development episodes – a period of far-reaching policy liberalisation (1984-90); a second period of slower liberalisation (1990-96); and the period of recovery from the Asian financial crisis (1999-2002). Growth was pro-poor in all three periods, while the impact of growth on poverty was either augmented or offset by changes in inequality, depending on the period. Only during the first liberalisation period did a reduction in inequality serve to augment the impact of growth on poverty.
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Human resource management: the forgotten dimension of decentralisation in Indonesia

1 Aug

Authors: Mark Turner; Amir Imbaruddin; Wahyu Sutiyono.

Indonesia has introduced radical decentralisation measures, transferring many functions and much finance to democratically elected sub-national governments. However, human resource management (HRM) has largely been overlooked. (more…)

Can Indonesia Trust the World Rice Market?

1 Apr

Author: David Dawe

Geography suggests that Indonesia will continue as a net rice importer for the foreseeable future, because it is an island nation without dominant river deltas providing abundant water and flat land suitable for rice growing. Yet policy makers remain reluctant to use the world rice market to achieve domestic food security goals for at least two reasons. (more…)

Agricultural Protection in Indonesia

1 Apr

Authors: George Fane; Peter Warr

Throughout the second half of the 20th century, Indonesia’s trade policies favoured the modern manufacturing sector relative to agriculture. Within agriculture, they favoured import-competing sectors at the expense of export-competing sectors. (more…)

Asian Development Strategies: China and Indonesia Compared

1 Aug

Authors: Bert Hofman; Min Zhao; Yoichiro Ishihara

China’s and Indonesia’s development strategies have been compared with others, but rarely with each other. Radically different political contexts have produced both similar and distinctly different development patterns. (more…)