In anticipation of the incoming new government, Strategic Asia Indonesia is organizing a series of discussions around the theme of “Policy Challenges for the New Government” which will cover aspects of economy, politics and security, governance, productivity, environment, and globalization and foreign policy. Each discussion is designed to provide deeper insight about the various policy and implementation dilemmas around the issue and collectively provide strategic recommendations in a set of policy briefs to be submitted to the new government for its consideration.

The discussion started on Wednesday, 19^th of August 2009 with the topic of Economic Challenges, which featured the following speakers: Anton Gunawan (Chief Economist, Danamon Bank), Iman Sugema (Director of Bogor InterCafe), Firmanzah (Dean of Faculty of Economy, University of Indonesia). Prabowo, Strategic Asia’s Director of Programmes moderated this discussion.

Key Points from Speakers

Anton Gunawan highlighted the following factors that have major influence on sustainable economic growth and sectoral dimensions:

1. Imbalance of sectoral share and growth that generate employment problems.
2. Indonesian’s economy is not well integrated and this leads to several problems: (i) distribution problem and high inflation rate, (ii) inter-province trade barriers and (iii) varied economic growth among regions/islands.
3. Weak supporting logistics system, including infrastructure, road, transportation, and also other soft infrastructure (such as information system about product specialization in each area/region).

Iman Sugema raised some important issues related to the equity dimension:

1. As long as the infrastructure disparity is not solved, unequal income distribution can become a long lasting problem in Indonesia. Moderate growth of GDP for the last five years weren’t followed by significant reduction of poverty and inequality. This indicates the low quality of growth, as a result of de-industrialization post Soeharto era.
2. Two important external factors could be considered: (i) vulnerability of the financial sector, and in contrast, (ii) Indonesian economy is not dependent on international trade, which in a sense is a blessing in disguise since it reduces the contagion effect of the recent global financial crisis.
3. Financing strategy of the government’s budget deficit via public debt (domestic and international) could lead to financial risk in the short term.

Meanwhile, Firmanzah highlighted the following factors as challenges:

1. From political aspects, New Government elected has many promises to be proved such as:

• Economic growth and public wealth (i.e. food supply, GDP per cap, public health, quality of education, and employment creation-labor wages), and also energy policy (four strategies to secure energy supply).
• Reform of the bureaucracy is still in progress and the draft Law on TIPIKOR is still under discussion.
• Agriculture sector is important especially in rural area. However, in reality, development in this sector is much more inclined to agro-industry transformation particularly outside Java.

1. Given that the rules of the game in decentralization is still evolving and unconsolidated yet, there’s a huge challenge on how to implement national development strategy in decentralization era and how to synergize the central government and local government efforts to boost and contribute to growth.   
2. The need to give attention to the role of the informal sector in national economy, especially since it is directly linked to the majority of the population and serves as coping mechanism in times economic shocks.   

Highlights of the Discussion

The discussion centered around the following key issues: (i) Sustainability and quality of economic growth; (ii) Sectoral dimensions (productivity, investment, labor force, etc); and (iii) Equity dimensions (poverty, demand for labor, etc). The following summarizes the key issues raised during the discussions:

• Economic challenges have to start from the core philosophy which puts more attention on welfare indicators rather than growth indicators.
• Budget allocation for the poor should continue to be a priority and secured.
• Logistic system and infrastructure (either soft or hard) are still important triggers for growth.
• To sustain the quality of growth, inclusive growth in Indonesian’s economy is needed.
• The need to boost the missing middle sector (i.e. sector between macro and micro sector) given its potentials to generate profits.

• Long term investor is critical for sustained economic growth.
• There is a fragmented labor market in some areas/regions because of the mismatch between supply and demand of labor, e.g. required qualification and available skills.
• The continuing disputes around the Labor Law should also be addressed to find a win-win solution for both parties (employer and workers).

Conclusions and recommendations

The discussion concluded on the following points:

1. Instead of focusing too much on the budget deficit, more consideration should be directed to how budget composition can be restructured to allow dedicated allocations for poverty programmes and avoid/escape discretionary spending.
2. An anti-unemployment program should be established to tackle the inequality problem in Indonesia.
3. Inclusive-integrated economy should be considered as an alternative strategy to be implemented in each area/region in this country, in order to maintain labor supply and guarantee the equilibrium of the economy.
4. The Government needs to ensure food security policy/programme in order to protect the poor from the impact of inflation on food prices.
5. Composition of growth is just as important as growth rate.
6. Future economic policies should be directed towards inclusive growth as well as minimize incoherence of sectoral strategies to attain synergies.