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JAKARTA - INDONESIA'S controversial near 30 per cent fuel price hike was applauded on Thursday by the OECD group of industrialised nations, which said energy subsidies were holding the country back.
The May price hike triggered protests but the OECD's first economic assessment of South-east Asia's largest economy said it needed to adjust subsidised fuel prices gradually to better reflect soaring crude oil costs.
Energy and other subsidies that cost many billions of dollars accounted for some 20 per cent 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), Mr 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 per cent 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 labour costs mean Indonesia is being overlooked for investment in labour-intensive sectors, such as manufacturing, in favour of regional rivals, it said.
'Burdensome labour laws, including minimum-wage provisions, often penalise 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 (S$14.08 billion) last year, 73.2 per cent higher than the year before, with Singapore the biggest source of funds.
Indonesia's relatively high labour costs, crumbling infrastructure, widespread corruption and confusing laws and regulations are frequently cited as concerns by investors, despite a large pool of consumers and rich resources. -- AFP
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