Regions and Countries

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p. 10 of 33 BACK | NEXT I. Current Development Trends and Issues A. Political Setting B. Economic Growth C. Poverty D. Governance and Institutional Capacity E. Private Sector F. Gender Assessment G. Environment H. Regional Cooperation I. Development Constraints II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : I. Current Development Trends and Issues

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I. Development Constraints

35. The Government’s ambition is to achieve higher levels of economic growth, leading to job creation, and to accelerate the attainment of the MDGs. The CSP identifies eight principal constraints, which can be grouped in to governance-related constraints, economic growthrelated constraints, and constraints on MDG achievement. Many of these constraints are not new to Indonesia. However, they now operate in a new, democratic and decentralized environment, causing a number of these constraints to become more binding.

36. Weak public sector management, systemic corruption, and a low capacity in the civil service are issues that are linked. Regional autonomy has required many regional governments to expand the workforce to meet their new obligations, while central ministries have not reduced the size of the departments from where tasks have been transferred, Government institutions are required to find additional, extra-budgetary revenues to cover regular expenses, and unbudgeted staff allowances. In addition corruption is related to recruitment and promotion. Corruption imposes a serious economic burden and leads to a slowdown in Government decision-making. All this translates into weak public sector management, with slow and inefficient decision-making and poor execution capabilities. Low development spending has been one of the major causes of low economic growth, and health and education indicators that are low by regional standards. Much of Indonesia’s infrastructure has reached the point where it is deteriorating as a result of lack of maintenance, while the lack of new investments has reduced the capacity of the economy to grow. A key reason for low development spending is the inability of the public service at both central and local levels to execute Government plans; the low capacity of the civil service is therefore emerging as one of the binding constraints to Indonesia’s development.

37. Economic growth-related constraints include a narrow and shallow financial sector, poor infrastructure, and an adverse investment climate. Deepening of the financial sector is a prerequisite for long-term development of the infrastructure sector and sustained growth. The reliance of most businesses on direct bank lending limits investment possibilities and does not encourage good governance. The Government recognizes that a major infrastructure expansion is required to increase service coverage, remove existing bottlenecks, and attract investments that would help achieve and sustain the projected economic growth. Infrastructure investments in the order of 5% of GDP per annum are considered to be the minimum required to restore the pre-crisis levels of infrastructure provision. A weak investment climate also precludes the private sector from playing its role in infrastructure.

38. The attainment of the MDGs is constrained by weak decentralized capacities, weak natural resources management, and the frequent occurrence of natural disasters. Local governments have been made responsible for many function, including service delivery (health and education among others). The lack of capacity in the civil service to deliver, and the lack of fiscal capacity to sustainably finance its obligations, is a constant constraint to improving the quality and quantity of local services. Similarly, the lack of capacity to sustainably manage the environment and natural resources frequently lead to adverse impacts on the poor, because resources are over-exploited, or because of mismanagement leading to natural disasters.

39. Indonesia has a high economic risk from natural hazards. A recent World Bank report²⁰ assesses 62% of GDP and 67% of the population as exposed to multiple natural hazards. Annually at least 200-300 disasters occur, killing hundreds of people, leaving tens of thousands homeless and causing millions of dollars of economic losses. The country’s regular natural disasters put at risk local development initiatives but also large-scale infrastructural works.

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