Executive summary
The Asian Financial Crisis of 1997-98 caused massive economic, political and social upheaval in Indonesia. Two decades later, the country has set its sights on becoming one of the ten largest economies in the world. Social protection has proven a key component of Indonesia’s economic recovery, its transition to democracy and progress towards a more cohesive society. The Government of Indonesia (GoI) considers social protection as a critical means of reducing inequalities of wealth and opportunity that represent a critical constraint to the country’s economic and social ambitions.
Since the Asian Financial Crisis, Indonesia has made great progress towards establishing a social protection system that cover a wide range of risks. Successive governments have replaced the country’s traditional approach to poverty relief with developmental social assistance programmes and reformed the social insurance system by implementing a new administrative and legislative architecture, expanding coverage and improving benefits. The extraordinary progress towards universal health coverage is emblematic of Indonesia’s achievements. As of October 2018, 203 million people, or three quarters of the population, were covered by Jaminan Kesehatan Nasional (JKN, national health insurance). Driving the growth in coverage is the GoI’s policy to subsidise fully or in-part the contributions of individuals who might otherwise be excluded from health provision.
Yet social protection is not yet operating at its full potential. Poor households with children are entitled to a number of complementary social protection programmes to promote their sustainable exit from poverty but only a minority of beneficiaries receive the full range of benefits. The largest programmes, in particular the rice subsidy for the poor, have historically been the least well targeted. At the same time, a new pension system is struggling to increase coverage amongst Indonesia’s large informal sector, while the growth of JKN is raising concerns around its long-term sustainability. Labour market policies to promote economic participation and productive employment amongst vulnerable groups are underdeveloped.
Social protection confronts major challenges. First, it must help address Indonesia’s last-mile problem. The GoI has targeted a national poverty rate of around 8% since 2004; the rate fell below double-figures for the first time in 2018. Income poverty is concentrated among children and the elderly. It also varies greatly be region: the poverty rate in Jakarta is below 5% but exceeds 30% in a number of eastern provinces. In addition to the poor population, some 30% of Indonesians are considered vulnerable.
Social protection can do more to improve livelihoods and income security among this group, particularly individuals (typically in informal employment) who are not eligible for social assistance but are also unable or unwilling to register for social insurance, sometimes referred to as the missing middle. Strengthening mechanisms to protect and promote this cohort – and the informal workforce as a whole – is a key means of growing the middle class, which currently accounts for some 20% of the population and is key to Indonesia’s future economic prospects. Major gender imbalances also exist. Women are poorer across the life cycle and face disadvantages at school and, especially, in employment.
Looking ahead, Indonesia’s demographics will become less benign as the population starts to age rapidly. Poverty amongst elderly Indonesians has not declined at the same rate as for other groups (notably children), in part because their access to social protection is extremely low. The productivity of the next generations of workers will be crucial in determining whether the Fourth Industrial Revolution is an opportunity or a threat. Other threats also loom in Indonesia’s future, such as the impact of climate change and increased frequency of natural disasters.
To meet these challenges, GoI should press ahead with its commitment to establish a social protection system based on two overarching priorities. First, it must address gaps in social assistance and social insurance provision to achieve comprehensive coverage across the lifecycle. Secondly, greater co-ordination and coherence between programmes is needed, as well as between the institutions that implement them and the information and targeting systems they use. Lack of co-ordination between central and sub-national government, between which responsibility for social protection provision is shared, is a further structural challenge to the implementation of national social protection strategies.
Social protection also faces significant financing constraints. To achieve long-term reductions in poverty and meet the risks identified here, higher allocations to social protection are required and resources must be optimised. However, Indonesia’s low levels of domestic resource mobilisation, as well as a large number of competing government priorities, are likely to limit the fiscal resources available to social protection. Formalisation policies will be important both for generating higher taxes, generating better jobs and expanding social insurance coverage.
In spite of these challenges, Indonesia possesses important foundations for a social protection system. Strong programmes have emerged, such as the Program Keluarga Harapan (PKH), a conditional cash transfer that has proven effective not only in reducing poverty but also improving beneficiaries’ health and education outcomes. Eligibility for PKH is determined by the Unified Database (UDB), a common targeting instrument for all social assistance programmes that links beneficiaries to complementary interventions, thereby maximising their chances of escaping from poverty.
This review proposes a number of recommendations for strengthening the social protection system that were developed jointly with the GoI, development partners and other social protection stakeholders. The review identifies scope to consolidate social protection programmes, to improve co-ordination between national and sub-national government, and to enhance the information architecture for social protection, for instance the UDB, as well as monitoring and evaluation systems. It also emphasises the importance of strengthening the social workforce and examines to what degree social protection might enhance gender equality and provide long-term income security to the elderly.