OECD Welcomes Govt’s Fuel Price Hike

oecd-logo.jpgJAKARTA ~ The central government’s controversial near 30-percent fuel price hike was applauded on Thursday by the OECD group of industrialized nations, which said energy subsidies were holding the country back.

The May price hike triggered protests but the OECD’s first economic assessment of Southeast Asia’s largest economy said it needed to adjust subsidized fuel prices gradually to better reflect soaring crude oil costs.

Energy and other subsidies that cost many billions of dollars accounted for some 20 percent of 2008 government spending and were sucking money away from badly needed infrastructure investment, the report said.

“These subsidies are an inefficient use of scarce budgetary resources” given that money was needed for investment that could boost the economy, it said, adding they stressed the national budget amid high crude prices.

The report comes as the secretary general of the Organisation for Economic Cooperation and Development (OECD), Angel Gurria, visits Indonesia to meet President Susilo Bambang Yudhoyono and other officials.

It said Indonesia’s economy had bounced back from the 1997 Asian financial crisis but had to take steps like simplifying regulations and removing barriers to investment to boost growth and overcome poverty.

Estimated 2008-2009 economic growth of more than six percent would help cut poverty, but the economy needed to expand more quickly to significantly lift living standards, it said.

Deregulation and better law enforcement would encourage more foreign investment, and Indonesia should ease restrictions on foreign ownership, including ceilings applied to some sectors, the OECD report argued.

Indonesia should also roll back laws that make it hard to dismiss workers and which provide for generous severance pay regulations, and cut minimum wages, in order to attract investors, the report said.

Higher labor costs mean Indonesia is being overlooked for investment in labor-intensive sectors, such as manufacturing, in favor of regional rivals, it said.

“Burdensome labor laws, including minimum-wage provisions, often penalize vulnerable workers, instead of protecting them … unemployment insurance could be introduced in lieu of onerous dismissal/severance compensation entitlements,” it said.

Foreign direct investment in Indonesia reached US$10.34 billion last year, 73.2 percent higher than the year before, with Singapore the biggest source of funds.

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