Indonesia Country Strategy 2013-2016 - Swiss Economic Cooperation and Development
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Federal Department of Economic Affairs,
Education and Research EAER
State Secretariat for Economic Affairs SECO
Swiss Economic Cooperation and Development
Indonesia Country Strategy 2013-2016
State Secretariat for Economic Affairs (SECO)
SECO’s Economic Cooperation and Development Accordingly, SECO’s economic and trade policy
Division is responsible for the planning and imple- measures strive to integrate its partner countries
mentation of economic cooperation and develop- into the global economy and foster economic growth
ment activities with middle income developing coun- that is both socially responsible and environmentally
tries, with countries of Eastern Europe and the friendly. The Economic and Development Division
Commonwealth of Independent States (transition bases its activities on its specific areas of compe-
countries) as well as the new Member States of tence and experience in promoting economic and
the European Union. It coordinates Switzerland’s fiscal policy, urban infrastructures and utilities, the
relations with the World Bank Group, the regional private sector and entrepreneurship, sustainable
development banks and the economic organizations trade and climate-friendly growth. Special emphasis
of the United Nations. SECO is part of the Federal is placed on issues relating to economic governance
Department of Economic Affairs, Education and and gender. SECO is headed by the State Secretary
Research (EAER). Marie-Gabrielle Ineichen-Fleisch. SECO’s Economic
Cooperation and Development Division employs
The overriding objective of Switzerland’s interna- 100 people at headquarter and spends approximately
tional cooperation is sustainable global develop- 380 million Swiss francs per year. Ambassador
ment that will reduce poverty and global risks. Beatrice Maser heads the division.
Editorial
Egypt, Ghana, South Africa, Indonesia, Vietnam, Colombia, Peru – all rapidly expanding economies on the threshold of global
market integration yet still facing the problem of poverty. These have been SECO’s priority countries since 2008 and, together with
Tunisia, they will remain the focus of our intervention over the next four years.
All of SECO’s priority countries are classified as middle-income countries (MICs). As their role in the global economy expands, they
continue to gain in significance, for example in providing global public goods. However, despite rapid growth rates in these coun-
tries, their development remains fragile. Poverty and social disparities persist, accompanied by other global challenges such as
urbanisation, infrastructure bottlenecks and unemployment.
Through its economic cooperation, SECO strives to integrate its partner countries into the global economy and to foster economic
growth that is both socially responsible and environmentally friendly. These approaches correspond to the main challenges facing
MICs. Middle-income countries are also important regional hubs of development for neighbouring States and serve as valuable
examples.
SECO’s activities are based on our many years of experience in international cooperation and our specific expertise in economic
issues. Whether we are seeking to strengthen economic and fiscal policy, expand urban infrastructure and utilities, support the
private sector and entrepreneurship, promote sustainable trade, or stimulate climate-friendly growth: all of our measures are
aligned with Switzerland’s foreign trade policy and the Federal Council’s foreign policy objectives.
In 2012 the Swiss Parliament passed the 2013-2016 Message on International Cooperation. For the first time, all of the tasks in
international cooperation were presented in a single bill, incorporated into a joint, overall strategy. This has the overriding objective
of sustainable global development that will reduce poverty and global risks.
The present Country Strategy is based on the framework credit for economic and trade policy measures, as described in the afore-
mentioned Message. It is determined by our areas of expertise and comparative advantages and paves the way for our continued
efforts over the next four years. We firmly believe that, in doing so, we can support our partner countries on their development path
while also making a contribution to addressing global challenges.
Marie-Gabrielle Ineichen-Fleisch Beatrice Maser
State Secretary, Ambassador,
Director of SECO Head of Economic Cooperation
and Development SECO
Indonesia 3
Abbreviations
AIMS Aid Information Management System MoF Ministry of Finance
APBN National Budget (Revenues and Expenditures) MP3EI Master Plan for Acceleration and Expansion of Indonesia’s
(Anggaran Pendapatan dan Belanja Negara) Economic Development 2011-2025
ASEAN Association of South-East Asian Nations ODA Official Development Assistance
Bappenas National Development Planning Agency of Indonesia OECD Organization for Economic Cooperation and Development
CHF Swiss Franc OJK Indonesia Financial Services Authority (Otoritas Jasa Keuangan)
EFTA European Free Trade Association PEFA Public Expenditure and Financial Accountability Program
EU European Union PFM Public Financial Management
FDI Foreign Direct Investment PPP Public-Private Partnership
FTA Free Trade Agreement REDD+ Reducing Emissions from Deforestation and Forest Degradation
G2G Government to Government RPJM Medium-term Development Plan (Rencana Pembangungan
GDP Gross Domestic Product Jangka Menengah)
GHG Green House Gas SECO State Secretariat for Economic Affairs
GoI Government of Indonesia SME Small and Medium-sized Enterprise
ILO International Labour Organization SPS Sanitary and Phytosanitary Agreement
IMF International Monetary Fund TBT Technical barriers to Trade
IPR Intellectual Property Rights WB World Bank
4 Indonesia
Contents Editorial 3 Abbreviations 4 1. Country context 6 1.1 Political situation 6 1.2 Economic and social situation 8 1.3 Bilateral economic relations 11 2. Development cooperation context 12 2.1 Partner country development strategy 12 2.2 Donor landscape 14 2.3 Lessons learnt from 2009-2012 15 3. Development challenges and SECO’s response 16 4. Financial resources 20 5. Results monitoring 21 6. Partner institutions 23 7. Statistical annex 24 Sustainable value chains need good produce.
1. Country context
1.1 Political situation
Indonesia has regained political stability. This Internationally, Indonesia has gained self-confi-
is underpinned by the achievements of the reform years, dence. The role and importance of Indonesia in multi-
i.e. democratic institutions, a free press, and a transfer of lateral fora (e.g. G20) and in the region (i.e. ASEAN, East
power to local governments. Cases of slow implementa- Asian Summit) is increasing. Being the only ASEAN
tion of reform efforts or missed targets may have been member that is a permanent member of the G20, Indo-
caused by the political environment but also by the slip- nesia is expected to contribute to creating a systemic
page in deadlines or overambitious targets. Reforms will impact in the Southeast Asian region as well as strength-
continue to depend on a critical mass of reform willing- ening the ties between the liberal-democratic systems
ness at senior executive positions in the administration. and Muslim-majority countries. In the regional arena,
under Indonesia’s chairmanship of ASEAN in 2011, sev-
In 2008, the scene was set for even faster pro- eral important agendas were adopted or reinforced,
gress. Indonesia had just emerged from a decade of including a master plan on ASEAN Connectivity. Addi-
economic crisis and political transition. President Susilo tionally, the ASEAN Framework for Regional Compre-
Bambang Yudhoyono was re-elected for a second term hensive Economic Partnership reaffirms the commitment
in 2009. His was the first re-elected government after a of Indonesia and other member countries to further
decade of instability and change – a manifestation of strengthen economic cooperation through comprehen-
the electorate’s trust in recent achievements in response sive partnerships between member states as well as
to the demands for reformasi, i.e. fundamental reforms other partner countries.1 All of these involvements are
of the political and economic system that had been built fostering increasing regional and global integration, a
under Suharto. Immediately after these elections, there more pro-active Indonesian foreign policy, and frequent
were high expectations that reforms would be imple- exchange and peer-to-peer learning in key policy areas.
mented with courage and determination. However,
many big corruption cases revealed over the past two At the sub-national level, coordination, institu-
years have created a growing sense of frustration tional capacity, and good governance remain
among the public. While the administration makes pro- key issues. This comes after more than a decade since
gress in reforming weak institutions and in enforcing a large decentralization program was initiated in
the law, the agenda is still unfinished. Also, Indonesia’s Indonesia. With a total of 530 local governments
infrastructure challenges need to be addressed with (431 regencies and 99 cities) – 205 of which are newly
urgency. The pace of reform in public administration and autonomous regions – vertical coordination across gov-
the judiciary as well as in combating corruption is seen ernment levels has become more intricate, while hori-
by many as too slow, and there are claims of setbacks zontal inter-ministerial coordination could still be
in the protection of religious or ethnic minorities. The improved. Fundamentally, the challenges faced at the
current government is a coalition led by the National sub-national level are no different from those at the
Democrats (25% of votes) which is divided over many central level, namely the need to build more capable
issues with its coalition partners, including the powerful and accountable institutions and to create stronger
Golkar party. citizen demand. Planning at the central and provincial
1 ASEAN Framework for Regional Comprehensive Economic Partnership, www.aseansec.org/26744.htm.
6 Indonesia
Competent institutions
for a good public service.
levels is confronted with challenges during implemen Elections in 2014 will dominate politics. The
tation. Overlap of governmental functions result in inef- run-up to the next presidential elections (2014) will
ficiencies and sometimes poor delivery of public services. increasingly dominate Indonesian domestic politics.
In response to this, the government is currently revising Contenders for the presidency will search for issues (e.g.
and drafting laws.2 The central government is instru- corruption cases) or policy areas (trade) on which they
mental in setting the directives and creating enabling can capitalize. This has its risks and opportunities: it may
mechanisms. A strategic and relevant platform capable work as an incentive to some parties in the ruling coali-
of impacting on decentralization has not yet been tion to deliver on issues of their reform agenda, but it is
formed successfully, despite substantial support from also likely to slow down public administration in 2014,
various donors in the past. The success of Indonesia’s and the ways in which the government wants to engage
decentralization will depend on the ability of districts/ with donors. In addition, a new medium-term develop-
municipalities to supply the services people need, and ment plan (2015-2019) will frame the government’s
on the control of officials’ decisions and behaviour cooperation programs beyond 2014.
through public scrutiny as well as a fair and transparent
electoral process.
2 On regional administration for more clarity on governmental functional assignment across the three tiers; a major law on civil service
apparatus to emphasize professionalism and meritocracy.
Indonesia 7
1.2 Economic and social situation
The macroeconomic fundamentals for Indo- Extreme poverty is still an issue. On the social side,
nesia look good. This is particularly the case if seen in one-fifth of the population is still living in extreme pov-
the context of the current difficulties of the global econ- erty and half the population is barely above the thresh-
omy. Indonesia’s GDP growth is projected to remain old. Rising inequality and high prices for food, fuel and
robust and grow well. Officially, unemployment is on a gas risk stirring popular unrest. The prices of petrol and
downward trend. However, this rice, for example, are subsidized for that very reason.
conceals the high level of under- However, the government’s subsidies for fuel constitute
Fuel subsidies and a employment in the informal sec- an increasing burden to its budget and are also becom-
growing economy pose tor. The size and resilience of ing an obstacle to more effective public spending. Ironi-
environmental risks if Indonesia’s domestic economy cally, the poor benefit less from these subsidies than the
has helped it to weather the rich and middle-income strata of the population.
not well managed. 2008 financial crisis relatively Attempts to abolish those subsidies have so far been
well. The factors that contrib- futile. In addition, if the economy cannot create enough
uted to that resilience persist: a growing middle class, a jobs outside of the agriculture sector for the growing
young population, rapid urbanization, a diversified population of educated young people, the consequences
economy based on both export commodities and broad- could be dire and Indonesia’s demographic dividend
based domestic consumption. However, there is a cer- could become a liability. Pervasive corruption, if not
tain degree of vulnerability in the Indonesian economy tackled, could also generate discontent.3 Fuel subsidies
– which is benefitting substantially from commodity and a growing economy also pose environmental risks if
exports in coal, timber and palm oil. Projections for not well managed. The Indonesian government’s good
growth over the period 2012-16 are an average 6.5% a intentions for a green economy are welcome in this
year. regard.
3 Indonesia Competitiveness Report 2011: Sustaining the Growth Momentum, http://www3.weforum.org/docs/WEF_GCR_Indonesia_
Report_2011.pdf.
8 Indonesia
Cocoa, worldwide high in demand.
Resilience to external financial shocks is better Acceleration and Expansion of Indonesia’s Economic
than in the past. The government has proven its capa- Development 2011-2025 (MP3EI) is ambitious, and its
bility to manage public sector debt and is committed to implementation will be challenging. In addition, fiscal
fiscal sustainability. Also the debt-to-GDP ratio stands spending on ineffective subsidy policies (e.g. fuel) con-
very low (2011 at 26%). The banking sector is profitable tinues and is weighing heavily on the state budget.
and well capitalized but remains vulnerable to volatility
in global capital markets (e.g. sudden outflows of short- The Indonesian economy needs to become more
term capital). Despite numerous achievements in competitive. This is particularly the case in the manu-
strengthening the financial sector, Indonesia still faces facturing sector and relates to the sustainability and
challenges to preserve financial stability and develop its impact of its commodity extraction. The high logistics
financial system. Weaknesses in the legal and govern- costs and the lack of skilled labor and innovation are the
ance framework prevent the country from fully leverag- major domestic constraints, while Indonesia’s manufac-
ing its potential. To strengthen financial sector oversight, turers are increasingly confronted with foreign competi-
the government has set up a new independent regulator tors, foremost China. Although export commodities are
(OJK, Financial Services Authority). Overall, however, a significant contributor to recent growth, their social
there is confidence among investors in macroeconomic and environmental cost is high, and may increase in the
stability, and FDI is increasing. There is a heightened future. However, each of the major commodities – coal,
awareness that world economic growth will increasingly gas, palm oil, timber, agricultural commodities – pre-
depend on emerging markets in Asia, including Indone- sents a different picture in this respect. Finally, Indonesia
sia and the ASEAN region. exports not only commodities but also migrant labor
(Malaysia, Middle East), and the remittances from
Public sector investment remains low. Underin- migrant workers are important in many regions. Despite
vestment exists in strategic areas. There are also con- its strong economic performance, Indonesia faces chal-
cerns that the bulk of government spending is going on lenges that stifle private-sector development. Skilled
salaries and that the government has been unable to labor shortages, poor infrastructure and an onerous
reach even pre-1998 investment ratios (as a percentage regulatory framework are three major bottlenecks to
of GDP) in areas of key relevance for economic develop- business expansion.
ment (e.g. infrastructure). The 2011 Master Plan for
Indonesia 9
Indonesia is at an efficiency-driven
development stage, alongside Malaysia,
China and South Africa.
Financial inclusion is suffering from low levels. In Looking forward, Indonesia’s most important eco-
terms of financial inclusion, access to finance – also for nomic and social challenge is to embark on a
SMEs – and a well-functioning financial system are a more sustainable and inclusive growth path. This
fundamental prerequisite in the economic and social means addressing underinvestment in strategic areas,
development process of Indonesia, where only about economic disparities between urban and rural areas,
half of the population has access to the formal financial competitiveness of the Indonesian economy, open trade
system. A nationwide household survey on access to and investment climate, and social equity and environ-
financial services in Indonesia (conducted by the WB in mental degradation. Indonesia is seen as being at an
2010) shows that only 49% of the population has “efficiency-driven” development stage, alongside China,
access to the formal banking sector. If combined with Malaysia and South Africa. In international rankings,
access to formal non-bank financial institutions, only Indonesia remains one of the best-performing countries
52% of the population is served by the formal financial within the developing Asia region but still needs to
system. This means that there are more than 110 million improve physical infrastructure (e.g. port facilities, elec-
people who have no access to formal financial institu- tricity) and persevere in its efforts to combat corruption.
tions. About 31% of the population obtains financial Enhancing market efficiencies, e.g. by eliminating opera-
services from non-formal institutions. Thus, 17% of the tional rigidities and improving labor productivity, is also
population (or nearly 40 million people) are excluded important in order to move Indonesia into a highly effi-
from the financial system altogether. cient economy. Furthermore, it is vital that Indonesia
redirect current fuel subsidies to other more critical
In addition, while Indonesia has made notable progress spending that would benefit poor and low-income
on the macroeconomic front, efforts to improve public households. A range of social assistance programs exist,
administration have lagged. Public investment levels are but the spending trend on such programs is falling as a
not back to pre-Asian crisis levels, and the quality of percentage of the government budget. This needs to be
public services remains inadequate. This is a reflection of adjusted, especially given that one in four Indonesians
institutional weaknesses and a lack of transparency and was classified as poor at least once in the years between
accountability which affect public resource use and rev- 2008 and 2010 and total social assistance spending is
enue generation. These, in turn, pose continuing con- far below regional standards. As highlighted by the
straints on the government’s efforts to alleviate poverty. World Bank, the execution and management of such
programs also need to be better targeted, and a crisis
monitoring and response system should be established
to enable Indonesia to respond swiftly to macroeco-
nomic and microeconomic shocks.
There are still considerable needs
10 Indonesia for improving public infrastructure.1.3 Bilateral economic relations
The trading volume between Switzerland and Indo- Swiss investors play an important role in Indonesia. Cur-
nesia is growing. The trade balance is traditionally posi- rently, some 70 Swiss companies are active in Indonesia.
tive in favor of Switzerland. In terms of share of Switzer- In terms of investment stock, Switzerland accounted for
land’s total trade, Indonesia accounts for 0.2%. Swiss some CHF 7 billion. This corresponds to 0.8% of total
exports to Indonesia are mainly machines as well as Swiss foreign direct investment and created over 40,000
chemical and pharmaceutical products. As for imports to jobs in Indonesia in total.
Switzerland, textiles and clothing as well as agricultural
products top the list. EFTA (of which Switzerland is a member country) is cur-
rently negotiating a Comprehensive Economic Partner-
ship Agreement (CEPA) with Indonesia, which is ex-
pected to enhance bilateral exchange in the areas of
trade and investment.
Indonesia 112. Development cooperation context
2.1 Partner country development strategy
National development planning is regulated by law The RPJM priorities that SECO can help to address are as
and coordinated by the National Development Planning follows:
Agency (Bappenas). Within the current long-time plan- 1. Administrative reform: “Bureaucracy reform” in
ning framework (2005-25), four five-year plans have the state administration, improving good governance
been, or will be, put in place. These are so-called and the quality of public services, both at the central
medium-term development plans (Rencana Pembangu- (e.g. reform of public function) and sub-national levels
nan Jangka Menengah, RPJM). The current one started (e.g. effectiveness of fiscal transfers, better harmoniza-
in 2010 and will end in 2014. It will thus still cover the tion of laws and regulations between central and sub-
first two years of SECO’s current country program com- national level).
mitment period. The RPJM also provides information on 2. Reducing poverty: Reducing absolute poverty to
the strategic plans and budgets of the line ministries below 10% and improving income distribution through
and is a major reference document for donors. The RPJM social protection (e.g. food assistance programs) and
defines five agendas and 11 national priorities. The most the expansion of economic opportunities (community
pertinent to SECO’s objectives and instruments is empowerment funds, smallholder business credits).
Agenda 1, “Economic development and increase in 3. Infrastructure development: Given that infra-
the welfare of the people”, and six priorities. On the structure issues are considered the single most impor-
outcome level, the plan aims at an average economic tant constraint to enhanced economic growth, the
growth of 6.3%-6.8% per year and a poverty rate of approach of the RPJM was far from comprehensive. The
below 10% in 2014. It also sets a target value for coordination of policies regarding land use, land acqui-
corruption (CPI of 5.0 in 2014). sition and spatial planning are well-known constraints.
12 IndonesiaSECO aligns its support with Indonesia’s
development priorities.
On the larger domestic geographical scale, the MP3EI 5. Energy supply including renewable energy:
has elaborated on how to solve some of the pressing Indonesia’s low energy generation capacity is addressed
infrastructure bottlenecks of the country. In 2011, the with a “crash program” that intends to add 3,000 MW
government launched an additional long-term plan annually, of which one-third – or a total of 4,000 MW
(2011-2025) for the acceleration of infrastructure devel- – should come from renewable energy including geo-
opment called MP3EI, which is expected to deliver on thermal.
Indonesia’s long-term development goals by focusing 6. Environmental protection and climate change
on those major challenges. The plan is based on the con- mitigation: Efforts to reduce deforestation which
cept of six specific “economic corridors”, each of which would contribute to Indonesia’s ambitious GHG emis-
is attributed a main economic function and infrastruc- sion reduction target (-26% by 2020) are most promi-
ture investments required over the longer term (i.e. until nent here; addressing degradation of river basins and
2025). The MP3EI is very ambitious but will guide gov- pollution from industrial activities is also mentioned, as
ernment action and investment planning to quite some is the increasing importance of disaster risks.
extent. The plan also defines 22 priority economic activ-
ities and areas 4 which require – or are supported with
– public policy action.
4. Investment and business climate: This needs to
be facilitated through enhanced legal certainty, better
information systems (e.g. the National Single Window
for exports and imports), simplification of procedures
(e.g. reducing business start-up costs) and the develop-
ment of special economic zones. The link between labor
policies and employment is also recognized though
vaguely addressed.
Good foundations for a good harvest.
4 This list is pragmatic and commodity-focused and includes cocoa,
fishery, food, animal husbandry, agriculture, timber, oil & gas, coal,
nickel, copper, bauxite, tourism, etc.
Indonesia 132.2 Donor landscape
In 2010, the total amount of ODA disbursed in favor capacity building; they are sometimes used complemen-
of Indonesia was nearly USD 6.5 billion (0.93% of Indo- tary to larger investments funded with loans. Of particu-
nesia’s GDP of USD 707 billion; the State Budget was lar note are the facts that Norway committed to an
USD 104 billion).5 important funding in climate change (up to USD 1 bil-
lion for REDD+), the UK DFID closed operations in Indo-
There are presently 25 active donors based on the num- nesia in 2011 but established a “UK Climate Change
ber that participated in the AIMS online survey 2011.6 In Unit” at the British Embassy in Jakarta, and USAID is
the context of its programs, SECO collaborates with streamlining its operation directives so as provide more
other donors (e.g. Germany, the Netherlands, the World flexibility to procurement and enable it to join multi-
Bank). The larger bilateral donors in 2011 included donor trust funds.
Japan, France, USA, and Australia. Among multilateral
donors, the World Bank ranks first followed by the Asian The government coordinates ODA both through Bap
Development Bank. A large part of the aid from the WB, penas and the Ministry of Finance (“on-budget, on-
the ADB, Japan and France are loans, some of which are treasury”). Donor country strategies are aligned with
co-financed. Grant funds, coming more often from bilat- the government’s priorities in G2G consultations with
eral donors, are playing an important role for TA and Bappenas.
5 Data sources for total amount of ODA disbursed in 2010, GDP, and State Budget are obtained from the AIMS survey, Indonesia Economic
Quarterly December 2011, and Law 47 Year 2009 regarding the State Budget of Revenue and Expenses 2010, respectively.
6 OECD 2011 Survey on Monitoring the Paris Declaration, First Draft of Indonesia Chapter, OECD, June 2011. See also www.aims-indonesia.org
for a 2010 country spreadsheet.
14 IndonesiaSECO needs to remain flexible and responsive
Sound urban planning for prioritized
infrastructure investments. to the needs expressed by partners.
2.3 Lessons learnt from 2009-2012
This country strategy document builds on SECO’s cooperation with government authorities requires flexi-
2009-12 strategy for Indonesia, which proved relevant bility, intercultural skills and patience but is rewarding
and in line with Indonesia’s national development strat- in terms of insight and visibility. In operational terms,
egies. Significant improvements have been made in the relatively rigid budget planning and approval as well as
areas of public finance management (budget planning procurement processes on the government’s side make
and implementation, parliamentary budget oversight, direct implementation – i.e. the use of government
tax and revenue collections) as well as in the field of systems – very resource-intensive. SECO will maintain a
access to finance. Also very relevant was the support in mix of the multi-bi and bilateral mode in an effort to
trade logistics (e.g. the establishment of the Indonesian exploit complementarity and potential synergies.
National Single Window portal and related regulations).
Nonetheless, some important lessons can be drawn: Support donor coordination. Donor coordination
often takes place in informal ways. The working groups
Remain responsive and flexible. SECO’s activities in defined under the Jakarta commitment are not yet very
Indonesia are perceived by partners, including the Indo- active. Coordination or information exchange in specific
nesian government, as relevant, timely and welcome in sectors (e.g. in climate change, renewable energy, agri-
nature (grants). In order to capitalize on this, SECO cultural development) are initiated on an ad-hoc basis
needs to remain flexible and responsive to the needs by lead donors. Multi-donor Trust Funds, to which SECO-
expressed by the partners. These are qualities estab- contributes, also play a role in that respect (with the WB
lished by Switzerland’s long-standing development and the respective ministry in the conveners’ role). The
cooperation with Indonesia, on which SECO can build implementation of the Paris Agenda still leaves room for
further. This offers Switzerland a comparative advantage implementation. SECO will participate in informal donor
over other donors, which needs to be maintained. coordination relevant to its program and support the
strengthening of donor coordination.
Fill relevant niches. Indonesia is a fast-moving econ-
omy in South-East Asia. Donor assistance is below 1% Keep decentralization in mind. Relations between
of GDP. The volume of financial aid from donors is thus central and local government are fraught with many
of decreasing importance, while technical assistance uncertainties and coordination problems. A better artic-
and capacity building remain important needs for the ulation and coordination of central and local govern-
government and society at large. The precise activities ment action (e.g. in budget spending) will be key to solv-
are not necessarily resource intensive in financial terms ing many of the persisting development challenges that
but rather demanding in terms of defining the niche and Indonesia faces. Rather than working from a strategic
concrete support required. SECO will strive to keep this platform or facility to address the decentralization issue,
approach. SECO’s program will try to identify opportunities across
its program focus areas where work on the sub-national
Use a balance of multi-bi and bilateral coopera- level (districts, municipalities, provinces) is needed and
tion mode. Relying on a multi-bi delivery mode remains justified, e.g. in strengthening PFM capacities of dis-
important, given the presence of strong and established tricts, or implementing improved municipal solid waste
multilateral donors and the government’s preference for management systems. Thus, SECO will address decen-
working with donors in a coordinated way to advance tralization as a cross-cutting issue on a selective basis.
its development agenda and reform strategies. Bilateral
Indonesia 153. Development challenges and SECO’s response
Based on the context analysis as well as Indonesia’s Focus: SECO supports Indonesia in building stable mac-
development priorities and SECO’s strategic orientation roeconomic framework conditions. It thus contributes to
and core competencies, the economic cooperation pro- enhanced public service delivery, accountable and effi-
gram with Indonesia will contribute towards the follow- cient public financial institutions, stability and economic
ing objectives: development. Second-generation reforms with a focus
on more effective budgeting and public spending as
well as PFM reforms that address deficiencies and weak
Objective 1: Good economic management capacities at the sub-national decentralized level build
(public sector) on past achievements in Public Financial Management
(e.g. more efficient legal framework, better control and
Challenge: Maintain achievements and proceed oversight in treasury and tax administration).
with an unfinished economic governance agenda. The
government of Indonesia is facing various challenges in
economic governance (institutions, enforcement of laws Proposed SECO measures:
and regulations, fighting corruption). These elements are
also important in Indonesia’s unfinished decentraliza- Strengthen public financial management and
tion agenda, where districts and municipalities still need revenue administration (including in the field of
to prove that they are able to supply the services people revenue administration, budget and treasury
need. Sustained reform efforts, notably in the perfor- reform, improved financial reporting and control
mance orientation of the budget and PFM, will remain and tax reform)
key challenges for Indonesia despite its impressive track Strengthen fiscal risk and debt management
record so far in terms of many aspects of its economic capacity
policies (e.g. debt management, fiscal policy, economic Strengthen and intensify the financial sector
growth). Efforts to improve economic governance will (e.g. financial sector regulation, stability, diversifi-
need to encompass enhancing the framework condi- cation and inclusion)
tions for economic actors in order to improve the busi- Develop national disaster risk financing and
ness environment. Fostering continued private sector insurance strategies
development in terms of the ease of doing business and
ease of access to finance therefore remains high on the
agenda. Achievements so far need to be stabilized to
enable Indonesia to pursue and further develop its Contribution to Indonesia’s country development
growth path. objectives: With these proposed measures, SECO aims
at contributing to Indonesia’s administrative reform as
defined in its RPJM (improving good governance and
the quality of public services), both at the central level
(e.g. reform of public functions) and sub-national levels
(e.g. effectiveness of fiscal transfers, better harmoniza-
tion of laws and regulations between central and sub-
national level).
16 IndonesiaObjective 2: Competitiveness, business finance, infrastructure bottlenecks, logistics cost, the
framework conditions and trade (private lack of skilled labor and weaknesses in innovation need
sector) to be addressed. Furthermore, export opportunities,
labor issues and the adherence to internationally
Challenge: Enhance competitiveness in order to required norms and standards (both SPS/TBT and pri-
improve the country’s international trade position. As vate voluntary standards) need to be addressed.
the biggest economy in South-East Asia, Indonesia
needs to enhance its competitiveness in
A growing middle order to improve international trade Proposed SECO measures:
positions and attract domestic and inter-
class, a young
national investment. Cost drivers like Strengthen the competitiveness of employ-
population, rapid high logistics expenses or the lack of ment and income-relevant export sectors; facili-
urbanization skilled labor and insufficient innovation tate the integration of SMEs into value chains
are threats to Indonesia’s economic posi- and their access to the European and Swiss mar-
and a diversified
tion. Indonesia’s role in regional and kets
economy are worldwide trade is therefore under con- Promote social and environmental standards;
opportunities for stant pressure, and growth-contributing enhance compliance with international labor
export commodities like coal, gas, palm standards as well as national labor law; provide
Indonesia.
oil, timber and agricultural products SMEs with effective tools to increase productivity
all have their own social and environmental costs. and monitor compliance
Export opportunities need to be harnessed, labor issues Improve access to long-term finance for pri-
addressed and the adherence to internationally required vate enterprises via SIFEM AG (Swiss Investment
norms and standards reinforced. At the same time, a Fund for Emerging Markets); including for invest-
dynamic and strong private sector creates employment ments in clean technologies; support skills devel-
and helps to introduce innovative technologies and to opment by way of targeted entrepreneurship
increase tax revenues. It is therefore crucial to enhanc- programs; support sustainable corporate govern-
ing Indonesia’s business environment and enabling ance efforts for SMEs and the private sector at
SMEs to access financial means more easily. A growing large (including financial institutions)
middle class, a young population, rapid urbanization Improve the business climate (regulatory
and a diversified economy represent opportunities in the reform, transparency, predictability and simplifica-
interests of Indonesia, which is on a path towards tion of administrative procedures; cost of doing
greater integration within ASEAN, and are contributing business); improve the protection of Intellectual
factors to easing this pressure. Property Rights and enhance the economic bene-
fits from it
Focus: SECO supports Indonesia’s efforts to obtain a
non-discriminatory and free market access for goods,
services and natural resources. This serves to improve Contribution to Indonesia’s country development
the global division of labour, create jobs in Indonesia objectives: The proposed measures are expected to
and contribute to poverty reduction and inequality. The contribute to Indonesia’s RPJM objectives regarding
opaque business environment, gaps in SME access to investment in the business sector, i.e. the needs to be
facilitated through enhanced legal certainty, better
information systems, simplification of procedures and
the development of special economic zones.
Indonesia 17Enhance the economic benefit from
an improved business climate.
Objective 3: Environmental protection,
climate change mitigation and sustain- Proposed SECO measures:
able urbanization
Support investments, measures and trans
Challenge: More sustainable and inclusive growth. action advisory in renewable energy and energy
While growth rates are projected to remain relatively efficiency
robust and at high levels, this should not be at the Support integrated and sustainable urban
expense of sustainability and inclusiveness. From an planning processes which lead to prioritized
environmental point of view, Indonesia’s ambitious infrastructure financing
greenhouse gas reduction target (-26% by 2020) merits Reduce GHG from urban solid waste by intro-
international support. The achievement of this target ducing sustainable municipal solid waste man-
will depend on many factors, including a more environ- agement systems
mentally friendly energy mix, such as the promotion of Improve the private sector’s access to finance
renewable energies and energy efficiency measures as for investments in energy efficiency measures
well as the speed at which the Indonesian urbanization and develop capacity to apply resource-efficient
process evolves. This process will entail a number of and cleaner production methods in the industry
challenges with regard to accessing affordable and reli- Strengthen the capacity to reduce emissions
able public service infrastructure in cities in order to from deforestation and forest degradation,
enable decent human life and the resultant inclusive including the coordination of the related financial
economic activity. resources of international donors, and facilitate
Indonesia’s market readiness for new carbon
Focus: Reaching the GHG reduction target will depend market schemes
on a range of factors, including how quickly and effec-
tively Indonesia can enhance energy efficiency and shift
its energy mix towards renewable energy.
It will also depend on how Indonesia provides energy Contribution to Indonesia’s country development
access to remote areas (currently there is still more than objectives: These measures address priorities set in
30% of the population without access to electricity) and Indonesia’s RPJM in terms of infrastructure development
how it tackles urbanization challenges and its resultant and better connectivity, given that infrastructure issues
needs in terms of infrastructure. Carbon finance may are considered a major constraint to enhanced eco-
help to mobilize the necessary investments but will nomic growth. It also supports the government’s wish to
require monitoring and verification of the CO2 impact. increase private sector participation and to provide a set
SECO contributes to improving access to affordable and of rules and regulations that create incentives for inves-
reliable public service infrastructure and thus supports tors to engage, e.g. through PPPs. Furthermore, it con-
Indonesia in its transition to a green economy and low tributes to including renewable energy in the energy
carbon growth. supply and to environmental protection as well as cli-
mate change mitigation.
18 IndonesiaModality mix Economic governance and gender
as cross-cutting issues
SECO’s program will be implemented in line with the The reinforcement of economic governance in the
principles of Aid and Development Effectiveness. SECO partner countries is an essential component of SECO’s
will seek to align its program with the government’s pri- support for the integration of partner countries into the
orities and to harmonize it with other donors’ activities. global economy and the promotion of sustainable eco-
SECO’s program will be reinforced by thorough policy nomic growth. Economic governance comprises all insti-
dialogue with key government partners and, whenever tutions, regulations, judiciary systems and norms that
possible, will use country systems in order to foster own- promote the effectiveness, non-discrimination, legiti-
ership and effective institutions. To ensure effective macy and accountability of economic activity and there-
development cooperation, SECO is committed to build- fore contribute to combating corruption. The majority of
ing capacity and interacting closely with public and pri- SECO’s interventions strengthen good economic gov-
vate actors. ernance at public and private levels.
Multi-donor setups are increasingly a modality with SECO sees gender equality as an important element of
which the government of Indonesia works with donors poverty reduction and improving the economic pros-
in order to coordinate their contribution with its devel- pects of partner countries. No projects should place
opment agenda and reform strategies and to reduce women or men at a disadvantage. The gender dimen-
absorption of government officials. In order to take this sion is integrated into project design and implementa-
trend into account, an increasing number of SECO’s tion, where it can contribute to the greater effectiveness
activities in Indonesia are carried out in a multi-donor of SECO’s projects.
context. A balance between multi-bi and bilateral will
therefore be sought over the duration of this strategy in
order to match the government’s needs and expecta-
tions with SECO’s expertise and capacity. SECO’s activi-
ties are being coordinated with regional activities of the
Swiss Agency for Cooperation and Development (SDC).
Indonesia 194. Financial resources
SECO’s interventions under this strategy will be
financed through the Swiss Framework Credit for Inter-
national Cooperation 2013-16. The allocation of funds
Commitment for Indonesia 2013-2016:
to individual countries, programs and projects will
CHF 75 million*
depend on the identification of suitable interventions,
the absorption capacity as well as the efficiency and The approximate distribution of funds foreseen
effectiveness of the cooperation with the relevant part- among the three objectives is as follows:
ners in each country. 1. Good economic management
13%
(public sector)
Accordingly, the following information on planned com-
2. C
ompetitiveness, business framework
mitments for the four-year period of this strategy is 51%
conditions and trade (private sector)
indicative only. It cannot be considered a firm commit-
3. E nvironmental protection,
ment or claimed as such by the partner country. This
climate change mitigation and 36%
information serves merely as a basis for the forward sustainable urbanization
spending plans that are reviewed each year. Actual
disbursements will depend on various factors, such as * Indonesia also benefits from regional and global initiatives
financed by SECO. When these measures cannot be earmarked
changes in the project portfolio and the framework to a specific country, they are not accounted for in the financial
conditions in the partner country. projections mentioned above.
Trade logistics matter,
for better market access.
20 Indonesia5. Results monitoring
The following table provides an overview of the implemented by SECO. The different projects agreed
future economic cooperation with the proposed moni- upon will contain some of these indicators. This will
toring and evaluation indicators at the outcome level make SECO and the Indonesian partners accountable
and alignment with Indonesia’s development objectives. with regard to what has been achieved by the projects
implemented in the framework of this country strategy.
The monitoring and evaluation indicators are selected It is not SECO’s intention to measure Indonesia’s devel-
examples; the success of implementation of this country opment objectives as a whole.
strategy will be measured in relation to the projects
SECO’s overall objective for Indonesia
Support Indonesia in further improving its economic governance and in enhancing its international competitiveness in investment and trade while
aiming at more sustainable and inclusive growth.
Main objectives of Contribution by SECO’s program Indonesia’s country development objectives
SECO’s interventions (from 2010-14 RPJM)
Objective 1: • Economic reforms and an improved financial Administrative reform: Improving good governance
Good economic policy lead to a more transparent fiscal policy and the quality of public services at the central (e.g.
management and a more reliable management of public reform of public functions) and sub-national level
resources. (e.g. effectiveness of fiscal transfers, better harmoni-
Selected indicators: Number and type of relevant zation of laws and regulations between central and
measures for financial market regulation and sub-national level)
supervision; Key Public Finance Indicators
following PEFA methodology.
Objective 2: • A more profound understanding of the Investment in the business sector: Needs to be
Competitiveness, business framework conditions of international trade facilitated through enhanced legal certainty, better
framework conditions and improves the partner country’s access to the information systems (e.g. the National Single
trade world market. Window for exports and imports), simplification of
Selected indicators: Number of successful reform procedures (e.g. reducing costs to establish a
measures for facilitating market access; number business) and the development of special economic
of jobs created and retained; implementation of zones.
the core ILO labour standards.
• Better entrepreneurial framework conditions
through a lean administration and good
governance improve competitiveness.
Selected indicators: Number and type of
impeding procedures that have been eliminated;
Doing Business indicators (particularly the 5-year
change in DB indicators).
Indonesia 21Main objectives of Contribution by SECO’s program Indonesia’s country development objectives
SECO’s interventions (from 2010-14 RPJM)
Objective 3: • Through reform and investment measures, energy Infrastructure development and better connectivity
Environmental protection, providers are increasingly able to offer a reliable across the Indonesian archipelago are a key
climate change mitigation basic infrastructure based on energy efficiency objective given that infrastructure issues are
and sustainable urbanization and renewable energy sources; sustainability and considered a major constraint to enhanced
climate compatibility are included as important economic growth. The coordination of policies that
criteria in energy policy; additional kilowatt- are enabling investment into infrastructure (i.e. PPP
hoursfrom renewable energy and from energy- frameworks, land acquisition and spatial planning)
efficiency measures through project interventions. needs to be enhanced.
Selected indicator: Savings in greenhouse gas Increase of private sector participation and
emissions (in tCO2). provision of a set of rules and regulations that
create incentives for investors to engage.
• Support for improved planning capacity and
financial structuring through the development of Energy supply including renewable energy:
integrated urban infrastructure development. Indonesia’s low energy generation capacity is
Selected indicator: Population numbers expected addressed with a “crash program” that plans to
to benefit from development plans; number of add 15,000 MW by 2014, of which one-third – or a
persons having access to improved public total of 5,000 MW – should come from renewable
services; ratio to output unit of energy (mainly geothermal).
• water volume
Environmental protection and climate change
• raw materials
mitigation: efforts to reduce deforestation would
• energy
contribute to Indonesia’s ambitious GHG emission
• CO2
reduction targets (-26% by 2020 compared to BAU)
• waste volume
are most prominent here, but addressing degrada-
tion of river basins and pollution from industrial
activities is also mentioned, as is the increasing
importance of disaster risks.
The strategy will be monitored on an annual basis, with SECO’s strategy is aligned with the development strat-
the following purposes: egy of the partner country. Therefore, the annual country
Institutional learning: Documentation and repli- strategy monitoring also seeks to verify that SECO’s
cation of best practices or lessons learnt. portfolio does indeed contribute to the achievement of
Monitoring of relevance, topicality, efficiency and the partner country’s development goals. Adaptive or
effectiveness of SECO’s programs and projects (and corrective measures will be implemented if any major
corrections/adaptations where necessary) changes occur in the country context or development
Accountability: goals occur.
• between the field and headquarters
• to the public
• to the partner country
22 Indonesia6. Partner institutions
SECO continues to work with both local and interna- ticular, SECO will work with the following main partners,
tional partners in the public and private sector. In par- depending on the thematic priority:
Abbreviation Institution
Local partners
Bappenas National Development Planning Agency (Indonesia)
CMEA Coordinating Ministry for Economic Affairs
DGIPR Directorate General for Intellectual Property Rights
KLH Ministry of Environment (Kementerian Negara Lingkungan Hidup)
MOF Ministry of Finance
MOI Ministry of Industry
MOT Ministry of Trade
MTCE Ministry of Tourism and Creative Economy
OJK Otoritas Jasa Keuangan (Indonesia Financial Services Authority)
PU Ministry of Public Works
Swiss partners
IPI Swiss Federal Institute for Intellectual Property
SC Swisscontact
SIFEM Swiss Investment Fund for Emerging Markets
SIPPO Swiss Import Promotion Programme
International partners
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
HEID Graduate Institute of International and Development Studies
IFC International Finance Cooperation
ILO International Labour Organization
IMF International Monetary Fund
ITC International Trade Centre
ITTO International Tropical Timber Organization
IUCN International Union for the Conservation of Nature
KFW Kreditanstalt für Wiederaufbau
PPIAF (WB) Public Private Infrastructure Advisory Facility
PIDG Private Infrastructure Development Group
UNCTAD United Nations Conference on Trade and Development
UNIDO United Nations Industrial Development Organization
UNDP United Nation Development Program
WB World Bank
Indonesia 237. Statistical annex
The following data from the respective years are national bodies, including the IMF 7, the World Economic
based on statistics from the World Bank and other inter- Forum, the ILO and the UNDP.
2012 2013
Sustainable Growth* 2008 2009 2010 2011
(proj.) (proj.)
GDP per capita (current international USD) 2.212 2.299 2.981 3.509 3.797 4.255
Real GDP growth (annual %) 6.0 4.6 6.2 6.5 6.1 6.6
Global Competitiveness Index (rank) – – 54 44 46 –
External debt stocks (% of GDP) 28.9 30.2 25.3 – – –
Government gross debt (% of GDP) 33.2 28.6 27.4 25.0 23.2 21.1
Gross Capital Formation (% of GDP) 28 31 32 – – –
Inflation. average consumer prices (annual %) 9.8 4.8 5.1 5.4 6.2 6.0
Domestic credit provided by banking sector (% of GDP) 36.8 37.0 36.5 – – –
Interest rate spread8 5.1 5.2 6.2 – – –
Strengthened integration
2008 2009 2010 2011
in the world economy*
Exports of goods and services (E) (% of GDP) 29.8 28.7 24.1 –
Imports of goods and services (I) (% of GDP) 28.7 24.1 21.3 –
FDI (net inflows. BoP. current USD) (millions) 9.318 4.877 13.371 –
7 International Monetary Fund, World Economic Outlook Database, April 2012.
8 Lending rate minus deposit rate (%).
24 IndonesiaReduction of disparities* 2008 2009 2010 2011
Gini index 9 – – – –
Unemployment rate (%). labor force survey 8.4 7.9 7.1 6.6
Poverty headcount ratio at national
15.4 14.2 13.3 –
poverty line (% of population)
Improved water source. urban
89 – 92 –
(% of population with access)
Improved sanitation facilities. urban 36 – 73 –
(% of population)
Access to electricity (%) – 64.5 – –
Improvement of economic governance* 2008 2009 2010 2011
Ease of doing business (rank) 129 122 121 129
Trade across borders (rank) – 45 47 39
Governance indicators of the World Bank: 10
a) Government effectiveness (%) 46.6 46.4 47.8 –
b) Regulatory quality (%) 44.7 43.1 39.7 –
c) Rule of law (%) 31.7 34.1 31.3 –
d) Control of corruption (%) 33.5 21.5 27.3 –
Improvement of environmental conditions* 2008 2009 2010 2011
CO2 emissions / population (tonnes per capita) 1.69 1.64 – –
Share of renewable energy of TPES (%) 34.4 34.6 – –
Energy use per unit of GDP (tonnes of oil equivalent
0.22 0.22 – –
per thousand US dollars) 11
* Missing data due to one of the following reasons:
– Depending on source, no projections available
– Statistics collected only on perennial base
– Data for the respective year not yet available
9 A value of 0 represents absolute equality, and a value of 100 absolute inequality.
10 Percentile rank indicates the percentage of countries worldwide that rate below the selected country. Higher values indicate better
governance ratings.
11 The GDP data have been compiled for individual countries at market prices in local currency and annual rates. These data have been
scaled up/down to the price levels of 2000 and then converted to US dollars using the yearly average exchange rates of 2000 or
purchasing power parities (PPPs).
Indonesia 25You can also read
