Download the Indonesia Human Development Report 2004. - UNDP

Annual costs for financing basic rightsCurrent annual costRp. trillion% GDPRequiredincrease,Rp. trillionFull annual costRp. trillion% GDPFood security 4.8 0.27 -1.1 3.7 0.2Basic health 8.4 0.47 5.2 13.6 0.77Basic education 33.0 1.84 25.0 58.0 3.24Physical security 7.5 0.42 20.9 28.4 1.59Total 53.7 3.00 50.0 103.7 5.80Rethinking fiscal prioritiesIf Indonesia is to commit an additional 3% of GDP to publicexpenditure on social services it will need to re-examine itsfiscal priorities. To some extent this will involve shiftingexpenditure from non-priority sectors to the social sectors.Over 20% of public expenditure, for example, currently goesto support state-owned enterprises. These subsidies shouldfall as more economic activity becomes market-driven, freeingup more funds to invest in the social sectors.One way to demonstrate the government’s commitmentto change priorities in this way would be to create a SocialSector Fund (SSF). This could be built up by taking a certainpercentage of the proceeds from the exploitation of naturalresources. Following the example of the fuel subsidycompensation fund, the SSF could also be allocated apercentage of the proceeds from privatization and from anysavings from reforms and restructuring. Another possibilityis to apply a social sector levy on corporations or on wealthyindividuals.However in addition to reallocating resources thegovernment will probably also have to increase publicexpenditure. This would first mean collecting more in taxes.Indonesia’s tax burden, currently at about 12% of GDP, isrelatively light, mainly as a result of the inefficiency of the taxsystem combined with large-scale evasion.At the same time the government could also accept ahigher level of fiscal deficit. Modest deficits can be useful;not only can they fund social spending but at a time whenprivate investment is low they provide a fiscal stimulus. Farfrom crowding out private investment such public investmentcan actually crowd it in. This will be the case when it is usedto improve physical infrastructure, for example, and also whenit promotes social cohesion, both of which improve the overallinvestment climate.It should be emphasized, however, that simply increasingsocial spending will not in itself improve social services. Inthe past, public spending has often been of low quality,compromised by widespread corruption and rent-seeking. Inthe current, more constrained environment the governmentwill have to pay greater attention to wastage and costeffectiveness.The process of decentralization should in principle offeropportunities for more effective controls through strongerlocal institutions. But decentralization also entails risks,particularly that of widening disparities: in 2001, on a percapita basis the richest local government already had 50 timesmore revenue than the poorest.A National Summit for Human DevelopmentIn these circumstances Indonesia needs to arrive at anational consensus on meeting its citizens’ humandevelopment rights. It has to establish minimum sociallyacceptable levels of human development across the country– and allocate its resources accordingly.This can be achieved by holding a National Summit forHuman Development that agrees on the list of essential publicgoods and the level at which they should be provided. Itshould then consider various targets and the timelines fortheir achievement.Once Indonesians have agreed on the appropriate levelof public social expenditure, they must then consider ways ofmobilizing resources. They should discuss what should betaxed and at what rates and also consider the revenue-raisingcapacity of the regions. This will then prompt the difficultquestion of cross-subsidization. While the richer regions maybelieve this merely implies sacrifices on their part they alsoneed to be made aware of the dangers to national stability ofallowing other regions to lag too far behind.Indonesia’s founding fathers chose as their motto fornation building ‘unity in diversity’ – a vision that remainsvaluable to this day. A National Summit for HumanDevelopment would help foster this kind of unity and reach aconsensus about what it means to be a citizen of Indonesia.This would not only give further impetus to decentralizationbut also help promote national solidarity, forge a sense ofcommon purpose – and both widen and deepen Indonesiandemocracy.4National Human Development Report 2004