Indonesia's Growth `Insufficient' to Reduce Poverty

By Arijit Ghosh

July 24 (Bloomberg) -- Indonesia's economic growth, which accelerated to an 11-year high in 2007, is ``insufficient'' to reduce poverty and create jobs, the Organization for Economic Cooperation and Development said.

The OECD in its first report on Indonesia also said the government needs to reduce subsidies for fuel and electricity and ease labor rules to attract investment and boost growth. Southeast Asia's biggest economy expanded 6.3 percent last year, the most since a financial crisis hit the region in 1997-98.

The Paris-based organization said gross domestic product growth of about 8 percent is needed to pull some 35 million people out of poverty in Asia's third-most populous nation. Labor laws make it tougher to employ workers in Indonesia than in civil-war stricken Sudan, restricting investment.

Economic growth of about 8 percent ``will allow a much faster reduction in the gap between relative living standards'' in Indonesia and the OECD, Luiz de Mello, one of the authors of the OECD report, said in an interview. Indonesia needs to ``ensure the private sector can contribute to this growth process by investing more and make regulations lighter.''

President Susilo Bambang Yudhoyono estimates Indonesia needs $22 billion of investment in infrastructure projects annually to help boost growth and reduce poverty. The president, who faces elections next year, isn't likely to meet his target of reducing the number of poor people to 5.5 percent of the population, or about 17 million people, by 2009.

Labor Laws

Political opposition has stalled attempts to relax labor laws in Indonesia, where the 8.5 percent jobless rate is the highest in the Asia-Pacific region, deterring investment.

Indonesia, with an economy six times larger than Vietnam, attracted about $6 billion of investment to build factories and set up plantations last year. Vietnam lured $10 billion.

``The private sector can play a prominent role in the growth process, so long as the business climate can be improved considerably,'' the OECD said. ``Economic and regulatory uncertainty, deficiencies in law enforcement and infrastructure bottlenecks are among the main barriers to entrepreneurship.''

Indonesia ranks 153rd out of 178 economies in terms of the ease of hiring workers, down from 140th a year earlier, according to the World Bank's annual ``Doing Business'' survey. Sudan was 36th in the rigidity-of-employment index, which gauges the degree of labor regulation in a country, better than Indonesia's 44th.

Accelerating inflation is also a threat for Indonesia, Angel Gurria, secretary general of the OECD, said at a briefing in Jakarta today. Consumer prices rose in June at the fastest pace in 21 months after the government lifted fuel costs in May.

The OECD also asked Indonesia's central bank to ``strengthen credibility in the policy regime,'' by reacting ``pre-emptively by tightening monetary policy stance.''

To contact the reporter on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net.