Sri Mulyani Indrawati, Former Managing Director, World Bank: Interview

Interview: Sri Mulyani Indrawati

How can Indonesia achieve more inclusive growth?

SRI MULYANI INDRAWATI: Inequality has been rising more rapidly in Indonesia than in many countries in the region, and the government has announced that reducing it is a priority. Inequality contributes to slower economic growth and can fuel social tensions. Taking action requires a better understanding of inequality. There is usually focus on inequality of incomes, but inequality of opportunity is highly relevant. Lack of access to health services or clean water can limit a child’s opportunities in life almost from birth. To address unequal opportunities Indonesia needs to improve the delivery of services at the district and village level, often in remote areas. Another measure that would make the labour market more equal is providing skills training to workers trapped in low-productivity, informal and low-paying jobs, improving their mobility.

How can trade agreements impact Indonesia’s economic standing in the region?

INDRAWATI: The opportunities offered by the ASEAN Economic Community (AEC) are tremendous. With a single market of over 600m people and a combined GDP of $2.4trn, it would be equal to the world’s seventh-largest economy. The AEC allows labour to move more freely, and brings Indonesia closer to global value chains through regional networks, enabling it to shift away from commodities and towards the more sustainable services and manufacturing sector. While the AEC and Trans-Pacific Partnership can provide jobs and help reduce poverty, investors will go where infrastructure is developed, labour is available and procedures are simple. That puts Indonesia at a disadvantage, due to decades of underinvestment in infrastructure and training. It runs the risk of becoming a consumer of goods and services provided by its neighbours. With spending on education increasing, Indonesia must ensure that the money is well spent to improve the quality of education and labour skills.

What impact does the high cost of doing business have on Indonesia’s growth potential?

INDRAWATI: It is limiting the country’s growth potential. The government recognises that Indonesia’s high logistics costs – 24% of GDP, compared to 16% in Thailand – reduces competitiveness. The government is also addressing constraints like excessive red tape by establishing the one-stop shop at the Investment Coordination Board. The 10 policy reform packages since September 2015 are further steps towards enhancing competitiveness. Yet some reforms must take extra steps. While the Negative Investment List has been relaxed, opening up dozens of sectors to foreign direct investment, many more sectors remain closed to it. If Indonesia opened up more of its economy the flow of investment would greatly increase.

What effect do ecological disasters have on the economy, and how can they be prevented?

INDRAWATI: The forest fires of 2015 were disastrous. Fires across Indonesia cost the country $16bn in damages and losses, equivalent to 1.9% of GDP. That is more than the value of palm oil production in 2014, and double the cost of rebuilding Aceh after the 2004 tsunami. It is calculated that if every hectare burned in 2015 were converted to oil palm, the value would be $8bn. Half a million Indonesians suffered acute respiratory infections due to the haze caused by the fires. Integrated landscape management is the best option. Indonesia needs to create a single registry for public land that would define boundaries and use, clarifying which lands are vulnerable to fire and should not be exploited. And it is critical to protect peatlands. The establishment of the Peatland Restoration Agency is encouraging. Restoring 2m ha of peatlands in five years will require strong inter-ministerial coordination and political will to prosecute offenders. Successful implementation of landscape management will also require the private sector.