Tito Summa Siahaan – Indonesia should more widely distribute the benefits of strong economic growth and protect poor and vulnerable households from sudden changes in the economy, the World Bank says.
The government is spending Rp 137 trillion ($15 billion) to subsidize fuel, and some economists say the funds would be better spent on other programs.
The World Bank, in its quarterly report published on Wednesday, called on the government to boost spending on the social safety net and invest more in infrastructure and education.
"It is like switching to a healthier diet," World Bank lead economist Shubham Chaudhuri told reporters in Jakarta on Wednesday. "The future of Indonesia's growth and development is dependent on the government's progress in improving the quality of its spending."
Chaudhuri said that although the country is fiscally sound, movements in the global economy could pose challenges. The World Bank cut its forecast for Indonesia's economic growth this year to 6.1 percent from 6.2 percent, citing a global economic slowdown. The economy expanded 6.5 percent in 2011.
"Indonesia possessed the advantage of having diversified trading partners, which is the main reason why the country can withstand the impact of the crisis in the US and Europe," Chaudhuri said. "But now it is a different time. With Indonesia's most important trading partners Asian countries, slowdown in India and China could impact the country's economy."
The government spent Rp 30 trillion a year on social assistance programs, the World Bank said. At 0.5 percent of gross domestic product, it is significantly less than the 1.5 percent average for other middle-income countries.
According to the World Bank, around 12.5 percent of Indonesia's 240 million people are living below the poverty line, which the government defines as a monthly income of Rp 233,000. Some 38 percent are borderline poor.
The government has eight social assistance programs for the poor, covering at least 18.5 million households. The largest program is rice assistance, which accounted for 53 percent of total spending.
The government has twice introduced a temporary cash transfer program (BLT), in which poor households received Rp 100,000 per month for nine months. The program was used to lessen the impact of fuel price rises in 2005 and to weather the global financial downturn in 2008.
Vivi Alatas, a World Bank economist, said that a decent social safety net would address the "fluidity" in the country's poverty issues.
"In Indonesia, 50 percent of the poor people [in 2011] were not poor in the previous year," she said. "Of course, the social safety net is not a panacea for the whole poverty issue, but it is still needed to [cope with a] sudden shock for Indonesia's poor."
Vivi noted that the cash transfer program was working well in times of sudden changes.
Suahasil Nazara, a professor of economics at the University of Indonesia, agreed with the World Bank, saying that a better social assistance programs would protect the country's growth momentum, especially in maintaining the purchasing power of the poor and the near-poor.
"Government could boost its social spending by taking the unused money from the state budget," Suahasil said. There are Rp 31.1 trillion in unused funds from the 2011 state budget.
Under the planned fuel price rise, which has now been halted, an estimated Rp 57 trillion rupiah in savings would be generated, of which Rp 40 trillion was to be paid out in BLT.