Using Extractive Revenues for Sustainable Development by OECD

Author:OECD
Language: eng
Format: epub
Tags: socialissues/development
Publisher: OECD Publishing
Published: 2019-11-25T00:00:00+00:00

During the two oil booms of the 1970s, Indonesia mobilised the oil windfall to advance major investments in education provision across the country, while also channelling the windfall to economic diversification projects. Indonesia was the most populous and the poorest of the countries in the world to receive an oil windfall. In 1974, GDP per capita was USD 200. However, the country did not earmark oil revenues to specific expenditures; oil revenues accrued to the central government budget. However, as oil revenues provided the majority of the government budget during the period, it can be interpreted as a case of symbolic earmarking. Oil revenues peaked at more than 70% of the budget in the early 1980s, falling to roughly 20% by the mid-1990s (Alisjahbana, 2005). Development spending doubled because of the oil windfall. In 1973, development expenditure was 63% the amount spent on current expenditures. By 1975, development expenditure exceeded current expenditure by 25%. Development expenditure either matched or exceeded current expenditure through the remainder of the oil boom (Gelb, 1988).

Some of this increased development expenditure was channelled to the Sekolah Dasar (basic education) programme. Between 1973 and 1979, Indonesia constructed 61 807 schools. This was the world’s largest ever school construction programme (1.5% of 1973 GDP). The number of schools built represented 1 for every 500 children aged 5-14 in 1971. Each school was designed for 120 students and 3 teachers. The central government also recruited and paid the teachers’ salaries. Enrolment of children aged 7 to 12 increased from 69% to 83%. Before the programme in the early 1970s, enrolment had been declining and there was no capital investment in schools. Duflo (2001) estimates that the programme led to an average increase of 0.12 to 0.19 years of education, with an increase in wages of 1.5% to 2.7%. This suggests that the large government intervention in the supply of education was effective. As such, Indonesia made efficient use of the oil windfall.

Indonesia also employed the oil windfall to advance agricultural development. Major investments were made in developing natural gas resources, for export to Japan and as an input for agricultural fertiliser production. Fertiliser was then distributed to farmers at subsidised prices, a practice which continues currently. With the benefit of new high-yield and disease-resistant rice varieties, Indonesia farmers greatly increased yields, pushing down prices for consumers. As a predominantly rural and agricultural-based economy, improved agricultural production and lower prices helped support economic diversification, underwriting the movement and growth of labour to low-wage export-orientated manufacturing in the early 1980s. Rural economies were furthermore supported by major investments in infrastructure (including construction of schools for the Sekolah Dasar programme), receiving a quarter of public infrastructure investment during the oil boom.

The lesson to draw from Indonesia is that this prioritisation of development expenditure did not require a specific earmarking of oil revenues. In fact, these development policy priorities had been established before the oil boom, which came unexpectedly. The oil boom simply facilitated the large-scale expansion and rollout of these programmes (Gelb, 2012).

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