COUNTRY PROFILE 2001 Indonesia This Country Profile is a reference tool, which provides analysis of historical political, infrastructural and economic trends. It is revised and updated annually. The EIU’s Country Reports analyse current trends and provide a two-year forecast The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom
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COUNTRY PROFILE 2001
IndonesiaThis Country Profile is a reference tool, which providesanalysis of historical political, infrastructural and economictrends. It is revised and updated annually. The EIU’s CountryReports analyse current trends and provide a two-yearforecast
The full publishing schedule for Country Profiles is nowavailable on our website at http://www.eiu.com/schedule
The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom
The Economist Intelligence UnitThe Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 50 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.
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ISSN 0269-5375
Symbols for tables“n/a” means not available; “–” means not applicable
Printed and distibuted by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.
4 Politics4 Political development8 Constitution, institutions and administration8 Political forces
12 International relations and defence
15 Resources and infrastructure15 Population16 Education16 Health17 Natural resources and the environment17 Transport and communications19 Energy provision
29 Economic sectors29 Agriculture, forestry and fishing32 Mining and semi-processing33 Manufacturing36 Construction36 Financial services40 Other services
42 The external sector42 Trade in goods45 Invisibles and the current account46 Capital flows and foreign debt49 Foreign reserves and the exchange rate
51 Appendices51 Regional organisations52 Sources of information55 Reference tables55 Population55 Geographical distribution of population by province56 Labour force56 Transport statistics57 National energy statistics57 Government finances58 Central government budget
59 Money supply and credit59 Interest rates60 Gross domestic product60 Gross domestic product by expenditure61 Gross domestic product by sector61 Prices62 Wage rates by sector62 Agricultural production63 Minerals production63 Manufacturing production63 Houses built by Perumnas64 Stockmarket indicators64 Banking statistics65 Exports65 Imports66 Key exports by value66 Key exports by volume67 Imports by main commodity group67 Main trading partners68 Balance of payments, IMF estimates69 Balance of payments, national estimates69 External debt, World Bank estimates70 Net official development assistance70 Foreign reserves70 Exchange rates
3,166,163 sq km (before deductions for sea area now under East Timoresecontrol)
5,070,606 sq km (as above)
203.46m (preliminary 2000 census results)
Population in ‘000 (2000 census)
Jakarta (capital) 8,385 Medan 1,792Surabaya 2,589 Semarang 1,345Bandung 2,142 Palembang 1,442
Tropical
Hottest months, April-May, 24-31°C (average daily minimum and maximum);coldest months, January-February, 23-29°C; wettest months, January-February,300 mm average rainfall
Indonesian (Bahasa Indonesia), as well as some 250 other regional languagesand dialects. English has increasingly replaced Dutch as the main secondlanguage, and is widely spoken in government and business circles
The Republic of Indonesia is formally a constitutional democracy with a strongexecutive presidency. Amid deepening economic troubles, President Soehartoresigned in May 1998 after more than 32 years in office, having lost bothpopular and elite support. He was replaced by his vice-president, BacharuddinJusuf Habibie, who held a democratic election to select a legitimate successor.At a parliamentary election on June 7th 1999 no single party won an outrightmajority. On October 20th 1999 the People’s Consultative Assembly (MajelisPermusyarawatan Rakyat, MPR) appointed Abdurrahman Wahid, a moderateMuslim cleric, as president, and Megawati Soekarnoputri, the daughter ofIndonesia’s first president, Soekarno, as vice-president. The new administrationquickly ran into problems with mounting tensions within the multiparty cabinetand between Mr Abdurrahman and parliament. On July 23rd 2001, after only 21months in office, Mr Abdurrahman was formally impeached by the MPR on thegrounds of incompetence and Ms Megawati was elected president. A couple ofdays later, Hamzah Haz, the leader of the Islamic United Development Party(Partai Persatuan Pembangunan, PPP) was elected vice-president. Ms Megawati,like her predecessor, nominated a multiparty cabinet with representatives fromall the main parties, the military and the two leading Islamic organisations.
Political development
The territorial extent of the Republic of Indonesia is defined principally by theboundaries of the former Dutch colonial empire in South-east Asia. Theterritories now comprising the country had never constituted a single politicalentity before the establishment of Dutch colonial rule, and their pre-colonialhistory was marked by the rise and fall of a number of important empires andkingdoms. Close commercial and cultural ties existed with India before the16th century, as a result of which the most important Indonesian empiresduring this period were based on Hindu and Buddhist beliefs and practices. Thecultural influence of this Hindu-Buddhist past remains strong in many parts ofIndonesia. The introduction of Islam in the 13th century was followed by the“Islamisation” of much of the archipelago.
European interest in Indonesia arose out of the quest for spices in the 16th and17th centuries. The founding of the Dutch East India Company (VereenigdeOostindische Compagnie, VOC) in 1602 set the scene for the gradualestablishment of Dutch colonial rule in Indonesia. In 1799 the Dutch statetook over the interests of the VOC and embarked on an extended period ofterritorial conquest, which continued until the early years of the 20th century.
In the early 1900s a pan-Indonesian nationalism began to emerge within thegrowing ranks of modern, educated, urban intellectuals. The Japanese conquestof the Dutch East Indies in 1942 and Japan’s subsequent defeat enabled thesenationalists, under the leadership of Soekarno and Mohammad Hatta, toproclaim Indonesia’s independence on August 17th 1945. This was followed by
an extended armed struggle against returning Dutch forces. It was not until late1949 that the Dutch formally transferred sovereignty over the archipelago,excluding Dutch New Guinea, to Indonesia.
On May 1st 1963 Indonesia was granted sovereignty over Dutch New Guinea(Papua, or Irian Jaya), which was officially incorporated into the country inSeptember 1969. Then, in 1975 Indonesia invaded the former Portuguesecolony of East Timor, which in July 1976 was formally integrated into therepublic. The UN, however, refused to recognise this annexation, and after 23years under Indonesian rule, the territory won its independence in areferendum held on August 30th 1999, formally separating from Indonesia onOctober 28th of the same year. Indonesia’s long-standing claim to sovereigntyover the seas separating its many islands was accorded internationalrecognition in April 1982. This more than doubled the country’s total area andpermitted Indonesia to declare the archipelagic seas an exclusive economiczone in October 1983.
The first 15 years of Indonesia’s history as an independent state were marked bypolitical instability and economic decline. The liberal democratic republicestablished in 1950 was characterised by frequent changes in cabinets, regionalrevolts and economic mismanagement. The situation deteriorated after 1959,when President Soekarno dissolved the elected House of Representatives andreplaced it with a Provisional People’s Consultative Assembly. This era ofGuided Democracy was a period of political turmoil, during which economicprudence was often subordinated to revolutionary zeal in domestic policy-making. Confrontations with the Netherlands and Malaysia were the primefeatures of foreign policy. It culminated in September 1965 in an abortive coupd’état led by a group of middle-ranking army officers. The military successfullyblamed the coup on the Indonesian Communist Party (Partai KomunisIndonesia, PKI), although the party’s involvement has never been conclusivelyproved and many believe the events were arranged by a group of right-wingarmy officers led by then Major-General Soeharto.
The September 1965 coup marked the end of the Old Order, as the period ofSoekarno’s presidency later came to be known. It was crushed by the army withmuch bloodshed, during which as many as 750,000 alleged members of thePKI and its affiliated organisations were killed. In March 1966 the New Orderwas established when the executive power of government was transferred toGeneral Soeharto. He became acting president in March 1967, and was electedfor six further five-year terms, the last of which began with his election by theMPR on March 10th 1998. The increasingly vocal opposition to the regime thathad been mounting over the previous two years (including during an excep-tionally violent parliamentary election campaign in May 1997) was given addedmomentum by the severe economic crisis that gripped Indonesia in late 1997.Four days of rioting in Jakarta in mid-May 1998 convinced even Soeharto’smost loyal supporters that a change was needed. On May 21st, having lost thebacking of the military high command and most of his cabinet, the presidentresigned, to be succeeded by his recently elected vice-president, Mr Habibie.
After becoming president, Mr Habibie had to distance himself from his formermentor, Soeharto. His survival depended on his ability to play to the diverseconstituencies that forced Soeharto to step down. All of these constituencieshad reason to distrust Mr Habibie and, as a result, Mr Habibie’s hold on powerwas never fully secure. His weakness was demonstrated for the last time whenthe MPR voted in October 1999 to reject his account of 18 months in office.This in effect ended his hopes of re-election and ushered in an era ofdemocratic leadership under a new president, Mr Abdurrahman.
Important recent events
1999
October 20th: Abdurrahman Wahid is elected president, beating his nearestrival, Megawati Soekarnoputri, by 373 votes to 313. Tension mounts assupporters of Ms Megawati take to the streets of Jakarta and other major citiesto voice their displeasure at the result.
October 21st: Ms Megawati is appointed vice-president, averting the threat ofmassive civil unrest.
October 26th: Mr Abdurrahman announces a “cabinet of national unity”,which includes representatives of all the country’s main political factions.
2000
February 14th: After a protracted public tussle, Mr Abdurrahman dismissesthe former armed forces commander, General Wiranto, from his post asco-ordinating minister for political and security affairs. The move is seen as animportant victory in his battle to bring the military under civilian control.
June 3rd: A separatist congress held in Papua (Irian Jaya) attended by 3,000people declares the territory to have been an independent state since 1961.
July 20th: Mr Abdurrahman refuses to answer questions after beingsummoned to the House of People’s Representatives (DPR, Dewan PerwakilanRakyat) to explain the dismissal of two cabinet ministers, Laksamana Sukardiand Yusuf Kalla. The president’s obstinacy takes his relations with coalitionpartners to a new low.
August 7th: The MPR convenes in its annual session and forcesMr Abdurrahman to concede a greater role in managing day-to-day govern-ment affairs to the vice-president, Ms Megawati.
August 24th: The president reneges on the recent compromises struck withhis coalition partners and unilaterally appoints a cabinet of his own choosing,effectively relegating his former government partners to an opposition role.
August 31st: The long-awaited trial of the former president, Soeharto, oncorruption opens, but Soeharto fails to attend court citing ill-health.
September 6th: Three UN humanitarian workers are murdered by a mob inWest Timor shortly before the opening of the UN Millennium Summit in NewYork after their safety had been guaranteed by the Indonesian security forces.
September 14th: A bomb explodes in the basement of the Jakarta StockExchange, killing 15 people. The bomb is linked to the military and the trial ofthe former president, Soeharto, due to convene on the following day.
September 26th: The Supreme Court sentences Hutomo Mandala Putra(Tommy), the youngest son of former president Soeharto, to 18 months in jail.Mr Hutomo evades capture and remains a free man to this day.
September 28th: Soeharto is ruled physically and mentally unfit to stand trial.
November 29th: Leaders of the Papuan Presidium Council, who called publiclyfor Papuan independence in June, are arrested and charged with treason.
December 14th: The IMF withholds aid after growing dissatisfied with thelack of progress on economic reform.
December 24th: A co-ordinated series of bomb blasts in churches across thecountry claims at least 19 lives and injures many more.
2001
February 1st: The DPR vote to censure the president over allegations of hisinvolvement in two corruption scandals. Mr Abdurrahman’s supporters,concentrated in East and Central Java, threaten civil war if he is oustedfrom office.
February 17th-18th: Violence erupts between Dyaks and Madurese inCentral Kalimantan, leading to a bloody spate of ethnic cleansing in which atleast 500 Madurese die and a further 50,000 are forced to flee Borneo.
April 11th: Mr Abdurrahman signs a presidential instruction giving themilitary a lead role in a drive to restore law and order in the troubled provinceof Aceh, where there is an active separatist movement. The order leads to asharp escalation of violence in the province.
April 30th: The DPR, following a constitutional path to impeachment, passesa second censure motion against the president over his conduct in office.
May 30th: The DPR vote to call for a Special Session of the People’sConsultative Assembly (MPR), due in early August, at which the president willbe held to account for his poor performance and could face impeachment if hisspeech of accountability is not accepted.
July 23rd: Mr Abdurrahman calls for a state of emergency in a last ditchattempt to stay in power. The military and the army refuse to support the stateof emergency.
July 23rd: The Special Session of the MPR is called and Mr Abdurrahman isimpeached. His vice-president Ms Megawati is installed as the new president.
July 26th: After four rounds of voting, the MPR elects Hamzah Haz of the PPPto the vice-presidency.
August 9th: Ms Megawati announces her Gotong-Royong (MutualCo-operation) cabinet. Technocrats are assigned the key economic posts andthe remaining portfolios are distributed evenly between the major parties andthe military.
Indonesia is governed by a constitution drawn up in 1945 and based on thefive principles of monotheism, humanitarianism, national unity, representativedemocracy by consensus, and social justice. These principles are embodied inthe state ideology, Pancasila. The constitution also provides for six principalorgans of state: the MPR; the presidency and the vice-presidency; the DPR; theSupreme Advisory Council (Dewan Pertimbangan Agung, DPA); the State AuditBoard (Badan Pemeriksa Keuangan, BPK); and the Supreme Court (MahkamahAgung). Under Soeharto’s rule these institutions were subordinated to thepresidency, the country’s highest executive office.
A committee set up during the 1999 general session of the MPR madesubstantial amendments to the chapters in the constitution dealing with thepowers of the presidency, including limiting a president’s tenure to two five-year terms and reducing the president’s legislative powers. All new laws arenow approved by the DPR, rather than the president. The president retains theright to select the cabinet, but, unlike in the past, this must (at least in theory)take place in consultation with the DPR.
In the lead-up to the June 7th 1999 general election the composition andstructure of the DPR and the MPR was changed. The DPR now consists of 500members, of whom 462 are elected every five years. The remaining 38members are appointed from the ranks of the military and the police. Electedseats are contested under a complicated system of proportional representation,which gives a disproportionate number of seats to Indonesia’s outer islands.The DPR always had the right to initiate legislation but never did so during theSoeharto years.
The MPR historically met every five years to sanction the Broad Guidelines ofState Policy (Garis-Garis Besar Haluan Negara, GBHN) and elect the presidentand vice-president. The MPR now convenes annually and plays a more activerole in the country’s politics. Membership has been cut to 700, from 1000, andconsists of the 500 members of the DPR, 135 regional representatives and 65interest group representatives. The regional representatives are now appointedby provincial legislatures, and members of the interest group faction areselected by the General Election Commission (Komisi Pemilihan Umum, KPU).
Political forces
Political parties were subject to severe restrictions under Soeharto’s New Ordergovernment. The main New Order political grouping was Golkar, a coalition ofprofessional and functional groups, civil servants and retired military officersset up in the early 1960s to counter the growing appeal of the PKI. As a self-proclaimed political group rather than a political party, Golkar was not boundby the campaigning restrictions that applied to political parties, allowing it todevelop a formidable electoral infrastructure, particularly in the rural areas.From 1973 only two state-sanctioned opposition parties were permitted, theIndonesian Democratic Party (Partai Demokrasi Indonesia, PDI), a coalition offormerly Christian and nationalist parties, and the United Development Party
(Partai Persatuan Pembangunan, PPP), a coalition of formerly Muslim parties.These parties stood little chance against the privileged Golkar, and togethermustered only 30% of the vote in parliamentary elections, leaving Golkar withan unassailable majority.
Golkar has now severed its formal ties to the bureaucracy and the military thathelped it to maintain its hold on power, and is registered as a political party.Despite being tainted by its association with Soeharto’s autocratic regime, theparty’s robust electoral infrastructure helped it to second place in the 1999general election, and it remains a major political force. Three other partiesemerged from the election in a strong position: the Indonesian DemocraticParty of Struggle (Partai Demokrasi Indonesia Perjuangan, PDI-P), led byMs Megawati; the PPP, led by Hamzah Haz; and the National Awakening Party(Partai Kebangkitan Bangsa, PKB), founded by Mr Abdurrahman. A fourth, theNational Mandate Party (Partai Amanat Nasional, PAN), led by Amien Rais,performed disappointingly, but has retained a degree of influence bycollaborating with other Muslim parties, including the PPP and the JusticeParty (Partai Keadilan, PK).
The military has been under intense pressure to end its political role. Althoughit now has a reduced presence in the House of People’s Representatives, itretains a powerful influence over the government, holds four important postsin the new cabinet, and in August 2000 the MPR passed a decree that leavesopen the possibility of extending its active political role to 2009. (Previouslythe military had been expected to quit politics in 2004.) Military involvementin politics is justified by the concept of dwifungsi (dual function), a principlethat has been enshrined in law since the early 1980s. The dual function wasintended to return a degree of stability to government after the turbulent yearsof the early 1960s, but has since become the means by which the militaryexerts political influence through performing civilian roles in the cabinet,parliament and the bureaucracy.
The Muslim community has never exercised power proportionate to its size(85% of the population nominally adhere to Islam), but there are signs thatthis may be changing. Politicised Islam was strongly discouraged by Soeharto,but his successor, Mr Habibie, handed important cabinet portfolios to anumber of modernist, nationalist Muslims from the Association of IslamicIntellectuals (Ikatan Cendikiawan Muslim Indonesia, ICMI), an organisationthat he formerly chaired. Although the former president, Abdurrahman Wahid,was a leader of Nahdlatul Ulama, a Muslim organisation with 37m membersthat draws much of its support from traditionalist Muslims in rural areas ofEast and Central Java, his political views were explicitly secular. That is not sofor a number of other parties, some of which performed well in the 1999general election and, by coalescing in the so-called Centre Axis, secured thepost of MPR speaker for its de facto leader, Mr Amien, and helpedMr Abdurrahman to the presidency. Mr Abdurrahman and Mr Amien comefrom Muslim organisations with a long history of uneasy relations. Mr Amienis a former leader of the 23m-strong Muhammadiyah, a modernist Muslimorganisation with a large membership drawn from urban areas. Rivalry and
divisions between Muhammadiyah and Nahdlatul Ulama have been partlyresponsible for the impotence of political Islam in Indonesia to date, and theanimosity between their followers contributed to the instability thatundermined Mr Abdurrahman’s presidency.
Ms Megawati finally named her so-called Gotong-Royong (Mutual Co-operation)cabinet 15 days after taking office. The cabinet drew praise as she did notoverly reward the military or her own PDI-P party and the two key economicposts went to well-respected technocrats: Dorodjatun Kuntjoro-Jakti andBoediono. Mr Dorodjatun, who became co-ordinating minister for economicaffairs, is a professional economist with close links to Washington whileBoediono, the minister of finance, is the former head of the NationalDevelopment Planning Board (Bappenas). Lesser economics posts, with theexception of the energy and mineral resources portfolio, went to members ofthe PDI-P. These posts, including forestry, agriculture, state enterprises and thechairmanship of Bappenas, were historically considered the most lucrativeportfolios, both for individuals and their parties. Golkar was assigned threeportfolios while the military received four, including the Ministry of HomeAffairs and the new cabinet-level post of chief of the national intelligenceagency, which went to Ms Megawati’s long-standing ally, A M Hendropriyono.Mr Hendropriyono is a conservative army general with an allegedly dubioushuman rights record (in 1989 he led reprisals against protesting villagers inLampung in which up to 246 people were massacred). The Centre Axis is alsowell represented—portfolios have been awarded in roughly equal measure toPAN, the PBB and the PPP—and two posts, one each, have been given tocandidates from Nadhlutal Ulama and Muhammadiyah. The cabinet remainsheavily dominated by Javanese Muslims, reflecting a long-standing bias ingovernment and the civil service.
Main political figures
Megawati Soekarnoputri: Daughter of the former president, Soekarno,Ms Megawati has been active in politics since 1987 and assumed the leadershipof the PDI in December 1993. Her efforts to challenge the ruling elite won herpopular support that went well beyond her party’s natural constituency.Despite the fact that her PDI-P party won the largest number of seats in theDPR elections in June 1999, Ms Megawati was outmanoeuvred in theOctober 20th presidential election and was forced to accept the vice-presidency. However, on July 23rd 2001, she assumed the presidency followingthe impeachment of Abdurrahman Wahid. As vice-president, Ms Megawatirarely spoke in public and her views on most issues were unknown with theexception of her deep commitment to the unified Indonesian state andgenerally nationalist stance.
Hamzah Haz: Born in West Kalimantan in 1940, Mr Hamzah began hiscareer in 1968 in provincial government before becoming an MP for theNahdlatul Ulama in 1971 and for the PPP from 1973. As leader of the largestMuslim party, Mr Hamzah was key in preventing Ms Megawati becomingpresident in 1999 on the grounds of her gender: although he subsequently lostto her in the vice-presidential vote. He later became the first MP to leave
Mr Abdurrahman’s cabinet when he resigned from the post of people’s welfareafter only two months in office, saying he wanted to concentrate on his PPPparty, which he now led. On July 26th 2001, Mr Hamzah was elected vice-president to Ms Megawati. Mr Hamzah is unusual in that he hails from Borneosince most successful politicians are Javanese: it could be that his election waspartly a desire to offset Ms Megawati’s nationalist image.
Amien Rais: Born in Solo, Central Java, in April 1944, Mr Amien attemptedto portray himself as the de facto leader of the popular opposition to Soehartoin the weeks leading to the former president’s resignation in May 1998. Untilthen his political base had been the Muhammadiyah, of which he waschairman between 1995-1998. In August 1998 he co-founded the secular,liberal PAN. His party performed disappointingly in the June 1999 DPRelections, but by joining forces with Muslim parties, he was able to build apower base on the strength of which he secured the important position ofspeaker of the MPR. He is believed to have presidential aspirations and isexpected to be a candidate in 2004.
Akbar Tanjung: Mr Akbar rose to prominence in May 1998 when he wasappointed President B J Habibie’s state secretary, a powerful position withdirect access to the president. Before that he held two minor positions in theSoeharto government, serving as state minister of youth affairs and sports(1988-93) and as state minister of public housing (1993-98). He was votedchairman of Golkar in July 1998 and succeeded in steering the party to secondplace in the DPR election of June 7th 1999. In October 1999 Mr Akbar waselected to the position of speaker of the DPR.
Lieutenant-General (Ret) Susilo Bambang Yudhoyono: Mr Susilo wasborn in East Java in 1949. He rose to the rank of lieutenant-general and was thearmy chief of territorial affairs before being appointed to the cabinet inOctober 1999 as minister of mines and energy. His political star rose with hisappointment to the influential post of co-ordinating minister for political,social and security affairs in August 2000. Mr Abdurrahman subsequentlysacked him in July 2001 but his managerial competence and the respect hecommands from the military and civilians meant that he was restored to hisformer post in Ms Megawati’s August 2001 cabinet.
Resentment arising from the central government’s control of revenue earnedfrom natural resources in outlying provinces and its insensitivity to regionaldifferences have led to strong calls for devolution of power. The governmenthas responded with two bills on regional autonomy, one covering adminis-tration and the other financial arrangements, which took effect on January 1st2001. The legislation is ill-prepared and inadequate, and although initialimplementation passed smoothly, it will be later in the year before any seriousproblems become apparent. It is also not clear if the changes will be sufficientto stem a rising tide of separatism (see International relations and defence), orif the government will need to consider a federal state model to avert thegrowing threat of national disintegration.
Business groups in Indonesia have tended to flourish by having access to statepower. During the Soeharto years these groups were commonly owned byethnic Chinese or relatives of the president. Resentment at the privileges theyenjoyed triggered a wave of looting in 1998 and brought about a resurgence ofeconomic nationalism. Although many of the monopolies and favourabletrading arrangements on which their success was founded have been broughtto an end, most of these wealthy individuals are still well positioned and byand large have succeeded in adapting well to the new political environment.
A large number of non-governmental organisations and trade unions havebeen formed or emerged from underground since Soeharto resigned fromoffice. They too have closer links to the new government and a growing(though still small) influence over the policymaking process.
International relations and defence
The establishment of the New Order government resulted in a transformationof foreign policy. President Soekarno’s quest for recognition as a revolutionaryleader of the developing world was abandoned and replaced by a morepragmatic and low-key approach. The new goal was to emphasise stability inIndonesia’s international relations, thereby allowing the country toconcentrate on domestic economic development. While adhering to theprinciple of non-alignment, Indonesia drew increasingly close to the West. Ithas generally enjoyed good relations with most Western countries, althoughthe IMF’s involvement in the country and the East Timor debacle have severelytested relations in recent years.
Until the mid-1980s Indonesia was content to focus its foreign policy withinthe regional context of the Association of South-East Asian Nations (ASEAN),and to permit its wider foreign policy initiatives to be taken under the auspicesof that organisation. Having made much progress towards its primary aim ofdomestic economic development, the government began to seek a moreprominent international role from the second half of the 1980s onwards. Itchaired the Non-Aligned Movement from 1992 to 1995 and played a leadingpart in developing the Asia-Pacific Economic Co-operation (APEC) forum,hosting its second annual summit in November 1994. Financial constraints anddomestic instability have forced a period of greater introspection since 1998.
The combat capacity of the armed forces was allowed to decline between themid-1960s and the late 1980s, and capital spending on defence fell to a low of2.5% of total development expenditure between 1984/85 and 1988/89. Theend of the cold war (which reduced the US presence in South-east Asia) and themilitarisation of China and India then prompted a drive to improveIndonesia’s defence capacity. Capital expenditure on defence and securityincreased to about 5% of total spending from 1989/90 to 1993/94. However,the recent economic crisis has since forced the military to put its expansionplans on hold. The capital budget allocated to defence and security fellfrom 5% of development spending in 1997/98 to 2.6% in 1999/2000, but roseto 4.5% in the 2000 transitionary fiscal year (April 1st-December 31st 2000)
and 6.4% of development spending in 2001. This increase, however, is more afunction of a smaller development spending budget than of an increase inabsolute terms in military spending. Furthermore, 70% of the budget is formaintaining equipment and a ten-year moratorium has been placed on thepurchase of major capital equipment. The military tend to blame the USembargo on the sale of military parts on its current dilapidated state but itis more to do with budget constraints and poor logistics and maintenance.In 1999 the police formally separated from the armed forces, and spending ondefence and security is now split between these two separate institutions.
The armed forces
1998 1999 2000
Army 235,000 230,000 230,000 of which: strategic reserve 35,000 30,000 30,000 regional commands 160,000–170,000 150,000 150,000 special forces 6,000–7,000 6,200 6,000
Navy 43,000–47,000 47,000 40,000 of which: marines 12,000 12,000 13,000 naval air 1,000 1,000 1,000
Source: The International Institute for Strategic Studies, The Military Balance, 2000/2001.
Security risk in Indonesia
Partly because of its size and diverse population, Indonesia suffers from a highlevel of internal conflict which does hinder progress with investment projectsand the operations of foreign business. At present, the primary source of theconflicts are internally generated issues but there are also signs of growingsupport for economic nationalism. The widespread frustration with the slowrecovery from the 1997-98 economic recession and rising levels of povertycould easily lead to more focussed attacks on foreign-owned enterprises,particularly in the oil and gas and mineral sectors.
The greater political freedom since the demise of the Soeharto era hasexacerbated the innate tensions between different groups, leading to a surge inseparatist violence, clashes between the military and civilian protestors, ethnicand religious violence and looting.
Communal violence between Christians and Muslims in the Moluccas, andDyaks and Madurese in Central Kalimantan has left thousands dead since thebeginning of 1999. Inter-religious violence has also flared up on Lombok inWest Nusa Tenggara, and in Poso, Central Sulawesi. In all instances of religious,inter-ethnic or separatist unrest the military have proved unable to restore lawand order and tend to resort to equally unsuccessful attempts at repression.
Separatist sentiment has been stimulated by the success of the East Timorese insecuring independence from Indonesia in 1999, and by public exposure ofmassacres and other atrocities perpetrated by the military under the NewOrder. Killings have continued in Aceh in the extreme west of Indonesia,despite a ceasefire agreement between the separatist Free Aceh Movement(Gerakan Aceh Merdeka, GAM) and the Indonesian government, which tookeffect on June 1st 2000.
In the extreme east of the country, the Free Papua Organisation (OrganisasiPapua Merdeka, OPM) continues to struggle for independence in Papua (IrianJaya), where support for its cause was voiced by a broad cross-section of theregion’s population at a congress held in the province between late May andearly June 2000. Papua is rich in mineral resources but again the securitysituation and the uncertain outlook for the province, deters investors.
Both Aceh and Papua have been offered autonomy in the form of much greatercontrol of revenue generated in the province and greater scope for autonomousrule: Aceh, for example, is being allowed to operate Shariah (Islamic) law.However, GAM and OPM do not accept greater autonomy and continue topress for independence. Ms Megawati has declared her support for autonomyand her intention to prioritise the restoration of law and order in the provincesbut she is also adamant that there will be no discussion of independence. Itthus appears unlikely that the conflict in these two provinces is going to beresolved in the near future.
Foreign companies operating oil and gas facilities in Aceh and mining concernsin Papua had not responded to the rising unrest until, in a surprise move,ExxonMobil, the US oil company operating in Aceh, closed its operations inMarch 2001 on the grounds that its staff and infrastructure were at risk fromthe deteriorating security situation. Operations resumed in July 2001 after theIndonesian authorities promised heavy policing and military protection of theExxonMobil facilities.
Mass demonstrations are currently a regular feature of the Indonesian politicallandscape. The recent cuts in the fuel subsidy, rise in electricity prices andchanges to the labour law have all led to public demonstrations, some ofwhich result in violence. Supporters of the former president, AbdurrahmanWahid, also took to the streets during his final months in office and as thepolitical crisis deepened, a spate of bombings took place in Jakarta. Foreignbusinesses operating in more remote areas have also recently been the target ofdemonstrations in a bid to secure a greater share of profits generated byinvestment projects.
Violent crime has also been on the rise since the removal of Soeharto and therelaxation of security conditions and has been exacerbated by the weak
economy but it does not appear to pose a serious threat to foreign businessinterests. One worrying development in July 2001 was the assassination of theSupreme Court judge who convicted Hutomo Mandala Putra (Tommy),Soeharto’s youngest son, in September 2000—assassinations and vendettasassociated with criminal activity had not previously been a feature ofIndonesian society.
Organised crime is seldom a threat to foreign business although it thrives inthe Indonesian underworld. Similarly, kidnapping had not traditionallyaffected the foreign community but in the last couple of years separatistfighters in Papua have kidnapped foreigners. Extortion in the conventionalsense does not affect foreign business in Indonesia. However, governmentofficials typically require illegal payment for permits, licences and otherprivileges, while the army or police often require additional payments forsecurity arrangements.
Resources and infrastructure
Population
Indonesia is the fourth most populous country in the world after China, Indiaand the US. The 2000 census placed the population at 203.46m, belowforecasts based on the 1990 census and 1995 intercensal survey. Populationgrowth in the 1990s was 1.35% per annum, well below an average of 2.3%recorded in the 1960s and 1970s, and below the rate of 1.97% between 1980and 1990.
Population, 1995a
(‘000 unless otherwise indicated)
Age group Male Female Total % of total
0–4 10,475 9,977 20,452 10.5
5–9 11,130 10,659 21,788 11.2
10–14 12,038 11,671 23,709 12.2
15–19 10,273 10,006 20,279 10.4
20–24 8,037 9,114 17,151 8.8
25–34 15,060 16,229 31,289 16.1
35–44 12,871 12,351 25,222 13.0
45–54 7,952 7,419 15,371 7.9
55–64 5,235 6,142 11,377 5.8
65+ 3,859 4,257 8,116 4.2
Total 96,930 97,825 194,754 100.0
a Full results from the 2000 census will be available from 2002.
Source: Central Bureau of Statistics, 1995 Intercensal Survey.
The falling rate of population growth is in part a result of a successful familyplanning programme which has, since it was introduced in the early 1970s,
reduced the fertility rate from 5.7 in the late 1960s to 2.8 in 1997. Accordingly,at the time of the 1995 intercensal survey 33.9% of the population was under15 years of age, compared to 36.6% in 1990 and 41.9% in 1980.
Industrial development has brought large-scale migration to urban areas—35.9% of the population lived in cities in 1995, compared with 30.9% in 1990and 22.4% in 1980. The population distribution also remains highly uneven.Despite attempts to ease congestion on Java, Bali and Madura through thenow moribund transmigration programme, 60.73% of Indonesians still live onthese small, crowded islands which make up only 7% of Indonesia’s landsurface area.
Education
Education improved greatly under the New Order, and as a result theproportion of the population who are illiterate has fallen from 39% in 1971 toonly 10.21% in 1999 (13.46% in rural areas and 5.36% in cities). Improvingaccess to primary education means that 92.6% of all children of eligible agewere attending primary school in 1999. Attendance has been helped by specialmeasures to ensure children remain in education throughout the crisis,including a decision to abolish all entrance fees for public schools in 1998/99.Spending on education typically comprises 10% of development spending inthe central government budget.
No. of students (‘000) 156 2,451 2,285Participation ratea 1.6 11.2 10.4
a Percentage of children in relevant age groups attending educational establishments. b Junior andsenior high schools. c Excluding religious seminaries.
Source: Central Bureau of Statistics, Statistik Indonesia, 1999.
Health
Indonesia has the highest rate of maternal mortality in the ASEAN region—390per 100,000 live births. Nevertheless, rapid improvements have been made tohealthcare since the late 1960s. Health policy has concentrated on theestablishment of public health centres (pusat kesehatan massal, puskesmas) inrural areas. Preventive healthcare involving, in particular, the provision ofclean drinking water, immunisation, pest control and improved nutrition has
also received priority. Between the mid-1960s and the mid-1990s the numberof public health centres increased from less than 1,250 to more than 7,000,supplemented by more than 28,000 auxiliary and mobile centres. The numberof hospitals and medical staff also increased dramatically, with particularlylarge increases in the number of specialised hospitals.
The effect of this improvement is illustrated by a decrease in the infantmortality rate from 145 per 1,000 live births in 1967 to 49 per 1,000 live birthsin 1996, and an increase in the life expectancy at birth from 46 years to 65years during the same period. However, health spending has been falling sincethe crisis, a trend only partially offset by a corresponding increase in donorsupport in the sector. Overall health spending fell 7% in real terms in 1997/98and by 12% in 1998/99 and absorbed less than 5% of development spendingin the 2000 budget.
Natural resources and the environment
Natural resources form the backbone of Indonesia’s subsistence and formaleconomies. Millions depend on subsistence farming, fishing, tree crop andcash crop cultivation for a living. The country also has vast oceanic resources.Large industrial concerns have interests in the plantations sector and in thecountry’s once vast forests, which have been decimated by commercial loggingsince the 1970s (see Economic sectors: Agriculture, forestry and fisheries). Richdeposits of oil, gas, coal, tin, copper, nickel, bauxite, gold, silver and iron sands,kaolin, marble, granite, limestone and pumice are the mainstay of animportant mining and quarrying sector (see Economic sectors: Mining andsemi-processing).
Despite the importance of natural resources to the economy, much of theexploitation is destructive, polluting, unsustainable and inefficient. Wealthgenerated from the exploitation of natural resources has not been distributedequitably, nor has it been reinvested in the country. Even in the country'snational parks—which cover about 10% of the country—resource exploitation isheavy and unsustainable due to encroachment by logging companies, mineralprospectors and smallholder farmers. Environmental laws are openly floutedby the private sector, often in collusion with local and provincial governmentofficials. Environmental destruction has intensified since Soeharto resignedfrom office in May 1998. A breakdown in law and order has led to a surge inillegal logging, mining and fishing, which have now reached alarming levels.
Transport and communications
Investment in infrastructure has collapsed since the 1997 crisis, leading toconcerns that poor infrastructure will prove an obstacle to future economicgrowth. Investment of approximately US$100bn is needed in the next eight toten years if the economy is to sustain growth rates of 5-6% per annum. However,investment is unlikely to return without political stability and legal certainty.
Land transport depends mainly on road and, to a lesser extent, rail networks.Railways are state-owned and cover approximately 5,000km on Java and1,300km on Sumatra (the latter in three unlinked networks). Total length ofroads in 1998 was 355,363km, of which 168,072km was asphalt covered.
Despite being an island nation Indonesia has a surprisingly small domesticoceangoing fleet (to the detriment of net services in the current account) andlacks the port facilities to attract major vessels. Most cargo is transhipped atSingapore and arrives in smaller feeder vessels. However, the country’s maincontainer port, Tanjung Priok in Jakarta (which handled 30.3% of exports and46.7% of imports in 2000), is now privately owned and heavy investment isbeing made to upgrade the port as a hub for Indonesia’s other main ports—Tanjung Perak in Surabaya (8.7% of exports and 4.9% of imports in 2000) andBelawan in North Sumatra (3.2% of exports and 1.9% of imports). The smalloceangoing fleet is supported by an inter-island shipping fleet of 1,333 vesselswith a capacity of 27m deadweight tonnes (dwt) and a traditional fleet of 2,793locally built sailing vessels with a total capacity of 397,616 dwt.
Indonesia has 179 commercial airports, 61 of which are large enough for wide-bodied jets. The Soekarno-Hatta International Airport at Cengkareng nearJakarta was officially opened in 1985 and, together with many other airportsthroughout the country, has been modernised and extended since then.Indonesia’s airlines developed rapidly in the early 1990s, but suffered badlyowing to large foreign-exchange denominated debts during the economic crisisand were forced to make sweeping cutbacks to their operations. There arecurrently two state-owned carriers—Garuda and Merpati—and ten privatecarriers, seven of which entered the industry in 2000 following a relaxation ofentry restrictions.
The government-owned telephone system covers almost the entire country,and has been greatly extended and made more effective since the mid-1970s bythe deployment of telecommunications satellites. This satellite system alsoprovides connections to the international direct dialling network. Thedomestic and international telephone systems are operated mainly by twomajority state-owned enterprises, PT Indosat and PT Telkom, and by theprivately-owned PT Satelindo. Since August 1999 companies entering thetelecoms sector no longer have to co-operate with Telkom and Indosat,although these two companies continue to enjoy exclusive rights over localfixed lines and international long-distance services respectively. Thesemonopolies are to be phased out within the next three years, exposing bothTelkom and Indosat to open competition.
Since 1996 Telkom has been expanding the telecoms infrastructure throughjoint operating schemes (kerjasama operasi, KSO) with five foreign companies.However, these contracts have been in dispute since the rupiah weakenedsubstantially in value in 1997/98. Negotiations have been further complicatedby the early loss of Telkom’s monopoly rights under a new telecoms law, andthe five partners are now seeking compensation from the Indonesiangovernment for loss of projected earnings. The disputes have delayed much-needed investment in the country’s telecoms network and infrastructure.
Indonesia is endowed with a wide variety of energy sources (see Referencetable 5 for national energy statistics.) It has large, though declining, petroleumreserves, as well as significant reserves of natural gas and coal. It also has greatpotential for the development of hydroelectric and geothermal power, and fornon-conventional sources of energy, including wind and wave energy, andsolar power.
Indonesia is a member of OPEC. In 1999 the country had proven oil reserves of5.1bn barrels, with a further 4.6bn barrels in potential reserves, and provennatural gas reserves of 77trn cu ft with potential reserves of 59.5trn cu ft. Mostoil reserves consist of light, low-sulphur crudes, which command a premiumover heavy crudes produced in the Middle East. Crude oil production wasapproximately 1.26m barrels/day in 2000 (including condensate). Howeverlack of investment in the sector has led to declining output. Early in 2001,Indonesia was unable to meet its 1.25m b/d OPEC quota, raising the possibilitythat Indonesia will voluntarily leave OPEC within five years. The country hadeight operational refineries in 1999 with an installed capacity of 1m b/d.Exploitation takes place through production-sharing contracts with the stateoil and gas company, Pertamina. A bill was placed before parliament in 2001which aims to break the monopoly Pertamina has on the upstream anddownstream sectors of the oil and gas industry. The bill is a revised version of asimilar bill rejected by parliament in 1999.
Note. In the electricity column primary electricity output and imports/exports of electricity areexpressed as input equivalents, on an assumed generating efficiency of 33%.a Input basis. b Output basis.
Gas production was 3.1trn cu ft in 1999. Unlike the oil industry gas productionis rising steadily and attracting investment, Indonesia is already the world’slargest producer of liquefied natural gas (LNG). A large deposit off the Natunaislands in the South China Sea is now being developed by a consortiumcomprising the US, UK and Canadian Conoco, Premier Oil and Gulf Resources,with production due to start in 2003. A consortium led by BP Amoco has alsobegun work to tap probable and proven reserves of 23.7trn cu ft in theTangguh gas field in Berau Bay off Papua (Irian Jaya). Production from the fieldis due to begin in 2005.
At its peak in 1980/81 the oil industry provided more than 70% of thegovernment’s total domestic budgetary revenue and almost 82% of exportearnings. Oil remains the single most important source of foreign exchangeand fiscal revenue, although its contribution has decreased over the past 18years. Crude oil, gas and refined petroleum products accounted for 23% oftotal export earnings in 2000 and budget revenue from oil and gas companies(including income tax payments) provided 36% of total government revenuein the 2000 transitionary fiscal year (April 1st-December 31st).
As only 10% of Indonesia’s area has been fully surveyed, estimates of coalreserves vary widely, from 4.2bn tonnes (proven) to 36bn tonnes (unproven).Major known reserves are in Sumatra and Kalimantan, with lesser reserves inJava, Sulawesi and Papua. At least 2.6bn tonnes of reserves are readilyrecoverable. A campaign launched in the mid-1980s to attract increased privateinvestment in coal exploration resulted in the granting of 30-year concessionsin East and West Kalimantan to ten foreign contractors. A further fiveconcessions were awarded in Central and East Kalimantan in 2000. Productionis growing rapidly with output rising 3m metric tonnes to 76.5m in 2000.Indonesia is now the world’s third-largest exporter of steam coal after Australiaand South Africa. However, in 2000 and early 2001 the sector was hit by aseries of strikes and protests as a result of unclear mining legislation andpolitical uncertainty in central government.
Provision of electricity is the responsibility of the State Electricity Company(Perusahan Listrik Negara, PLN), which inefficient management, bad businesspractice and corruption has rendered effectively bankrupt. To expand powergeneration capacity in the early 1990s PLN entered into 27 independent powerproducer (IPP) contracts with private sector companies to build and run powerstations in Indonesia. Contractual disputes stemming from the rupiahdevaluation in 1997 have prevented many of these projects from starting.However, demand for electricity has continued to grow throughout the post-crisis period and is expected to continue expanding over the 2001-2005 periodat a rate of 11% per year in the main consuming regions of Java and Bali. Thedearth of investment in power generation means that shortages are now amajor threat in some parts of the country.
Sources: Central Bureau of Statistics, Indikator Ekonomi; Bank Indonesia, Indonesian Financial Statistics.
Indonesia has a reasonably well-balanced economy in which all major sectorsplay an important role. Agriculture (including animal husbandry, fishing andforestry) has historically been the dominant activity, in terms of bothemployment and output. There is a vast range of mineral resources, theextraction and exploitation of which have proceeded rapidly in the past threedecades, enabling the mining sector to make an important contribution to thebalance of payments. The manufacturing sector also expanded dramaticallyduring the New Order period, especially since the mid-1980s. In 1991 the shareof manufacturing in GDP exceeded that of agriculture for the first time. Morerecently the services sectors have expanded rapidly, and in 2000 jointlyaccounted for approximately 40% of GDP and employed about one-third ofthe working population.
Low levels of domestic disposable income mean that exports have been theprimary engine of growth. Before the mid-1970s exports consisted mainly of asmall number of primary commodities, including natural rubber, coconut oiland copra, tin, and crude oil. The decline in petroleum prices after 1983resulted in a concerted push towards industrialisation, as a result of whichsemi-processed and manufactured products increasingly came to dominateexports. A determined effort to promote tourism since the mid-1980s has alsohad a big impact on invisibles export earnings during the past decade.
When the New Order was established, the economy was in a desperate state.Production and investment had fallen in many sectors since 1950, and realgrowth in GDP had averaged around 2% a year in 1950-65, less than the rate ofgrowth of the population. Manufacturing accounted for less than 10% of GDPand was characterised by substantial excess capacity caused by uncertaintiesabout prices, supplies and government regulations. In the early 1960s budgetdeficits amounted to as much as 50% of total government expenditure, exportearnings slumped and inflation accelerated to a peak of 640% in 1966.
A reappraisal of economic objectives took place after the economy wasrehabilitated; they were henceforth defined as stability, growth and equity,collectively described as the “trilogy of development”. The means of attainingthese objectives were a series of five-year development plans known as RencanaPembangunan Lima Tahun (Repelita), designed to establish developmentpriorities and set specific growth targets. The Repelita system was replaced byProgram Pembangunan Nasional (Propenas), after the end of Repelita VI inMarch 1999. The Propenas sets out broad policy for a five-year developmentstrategy from 2000 to 2004.
From the mid-1970s the government’s economic policy represented a blend oftwo separate development strategies. The first (espoused by the “technocrats”)called for priority to be given to sustainable economic development throughthe efficient allocation of resources, and the maintenance of macroeconomicbalance and international competitiveness. The second (promoted by the“technologists”) was more strongly rooted in the tradition of economicnationalism and placed greater emphasis on promoting Indonesia’sdevelopment as a technologically sophisticated industrial power, irrespective ofthe economic costs of achieving this goal. The advantage in this conflict swungback and forth for much of the New Order period. After a period oftechnocratic ascendancy beginning in the mid-1980s, related in particular tothe premium placed on the efficient use of resources after the collapse of oilprices, the technologists made a strong comeback in 1993, when a recordnumber were appointed to the cabinet. Politically well-connected businessgroups then used this advantage to justify protectionist policies in the name ofnational interests.
The economic crisis laid to rest many of the technologists’ more grandioseschemes, but the cabinet appointed by Bacharuddin Jusuf Habibie in 1998 stillfavoured economic nationalists and had only a weak technocrat presence.During Abdurrahman Wahid’s presidency the distinction between these twocamps mattered less in view of the constraints imposed on policy by theimperatives of debt repayment and restructuring, and maintaining basicmacroeconomic stability.
While it lasted, strong GDP growth obviated the need to address the growingneed for economic reforms, but this led to the creation and toleration of arange of distortions that partly explain the crash of 1997-98. Investment
became increasingly concentrated in import-dependent manufacturing and inproperty development. By contrast, investment that would create backwardlinkages in manufacturing and in agriculture was neglected. This misallocationof investment was encouraged by the breakneck and poorly regulatedexpansion of the banking system after the reform package of October 1988 (seeEconomic sectors; Financial services).
The rapid pace of development also translated into widening current-accountdeficits and large-scale foreign borrowing by corporations and banks, much ofit short term. The need to finance the deficits and to meet debt-servicingobligations distorted the domestic interest-rate structure, with negative implica-tions for the real economy. Further layers of distortion were introduced by themaintenance after 1996 of an exchange-rate system in which the rupiah waslinked to a strengthening US dollar, and by the continuing regulation offoreign and domestic trade. These two factors underlay a slowdown in exportgrowth that began in the mid-1990s. The link between the US dollar and therupiah also created a false sense of security and convinced private entitiesseeking overseas credit that they did not need to hedge their borrowings. Therush of debtors to cover their unhedged obligations created the conditions forthe initial collapse of the rupiah in July-September 1997.
Summary of government financesa
(Rp trn unless otherwise indicated)
2000b 2001
Total revenue and grants 152,897 242,997 Tax revenue 101,437 173,443 Domestic taxes 95,538 163,403 Income tax 54,225 93,073 Oil & gas 10,036 17,623 Non-oil & gas 44,189 75,450 Non-tax revenue 51,460 69,554 Oil 25,311 37,965 Gas 7,918 11,557
Expenditure 179,668 295,114 Current 138,062 186,855 Personnel expenditures 30,682 39,889 Balanced Fund 33,522 74,896
a Adjusted to new classifications based on Law No. 7/1999. b Nine-month fiscal year (April 1st-December 31st).
Source: Ministry of Finance, Economic Indicators, 2001 Budget Statistics.
The New Order government inherited an economy in which fiscal disciplinehad broken down. The new government enshrined the balanced-budgetprinciple in law, requiring that public expenditure should not exceed domesticbudgetary revenue plus foreign aid flows. The balanced-budget principle wasnot unduly restrictive in practice. The definition of foreign aid as a form ofrevenue rather than a means of financing deficits, and the government’s use of
its balances with Bank Indonesia (the central bank) for off-budget funds,created plenty of leeway. Another element of flexibility was added in the early1990s when, in pursuit of a more effective counter cyclical fiscal policy, thegovernment allowed itself to run surpluses or deficits as long as a broad balancewas maintained over the medium term. For the first time in almost threedecades, in 1992/93 and 1993/94 there were sizeable budget deficits, whichwere covered from budgetary reserves built up over the previous two years.This practice, as well as increasing resort to off-budget funds in the last years ofthe New Order, helped undermine fiscal stability. (See Reference table 6 forhistorical data on government finances.)
Following the drop in OPEC’s official oil price by US$5/b in March 1983, thegovernment resolved to proceed with long-delayed tax reforms. This resultedin the simplification of the income tax structure in January 1984. A new,unified income tax was introduced to replace four existing taxes on differentforms of income. Value-added tax (VAT) was introduced in April 1985 toreplace the existing sales tax. In April 1986 the government concluded this firstround of tax reforms with the introduction of measures to simplify theproperty tax regime and stamp duty regulations. The resulting boost todomestic tax revenue allowed the contribution to budgetary resources fromforeign aid to fall, from 30.3% of total revenue in 1988/89 to 11.5% in 1996/97.The economic crisis has reversed this trend decisively: foreign aid contributed18% of budget revenue in 1997/98 and 43% of revenue in 1998/99.
The 2000 budget covered a nine-month period from April 1st to December 31stin order to permit a transition to calendar-year accounting from 2001. A newsystem of classification changes the former practice of including foreign aid asgovernment revenue and is more specific in its breakdown of other sources ofstate income. Windfall oil revenue has to a certain extent compensated forweak post-crisis revenue, but rising oil prices also increase the bill for domesticfuel subsidies. As a result, the budget deficit falls by only 0.1% of GDP for everyUS$1 rise in the price of oil, according to World Bank estimates.
Recent budget assumptions
2000a 2001b 2001c
GDP growth (%) 3.8 5 3.5
Consumer price inflation (av; %) 4.8 7.2 9.3
Crude oil price (US$/b) 18.0 24 24
Exchange rate; Rp:$ (end–1998) 7,000 7,800 9,600
Total budget spending (Rp trn) 183.1 295,114 n/a
a April-December 2000. b Original budget. c Revised June 2001.
Source: Bank Indonesia.
The 2000 budget envisaged a deficit of 2.9% of GDP but provisional datasuggest the deficit rose to 3.2% of GDP. Revenues were higher than expectedowing to stronger economic growth than envisaged and rising international oilprices, but this was more than offset by the sharp rise in petroleum subsidiesand the weaker rupiah pushing up external debt-servicing costs.
Until recently tax reformcut reliance on foreign aid
The political crisis and subsequent slide in the rupiah and rise in interest ratesin 2001 led to IMF pressure on the government to revise the 2001 budget. Theoriginal budget envisaged a deficit of 3.7% of GDP and although this target wasretained in the June 2001 budget, the underlying assumptions were changed.In June a 30% rise in fuel prices was enacted, followed in July by a 17.5%hike in electricity tariffs: subsidies accounted for 36.4% of governmentspending in 2000. Plans to raise VAT and telephone tariffs have been delayedby the DPR and the proposed acceleration of the privatisation programmeappears unrealistic in light of current market conditions and the need torestore investor confidence. On a positive note, the sharp appreciation of therupiah since Ms Megawati assumed the presidency and the prospect of lowerinterest rates will help to prevent the budget deficit spiralling out of control.
Both external and internal trade have traditionally been subject to a variety oflevies and controls. A wide range of duties and taxes, quantitative controls, soletrading licences, and other restrictions have been imposed on exports andimports. Domestic trade has been similarly regulated: foreign nationals andenterprises have been barred from engaging in retail trade outside majorcentres of population; ethnic Chinese entrepreneurs have been discouragedfrom trading in rural areas; and exclusive trading privileges for a number ofproducts were granted to publicly or privately owned monopolies.
The sharp deterioration in the balance of payments caused by the decline in oilprices in the mid-1980s, and the consequent need to develop non-oil and gasexport revenue, prompted the introduction of a programme of trade policyreforms aimed at reducing the cost of imported inputs for export-orientedindustries. This resulted in the steady replacement of non-tariff barriers with amore transparent tariff regime, as well as a gradual reduction in the degree oftariff protection granted to domestic producers. Little was done to relax theexport restrictions, however, until they began to be dismantled at theinsistence of the IMF in 1998, and then only reluctantly.
The New Order government enacted two laws on foreign and domesticinvestment in 1967 and 1968 respectively, which greatly liberalised theregulatory framework for both categories of private investors. However, aresurgence of nationalist sentiment and the large increase in oil revenueresulted in a steady tightening of controls over foreign investment after 1974.As in the case of the import controls introduced in the same period, much ofthis regulatory edifice has been dismantled since 1983. The coup de grâce wasadministered in a reform package issued in June 1994, which restored anessentially free investment regime. Under this regime foreign investment ispermitted in virtually all sectors, including infrastructure; wholly ownedforeign investments are allowed; the equity limits on foreign partners in joint-venture enterprises have been raised to 95%; an earlier minimum capitalrequirement of US$250,000 for foreign investors has been scrapped; and thedivestment requirement has been eased to a token 1% of equity after 15years. In 1999 steps were taken to speed up the approval process (throughdelegation of decision making) and tax incentives were offered for investmentsin certain sectors.
The reform of the complex structure of foreign-exchange controls and multipleexchange rates was accomplished by 1970, when the rupiah was made fullyconvertible. The government subsequently pursued an essentially free andopen foreign-exchange policy: the few remaining direct restraints on the freeflow of capital were removed in the late 1980s. Within this framework economicpolicy sought to adjust the nominal rupiah exchange rate to a level consistentwith maintaining the country’s international competitiveness, resulting in anannual downward drift of 3.5-5.5% against the US dollar between 1988 and1996. The inflation differential between Indonesia and its major trading partnerskept the real effective exchange rate broadly unchanged during these years.
Rising domestic interest rates and a narrowing inflation differential promptedstrong inflows of foreign capital and an appreciation of the rupiah’s realeffective exchange rate in the first half of 1996. This phenomenon was short-lived, however, as political events in mid-1996 caused investors to reassessIndonesia’s political risk. By early 1997 concerns over political stability werereinforced by fears that the economy was in danger of overheating. Thisrendered the rupiah susceptible to the currency crisis that began in Thailand inmid-1997 and rapidly spread through South-east Asia. After withstandingpressure for a short period, the rupiah buckled and was allowed to float freelyon August 14th 1997, setting off a depreciation that was eventually to surpassthose suffered by currencies in the other stricken Asian economies (see Foreignreserves and the exchange rate).
Economic performance
Prudent economic management enabled Indonesia to record consistently highrates of economic growth, well in excess of the expansion in population, formore than three decades. This growth, which averaged more than 6% a yearbetween 1970 and 1996, was achieved despite a number of external shocks,including sharp movements in oil prices and in international exchangerates, which affected the terms of trade and the value of the country’s externaldebt. From a low-income country in the mid-1960s, Indonesia transformeditself into a middle-income country, with an estimated income per head ofalmost US$1,150 in 1996.
A breakdown of the economy’s growth performance by sector shows thatindustry was the principal engine of growth (see Reference table 11 forhistorical data on gross domestic product by sector). Manufacturing expandedmore rapidly than the economy as a whole. The need to ensure matchinggrowth in infrastructure stimulated a sharp acceleration in the rate of growth ofthe utilities and construction sectors. The electricity, gas and water componentof GDP expanded by an average of around 14% a year between 1986 and 1996,while the construction sector expanded by more than 10% a year in the sameperiod. (See Reference tables 9, 10 and 11 for historical GDP data.)
The growth of the other sectors, although not as dramatic, was also impressive.Agriculture grew steadily, although the food-crop sub-sector was held back for
much of the 1990s by unfavourable climatic conditions and the increasedconversion of paddy fields to other uses (see Economic sectors: Agriculture,forestry and fishing).
Gross domestic product, 2000(% real change)
Annual average2000 1996–2000
GDP 4.8 1.0
Source: Central Bureau of Statistics, Indikator Ekonomi.
The expansion of the mining and quarrying sector also began to slow in theearly 1990s as a result of the gradual depletion of known petroleum reserves.This decline in the oil industry was partly offset by the rapid expansion of anumber of other mining activities, including the mining of coal, copper andgold. The services sector also grew rapidly, fuelled both by the demandgenerated by the expanding primary and secondary industries, and by thegrowth in personal disposable incomes, the effect of which was reinforced bythe booming tourist industry.
As a result of the economic crisis GDP growth first slowed to 4.7% year on yearin 1997, and then contracted by 13.1% in 1998, the worst performance sincerecords began. Declines in output occurred across all sectors except agriculture,which managed full-year growth of 0.8% in 1998, and electricity, gas and waterwhich grew by 1.9%. The worst affected sectors were construction (down by36.4%), trade, financial, real estate and business services (down by 26.6%), andhotels and restaurants (down by 18%). In 1999 the economy returned togrowth, but only just, as it expanded by 0.8%. In 2000 the economy appearedto be in recovery, expanding by 4.8% year on year, with all sectors recordingpositive growth. Robust external trade was a major factor behind the 9.4%year-on-year growth in transport and communications and the 6.2% year-on-year growth in manufacturing. Although construction grew by 6.7% year onyear, the sector is still 30% smaller than it was in 1997.
Throughout the 1980s and much of the 1990s the broadly conservative stanceadopted by the monetary authorities enabled them to restrain inflationarypressures in the economy with reasonable success. Only in one year between1984 and 1997 was the average annual rate of inflation not held to singledigits—and in that year, 1993, it was no more than 10.2%. (Comprehensiveprice data are given in Reference table 12; data on wage rates in Reference table13; information on money supply is given in Reference table 7.) The onset ofthe crisis in 1997-98 led to an episode of severe inflation (57.6% for the 1998calendar year), driven by the collapse of the rupiah, the breakdown ofproduction and distribution, and the very rapid expansion of money supply tofinance subsidies and keep banks liquid. However, a return of macroeconomicstability and negligible economic growth in 1999 brought inflation rapidlyback down to an annual average of 2%, and despite growing inflationarypressures in 2000 inflation was held to an annual average of 3.7%.
After a slump in the mid-1980s, private investment interest was strong formuch of the next ten years. The value of foreign direct investment (FDI)projects approved by the Investment Co-ordinating Board (Badan KordinasiPenanaman Modal, BKPM), which is responsible for licensing investmentsoutside the oil and gas, and financial services sectors, received an immediateboost from the liberalisation of investment regulations announced in June1994. By the end of that year FDI projects worth US$23.7bn had beenapproved; in 1995 their value increased to US$39.9bn. The economic crisis andpolitical unrest had a devastating impact on investment—approvals fell toUS$13.6bn in 1998, and in 1999 were a mere US$10.9bn, rising back up toUS$13.6bn in 2000. Domestic investment followed a similar pattern: interestpeaked in 1997, when the BKPM approved projects worth Rp119.9trn, fallingto a low of Rp17.5trn in 2000.
Implementation of investment projects has been less impressive. According toBKPM data, the value of foreign investment projects implemented betweenJune 1967 and the end of 1997 was only 27.5% of the value of foreigninvestment projects approved during that period. The implementation rate wasparticularly low for import and capital-intensive “mega-projects” requiringmultimillion US dollar investments, such as oil refineries, power stations andlarge-scale chemicals and metallurgy plants, which had begun to account foran increasing proportion of the applications submitted to the BKPM during the1990s. Since the onset of the economic crisis many of these projects have beenpostponed and some have been abandoned altogether.
Regional trends
Java and Bali have enjoyed the fastest rates of growth over the past threedecades, leading to a concentration of wealth in these densely populatedislands. In 1995 Java and Bali accounted for more than 61% of national GDP;Jakarta alone accounted for more than 16% of the total. The gap between Javaand Bali and the rest of the country widened during the boom years of the1980s and 1990s. Their 1984-95 growth rates, of more than 7% for Java andover 8% for Bali, outstripped the national average of 6.4% for this period. As aresult, Java’s share of GDP rose from 52% in 1983 to 59% in 1995 and was65.8% of current price GDP in 1999. Growth in the peripheral regions has beenconcentrated in areas suitable for the cultivation of cash crops or theexploitation of mineral resources. The pace of development has beenparticularly slow in many of the eastern provinces, which for the most parthave relatively small populations and are far from the centres of political andeconomic power.
Private investment interestwas strong in the 1990s
In the short term the economic crisis partially reversed these trends. Therecession was deepest in Java, where rice farmers were also hit by poor prices.The relatively backward and isolated areas of eastern Indonesia were sparedsome of the worst effects of the downturn, but were in any case extremelypoor. On the other hand, some of the outer island producers of exportcommodities benefited from the depreciation of the rupiah (inflation has sinceeaten away at these gains), as did Bali’s tourism industry, until unrest elsewherein the country began to deter visitors. Broad-based structural reform will beneeded to mitigate these inequalities, but it is likely that the decentralisation ofgovernment introduced on January 1st 2001 will only exacerbate differences inwealth between resource-rich and resource-poor regions. (For historical data onemployment and wages, see Reference tables 3 and 13.)
Economic sectors
Agriculture, forestry and fishing
Agriculture, including forestry and fishing, is of vital importance to theIndonesian economy. It is both an important source of export earnings andformal employment, and the means by which the majority of Indonesia’s ruralpopulation subsists. In the subsistence part of this economy wages are in theform of crop shares, a large portion of food crops are for home consumption,and much output goes unrecorded in the national economic statistics.
The share of GDP from agriculture has declined as Indonesia has industrialised.In the early 1970s agriculture contributed 40-50% of constant price GDP, butby 1997 this had fallen to 14.8%. A contraction in the industrial economy,which was not reflected in agriculture, pushed the latter’s share back up to17.3% in 1998, but by 2000 this had fallen back to 16.9%. (See Reference table14 for historical data on agricultural production.)
Rice is the main food staple in most areas, with the exception of some parts ofeastern Indonesia, where the sago palm is more suitable for cultivation.Production has been declining since Indonesia briefly gained self-sufficiency in1985, and the country now buys around 3.5m tonnes (roughly 10% of itsneeds) on the open market every year, making it one of the world’s largest riceimporters. The main rice producing regions are the fertile islands of Java andBali, where industrialisation and high population density have resulted in theloss of large swathes of arable land. Indonesia lost a total of 1m ha of ricepaddy between 1983 and 1993, and to reverse this trend the government plansto develop 2m ha of paddy in the less fertile provinces of Riau, Jambi, SouthSumatra, Bengkulu and West Kalimantan (after a disastrous attempt to convert1m ha of peatland in Central Kalimantan into rice paddy failed). A total of11.6m ha was devoted to rice cultivation in 2000.
In recent years oil palm has expanded rapidly and Indonesia is now the world’ssecond largest producer after Malaysia. Planted area increased from only106,000 ha in 1967 to 2.96m ha in 1999, and more than 2m people are nowemployed in the sub-sector. Over the same period crude palm oil (CPO)production rose from 167,669 tonnes in 1967 to 6.3m tonnes in 2000. Largeplantations were first established in North Sumatra, then throughout the 1990srapid expansion was fostered in Aceh, Riau, Jambi, South Sumatra and WestKalimantan. The government has actively encouraged further oil palmdevelopment in eastern Indonesia, and huge (as yet undeveloped) concessionshave been allocated in Kalimantan, Sulawesi and Papua (Irian Jaya). There aresuspicions that at least part of the commercial interest in these investmentsderives from the money to be made from the clear-felling of standing forestthat is open to those granted plantation development permits (see below).Clearing land for plantations is also one of the major reasons for the annualfires that burn on Sumatra and Kalimantan.
Indonesia was once the world’s largest producer of natural rubber. After aperiod of neglect and decline in the 1960s and early 1970s, planted area wasexpanded and existing plantations rehabilitated through the introduction ofnew high-yielding varieties. Total output rose from 736,000 tonnes in 1968 to1.75m tonnes in 2000, of which smallholder production accounted for over1.3m tonnes. Indonesia now lies second in the list of world producers betweenThailand (the largest) and Malaysia (in third place). To combat low pricesfollowing the demise of the International Rubber Organisation (INRO) in 1999,these three countries have now entered into a tripartite agreement aimed atlifting world prices past the US$1/kg mark.
Indonesia is now the world’s fourth-largest producer of coffee. The main coffeegrowing regions are found in the southern provinces of Sumatra (Lampung,Bengkulu, Jambi and South Sumatra) and parts of Sulawesi. Output of coffeeexpanded from 157,000 tonnes in 1968 to an estimated 479,000 tonnes in1996. In 1999/2000 total harvest was an estimated 511,000 tonnes but theharvest is forecast to fall by 20% in 2000/01 because of unfavourable weatherconditions and also because of international prices at 30-year lows which arediscouraging farmers from harvesting and growing coffee. Indonesia is amember of the Association of Coffee Producing Countries (ACPC), which iscurrently withholding coffee from the market in a bid to raise prices. However,Indonesia is not meeting its retention commitment (of 8,000 tonnes) becausefinancial support pledged by the government has not been forthcoming. Over90% of Indonesia’s coffee output is produced by smallholders, who have beensteadily increasing the area planted from less than 322,000 ha in 1968 to morethan 1.1m ha by 1999/2000. However, poor productivity remains a problem,and yields are commonly as low as 650 kg per hectare. By contrast Vietnam hasonly 350,000 ha under cultivation but achieves yields in the order of 1.2tonnes per ha over large parts of this area.
Some of Indonesia’s most remote Moluccan islands were once at the centre ofthe global spice trading routes. The lure of these spices led the Dutch toIndonesia and ushered in nearly 350 years of colonial rule. Ternate, Tidore and
later Ambon were the source of cloves, and the Banda islands were the onlysource of mace and nutmeg. Pepper was also an important commodity in Javaand Sumatra. Now these once famous islands are wracked by religious violence,and the spice trade has diminished in importance. The commodities producedremain the same though. Pepper production was 52,100 tonnes in 1999 andnutmeg production in the same year was 19,300 tonnes. Clove production in1999 was 59,000 tonnes, most of which was consumed by the domestic kretek(clove-spiced cigarettes) manufacturing industry. Clove farmers are now free ofthe marketing monopoly granted to a semi-official agency headed by a son ofPresident Soeharto in late 1990. The monopoly was dismantled as part of theprogramme agreed with the IMF in 1998, although only after it had costIndonesia’s clove farmers an estimated US$761m in lost revenue between 1992and 1997.
A host of other crops are of great importance to smallholders in differentregions of the country. Cocoa, coconuts, and cashew nuts are of particularimportance in parts of Sulawesi; tea is grown in Java; North Sumatra andCentral Sulawesi have acquired a reputation as producers of passion fruit. Mostproduction is in the hands of smallholders. In 2000 production of cocoa was471,000 tonnes. In 1999 production of coconuts and cashew nuts were 2.6mtonnes and 76,000 tonnes respectively, while tea yields were 144,945 tonnesfrom smallholdings and 31,255 tonnes from large estates.
Indonesia is the principal exporter of wood and wood products in South-eastAsia. Plywood is the main export as a result of government regulations thatfirst banned the export of roundwood in 1980 and then the export of roughsawn wood in 1985. Both bans were later replaced with prohibitively highexport taxes, which were lowered to 20% in early 1999 at the behest of the IMF.
By law all forest resources come under state ownership, but exploitation rightsare leased to private companies under the forest utilisation right system (HakPengusahaan Hutan, HPH). According to official statistics, the number ofoperating forest concessions peaked at 579 in 1991. Since then the number hasdeclined, falling to 427 in 1997/98, although many “unoperational”concessions continue to work under opaque administrative classifications andas subcontractors to state-owned forest companies, which take over andrehabilitate (in practice this often means clear-fell) concessions exhausted bythe private sector.
Indonesia has suffered massive deforestation in recent years, but opaquestatistics make it virtually impossible to determine exactly how much forestremains. Forest loss has been in the order of 1.6m ha per year since 1985, butin the late 1990s this rose to as much as 2.4m ha per year. The wood-processingindustry has been allowed to expand without reference to the available supplyof timber, resulting in vast overcapacity. The shortfall in the official timbersupply is being met by illegal logging, which has reached epidemic proportionsand is even thought to have led to lower international prices for Indonesianplywood. The forestry companies blame the number of levies on the industryand the recent imposition of value-added tax (VAT) at 10% on logs and other
forest commodities for the prevalence of illegal logging. According to theMinistry of Industry and Trade, illegal log exports have reached 10m cu metresper year, worth US$360m at 2000 prices. In 1998/99 the official supply ofroundwood was 19m cu metres, having fallen from 29.5m cu metres in1997/98. At the same time output from the wood-processing industry was inthe order of 50m-60m cu metres in roundwood equivalent volumes.
As large diameter logs required for plywood have become more scarce, sotimber companies have turned their attention to pulp and paper production.The pulp industry has expanded aggressively in recent years, rising from aninstalled production capacity of 1.1m tonnes in 1991 to 4.9m tonnes in 2000.Plantation development has not kept up with the expansion of the industry,and pulp mills have come to depend on small diameter logs recovered fromclear-felling operations in the natural forest for a supply of fibre. As a result, thevolume of roundwood coming from clear-felling permits rose from 20% of theofficial timber supply in 1995/96 to 34%, in 1997/98. The use of fire to cleardebris from land after clear-felling operations is the main cause of the vastforest fires that occur annually in Sumatra and Kalimantan.
Fishing in Indonesia accounted for 2.7% of constant price GDP in 2000. Theproductivity of the reef fishery is threatened by the use of destructive fishingtechniques using explosives and cyanide. The commercial effort is focused onhigh-value species like prawns and tuna, which are exported to countries in theAsian region. The government estimates that the total potential fishery catch is6.2m tonnes per year, and in 1999 total catch was 3.95m tonnes. The WorldBank and the UN Food and Agriculture Organisation (FAO), however, arguethat the national catch is understated and the potential yield overestimated,leaving little room for further expansion in commercial fisheries. The fisheriesin western Indonesia are operating at (or above) maximum sustainable yields.If there still is any potential for expansion, it is to be found in the easternregion of the country.
In 1999 an agreement expired that allowed foreign firms to fish in Indonesianwaters if they chartered boats from local firms, effectively closing the sector toforeign involvement. However, poaching by foreign vessels has become aserious problem, particularly off Sumatra, Northern Sulawesi and in the Natunasea, which is costing the government an estimated US$2bn in lost revenueeach year. Regulations allowing foreign vessels to operate legally with permitsare currently under preparation.
Mining and semi-processing
Indonesia is well endowed with mineral resources. Because of the capitalintensity and expertise required for mineral ventures, the government hasencouraged foreign investment. High-profile mining projects have been caughtup in the euphoria of decentralisation and subject to predatory attacks by localpoliticians seeking district and provincial revenue. Past land acquisitions,conducted with the assistance of the New Order security forces, are alsoresurfacing in numerous disputes with local communities. Furthermore the
January 2001 regional autonomy law conflicts with current mining law and anew law is needed to set out the autonomy policy. This uncertain legalenvironment coupled with rising security concerns has led to a 90% fall inexploration spending by mining companies since 1997. (See Reference table 15for historical production data for selected minerals.)
Indonesia is one of the world’s leading producers of tin, with extensiveonshore and offshore deposits estimated at well over 1m tonnes. These arelocated mainly on the islands of Bangka, Belitung and Singkep off the easterncoast of Sumatra. The industry is dominated by the state-owned tin miningand processing company, PT Tambang Timah, which accounts for 80% of thecountry’s tin production. Production in 2000 rose to 51,600 tonnes comparedwith 47,800 tonnes in 1999.
Indonesia’s known reserves of bauxite are estimated at 500m tonnes. Becauseof the remoteness of the Kalimantan deposits, only those in the Riau islandshave so far been exploited commercially. In the absence of a domestic aluminaextraction industry, almost all bauxite production is exported.
Indonesia has been a large-scale producer and exporter of copper since 1973,when Freeport Indonesia, a wholly-owned subsidiary of a US company,Freeport-McMoRan, started mining operations on the Ertsberg mountain inPapua (Irian Jaya). With the Ertsberg mine having been virtually depleted, thecompany shifted production to the nearby Grasberg mine in January 1990, andhas continued to invest substantial amounts in the development of this open-cast operation. A new copper mine operated by PT Newmont Nusa Tenggara, asubsidiary of the US firm, Newmont Mining, on the island of Sumbawa in WestNusa Tenggara, became operational in 1999. It is capable of processing 160,000tonnes of ore a day.
Indonesia became an important producer of nickel in the mid-1970s, whentwo large deposits were developed on the island of Sulawesi. Almost all of thecountry’s output of nickel is exported, with only a small proportion used forthe local manufacture of stainless steel. The total production of nickel ore hasincreased since the mid-1980s, peaking at 3.4m tonnes in 1996.
More than 125 contracts of work to develop gold and silver deposits weresigned between 1985 and 1988. As a result, new deposits were discovered anddeveloped. In addition, large associated deposits at the Freeport copper mine inPapua have boosted output. Production of gold rose from 2,391 kg in 1983 to74,291 kg in 2000. The country’s production of silver has also increasedsharply, from 35,293 kg in 1983 to 114,245 kg in 2000.
Manufacturing
Indonesia’s manufacturing sector is diverse. Much of it is made up of small-scale and cottage industries, mainly producing consumer goods for thedomestic market, which employ the bulk of the industrial labour force.However, in recent years a growing medium- and large-scale componentemerged, which, by the time that Indonesia became engulfed in economic
Indonesia’s manufacturingbase is highly diversified
crisis in late 1997, accounted for most of the sector’s gross output and valueadded (91% in 1996).
The medium- and large-scale segments of the manufacturing sector weredominated by state-run industrial concerns until the mid-1960s. Since then theownership structure has become more balanced as a result of a gradual shift ofpublic investment away from manufacturing, and because of the large volumesof private investment stimulated by the relatively liberal laws governingforeign and domestic private investment introduced in 1967 and 1968.
Manufacturing sector
1999 2000
Outputa (Rp bn) 287,703 336,053
Real growth (%) 3.8 6.2
Employmentb (m) 10.1 10.1
a Current market prices. b 1995 census.
Sources: Central Bureau of Statistics, Indikator Ekonomi; Bank Indonesia, Annual Report, 2000.
As a result of this heavy investment, the manufacturing sector grew at annualrates well in excess of the rate of overall GDP growth. Its share of constantprice GDP rose from 8.3% in 1965 to 20.8% in 1991, when it surpassed that ofagriculture (19.6%) for the first time. By 2000 it accounted for 26% of GDP.(Reference table 16 provides historical data on manufacturing production.) Thedecline of oil and gas export revenue during the early and mid-1980s forcedthe government to promote alternative exports in general, and manufacturedexports in particular. As a result of several policy packages, between 1983 and1999 the value of manufactured exports increased in absolute terms fromUS$3.2bn to US$32.2bn and in relative terms from 15.2% of total exports to77.7% of total exports.
Indonesia has developed a range of heavy industries. Its iron and steel industryis centred on PT Krakatau Steel, an integrated iron and steel producingcomplex at Cilegon in West Java, which began production in 1973. Analuminium smelter, which is powered by the nearby Asahan hydroelectricproject, has been operating since it was established in North Sumatra in 1985by PT Indonesia Asahan Aluminium (PT Inalum), a joint venture between theJapanese Overseas Economic Co-operation Fund (OECF) and the Indonesiangovernment. The oil refining industry is dominated by the state-owned oilcompany, Pertamina, which owned and operated eight major refineries with acombined installed capacity of some 1m barrels/day at the end of 1999.
After being based almost entirely on the production of fertilisers until the mid-1980s, the petrochemicals industry began producing a large variety ofproducts, including benzene, methanol, formic acid, paraxylene, polyethylene,polypropylene, polystyrene and purified terephthalic acid. To meet demandgenerated by the rapid pace of development since the 1970s, there has been arapid expansion of domestic cement capacity and output. From three plantswith a combined capacity of 645,000 tonnes/year in 1969, the cement industryexpanded and had a total production capacity of 27.3m tonnes by 1996.
Demand, however, has slumped since the crisis. In 1997 domesticconsumption was 28m tonnes; by 1999 it had fallen to 18.4m tonnes.Nevertheless, exports have remained strong, and in 2000 reached a total of7.4m tonnes (up from only 3.8m tonnes in 1998) valued at US$138m.Domestic consumption recovered strongly in 2000: according to theIndonesian Cement Producers Association, domestic consumption was 22.4mtonnes, up by more than 19% on 1999.
The pulp and paper industry, which initially consisted of a few state-ownedcompanies, has expanded dramatically since the mid-1980s, when it began toattract growing private investment interest. Many private Indonesian businessgroups have entered the industry in the past decade. By the end of 1999 theindustry consisted of 17 pulp mills and 88 paper mills, with a combinedannual production capacity of 4.9m tonnes of pulp and 10.7m tonnes of paper.
The textiles and garments industry was initially developed as a heavilyprotected producer of import substitutes. By the early 1980s, however, asdomestic demand began to be sated, the industry embarked on a major exportdrive. This resulted in a rapid increase in exports from negligible levels in 1980to 1.6m tonnes worth US$6.7bn in 2000, making the industry the secondlargest earner of foreign exchange after petroleum.
Indonesia’s motor vehicle industry was launched in the early 1970s with thelocal assembly of motorcycles, passenger cars and commercial vehicles fromimported completely-knocked-down (CKD) kits. The industry was traditionallyheavily protected but a trend towards tariff liberalisation was suddenly reversedin February 1996, when a presidential decree was issued to promote thedevelopment of a “national car”, a project granted to a company, PT TimorPutra Nasional, owned by President Soeharto’s youngest son. At the end of1995 the industry consisted of assemblers of 18 marques of four-wheeledvehicles. Sales reached 392,203 units in 1997, but plummeted to 68,413 unitsin 1998. The Automotive Deregulation package issued in 1999 is part of thereason behind the rapid growth in car sales in both 1999 and 2000. Importersare now allowed to import not only luxury cars but also all other types of carsin CBU (completely built-up) condition. In 2000 domestic car sales reached342,242 units, a return to pre-crisis levels.
In pursuit of ambitious plans to develop manufacturing capacity for aircraft,ships of various kinds and other high-technology products, a specialgovernment agency, Badan Pengelola Industri Strategis (BPIS), was set up in1989 under the chairmanship of the then minister of state for research andtechnology, Bacharuddin Jusuf Habibie, to oversee the development of these“strategic” industries. It was assigned control over a number of state-ownedenterprises in the high-technology field, including: an aircraft manufacturer,Industri Pesawat Terbang Nusantara (IPTN); a shipbuilder, PT PAL; a steelmaker,PT Krakatau Steel; a munitions manufacturer, PT PINDAD; and atelecommunications equipment company, PT INTI. A number of theseindustries, including the high-profile IPTN, have huge debts and are nowvirtually dormant as a result of budget cutbacks agreed with the IMF.
The previously high levels of economic growth in general, and investmentgrowth in particular, provided a strong stimulus for the construction industry,which received a steady flood of orders for infrastructural, industrial, housebuilding and other development-related projects. Like the manufacturingsector, construction has recorded annual growth rates well in excess of theoverall rate of GDP growth. Its average annual growth rate was 11.9% in realterms between 1973 and 1983 and 7.2% between 1983 and 1993. By 1996 itsshare of constant price GDP had risen to almost 8%. This impressive growthrate was accompanied by an equally impressive development of the sector, asdomestic architects, surveyors, engineers and contractors increased in numberand acquired a higher degree of professionalism. However, the sector was hardhit by the economic crisis. Construction contracted by 36.4% in 1998, makingit the worst performing sector in the economy, and it has only recently beganto claw back some of this lost ground. (See Reference table 17 for historical dataon house building.)
Financial services
The reform process in the banking industry began in 1983 with the aim ofimproving the mobilisation of domestic savings (see box below). During the1980s the banking sector was deregulated by the removal of direct BankIndonesia (the central bank) controls on lending and interest rates. To replacethem the central bank created an institutional framework that would allow itto exercise more indirect and market-oriented forms of monetary management.This involved the introduction of a lender-of-last-resort facility, as well as thecreation of discount instruments known as Bank Indonesia Certificates(Sertifikat Bank Indonesia, SBI) and a new set of money-market securities (SuratBerharga Pasar Uang, SBPU), which could be traded within the banking systemto help to regulate liquidity.
Further reforms in 1988 removed barriers to the establishment and expansionof privately owned domestic banks and foreign banks, setting off an explosionof new banks. Measures taken in the early 1990s to raise prudential standards,encourage mergers and increase bank transparency did little to stem adeterioration in the asset quality of the proliferating banks (of which therewere 238 in October 1997). The scale of the banking sector’s problems wasexposed by the onset of Indonesia’s economic crisis in the second half of 1997.Most banks had violated prudential regulations covering their capital adequacyratios (CARs, the minimum amount of capital that has to be held by a bankrelative to its risk-weighted assets), their loan/ deposit ratios (LDRs), legallending limits (LLLs, on loans to single borrowers or groups of relatedborrowers, as well as borrowers with insider links to the issuing bank), andlimits on their net open position (NOP, of banks with access to offshore sourcesof funds, to restrict their exposure to exchange-rate risks).
From July 1997 a combination of factorsthe collapse of the rupiah, thedownturn in the real economy, high interest rates, negative interest spreads,and rumoured and actual closuresbrought the banking system to its knees. Itsurvived only through large injections of liquidity support from the centralbank. The decision to close 16 banks in November 1997 without providing thesupport of a deposit insurance scheme set off a run on bank deposits across thecountry. The situation was only partly remedied in January 1998 by agovernment guarantee of domestic bank deposits and liabilities, and theestablishment of the Indonesian Bank Restructuring Agency (IBRA) torehabilitate the banking system. A total of 68 banks have been closed since1997, 12 have been nationalised and 14 banks have been merged into twolarger entities. Recapitalisation of the banking system is now complete, at acost of Rp431.8trn as of end-December 2000, but the sector is still facingsubstantial difficulties.
Seven state banks historically dominated the banking industry. Four of thesehave now been merged into Bank Mandiri, which commands approximately30% of the commercial banking market. Until the late 1980s the fivecommercial state banks accounted for 80-90% of all outstanding bank credits.The other two state banksthe specialised savings and development banks,Bank Tabungan Negara and Bapindofaced almost no competition from theprivate sector. Despite the mushrooming of private banks after the 1988reforms, the seven state-owned banks continued to dominate the commercialbanking industry: as of mid-1997, on the eve of the financial crisis, theyaccounted for about 30% of total outstanding deposits and 35% of totaloutstanding credits of the commercial banks. (See Reference table 19 fordetailed historical banking statistics.)
The total assets of privately owned domestic commercial banks increased fromRp10.5trn (US$6bn) at the end of 1987 to slightly less than Rp230trn by mid-1997, when they accounted for 53% of the outstanding credit and 64% of theoutstanding deposits of the commercial banking sector. Foreign banks, whichhave been permitted to operate in Indonesia since February 1968, were alsogiven a boost by the October 1988 package, which allowed them to expandtheir activities and to set up joint ventures.
Developments in the banking industry, 1983-2000
June 1983: Banks are permitted to set deposit rates and are no longer subjectto credit ceilings set by Bank Indonesia. Discount instruments and a new set ofmoney-market securities are introduced.
October 1988: New regulations are issued easing entry to the sector, reducingreserve requirements and lifting restrictions on bank and non-bank activities.Prudential regulations covering related-party lending and capital requirementsare tightened.
December 1988: A package focusing on the capital markets and non-bankfinancial institutions is issued. The package gives a strong impetus todevelopment of the stockmarket by, among other things, extending the 15%withholding tax levied on dividend payments to domestic bank deposits.
March 1989: A further package refines the prudential regulations announcedin October 1988. An absolute limit on external borrowing is replaced with arestriction on the net open foreign-exchange position of banks equivalent to25% of their equity.
January 1990: The role of directed credit is further reduced.
February 1991: Measures are introduced to improve the banking industry’sprudential standards and banking supervision, including the establishment oftimetables for banks to strengthen their capital base to meet the capitaladequacy ratio (CAR) of 8% recommended by the Bank for InternationalSettlements (BIS).
March 1992: A new banking law simplifies the structure of the bankingsystem.
May 1993: Prudential standards are changed to stimulate lending in the shortterm; phased deadlines are set for banks to meet prescribed legal lending limits.
June 1995: New tax regulations are introduced to provide incentives for bankmergers and to encourage consolidation.
August 1995: Bank Indonesia announces plans to establish a depositprotection scheme.
September 1995: The minimum paid-up capital requirement for banksseeking a foreign-exchange licence is raised from Rp50bn (US$22.2m) toRp150bn in order to encourage mergers and strengthen commercial banks’capital bases. Changes are also announced to the legal limits for loans toconglomerates, with a view to increasing the transparency of the bankingindustry.
September 1996: Bank Indonesia raises the commercial banks’ minimumreserve requirement from 3% to 5%.
November 1997: In the wake of the first agreement with the IMF, 16 banksare closed, leading to a loss of confidence in the banking system as a whole.
January 1998: The Indonesian Bank Restructuring Agency (IBRA) is createdto rehabilitate ailing banks. Bank Indonesia announces that it will guarantee allnational banks’ deposits and liabilities. Some 54 banks come under IBRAsupervision.
August 1998: Bank Indonesia announces a package of measures for therecapitalisation of banks, and the improvement of banking regulations andlaws under which the government will put up Rp4 for every rupiah of freshcapital injected into banks included in the recapitalisation programme. Inreturn for this capital (which is to be funded by bond issues), the governmentwill receive equity stakes in the banks. Bank owners then have three years toredeem part or all of the government stake.
March 1999: The government announces the closure of 38 domestic privatecommercial banks. A further seven are nationalised and nine selected forrecapitalisation. Nepotism is alleged to have influenced the decision tonationalise the seven banks.
May 1999: The first bond issue, worth Rp157.6trn (US$19.4bn), takes place tobegin recapitalisation.
July 1999: IBRA announces that assets worth Rp100trn-110trn have been puton sale to fund bank recapitalisation. The assets will be sold off over a four-yearperiod. The deal falls through later in the year, seriously damaging foreigninvestor confidence in the sector.
July 1999: Bank Mandiri is formed out of the merger of four state banks, BankBumi Daya, Bank Dagang Negara, Bank Pembangunan Indonesia and BankExim.
July 1999: The details of Standard Chartered Bank’s (UK) bid to acquire a 20%stake in Bank Bali are finalised. Due diligence audits uncover financialirregularities, which develop into a corruption scandal with serious politicalrepercussions. The deal falls through later in the year, seriously damagingforeign investor confidence in the sector.
January 2000: Auditors pass a “no-opinion” verdict on Bank Indonesia’sbalance sheet, casting doubt on the financial health of the central bank.
February 2000: Trading in recapitalisation bonds begins. A lack of investorinterest prevents banks from selling these bonds to increase their liquidity.
June 2000: The Bank Indonesia governor, Sjahril Sabirin, is detained onsuspicion of involvement in the Bank Bali scandal.
July 2000: The legal merger of Bank Danamon with Bank Tiara Asia, BankPDFCI, Bank Duta, Bank Rama and Bank Tamara, Bank Pos Nusantara, BankNusa Nasional, Jaya Bank Internasional, and Bank Risjad Salim is completed.
August 2000: The main suspect in the Bank Bali scandal, Djoko S Chandra, isacquitted on a legal technicality. The government had promised donors tobring those who violated the law to justice, and the decision is a further blowto the shattered reputation of the country’s legal system.
October 2000: A further two ailing banks are closed, bringing the totalnumber of banks liquidated since 1997 to 68.
November 2000: Five central bank directors resign to take "moralresponsibility" for the liquidity credits scandal, of which an estimated Rp138trn(from a total of Rp144.5trn) was subject to abuse. Those resigning do notinclude the Bank Indonesia governor, Sjahril Sabirin, who was held underhouse arrest for six months from June 21st 2000 on suspicion of involvementin the Bank Bali scandal.
March 2001: The House of Representatives (DPR) approves plans to sell 40%of the government's shares in Bank Central Asia (BCA) and a 51% stake in BankNiaga.
April 2001: A panel of experts sits to conduct an independent review ofproposals to amend the 1999 central bank law. The controversial plan toamend the law, at the cost of Bank Indonesia independence, was prominentamong a number of factors behind the IMF's decision to suspend aid toIndonesia.
The long-moribund Jakarta Stock Exchange (JSX) was relaunched in 1977, butit was not until the announcement of changes to the taxation system that putdividend and interest income on an equal footing in the October 1988financial reform package that the market began to stir. The JSX index rose from83 at the start of 1988 to a new record of 682 in April 1990. The number oflisted firms rose to 104 during this period. These developments wereaccompanied by the inauguration of a secondary over-the-counter (OTC)market in February 1989 and the establishment of a privately owned stockexchange in Surabaya in June 1989. The fortunes of the capital market turnedin mid-1990, and by early 1992 the JSX index had slumped to about 250. In anattempt to support its revival, the government introduced a number ofmeasures to tighten supervisory procedures and enhance public confidence inthe exchange, which was privatised in April 1992. These measures led to arecovery that, after wide fluctuations, eventually brought the index to a newpeak of 725 by the end of June 1997.
The region was then plunged into an economic crisis. Despite efforts to liftinvestor confidence, for example by a measure in September 1997 abolishingthe 49% cap on foreign ownership of Indonesian initial public offerings (IPOs),the general downward trend of the index continued. In mid-September 1998the index fell to 292, almost 60% below its level at the end of June 1997. Byend-1998 the index had recovered to 398, and in the wake of the election ofAbdurrahman Wahid to the presidency had risen to 676 by the end of 1999.However, it remained extremely vulnerable to political instability and asdoubts about President Abdurrahman’s capacity to deal with the country’smyriad problems increased, the index slid back during the course of 2000,ending the year at 410. Over the course of 2001 the market continued to fallhitting a low of 343 on April 20th but the prospect of Mr Abdurrahman’simpeachment, the new Megawati government and subsequent resumption ofIMF lending enabled the market to recover modestly to reach 441 on August 24th.(See Reference table 18 for historical data on the JSX.)
Other services
The domestic trade (retail and wholesale) and the hotels and restaurants sectorsare the most important other services in the economy, accounting for 15.2% ofGDP in 2000. Growth in these sectors in recent years has been broadly in linewith the overall rate of growth in GDP.
The domestic trade sector is growing steadily despite a number of officialcontrols. These were intended to protect indigenous traders from competitionfrom resident ethnic Chinese and, to a lesser extent, ethnic Indian and Arabbusiness communities. Restrictions include a prohibition on foreigninvolvement in retail trade outside major urban centres and a number ofrestrictions on the participation of ethnic minority communities in rural trade.These latter regulations have been increasingly flouted in recent years, butalthough the government has turned a blind eye, political sensitivities haveprevented the formal deregulation of the sector.
Large amounts of foreign and domestic investment funds were channelled intothe hotel and tourism sector from the mid-1970s onwards. However, theincrease in tourist arrivals fell below expectations, with 592,000 recorded in1982. The prospect of declining export revenue from oil prompted acomprehensive review of the sector. In April 1983 visa requirements were liftedfor tourists from most west European countries, all Association of South-EastAsian Nations (ASEAN) countries and many countries of the Pacific area,including the US and Canada. Further efforts to promote tourism werelaunched in subsequent years, and the period from 1993 has been designatedVisit Indonesia Decade by the Department of Culture and Tourism.
From 1986 the growth of the industry accelerated sharply, with the number oftourists visiting Indonesia increasing by an annual average of 19.7%, from825,000 in 1986 to an estimated 5m in 1995. In the same period touristspending increased by 24.1% a year, from US$590.5m to about US$5.1bn. Inthe following two years, although earnings continued to rise, the number oftourist arrivals stabilised at around 5m. From mid-1997 tourist visits started todrop, falling to only 3.8m people in 1998, 3.9m in 1999 and 4.2m in 2000 as aresult of rising civil unrest and political instability. In 2000 earnings fromtourism were US$4.8bn, down from a peak of US$5.3bn in 1997.
After the oil price increases of 1973-74, Indonesia’s external trade wasdominated by oil and gas exports, which consistently enabled it to register asurplus on the merchandise trade account, even though the non-oil and gasaccount remained in deficit. Until the early 1980s the growth of the overallsurplus permitted the rising deficit on the non-oil and gas account to beoverlooked. After the slump in global oil markets in the mid-1980s, a majoreffort was launched to reduce the non-oil and gas deficit, mainly by promotingnon-oil and gas exports. This was very successful and the resulting surgepushed the non-oil and gas balance into surplus in 1993 for the first time inover 20 years—a state of affairs which has since been maintained, with the soleexception of 1995.
Source: Central Bureau of Statistics, Indikator Ekonomi.
A breakdown of exports by commodity reveals a growing diversification of theproduct mix, with 30 separate products achieving export revenue of US$100mor more in 2000. Within the category of non-oil and gas exports, industrialgoods account for 80% of the total and grew 15% in value in 2000. There wasparticularly strong growth in the export of electronic goods (71% year on year)and machinery and mechanical appliances (77% year on year) but traditionalsectors also performed well. Textiles (18% of industrial exports) grew 6.4%, andpaper (11% of the total) grew 14% as a result of higher international prices.(Reference tables 20 and 21 show the value of exports and imports by productgroup; principal exports are shown by value and volume in Reference tables 22and 23.) The data also show that oil and natural gas continue to make animportant contribution to Indonesia’s exports, accounting for 23.1% of thetotal value of exports in 2000.
Among imports, raw materials and other intermediate goods have been theleading category (see Reference table 24 for historical data on imports bycommodity group), followed by capital goods. This reflected the high rate of
investment and manufacturing growth taking place in the country untilrecently. It also reflected the heavy dependence of many of Indonesia’smanufactured exports on imported inputs, which made increasingly largeswathes of manufacturing industry vulnerable to a rupiah devaluation.Growing levels of disposable income led to a steady increase in consumergoods imports throughout the early 1990s until the Asian financial crisis sawthe value of consumer goods fall by 32% from US$2.8bn in 1996 to US$1.9bnin 1998.
Indonesia has a relatively open economy, although the import of certain goods isprohibited or limited by quota restrictions, while other goods may be imported only byapproved importers. Goods particularly affected are those for which adequate domesticproduction capacity has been installed. Tariffs and surcharges are also imposed to regulatethe flow of imports, which are divided into four categories ranging from those regardedas essential to unclassified. Duties levied on these imports range from zero to 100%.
Other surcharges ranging from 50% to 400% may also be imposed, often dependingon how competitive the imported product is with its Indonesian counterpart. Importedgoods may also be subject to value-added tax (VAT) and an additional tax on luxurygoods. Since May 1986 the restrictions on imports of capital and intermediate goodshave been eased progressively in order to enable domestic exporters to import morecompetitively priced inputs from abroad.
The business of importing, exporting and distribution is generally in the hands ofIndonesian nationals, although some foreign companies with direct capital investmentsin Indonesia may operate under a special licence. With a few exceptions, letters of creditare required for all imports by private enterprises. Export companies are registered bythe government to enable it to record the foreign-exchange proceeds from the export.Export duties are levied on a number of goods, and exporters usually require theirbuyers to raise letters of credit. Bonded warehouses exist where imported goods may beheld for re-export.
In January 1982 the government introduced a counter-purchasing policy wherebyforeign companies awarded contracts (outside the oil and natural gas sector) of a valueexceeding Rp500m (US$756,000 at the exchange rate prevailing at the time) mustarrange for exports of Indonesian products equivalent in value to the equipment andproducts that they bring into the country. This ruling applies only to governmentprocurement and construction contracts, and therefore exempts joint ventures withprivate or state-owned Indonesian companies, or projects financed by loans atpreferential interest rates. The policy met with opposition, but has been graduallyaccepted as it plays only a marginal role in Indonesia’s overall trade flows.
In 1999 the value of exports fell by 0.4% when compared with the low base of1998 but it was only as a result of the beginning of the rise in international oilprices that a greater contraction in exports was prevented. Nevertheless, thetrade balance remained in surplus throughout 1999 as a result of a sharpcompression of imports, which fell in value by 12.2% year on year. Accordingto Bank Indonesia (the central bank), the trade surplus rose 25% in 2000 toUS$25.1bn primarily owing to persistently high international oil and gas pricesbut also to a rise in the volume, although not the value, of non-oil and gasproducts. Revenue from exports rose 22% in 2000 to reach US$62.5bn, withthe value of non-oil and gas exports rising 15% to US$47bn. The rise in non-oiland gas exports reflected strong demand from the US and from Asia (excludingJapan). The cost of imports also rose strongly, up by 22%, in line with somerecovery in domestic economic activity and also because of the relatively highimport content of Indonesia’s exports. The growth in consumer goods was
particularly strong, rising 63%, although coming from a low base. Rawmaterials and intermediate goods are still by far the largest category of imports,accounting for 73% of the non-oil and gas total, and these grew by 21% in2000 reflecting the rise in manufacturing activity.
Source: Central Bureau of Statistics, Indikator Ekonomi.
Indonesia’s external trade has traditionally been heavily biased towards threecountries, Japan, the US and Singapore, which still accounted for over 47% ofexports and 37% of imports in 2000. (Detailed historical data on Indonesia’smain trading partners are given in Reference table 25.) However, Indonesia hasactively been trying to diversify export markets. In 2000 Asian countriesabsorbed 57% of Indonesia’s non-oil and gas exports with particularly stronggrowth in exports to Association of South-East Asian Nations (ASEAN) markets.
Main trading partners, 2000
Exports to: % of total Imports from: % of total
Japan 23.2 Japan 16.1
US 13.6 Singapore 11.3
Singapore 10.6 US 10.1
Malaysia 3.2 Australia 5.1
Netherlands 3.0 Germany 3.7
Sources: Central Bureau of Statistics, Indikator Ekonomi.
Invisibles and the current account
Although Indonesia has consistently recorded a surplus on its merchandisetrade account, all the main invisibles components have been in deficit in mostyears. (See Reference table 26 for IMF estimates of the balance of payments andReference table 27 for national estimates.) The deficit in the transport sector ismainly explained by the small size of Indonesia’s ocean-going fleet. Netearnings on travel also recorded consistent deficits until fiscal year 1985/86(April-March); this trend has been reversed since 1986/87 as a result of thegrowth of tourism. The tourism sector generated US$4.8bn in foreign-exchange
Trade within Asia has beengrowing rapidly
The invisibles account hasgenerally been in deficit
in 2000. Net flows of interest and investment income have been negative andrising rapidly in recent years as a result of mounting external debt-servicecommitments, and the increasing repatriation of profits on foreign direct andportfolio investments. According to Bank Indonesia, the invisibles accountregistered a deficit of US$14.9bn in 1999 but this rose to US$17.4bn in 2000owing to higher freight costs from increased import activity, larger contractsharing payments to production sharing contractors (principally in the oilsector) and higher interest payments on foreign debt.
Relatively small amounts of unrequited private and official transfers, primarilyin the form of remittances from Indonesian workers abroad and grants-in-aid,have been insufficient to offset the excess of the invisibles deficit over themerchandise surplus. Until recently the current account had consistently beenin deficit, with surpluses only in the three oil-boom years of 1974 and 1979-80.However, the collapse in merchandise imports at the time of the 1997-99recession generated a large surplus on the merchandise trade account and morethan offset the deficit on the income and services accounts, enablingIndonesia’s current account to move into surplus in 1998. Despite rising debt-servicing costs, the strong trade performance has meant the surplus rose inboth 1999 and 2000 to US$5.8bn and US$7.7bn respectively (according toEconomist Intelligence Unit estimates for 2000).
Current account, 1999(US$ m)
Merchandise exports fob 51,292
Merchandise imports fob –30,598
Trade balance 20,644
Services, net –6,974
Current-account balance 5,785
Sources: IMF, International Financial Statistics.
Capital flows and foreign debt
For most of the past 30 years Indonesia has relied primarily on concessionalofficial borrowing to meet its financing requirement (current-account deficitplus debt repayments). This aid has been disbursed mainly through twoconsortia of official donors: the Inter-governmental Group on Indonesia(IGGI), which was established in 1966 under the chairmanship of theNetherlands; and from 1992, after a falling out with the Dutch over East Timor,the Consultative Group for Indonesia (CGI), chaired by the World Bank. From1992 to 2000 the CGI has made annual commitments in the order of US$5bn,with the exception of the crisis year of 1998 (US$7.9bn) and to a lesser extentin 1999 (US$5.9bn) (see The economy: Economic policy; Reference table 29provides historical data on net official development assistance.)
The capital account remained in deficit in 2000, according to Bank Indonesiadata. There was a fall in the surplus of net official capital flows to US$3.8bn,compared with US$5.4bn in 1999. There was also a sharp drop in foreign
programme aid, particularly from the Asian Development Bank (ADB), theWorld Bank and Japan, as well as a drop in food aid. This was partially offset bya rise in project loans from the CGI and non-CGI sources which rose toUS$2.7bn, up from US$2.4bn.
External debt(US$ bn)
Apr 1999 May 2000 Nov 2000
Public sector 77.73 85.74 84.48 Government 67.33 75.09 74.56 State enterprises 10.40 6.00 5.69 Banks 4.76 4.64 4.22
Total 146.87 141.81 140.62 of which: corporate debta 68.73 56.63 – bank credit 63.50 53.97 – domestic securitiesb 5.23 2.66 – bank debt 10.81 10.09 –
a Includes state enterprise debt. b Held by non-residents.
Sources: Bank Indonesia.
From the late 1980s, Indonesia’s debt profile began to change, which increasedthe country’s vulnerability to the regional currency crisis when it began inmid-1997. Non-guaranteed private and short-term debt began increasingly todominate the debt stock on a scale that was partly masked by official data,which understated the true value of these components. By the end of 1997,according to World Bank data, 42% of private debt totalling US$77.3bn wasshort term, with an average maturity of about 18 months. Private debtaccounted for 57% of Indonesia’s total stock of debt.
Since the crisis began, the composition of the debt stock has shifted backtowards a greater emphasis on public medium- and long-term debt and awayfrom private debt of all kinds. Between the end of April 1999 and the end ofNovember 2000, according to Bank Indonesia data, Indonesia’s external private-sector debt fell by US$13bn, while public-sector debt rose by nearly US$7bndespite falls in state enterprise and state bank debt. The decline in privateforeign debt was mainly a result of debt repayment by non-bank corporations.The rise in the value of the public-sector debt stock was despite the weakness ofthe yen in relation to the US dollar which reduced the dollar value of Yen debt.Yen denominated debt accounts for 22% of public-sector debt.
This shift has occurred despite the great difficulties of restructuring the privatedebt in particular. Indonesia’s private debt was heavily concentrated in a largenumber of corporate borrowers rather than in a small number of banks,making any solution extremely complex. Political interference in the debtrestructuring process and an uncertain policy environment have alsocontributed to the long delays witnessed. (Reference table 28 gives details ofdebt from the World Bank’s Global Development Finance.)
Debt servicing now places a considerable burden on government and corporatefinances. Official debt maturing in 2000 amounted to US$4.5bn but US$2.5bnof this was rescheduled via the Paris Club. In April 2000, a further agreementwas signed with the Paris Club involving the rescheduling of US$5.8bn inprincipal payments on debt maturing between April 1st 2000 and March 31st2002. An additional US$340m in commercial debt was restructured via theLondon Club framework. Private-sector debt is also being restructured underthe auspices of the Jakarta Initiative Task Force which rescheduled nearlyUS$10bn in debts between 1998 and 2000.
The government attempted to reduce its reliance on debt to meet its externalfinancing needs by promoting increased foreign investment. This resulted inthe adoption of a series of policy packages to liberalise the regulationsgoverning both foreign direct investment (FDI) and foreign participation in thecountry’s capital markets since the mid-1980s; the most important of thesewere introduced in mid-1994.
Foreign investment policy
Beginning in 1966 the New Order government actively encouraged foreigninvestment. This was underlined by the promulgation of the relatively liberalForeign Capital Investment Law of 1967, which, with several amendments,continues to govern foreign private investment. It permits foreign companiesto invest in projects approved by the government, and to operate in Indonesiafor a period of up to 30 years with guaranteed rights of profit repatriation andprotection against expropriation.
In the 1970s and early 1980s the vast inflows of oil wealth reduced thegovernment’s need for foreign investment funds. Consequently, increasinglysevere conditions began to be placed on potential foreign investors. The rulesgoverning the employment of expatriates and the importation of machineryand materials were progressively tightened, the range of activities open toforeign investment was restricted, and rigid requirements were imposed withregard to local partnerships and equity divestments. These increasinglystringent requirements, combined with the growing prospect of stagnation inthe domestic market, resulted in a sharp decline in interest in privateinvestment from 1984 onwards.
Coinciding as it did with the tightening resource constraints imposed on thegovernment by the changing external economic environment, this investmentdownturn triggered a comprehensive reappraisal of the government’s foreigninvestment policy. In recognition of its increased dependence on directinvestment flows, the government launched an investment promotion drive. Itintroduced its first major package of deregulatory reforms in 1986, which hasbeen followed by further relaxation of the terms governing foreigninvestments. The number of sectors open to such investment has increasedsteadily, the minimum initial capitalisation requirements for foreigninvestment projects have been reduced, and restrictions on expatriateemployment and the use of imported inputs have been eased.
Successful efforts to reducedebt servicing
The government has soughtto rely more on investment
Under the new regulations, introduced gradually between 1989 and 1994,100% foreign equity ownership is permitted in most sectors subject to certainconditions. All investment applications outside the oil and gas, and financialsectors, which are governed by different procedures, must be submitted to theInvestment Co-ordinating Board (Badan Kordinasi Penanaman Modal, BKPM),the body responsible for processing applications. However, policy towardsforeign investment remains inconsistent. Proposals to ease restrictions on thesale of majority stakes in “strategic” industries to foreigners, and the easing ofvisa and residency restrictions, were accompanied by a decision in mid-2000 toincrease royalties on mining products. There is growing political and popularopposition to foreign acquisitions, stemming from resentment towards foreigninvolvement in some of the secessionist conflicts in recent years, perceivedoutside interference in economic policymaking since the 1997-98 crisis and apopular belief that state assets have been sold to foreigners at undervaluedprices. The granting of financial autonomy to regional governments, whichtook effect in January 2001, is a new source of uncertainty, despiteexhortations from the central government that the newly empowered regionalauthorities refrain from overburdening investors with unnecessary levies.
The value of FDI projects that were approved by the BKPM rose from a low ofUS$859m in 1985 to US$8.1bn in 1993, before surging to unprecedented levelsin 1994-97 (in the peak year, 1995, approvals reached US$39.9bn; see Theeconomy: Economic policy). However, there has always been a distinct gapbetween the value of FDI projects approved and the number or size of projectsimplemented. Historically, only about one-quarter of approved projects havebeen implemented. This trend has been particularly marked in the larger,capital-intensive projects, many of which get postponed or delayedindefinitely.
Foreign reserves and the exchange rate
As a result of large capital inflows, the overall payments account generallyenjoyed large surpluses, which was reflected in the accumulation of foreign-exchange reserves. (See Reference table 30 for historical data on foreignreserves.) This situation was dramatically reversed as a result of the economiccrisis. International reserves (using the broad definition of gross foreign assets,GFA) increased sharply from the late 1980s, from US$5bn at the end of 1988 toa peak of US$28.9bn at the end of June 1997. Reserves then fell sharply as aresult of a massive net outflow of (mainly private) capital, reaching US$16.6bnby the end of March 1998. Subsequent inflows of (mainly official) capital, andoil and gas revenue improved the position.
In May 2000, to comply with international reporting standards, BankIndonesia began calculating foreign reserves based on the concept ofInternational Reserve and Foreign Currency Liquidity (IRFCL), which providesa more accurate assessment of liquid assets at the government’s disposal. Thenew method results in a calculation of foreign reserves that is lower than theGFA method, but that has nevertheless risen steadily since mid-1999 to lie atUS$28.9bn on August 23rd 2001.
After a long period from the early 1970s in which the rupiah was pegged to theUS dollar but subject to periodic large devaluations (of 28.34%, in 1978, 1983and 1986), the government introduced a managed float aimed at maintainingthe competitiveness of Indonesia’s non-oil and gas exports in the face of theinflation differential against its main international customers and competitors.The rupiah’s year-end value against the US dollar fell from Rp1,733:US$1 in1988 to Rp2,383:US$1 in 1996, an average annual rate of depreciation of 4.1%.(See Reference table 31 for historical exchange-rate data.)
The Asian currency crisis forced the government to allow the rupiah to floatfreely on August 14th 1997, and thereafter the currency was severely buffetedby a range of external and domestic developmentsindebted corporationsbuying US dollars to cover their unhedged liabilities, the growing crisis in thebanking sector, and political instability. From Rp2,450:US$1 on the eve of thecrisis at the end of June 1997, the rupiah hit lows of around Rp17,000:US$1 inearly January and mid-June 1998. Helped by the weakening US dollar, inflowsof official aid, the current-account surplus and the de facto debt moratoriums,the rupiah strengthened rapidly from September 1998. Victory forAbdurrahman Wahid in the 1999 presidential election pushed the rupiah toRp6,900:US$1 in October of that year, but since then mounting politicalinstability and civil unrest led to a sharp depreciation of the rupiah which hit alow of Rp12,000:US$1 in April 2001. The subsequent impeachment ofMr Abdurrahman and his replacement by Ms Megawati as president, combinedwith a resumption of IMF lending led to a rapid appreciation of the rupiahwhich stood at Rp8,695:US$1 on August 20th.
In May 2000 ASEAN and South Korea, China and Japan (ASEAN + 3) signed theChiang Mai Initiative. The initiative aims to avert a repeat of the 1997 financialcrisis by linking reserves and creating a network of currency swaps. At theASEAN finance ministers’ meeting in April 2001, it was agreed that aside froman intra-ASEAN agreement, countries could negotiate bilateral agreements thatwould ultimately form part of the proposal to link ASEAN reserves with those ofJapan, China and South Korea. However, the bilateral agreements would haveto be complementary to any programmes or targets the participating countrieshave with the IMF. Japan has already announced a currency-swap arrangementwith Thailand and South Korea but as yet there have been no moves towardsbilateral arrangements with Indonesia.
The rupiah has been forcedout of its managed float
The Association of South-East Asian Nations was established in 1967.The five original members were Indonesia, Malaysia, the Philippines, Singaporeand Thailand. Subsequent joiners were Brunei (1984), Vietnam (1995), Laosand Myanmar (1997) and, most recently, Cambodia (1999).
ASEAN summit meetings, which bring together the heads of government ofmember states, must now be held every three years. The most recent was inBrunei in 2001. Informal summits of heads of governments are also held. Inaddition, members’ foreign and economic affairs ministers meet once a year.Joint meetings of foreign and economic affairs ministers are held before eachASEAN summit. There is also a Standing Committee (consisting of themembers’ accredited ambassadors to the host country), which usually meetsevery two months. There is a permanent secretariat, based in Jakarta, and anumber of committees.
The organisation started with some grand objectives, but has generally failed todeliver. Early hopes that ASEAN could engineer a regional economicdevelopment strategy—with particular countries concentrating on particularindustries—were soon dashed. In 1977 the Basic Agreement on theEstablishment of ASEAN Preferential Tariffs was concluded, but a decade lateronly about 5% of trade between members was covered by this system.(Members had been permitted to exclude “sensitive” sectors, a let-out clausethat a subsequent agreement in 1987 only slightly curtailed.)
Plans for a proper ASEAN Free-Trade Area (AFTA) were unveiled in 1992,with the aim of achieving this by 2008. A common effective preferential tariff(CEPT) scheme was applied in 1993, providing for the gradual reduction oftariffs on intra-ASEAN trade in certain goods over a number of years. Again,however, member states could exclude “sensitive” items, limiting progress. Anew AFTA programme, with a wider spread of products covered, was launchedin 1994. During the mid-1990s the timescale for implementing the programmewas steadily tightened, with the aim being to reduce tariffs on most goods tobelow 5% by 2000, with a full AFTA achieved by 2003. (Recent joiners havebeen allowed more time.)
The 1997-98 regional financial crisis exposed ASEAN’s failings in a brutalfashion. The organisation was unable to stop the regional currencydevaluations, or alleviate the subsequent economic hardship. A Statement onBold Measures, released at end-1998, was exactly the opposite of what the titleimplied. Unfolding events in Indonesia then moved the focus on to theorganisation’s security plans. ASEAN members’ commitment to the principle ofnon-interference in the internal affairs of other members complicated theresponse to East Timor. (Some members did eventually participate in themultinational force, but not under ASEAN auspices.)
On the economic front, ASEAN’s slow progress towards AFTA has encouragedone of its members, Singapore, to opt instead for bilateral trade pacts.Singapore’s bilateral trade agreement with New Zealand in 2000 promptedprotests from other ASEAN members, but the island state is pursuing similaragreements with other countries, including the US. (It is unlikely that thisapproach will prove universally applicable, as the absence of an agriculturalsector in Singapore makes it much easier for it to negotiate with tradingpartners with heavily protected primary sectors.) A decision in 2001 by variousASEAN members to set up bilateral currency-swap arrangements to protectagainst currency volatility is limited in scope, and does not presage furtherASEAN economic collaboration.
The organisation’s political hopes could be severely tested in the next fewyears. Changing governments in member countries could undermine anyremaining pretence about political consensus in the region. On the securityfront, the ASEAN Regional Forums (ARFs—which bring together theASEAN ministers of foreign affairs with those of other countries, notablyChina) are likely to remain just talking shops, with little impact on changinggeopolitical trends.
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Bank Indonesia, Annual Report, Jakarta
Bank Indonesia, Statistik Ekonomi-Keuangan Indonesia (monthly), Jakarta
Central Bureau of Statistics, Buletin Ringkas (monthly), Jakarta
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Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ
IMF, International Financial Statistics (monthly)
International Institute for Strategic Studies, The Military Balance (annual)
OECD, Financial Statistics (monthly)
OECD, Geographical Distribution of Financial Flows to Developing Countries (annual)
UN, Monthly Bulletin of Statistics
UN, World Investment Report (annual)
United Nations Industrial Development Organisation (UNIDO), Indonesia:Industrial Development Review, Economist Intelligence Unit, London, 1992
US Embassy (Jakarta), Petroleum Sector Report Indonesia (annual)
World Bank, Global Development Finance (annual)
World Bank, World Development Report (annual)
Australian National University, Bulletin of Indonesian Economic Studies (threetimes a year), Canberra
Colin Barlow and Joan Hardjono (eds), Indonesia Assessment 1995—Developmentin Eastern Indonesia, Institute of South-east Asian Studies, Singapore, 1996
Binhadi, Financial Sector Deregulation, Banking Development and Monetary Policy:The Indonesian Experience (1983-93), Indonesian Bankers’ Institute, Jakarta, 1995
Robert Cribb and Colin Brown, Modern Indonesia: A History since 1945,Longman, London, 1995
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Miranda S Goeltom, Indonesia’s Financial Liberalisation-An Empirical Analysis of1981-88 Panel Data, Institute of South-east Asian Studies, Singapore, 1995
Hal Hill, Indonesia’s Textile and Garment Industries: Developments in an AsianPerspective, Institute of South-east Asian Studies, Singapore, 1992
Gavin W Jones and Terence H Hull (eds), Indonesia Assessment 1996—Populationand Human Resource Development, Institute of South-east Asian Studies,Singapore, 1997
Ross McLeod (ed), Indonesia Assessment 1994—Finance as a Key Sector inIndonesia’s Development, Institute of South-east Asian Studies, Singapore,1995
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Adam Schwarz, A Nation in Waiting: Indonesia’s Search for Stability, Allen andUnwin, St Leonards, New South Wales, 1999
Reza Y Siregar, Inflows of Portfolio Investment in Indonesia: Anticipating theChallenges Facing the Management of the Macroeconomy, Institute of South-eastAsian Studies, Singapore, 1996
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Indonesian Bank Restructuring Agency: http://www.bppn.go.id
Reference tables
These reference tables provide the most up-to-date statistics available at the date ofpublication.
Imports from:Asia 22,313 22,024 14,096 13,877 21,421 of which: ASEANa 5,088 5,393 4,497 4,764 6,462 of which: Singapore 2,875 3,411 2,543 2,526 3,789 Japan 8,504 8,252 4,292 2,913 5,397Europe 10,258 9,262 6,348 4,133 4,685 of which: EU 9,234 8,332 5,866 3,801 4,163 of which: Germany 3,001 2,629 2,366 1,399 1,245Americas 6,935 7,050 4,537 3,844 4,625 of which: US 5,060 5,441 3,517 2,839 3,390Australasia 2,780 2,661 1,927 1,578 1,959 of which: Australia 2,535 2,427 1,761 1,460 1,694Africa 643 684 430 573 825Total 42,929 41,680 27,337 24,003 33,515
a Comprises: Indonesia, Brunei, Malaysia, Philippines, Singapore, Thailand, Vietnam (admitted in1995), Laos and Myanmar (admitted in 1997) and Cambodia (admitted in 1998).
Source: Central Bureau of Statistics, Indikator Ekonomi.
