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Survey of recent developmentsArianto A. Patunru a;Christian von Luebke ba University of Indonesia, Jakarta b Stanford University,

Online publication date: 17 March 2010

To cite this Article Patunru, Arianto A. andvon Luebke, Christian(2010) 'Survey of recent developments', Bulletin ofIndonesian Economic Studies, 46: 1, 7 31

To link to this Article: DOI: 10.1080/00074911003642229URL: http://dx.doi.org/10.1080/00074911003642229

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Bulletin of Indonesian Economic Studies, Vol. 46, No. 1, 2010: 731

ISSN 0007-4918 print/ISSN 1472-7234 online/10/010007-25 2010 Indonesia Project ANUDOI: 10.1080/00074911003642229

SURVEY OF RECENT DEVELOPMENTS

Arianto A. Patunru* Christian von Luebke*

University of Indonesia, Jakarta Stanford University

SUMMARYRecent political developments are slowing reforms. The Corruption Eradication Com-mission (KPK) and the finance ministry find themselves entrapped in legal inquiriesand political wrangling that seem intended to weaken their reforming zeal. KPKs

effectiveness has been undermined by legislative changes and the arrests of three of itscommissioners. Meanwhile, the costly bail-out of a small bank has provided an oppor-tunity for attacks on leading reformers Vice President Boediono and the Ministerof Finance, Sri Mulyani Indrawati. The presidents diffident stance in both instanceshas played into the hands of the opposition and, although key reformers are likelyto remain in office, the political imbroglio has nonetheless eroded confidence in thegovernment.

Year-on-year GDP growth recovered strongly to 5.4% in the fourth quarter of 2009.Government spending has been the key driver, while household spending slowedand investment remained low. Both exports and imports have returned to modestgrowth. Although 2009 ended with low inflation, Bank Indonesia (BI) has set its target

inflation rate for 2010 at double the rate it achieved in November. BI is likely to bow topopulist demands to lower nominal interest rates rather than raising them somewhatto prevent inflation accelerating, even though its real policy rate has been consistentwith significant acceleration of GDP growth. The 2009 budget outcomes confirm thatthe fiscal stimulus in response to the global financial crisis has been less than hopedfor. As for 2010, high world oil prices will imply huge subsidies, given that the gov-ernment is unwilling to increase domestic fuel and electricity prices commensurately.

The president announced that virtually all the governments first 100 days pro-gram targets have been met. However, half of the action plans amounted to nothingmore than issuing or announcing new regulations, plans, blueprints, guidelines, rec-ommendations or policies, or simply preparing drafts of these. No real progress has

been made in relation to the most urgent reforms, particularly on energy subsidiesand labour market regulation. Realising that the whole population would benefit innet terms, the previous government signed the ASEANChina Free Trade Agreement(ACFTA) in November 2004. But just when the agreement was to take effect, strongresistance from business and parliamentarians emerged, leading to the governmentsdecision to re-negotiate many tariffs with China. This is disappointing: failing touphold its commitments under this long-standing agreement makes Indonesia appearunreliable as an economic partner.

* The authors thank Erna Zetha and Susi Haryani for data and logistics assistance. Chris-

tian von Luebke gratefully acknowledges thefi

nancial support of the German ResearchFoundation (DFG).


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8 Arianto A. Patunru and Christian von Luebke

RECENT POLITICAL DEVELOPMENTSNation-wide demonstrations on 9 December 2009 World Anti-Corruption Day served as a reminder that Indonesias reform challenges have reached new lev-els of complexity. Thousands of citizens voiced demands for better governance

and, especially, less corruption. Public dismay had been fuelled by the arrestsof three commissioners of the Anti-Corruption Commission (Komisi Pemberan-tasan Korupsi, KPK), which many saw as part of a campaign to stifle this newand hitherto highly successful institution. Discontent was further fanned bymedia reports of a Rp 6.7 trillion bail-out of the troubled Bank Century, includingunsubstantiated allegations that the bail-out involved some kind of subterfugeto channel government funds to the 2009 election campaign of President SusiloBambang Yudhoyono (SBY). The diffident response of the president, especially inthe Bank Century case, has emboldened political opponents to attack two of thecountrys most steadfast reformers: the vice president, Boediono, and the Minister

of Finance, Sri Mulyani Indrawati. The resulting political quagmire has been asevere distraction from the governments first 100 days program, and casts con-siderable doubt on whether much-needed public sector reforms can be realised.

KPK in the cross-hairsMcLeod (2005a: 383) argued that when corruption and malpractice are endemic,as they are in Indonesia,

mechanisms that seek to monitor and penalise officials misbehaviour may be of lit-tle use ... [since] other individuals within the same system need to take firm actionagainst those found to be corrupt, but ... are themselves likely to be (or, at least, to

have been) involved in malfeasance.

Thus it comes as no surprise that key state institutions whose members the KPKhas exposed as corrupt the police, the attorney generals office and the parliament(DPR) have been involved in attacks of some kind against the commission. Therewere three controversial arrests of KPK commissioners in 2009. In May, AntasariAzhar, then chief commissioner, was charged with master-minding the murder ofa businessman under investigation by the KPK. Then in October, deputy commis-sioners Chandra Hamzah and Bibit Rianto were arrested on corruption charges.The arrests sparked nation-wide protests and prompted national leaders such as

former President Abdurrahman Wahid (who died on 30 December 2009; box 1) tosupport the KPK publicly. Bibit and Chandra were released from police custodyin early November, in response to public outrage following the release of tapedconversations that appeared to reveal police involvement in a conspiracy againstthem. Antasari was sentenced to 18 years in prison, however. Many observers (forexample, Sukma 2009: 332), believe that the arrests, particularly those of Chandraand Bibit, reflected elite resistance to the anti-corruption drive.1

In general, KPK seems to have fallen victim to its own success. During its six-year existence the agency has achieved an impressive track record. Equipped with

1 One witness in the Antasari trial asserted that top-level police officials gave orders tospin the [statement] of Antasari from the original bribes paid to certain KPK em-ployees into bribes paid to KPK leaders (Jakarta Post [hereafter JP], 13/11/2009).


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Survey of recent developments 9

far-reaching powers including the authority to wire-tap conversations, freezebank accounts, enforce travel bans and prosecute corruption suspects the com-mission has a conviction rate of 100%. It has revealed transgressions by seniorparliamentarians, bureaucrats, police officials and business people, but its effortsto target the higher echelons of power are being met by increasing resistance.Even the president seemed to support the emerging criticism, noting that KPKhas developed into a super-body that is accountable only to Allah (Kompas,

25/6/2009).Apart from its conflicts with the police force, KPK has also faced considerableopposition in parliament. In September 2009, DPR legislators drafted a new

BOX 1 ABDURRAHMAN WAHID: FATHEROF PLURALISM

Indonesia has lost one of its foremost champions of integration and multi-culturalism. On 30 December 2009, Abdurrahman Wahid widely known as

Gus Dur passed away in a hospital in Jakarta. The father of pluralism, asPresident Yudhoyono describes him, will be remembered for his vision of anIndonesian nation in which tolerance and solidarity transcend religious andethnic divides.

As Indonesias fourth president, Gus Dur attained little acclaim. His shortpresidency during Indonesias early democratic transition (19992001) wasbeset by political friction. Facing a fragmented parliament with 21 politicalparties, Gus Dur never succeeded in aligning political interests and coalitionpartners. His alleged involvement in the 2000 Bulog (national logistics agency)financial scandal and his accommodating stance on Papuan and Acehnese

separatism only served to fuel tensions further. In July 2001, after a failedattempt by Gus Dur to dissolve parliament, the DPR voted to impeach thepresident and replace him with Megawati Soekarnoputri.

But shortcomings during his presidency do not diminish Gus Durs vastcontributions to the Indonesian nation. As head of Indonesias largest Islamicorganisation, Nahdlatul Ulama, he was an unwavering advocate of peace andreconciliation, a visionary Muslim cleric who promoted a greater opennessin mainstream Islam towards other religious traditions. His natural, unpre-tentious demeanour attracted people from all walks of life. While Wahidsfrailty may have been a disadvantage in politics, it highlighted his humilityand compassion in social dialogue. Reconciliatory gestures during his term inoffice including his apology for anti-communist violence in 1965, his over-turning of repression of Chinese language and traditions, and his attemptsto normalise relations with Israel helped to reduce inter-faith friction andpaved the way for a peaceful democratic transition.

The reputation of Gus Dur will live on far beyond his death. On 2 January,hundreds of Indonesians Muslims, Christians, Buddhists and Hindus alike gathered around Jakartas Proclamation Monument to pay their last respects.One thousand candles were lit to commemorate the accomplishments of thelate religious leader. Gus Durs legacy will remain in the minds and hearts ofmany, raising hope that future leaders will follow in his footsteps and uphold

the traditions of pluralism and tolerance he held so dear.


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anti-corruption bill that overtly sought to diminish the commissions investiga-tive powers. The initial draft of the bill aimed to abolish KPKs authority to wire-tap conversations and prosecute corruption suspects. In addition, it called forthe replacement of the national anti-corruption court by 33 provincial corruption

courts, whose judicial panels would be appointed by existing district courts. Thebill provoked considerable criticism because it subordinated KPK operations totraditional law enforcement structures, turning the institution into a toothlesstiger. Although public protests and last-minute intervention by the presidentsafeguarded KPKs core investigative functions, the bill will nonetheless reducethe efficiency and independence of corruption prosecutions, by dispersing corrup-tion courts across provinces and reducing transparency in the appointment of judi-cial panels. In light of the simultaneous attacks on its commissioners by other lawenforcement agencies, the overt resistance in parliament to KPKs continued effec-tiveness suggests that its leaders should brace themselves for an uphill battle.

The Bank Century bail-outAnother episode that has captured public attention is the bail-out of Bank Cen-tury. Ever since its establishment, Bank Century the result of a merger of threeailing banks in December 2004 has provided much cause for concern. Accord-ing to the Supreme Audit Agency (Badan Pemeriksa Keuangan, BPK), the bankstrack record included several banking law violations between 2004 and 2008 thatwere not adequately dealt with by the central bank, Bank Indonesia (BI) (BPK2009). During the global financial crisis (GFC), its problems reached new levelsof urgency, such that between September and October 2008 its capital adequacyratio (CAR) fell from 2.4 to 3.5%, far below the prescribed minimum of 8%. BIresponded by providing three short-term funding facilities, on 14, 17 and 18November, totalling Rp 689 billion (about $73 million).

Despite these liquidity injections the bank continued to falter. By 20 November2008, its CAR was estimated to have plummeted to 35.9%, and BI brought theBank Century case to the Financial System Stability Committee (Komite StabilitasSistem Keuangan, KSSK). The committee, chaired by finance minister Sri Mul-yani, was seriously concerned that the failure of even a small bank could havea deep psychological impact throughout the banking system, given existing tur-bulence in financial markets as a consequence of the GFC. It therefore approvedthe bail-out on 21 November. While BIs initial estimate of its likely cost was just

Rp 0.63 trillion, the actual disbursements required by the Deposit Insurance Cor-poration (Lembaga Penjamin Simpanan, LPS) had ballooned to Rp 5 trillion bythe end of 2008, and eventually to Rp 6.76 trillion by July 2009 (figure 1).

Interestingly, although LPS disbursements to the bank had by February 2009increased nine-fold from the initial estimate, the bail-out was virtually ignoredbefore the parliamentary and presidential elections in April and July 2009. It wasnot until August that newly elected DPR members began to criticise the deci-sion. Media reports, coloured by speculation that the bail-out funds had benefitedSBYs election campaign, were accompanied by calls for the resignations of Boedi-ono (who was BI governor at the time of the bail-out) and Sri Mulyani. These

political attacks were further invigorated by a report on the bail-out by BPK inmid-November. The newly appointed BPK chairman, Hadi Purnomo a formertax chief dismissed by Sri Mulyani in 2006 in a bold move to root out graft in the


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finance ministry (McLeod 2008) declared that Rp 2.9 trillion of the LPS disburse-ments were illegal and required further investigation (JP, 23/11/2009). On thebasis of the BPK report, politicians eager to attack the government includingthose from parties supposedly in coalition with SBYs Democratic Party (PartaiDemokrat, PD) voted to set up a special parliamentary committee of inquiry(Panitia Khusus, or Pansus) to probe more deeply into the Bank Century affair.

According to the finance minister and the former BI governor, the bail-outwas necessary to sustain financial sector confidence and stability. By prevent-ing contagious bank runs, the government contributed to Indonesias success inweathering the GFC better than most Asian countries (JP, 16/1/2010). Technicalarguments about systemic risk and the relative cost of bailing out or liquidatingthe bank failed to resonate with the parliamentary inquiry committee, however.Televised cross-examinations of Sri Mulyani, Boediono and other KSSK members

left the strong impression that scoring political points and discrediting senior offi-cials was more important than adding substance and clarity to the case. Someof the most outspoken critics were guilty of inconsistency, having themselvespressed for rapid and far-reaching government intervention as the GFC peaked.Pansus member Bambang Soesatyo (of the Golkar party), who levelled a seriesof media attacks against Sri Mulyani,2 had argued in April 2008 that the govern-ment needed to act not in a matter of days, but in a matter of hours, even min-utes [to sustain] financial markets (Kompas, 28/4/2008). His colleague MaruararSirait (of the Indonesian Democratic Party of Struggle, PDI-P), who was one of the

2 Soesatyo accused Mulyani through the press of having met secretly with Bank Centurypresident director Robert Tantular before the KSSK approved the bail-out. Although this al-legation was quickly disproved, Soesatyo refused to apologise (Kompas, 13/12/2009).

0

1

2

3

4

5

6

7

24-Nov-2008 24-Jan-2009 24-Mar-2009 24-May-2009 24-Jul-2009

FIGURE 1 Bank Century: Cumulative Deposit Insurance Corporation Disbursements(Rp trillion)

Source: BPK (2009).


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most vocal critics of the bail-out, had urged the finance ministry in October 2008to take immediate action to prevent the crisis from hitting capital markets andspreading to the banking sector (Suara Pembaharuan, 13/10/2008).

In short, it appears that political parties from within and without the cur-

rent coalition have exploited the investigative powers of the Pansus primarilyto advance their political agendas. For the Islamic parties (PKS, PAN, PPP andPKB),3 who were unhappy with SBYs choice of the technocrat Boediono as hisvice-presidential running mate, the case provided a useful platform from whichto press for his replacement. For the opposition parties (PDI-P, Hanura and Ger-indra), the parliamentary inquiry offered an opportunity to undermine the gov-ernments anti-corruption image. And for Golkar, which remained a somewhatreluctant coalition partner at best, it provided a possible means to unseat Mul-yani, who had becomepersona non grata for the partys chair, Aburizal Bakrie.

Conflict between Mulyani and Bakrie one of the countrys wealthiest citizens

appears to be at the heart of the current political turmoil. It has grown out ofa series of issues. In October 2008, Mulyani publicly refused Bakries request toclose the stock exchange after Bakrie-controlled companies rapidly lost 30% invalue (Wall Street Journal, 10/12/2009; Gunawan and Siregar 2009: 223). Tensionsincreased further when the minister issued travel bans on executives from certainBakrie companies accused of tax evasion. She has also reportedly urged Bakrieto take responsibility for the Lapindo mudflow disaster (McMichael 2009), andopposed his plans to buy into one of the countrys largest gold mines. A recon-ciliation meeting initiated by the president in early November 2009 seemed onlyto worsen the conflict, and shortly afterwards the Golkar chair gave his blessingto the parliamentary committee inquiry (JP, 16/12/2009), which has tied Mul-yani up in long-winded hearings and the need to defend herself against mediaattacks.

Presidential leadershipDespite his sweeping electoral victory in 2009, President Yudhoyono has remaineda somewhat disengaged observer of these important political developments. Inthe KPK drama it was the force of public opinion not the intervention of thepresident that secured the release of KPK deputy directors Bibit and Chandra,while SBYs reluctance to defend Boediono and Mulyani with any vigour merelyencouraged political opponents to step up their attacks on the government and its

reform agenda (JP, 17/1/2010). Although the presidents behaviour may reflecta desire to maintain a clean, reformist image, his public approval rating declinedsignificantly, from 85% in July 2009 to 70% in January 2010 (JP, 28/1/2010).

Because he persevered with the strategy of forming a rainbow coalitioncabinet, the president is likely to face a continuing tug-of-war among diverseparty interests, making it very difficult to advance any reform agenda (Diamond2009: 338). His relationship with Golkar is particularly challenging not only

3 PKS (Partai Keadilan Sejahtera, the Prosperous Justice Party); PAN (Partai Amanat Na-sional, the National Mandate Party); PPP (Partai Persatuan Pembangunan, the United De-velopment Party); and PKB (Partai Kebangkitan Bangsa, the National Awakening Party).


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because Golkar controls important media networks4 and a well-institutionalisedmachinery, but also because its chair, Bakrie, is widely believed to have providedsubstantial financial support to Yudhoyonos presidential campaign (see,for example, Suharmoko and Witular 2008). At the same time, the president

will find it difficult to rebuild trust with his technocrat ministers, who havebecome increasingly risk-averse and disconsolate owing to the politicalattacks surrounding Bank Century and the lack of strong support from above.Uncertainty about the future role of this group of ministers will reduce privatesector willingness to commit to new investments, making it virtually impossibleto achieve the targeted growth rate of 7% by 2014. Indeed, political disruptionhas already exacted a toll, rendering the government unwilling to take the riskof reducing hugely wasteful and regressive fuel and electricity subsidies in theface of world oil prices far above the original budget estimate. And although thepresident claims to have achieved most of the first 100 days objectives, progress

in key policy areas has in fact been slow. In his quest to re-invigorate investment,trade and growth, the president cannot afford to lose private sector trust: anyshort-term political gain from ousting technocratic reformers would be far out-weighed by longer-term economic costs.

Executive proliferationA related cause for concern is that the executive has grown very large in termsof key high-level official posts, and the effect of this can be expected to cascadedown to lower levels of government. The cabinet now consists of 34 ministers(including three coordinating ministers) and four officials with rank equivalent toministers (attorney general; police chief; military chief; and head of the Presiden-tial Unit for Development Supervision and Control [Unit Kerja Presiden untukPengawasan dan Pengendalian Pembangunan, UKP4]).5 Not since the Soekarnoera has Indonesia had such a large cabinet. Its size creates difficulties for effectivecoordination and efficiency in policy making. For example, UKP4 is tasked toserve as a delivery or de-bottlenecking unit, but it is not clear how its head willundertake coordination alongside the three coordinating ministers (for political,legal and security affairs; the economy; and peoples welfare) without creatingtensions, since the need for de-bottlenecking would seem to imply a failure ofthe coordinating ministers to do their job properly. Another danger is that eachside may rely on the other to manage coordination, given the overlap in responsi-

bilities, with the perverse result that nothing at all gets done.A curious aspect of the expansion of the executive under SBY is the unexpected

appointment by the president in December 2009 of deputy ministers in 10 of theministries. It is to be hoped that the ministers will be helped rather than hinderedby these appointments, given that some were reportedly not consulted in advance

4 Golkar chair Bakrie controls TV One, which broadcast all the Bank Century inquirysessions. The head of Golkars advisory council, Surya Paloh, owns the newspaper MediaIndonesia and the news channel Metro TV. However, rivalry between Paloh and Bakrie ap-pears to have led more recently to coverage byMedia Indonesia and Metro TV that is moresympathetic to the finance minister.

5 In addition, the president has 10 special staff, one secretary and an advisory board withnine members, while the vice president has four special staff and one secretary.


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about them. There is the possibility of disruptive conflict between deputy minis-ters and secretaries-general in the respective ministries. Only the latter have anofficial hierarchical line of authority, so it is hard to envisage how the deputyministers could be effective. Many of the new deputies are among the most capa-

ble people in the bureaucracy, but if they have no clear authority to exercise theirvision, their appointment to these positions may be a misallocation of humanresources.

MACROECONOMIC DEVELOPMENTSIndonesias economy has remained surprisingly resilient to the GFC. In the fourthquarter of 2009 the GDP growth rate rebounded from 4.2% to 5.4% year on year(table 1a), such that GDP for the whole year increased by 4.5% over that in 2008.By contrast, neighbouring Malaysia and Thailand are estimated to have contracted

in 2009 byaround 3% and 4%, respectively (Hill 2010). This is in sharp contrastwith the three countries relative performance during the 199798 financial crisis,when Indonesias GDP fell by 13%, Thailands by 11% and Malaysias by 7%.

Expansionary fiscal policy and sound monetary policy have contributed to thisresilience by helping to stabilise domestic conditions (Resosudarmo and Yusuf2009). Nevertheless, we share the view of most observers (for example, Hill 2010)that Indonesias resilience is in large part due to its relatively low exposure tointernational trade and financial flows. Indonesias ratio of exports to GDP beforethe GFC was only around 30%, while the respective measures for Malaysia, Thai-land and Singapore were around 80%, 60% and 160%. Moreover, there are onlyweak links between Indonesias financial sector and those that have been crum-bling in the US and Europe. The impact of the GFC has therefore been limitedmainly to foreign trade, and a severe decline in Indonesias exports (table 1a). Butsince many exports have a high import content, there have been similar declinesin imports, tending to offset the impact on the level of output.

We note in passing that there is no basis for the argument that Indonesia wouldbe better off if it reduced the extent of its trade with the rest of the world in thefuture, so as to protect itself from external shocks like the GFC. A country such asSingapore, which is extremely open to trade, has certainly suffered from the crisisbut, on the other hand, it is precisely its openness to trade that has allowed itseconomy to grow rapidly over several decades, resulting by now in very high per

capita incomes. By contrast, a country such as Burma may not have been greatlyaffected by the GFC, but its reluctance to engage with the world economy hashelped to condemn its people to very low standards of living.

GrowthAfter falling steadily from 6.2% in the third quarter (Q3) of 2008 to a little over4% in Q2 and Q3 2009, year-on-year growth of quarterly GDP jumped to a rathersurprising 5.4% in Q4 2009 (table 1a). Growth has been well supported by gov-ernment consumption expenditure, which has continued to record double-digitgrowth. On the other hand, private consumption switched from leading growth

to holding it back in Q4 2009; its decline to 4.0% was perhaps due partly to dissi-pation of the boost that had been provided by election campaign spending (Reso-sudarmo and Yusuf 2009: 291).


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The year-on-year growth of investment accelerated somewhat during the lasttwo quarters of 2009, but remained disappointingly low at 4.2% in Q4, far belowthe corresponding figures a year earlier. Even though construction spending hasremained healthy, investment in machinery and equipment and in transporthas declined significantly. A more optimistic picture emerges from exports andimports, however, both of which have returned to modest positive growth ratesafter several quarters of severe decline.

The non-tradables sector continued to record significantly higher growth

rates than tradables throughout the period under consideration. Nevertheless,the growth of tradables increased noticeably in Q4 2009. Of particular inter-est is the large and unexpected acceleration of manufacturing output growth

TABLE 1a Components of GDP Growtha

(2000 prices; % year on year)

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Gross domestic product (GDP) 6.2 5.3 4.5 4.1 4.2 5.4

GDP excluding petroleum & gas 6.7 5.7 4.9 4.5 4.5 5.8

By expenditure

Private consumption 5.3 4.8 6.0 4.8 4.7 4.0

Government consumption 14.1 16.4 19.2 17.0 10.3 17.0

Investment 12.3 9.4 3.5 2.4 3.2 4.2

Construction 7.8 5.9 6.2 6.1 7.7 8.0

Machinery & equipment 24.5 15.9 8.6 11.5 12.7 3.9

Transport 40.6 38.3 9.6 0.6 2.1 14.6

Other 9.5 6.2 4.2 2.6 1.8 3.0Exports 10.6 2.0 18.7 15.5 7.8 3.7

Imports 11.1 3.7 24.4 21.0 14.7 1.6

By sector

Tradables 3.7 2.8 2.9 2.2 2.7 4.5

Agriculture, livestock, forestry &fisheries

3.2 5.1 5.9 2.9 3.3 4.6

Mining & quarrying 2.3 2.4 2.6 3.4 6.2 5.2

Manufacturing 4.3 1.8 1.5 1.5 1.3 4.2

Excluding petroleum & gas 4.9 2.1 1.9 1.8 1.5 4.9

Non-tradables 8.9 7.6 6.1 5.9 5.6 6.3Electricity, gas & water supply 10.4 9.3 11.2 15.3 14.5 14.0

Construction 7.8 5.9 6.2 6.1 7.7 8.0

Trade, hotels & restaurants 7.6 5.5 0.6 0.0 0.2 4.2

Transport 1.0 1.0 2.0 5.7 7.4 6.7

Communications 33.5 33.5 30.3 26.6 23.7 16.3

Financial, rental & business services 8.6 7.4 6.3 5.3 4.9 3.8

Services 7.0 5.9 6.7 7.2 6.0 5.7

a Some data from earlier periods have been revised in the latest estimates.

Source: CEIC Asia Database.


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in that quarter. Mining and quarrying also grew impressively in the secondhalf of 2009, returning to growth rates not seen since early 2007. Utilities andcommunications continued as important contributors to non-tradables growththroughout the period in question. The performance of the trade, hotels and res-taurants sector improved considerably in Q4 2009, after three quarters of negli-gible growth.

In conditions of significant economic disruption it is important to shorten

the time horizon of analysis. Table 1b therefore presents the seasonally adjustedquarter-on-quarter growth rates of key demand categories and sectors. The sud-den jump in GDP growth in Q4 2009 is confirmed, as is the noticeable decline in

TABLE 1b Components of GDP Growth a

(2000 prices; seasonally adjusted; % quarter on quarter)

Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09

Gross domestic product (GDP) 1.3 1.0 1.2 1.1 1.1 1.4

GDP excluding petroleum & gas 1.4 0.9 1.2 1.2 1.3 1.6

By expenditure

Private consumption 1.2 1.2 1.9 0.4 1.1 0.6

Government consumption 4.4 3.8 4.1 3.7 3.3 3.8

Not seasonally adjusted 5.6 25.6 28.7 23.7 0.4 33.2

Investment 1.8 1.0 1.0 0.5 2.7 1.9

Construction 1.3 1.7 1.6 1.8 2.2 1.9

Machinery & equipment 9.6 7.8 11.1 1.4 8.1 1.4

Transport 7.5 7.8 13.3 2.2 4.2 4.3

Other 1.3 0.9 2.9 2.6 3.2 0.2

Exports 1.5 4.4 15.2 5.9 7.5 7.4

Imports 2.9 8.7 14.4 4.4 4.6 8.2

By sector

Tradables 0.7 0.5 0.8 0.7 0.9 1.0

Agriculture, livestock, forestry &fisheries

1.1 1.0 1.3 0.6 1.0 1.0

Mining & quarrying 0.6 0.8 1.1 1.2 1.9 0.4

Manufacturing 1.1 1.3 0.8 0.9 0.9 1.4

Excluding petroleum & gas 1.3 1.8 1.2 1.2 1.2 1.2Non-tradables 1.9 1.3 0.8 1.8 1.6 1.9

Electricity, gas & water supply 2.6 3.1 3.3 3.8 3.5 3.5

Construction 1.3 1.7 1.6 1.8 2.2 1.9

Trade, hotels & restaurants 2.5 1.1 3.4 2.1 2.2 3.3

Transport 0.1 1.4 2.0 2.3 1.5 0.8

Communications 8.0 7.4 4.0 5.0 5.5 1.0

Financial, rental & business services 1.8 2.0 0.8 0.6 1.4 0.9

Services 1.5 1.6 1.4 2.3 0.6 1.3

a Some data from earlier periods have been revised in the latest estimates.



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growth of private consumption. Growth of investment spending has been rathervolatile, but in the second half of 2009 it was more rapid than growth of theeconomy as a whole. Healthy growth of exports in the last three quarters contrasts

strongly with that of the previous three, and this is mirrored in the performanceof imports. Government consumption appears remarkably stable, but this is dueto seasonal adjustment of the data: the unadjusted growth rates continue to dem-onstrate very high volatility. The significant recovery in year-on-year manufactur-ing growth in Q4 is confirmed in the quarterly data, while mining and quarryingoutput in Q4 2009 can be seen actually to have fallen.

Indonesias total merchandise exports in 2009 contracted by 15.0% from theirlevel of $137.0 billion in 2008, while non-oil and gas exports fell by 9.7% from$107.9 billion. In terms of sectors, exports of manufactured products fell 16.9%,while those of the agriculture and mining sectors declined by 4.8% and 31.9%,

respectively (BPS 2010). As the world economy began to recover from the GFC,exports started to pick up noticeably, after reaching their low point in about March2009 (figure 2a). There appears to have been a slight setback towards the end of2009, but it is too early to tell whether this renewed softening of exports will besustained.

Total merchandise imports amounted to $96.9 billion in 2009, some 25.0%lower than in 2008. Non-oil and gas imports totalled $77.9 billion, down by 21.1%from 2008. Imports of consumer goods declined by 18.6%, while those of rawmaterials and capital goods fell by 30.0% and 4.5%, respectively (BPS 2010). Thelarge decline in raw materials inputs reflects similarly large declines in manufac-

tured exports, for which they are an important input. Figure 2b shows a severedecline in major import categories as the GFC began to affect Indonesia. The lowpoint was reached in Q2 2009, and the subsequent recovery toward the end of the


FIGURE 2a Exports($ values, 3-month rolling sum, July 2008 = 100)

Nov-2008 Feb-2009 May-2009 Aug-2009 Nov-20090

20

40

60

80

100

120

Crude materials, inedible

Animal & vegetable oils & fats

Food, beverages, tobacco & live animals

Manufactures

Chemicals


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year shows evidence of an even more noticeable stagnation of imports than ofexports.

Fiscal developments

Table 2 presents key features of the 2009 and 2010 budgets. The preliminary out-come data for 2009 confirm that the government was rather less successful thanhad been hoped in providing a fiscal stimulus to counter the expected contrac-tionary impact ofthe GFC. Expenditure by the central government was 7.3% lessthan the amount specified in the revised budget, and although tax revenue wasalso below its target, the overall revenue shortfall was only 0.7%. The stimulatoryimpact of collecting less revenue than intended would have been much too smallto offset the shortfall in spending. Accordingly, the actual deficit was far lowerthan expected. The original 2009 budget had called for a deficit equivalent to 1.1%of GDP, but this estimate was revised in view of the need to provide a strongerfi

scal stimulus. In the revised budget the defi

cit was increased to 2.5% (see table 2,note a), but the realised deficit was only 1.6%. One consequence of this is thatthere were unspent funds amounting to Rp 38 trillion to be carried over to 2010.

The shortfall in tax revenue in 2009 gives some cause for concern, althoughthe revenues collected contributed slightly to the hoped-for fiscal stimulus. Theshortfall was mainly the consequence of disappointingly slow growth in non-oiland gas tax collections which, at 4.4%, compares poorly with the average annualgrowth rate of 18% during 200508 (Directorate General of Taxation, press release,4/1/2010). Although the number of registered taxpayers remained low in 2009, at15.9 million, this represented a huge proportionate increase from just 10.7 millionin the previous year (Kompas, 5/1/2010), so it would seem that the downturn inthe economy must have had a significant negative impact on tax collections. In2010 the target increase in tax collections is 13.7%. Accelerating economic growth

Nov-2008 Feb-2009 May-2009 Aug-2009 Nov-20090

25

50

75

100

125

Crude materials, inedible

Food & live animals

Machinery & transport equipment

Manufactures

Chemicals


FIGURE 2b Imports($ values, 3-month rolling sum, July 2008 = 100)


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TABLE 2 Budgets for 2009 and 2010(Rp trillion)

2009 2010

RevisedBudget

Actual Difference(%)

Budget % GDP

REVENUE AND GRANTS 872.6 866.8 0.7 911.5 15.1

Revenue 871.6 865.7 0.7 910.1 15.0

Tax 652.1 641.2 1.7 729.2 12.1

Non-tax 219.5 224.5 2.3 180.9 3.0

Grants 1.0 1.1 10.9 1.4 0.0

EXPENDITURES 1,005.7 954.0 5.1 1,009.5 16.7

Central government 696.1 645.4 7.3 699.7 11.6Personnel 133.7 161.7 2.7

Goods & services 87.0 100.2 1.7

Capital expenditures 74.3 76.9 1.3

Interest payments 110.1 115.6 1.9

Subsidies 160.0 144.4 2.4

Social assistance 77.8 69.1 1.1

Other expenditure 53.3 31.8 0.5

Transfers to regional governments 309.6 308.6 0.3 309.8 5.1

DEFICIT 133.0 87.2 34.4 98.0 1.6

% of GDP 2.5a 1.6 1.6

FINANCING 133.0 125.2 5.9 98.1 1.6

Domestic financing (net) 144.8 142.6 1.5 107.9 1.8

Foreign financing (net) 11.8 17.4 47.7 9.8 0.2

Foreign gross drawings 70.7 57.6 1.0

Amortisation 69.5 58.8 1.0

Loan rescheduling 13.0 8.6 0.1

UNSPENT FUNDS 38.0

ASSUMPTIONS FOR 2010 BUDGETGDP

Growth (%) 5.0

Nominal value (Rp trillion) 6,050

Inflation (% p.a.) 5.0

Exchange rate (Rp/$) 10,000

3-month SBI rate, average (%)b 6.5

Oil price ($/barrel) 60

Oil production (000 barrels/day) 965

a

The revised budget defi

cit is based on MOF (2009a). MOF (2009b) reported a revised defi

cit of 2.4%.b SBI = Sertifikat Bank Indonesia (Bank Indonesia Certificate).

Source: MOF (2009a, 2009b).


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will be of some assistance in meeting this target, but the government will alsoneed to improve its strategies for tax collection.

Assessing thefiscal stimulus package

It is difficult to evaluate the success of the governments early 2009 fiscal stim-ulus package. Even though the macroeconomic indicators show that Indonesiahas suffered nothing more than a short-lived and small decline in its growth ratein the face of the GFC, there is no direct way to determine the extent to whichthe limited nature of the decline is a consequence of the fiscal stimulus program.Nevertheless, there are important lessons from Indonesias experience with fis-cal stimulation in 2009 (Patunru and Zetha 2010). First, a fiscal stimulus relyingon extra spending on infrastructure depends heavily on the effectiveness of theministries involved. Thus far, effectiveness has left much to be desired. Failure toexecute budget allocations for infrastructure has made the stimulus program less

successful than it might otherwise have been.Second, to stimulate household spending, income tax was waived for certainworkers those with a maximum gross income of Rp 5 million per month (around$20 per day) and employed in the agriculture, fisheries and manufacturing sec-tors (Ministry of Finance Regulation 43/2009). It is difficult to see the rationalefor discriminating against workers who happen to be employed in retail trade orthe construction industry, for example. Moreover, although the cut-off was highenough to include the vast majority of Indonesian employees, the context is one inwhich only a very small proportion of them pay income tax; for the remainder, thetax cut is irrelevant. This fact, plus the sectoral restrictions, almost certainly meantthat this aspect of the stimulus package would have had virtually no impact.

Similarly restrictive eligibility criteria were applied to the provision of favoura-ble tax treatment to infrastructure projects (Minister of Finance Circular 883/2009).Projects were required to satisfy no fewer than eight conditions. They had to:

1 create a significant number of job opportunities;2 complement existing infrastructure networks in order to make them more

efficient;3 produce immediate results, and be able to be completed during 2009;4 be already designed or be able to be quickly designed;5 be able to be absorbed during 2009;6 not be affected by land acquisition difficulties;7 meet the targets of Presidential Instruction 5/2008 concerning the focus of the

economic program for 200809; and8 be part of the governments strategic plan.

Little of this makes sense.All infrastructure projects create employment, and it ishard to imagine any that would be inconsistent with the governments programs,given the urgent need for infrastructure spending even if there were no necessityfor a stimulus. Provided that projects could be initiated quickly, there is no obvi-ous reason why they would need to be completed in 2009, and it is not clear whyit should matter whether they complement existing infrastructure (provided theyhave positive net social benefits). The requirement for immediate results makesitems 4, 5 and 6 redundant. Such an array of requirements seems to do little otherthan create red tape, opportunities for corrupt behaviour and an unnecessaryobstacle to the desired fiscal stimulus.


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The 2010 budget assumptionsMost of the assumptions underlying the 2010 budget seem plausible, although someare perplexing. Current indications suggest that the projected GDP growth rate isrealistic. The government seems to be expecting the central bank to soften monetary

policy somewhat, given that it foresees inflation roughly doubling from its late 2009level, with the rupiah weakening from current levels of around Rp 9,400/$. The keyitem of concern is the assumed oil price of $60/barrel, which is almost certainly toolow. By early February 2010, the oil price was close to $84/barrel, and it is likely toincrease quite significantly, especially in the second half of 2010, as the recovery ofmajor world economies strengthens. As in previous years, the finance minister hasalready signalled the governments intention to revise its initial, unrealistic oil priceassumption, this time to $80/barrel. In the absence of changes to domestic fuel andelectricity prices, this will imply a huge rise in subsidies beyond the already highlevel of about $15 billion in the 2010 budget. Unfortunately, political attacks on the

minister and the vice president seem already to have caused the government toback away from its promised reconsideration of subsidies (and the implied shift toaligning domestic energy prices more closely with world levels).

Monetary policy, inflation, financial markets and government debtMonetary policy and inflationBI seems scarcely to have noticed the recent success of its monetary policy inbringing inflation as low as 2.4% in November 2009 (figure 3). Inexplicably, it hasset its target inflation rate for 2010 twice as high, at 46%, with a declining trendtoward its medium-term target of 3% (Nasution 2010) even though that targetwas achieved as long ago as August 2009. This curious disconnect between futuretargets and what has already been achieved seems to suggest that BI still fails toappreciate the impact of growth of its monetary liabilities on inflation. Or per-haps it does. The rate of growth of currency in circulation over the three monthsto January 2010, although volatile, displayed a somewhat rising trend, such that

Jan-2009 Mar-2009 May-2009 Jul-2009 Sep-2009 Nov-2009 Jan-20100

4

8

12

16

20

CPI inflation

Currency in circulation

SBI rate 30 days

Real SBI rate


FIGURE 3 Monetary Policy and Inflation(% p.a.)


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inflation increased quite markedly from its previous low point to 3.7% (althoughit is possible that this is a short-term aberration). In turn, the real rate of interest onBI Certificates (SBIs) has declined even though the nominal rate has been heldsteady since September 2009. This unannounced moderate easing of monetary

policy is not consistent with keeping inflation at the low level already achieved,but it is consistent with the soft target now set for 2010.

A real SBI rate of about 4% has been consistent with the significant accelerationof GDP growth already noted, demonstrating that monetary policy through Octo-ber 2009 was entirely appropriate to the circumstances. Nevertheless, the mostrecent data, combined with the newly announced inflation target, suggest thatBI is likely to bow to populist demands to lower the nominal SBI rate ( Kompas,7/1/2010), rather than raising it somewhat in order to slow money growth. Ashas been the case on several occasions in the past notably in 200001, 200405and 2008 gains on the inflation front are unlikely to be sustained.

Capital and foreign exchange marketsReflecting the strengthening of GDP growth, share prices resumed their upwardtrend following a short-lived decline in October 2009 (figure 4). Investors opti-mism is shared by Fitch Ratings, which upgraded Indonesias long-term foreignand local currency debt from BB to BB+ on 25 January, with an outlook of sta-ble for both (Fitch Ratings, Singapore/London, press release, 25/1/2010). Thisis Indonesias highest rating since the Asian financial crisis in the late 1990s. Thatsaid, the decline in share prices from mid-January may be a reflection of concernabout the continued attacks on the finance minister and the vice president, andthe likely consequences for economic management. The solid performance of thecapital market is also reflected in the exchange rate, which has been relatively sta-ble at Rp 9,2009,400/$ since October. The currency would have strengthened fur-ther had it not been for heavy intervention by BI in the foreign exchange market;

31-Dec-2008 19-Mar-2009 5-Jun-2009 21-Aug-2009 6-Nov-2009 26-Jan-20100

500

1,000

1,500

2,000

2,500

3,000

0

3,000

6,000

9,000

12,000

15,000

CSPI

Exchange rate

CSPI Rp/$

Source: Indonesia Stock Exchange; Pacific Exchange Rate Service.

FIGURE 4 Composite Stock Price Index (CSPI) and Exchange Rate


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this increased its international reserves by about $18 billion from the end of 2008through January 2010. Although rising reserves are usually portrayed as a signof successful macroeconomic policies, in fact they simply demonstrate the cen-tral banks willingness to spend heavily in the foreign exchange market. BI had to

finance a large part of these purchases by issuing SBIs some $8.5 billion equiva-lent in the 10 months through October 2009 alone. The interest cost of these SBIs isconsiderably higher than the yields BI obtains on the reserves, so it is hard to seewhat Indonesia gains from this investment.

Government debtNot least because it has managed to keep its budget deficits small, the governmenthas succeeded in reducing its dependence on debt from 89% of GDP in 2000 to29% as of October 2009 (table 3). This is low by international standards (Ashcroftand Cavanough 2008: 360). During this same period, the role of borrowing (entirely

from foreign sources and predominantly in the form of relatively low-cost develop-ment assistance loans) has been declining relative to that of issuing securities (SuratBerharga Negara, SBN) denominated in both domestic and foreign currency.6 Bor-rowing has declined from 47% of total debt in 2000 and 2005 to 38% in October2009, while securities issued at market rates have increased from 53% to 62%. SBNs

6 The SBN component of the governments overall debt is often referred to as governmentdomestic debt, but this term leads to confusion, since a significant portion of it is actu-ally owned by foreigners. The foreign-owned share of rupiah-denominated SBNs averaged17% during 2009, rising to almost 20% by 21 January 2010 (MOF 2010).

TABLE 3 Central Government Debt Outstanding

2000 2005 2009a

($ billion) % of total ($ billion) % of total ($ billion) % of total

Borrowings 61.1 47.2 63.1 47.2 64.9 38.4Bilateral 36.5 28.2 42.2 31.6 41.2 24.3

Multilateral 20.6 15.9 18.8 14.1 21.5 12.7

Commercial 3.1 2.4 1.8 1.4 2.2 1.3

Suppliers 0.7 0.5 0.2 0.1 0.1 0.0

Other 0.2 0.1 0.2 0.1 0.0 0.0

Securities 68.4 52.8 70.5 52.8 104.2 61.6Foreign denominated 0.0 0.0 3.5 2.6 15.2 9.0

Rupiah denominated 68.4 52.8 67.0 50.2 89.0 52.6

Total outstanding debt 129.5 100.0 133.6 100.0 169.1 100.0

GDP 145.6 290.7 574.6Debt/GDP (%) 88.9 46.0 29.4

Memo item

Exchange rate (Rp/$) 9,535 9,830 9,400

a The 2009 data are for October.

Source: MOF (2010).


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were first introduced in 1998, and were used to recapitalise insolvent banks takenover by the government; they were denominated almost entirely in rupiah. From2004, however, the government also began to issue foreign currency-denominatedsecurities. The bulk of securities outstanding in October 2009 were denominated

in rupiah; a large proportion of these were in the form of bonds (with fixed andvariable interest rates), and the rest were treasury bills. The role of governmentsyariah securities (that is, bonds deemed acceptable for Islamic investors) remainsvery small for the present.

The governments initial target for debt financing in 2009 was Rp 51.3 trillion almost 39% lower than the realised amount in 2008 (MOF 2009a). However, withthe sudden need for fiscal stimulus in 2009 it was instead increased to Rp 133 tril-lion (table 2) 58% more than in 2008. As it turned out the realised amount wasRp 125.2 trillion. This was more than covered by domestic financing of Rp 142.6trillion, raised mainly through the issue of government bonds (Rp 102 trillion),

allowing foreignfi

nancing to be run down by Rp 17.4 trillion. Given the relativelyminor impact of the GFC on Indonesia, there has been no need to draw on the$5.5 billion in stand-by loans committed by Indonesias development partners,the World Bank, the Asian Development Bank and the governments of Japan andAustralia.

THE FIRST 100 DAYS PROGRAMThe newly assembled government established its 100 Days Program under thecoordination of the vice president and the UKP4 Team, with input from all min-istries and other government agencies. There were 45 programs and 130 actionitems, with priority given to 15 programs, nine of which are in the field of eco-nomic policy. Resosudarmo and Yusuf (2009: 3047) discuss the strategy for thefirst 100 days of the second SBY administration, arguing that the intention was todemonstrate

that the new government is serious about conducting reform. By generating ...quick success stories, the government hopes to create a perception that it has thewill and the capacity to tackle reform more generally. It believes that ... the posi-tive impact resulting from ... small reform projects is likely to create a snowball ef-fect, making it easier to implement much larger and more sensitive reform projects

subsequently.

In retrospect this interpretation of the 100-day program may have been too gen-erous. As the authors noted, it had become predictable that the media would usecompletion of the first 100 days as the basis for generating what they hope will bea collection of reports on the governments performance that will be considerednewsworthy by the general public. To a government leader in an age in whichopinion polls have become very common, this can be a somewhat daunting pros-pect. It does not seem implausible to argue, therefore, that SBY decided to take con-trol of the process by pre-empting the media in its choice of matters for emphasis.

Left to itself, the media might have focused on the governments success or lackof it in tackling corruption and crime, improving deficient infrastructure, pre-venting electricity black-outs, ensuring compensation for victims of the Lapindomudflow disaster (McMichael 2009) and so on. Instead, media commentators seem


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for the most part to have been overwhelmed by the administrations extraordinar-ily long and often vaguely specified list of things to be achieved in the first 100days. This kind of approach ambitious programs with a long list of action items has been observed before (for a discussion of the problems it entails, see Basri

and Patunru 2006). Not least of the difficulties faced has been even to gain accessto a reliable official list. Government websites have provided different versions,and officials have often gone public with yet different lists. Initially, the most com-mon classification of tasks was similar to that underlying the governments five-year program: physical/geographical infrastructure (roads, ports, electricity andhousing); soft infrastructure (ease of doing business, logistics, legal certainty andregulatory reform); and social infrastructure (social protection for the poor).

In any event, at the end of the first 100 days the president announced that vir-tually all activities included in the program had been completed on target. Thesummary of these achievements can be found at , a document running to some 50 pages. We focushere only on its economic section, which lists roughly 60 action plans, for eachof which the level of achievement is recorded. For almost every item the level ofachievement is given as 100%; a few list achievement in excess of 100%, but noneless than that. Taken at face value, the document seems to suggest that the incom-ing government has been performing extremely well.

If we focus on the concrete, albeit brief, information provided on the nature ofthese achievements, however, a different picture emerges. For at least half of theindividual action items, the achievement amounts to issuing or announcing a newregulation, plan, blueprint, recommendation, policy or set of guidelines, and inseveral cases nothing more than preparing a draft thereof. In about one-fifth ofcases the achievement has been to hold one or more meetings, seminars or sitevisits. In about seven cases, a letter or other document has been sent to the presi-dent or one of the ministers, from whom further action is awaited.

The important distinction to be made here is between inputs and outputs. Theinputs in question encompass all the ministerial and bureaucratic activity that liesbehind the delivery of services by the government to the public. The outputs arethose services themselves. The general public, presumably, is not interested inthe fact that ministers and bureaucrats have held meetings or written new regu-lations. What it wants to see is outputs such as improved infrastructure, betterlaw enforcement and so on. While it is true that not enacting laws and issuing

regulations often holds back progress, doing these things does not guarantee it.By way of illustration, several years ago a presidential decree was issued that wasintended to clarify the governments power of eminent domain that is, its powerto resume land needed for important public purposes such as building a newroad (McLeod 2005b: 1467). To our knowledge this decree has never been used,yet government officials continue to complain that slow progress in building newinfrastructure results from inability to take over the land that is needed.7 Thus, forexample, PT Jasa Marga, the state-owned toll road operator, took more than twoyears to procure just six hectares of land in one case (Kompas, 1/2/2010).

7 Recall that one of the eligibility criteria listed above for infrastructure projects to be givenfavourable tax treatment as part of the fiscal stimulus package was that the project had tobe free of any land acquisition constraint.


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Returning to the achievements of the 100-day program, in a few cases 100%completion is claimed, but no concrete evidence of this is provided; in a fewmore, the information provided actually makes it clear that the target has not beenachieved. An example of the latter relates to item P15A2: the plan to establish a

food estate in Merauke. The information provided here states explicitly that thishas not yet been able to be implemented because certain technical conditionshave still to be determined. Several achievements seem to amount to nothingmore than that the relevant department has continued to do its regular day-to-dayoperations (for example, item P13A3, increasing the capacity of 695 kilometres ofroads in Sumatra and Sulawesi), and there is at least one case where the claimedachievement seems quite implausible (item P13A7, providing telephone access to25,000 villages).8

Aside from the question of what has actually been achieved, little attentionseems to have been given to the content of the 100-day program to its lack of any

sense of what is crucial and what is of minor importance, to items that have beenleft off the list, and to whether particular items have any place there. Two itemsthat are clearly extremely important to Indonesias economic progress are policiesrelating to the subsidisation of fuels, electricity and fertiliser, and to the regulationof minimum wages. The subsidies consume tens of billions of dollars of the gov-ernments financial resources, while wage regulation creates an insurmountablebarrier for millions of low-productivity workers who might otherwise join theformal sector workforce. The government claims to have met completely the tar-gets of the relevant action plans. In the first case, completion means preparationof a roadmap for reducing fuel subsidies (which seems not to have been madepublic); subsidies to electricity and fertiliser are not even mentioned. In reality, theCoordinating Minister for Economics has already announced that domestic fuelprices and electricity tariffs will not be changed in 2010 (Kompas, 14/1/2010). Inrespect of minimum wages, completion means that a draft regulation has beendelivered to the Minister of Labour and Transmigration; it has yet to be approvedand issued and, in any case, no information has been provided as to whether itwill free up the labour market or constrain it further.

One of the important policy issues that has been ignored in the 100-day pro-gram is the long-awaited synchronisation of regulations in the mining sector. Therelated regulatory framework involves laws on oil and gas; minerals and coal;the environment; forestry; spatial planning; and tax. Several cases of overlap and

contradiction between these laws have created uncertainty for investors, causingbillions of dollars worth of mining investments to be placed on hold.

Another important omission from the program is privatisation. This has neverbeen implemented with any enthusiasm, and now gives every sign of havingbeen reversed. Several of the action plans under the broad heading revitalisa-tion of fertiliser and sugar manufacturing actually involve expansion of exist-ing, under-performing state-owned firms. Indeed, they even envisage extensionof one such firms activities overseas through the establishment of a joint-ventureurea factory in Iran. At the same time, new state enterprises have been set up tohandle various aspects of infrastructure financing. This reflects the belief that it

8 Indonesia has about 70,000 villages, so the continuation of progress at this rate would seeevery village in the country with telephone access in less than nine months!


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is lack of financing that is holding up the development of infrastructure, whereasin fact the greatest obstacle is the unwillingness of the government to recognisethe importance of pricing policy relating to infrastructure use. If there were rea-sonable certainty that prices to users could be set on a rational basis rather than

determined by political considerations, profitability would not be at issue, andfinancing would not be a problem.

A few of the items in the 100-day program deal with some of the sacred cows ofpolicy making in Indonesia, including the supposed need for government supportfor the development of small and medium enterprises (and the related policy ofsubsidising, directly or indirectly, the flow of outside financing to such firms); andthe desirability of self-sufficiency in various foods, including soy beans, corn, sugarand beef. Governments at least as far back as the Soeharto era have paid lip serviceto the need for policies to support small and medium business. There are few if anycredible arguments in their favour: countless small and medium firms survive and

prosper in the absence of assistance, with some of them going on to become large.The key determinant of small firms success is the capability of their owners, whichin turn largely determines their access to outside finance (if not from banks, thenfrom a wide range of other sources). Likewise, advocacy of food self-sufficiencyhas very little basis in economic rationality; in particular, it is not sensible for acountry with limited land resources to pursue self-sufficiency in beef.

The substantial decline in the presidents opinion poll ratings has drawn a pre-dictable response from a presidential spokesman, along the lines that the newsmedia had unfairly focused on the [KPK and Bank Century] scandals and ignoredthe governments progress in infrastructure projects and other areas (Onishi 2010).There are indeed a few important areas where the government has made someprogress but, given that these have been lost in a forest of achieved targets that areessentially vacuous, the media can hardly be blamed for its failure to focus on thegenuine successes. SBYs decline in popularity may indeed have much to do withthe scandals, but it may also reflect public disappointment with the presidentsattempt to hijack the 100-day assessment exercise, and with the governmentsfailure to distinguish meaningful achievement from mere bureaucratic bustling.

Among the more genuine achievements in the first 100 days are the commence-ment of 24-hours-a-day, seven-days-a-week operation at Indonesias four majorports (in the cities of Jakarta, Medan, Surabaya and Makassar); the launching ofthe national single window (a one-stop electronic service for import and export

clearance); and the issue of a joint decree (by the ministers of trade, home affairs,justice and human rights, and transmigration and manpower, and the head of theinvestment coordinating board) abolishing 70 business permits, with a view toreducing from 60 days to 17 days the time required to complete licensing proce-dures for the establishment of new businesses (Basri 2010; Lingga 2010).

ASEANCHINA FREE TRADE AGREEMENTThe ASEANChina Free Trade Agreement (ACFTA) signed in November 2004took effect on 1 January 2010. The agreement requires Indonesia to remove tar-iffs on some 6,682 items spread over 17 sectors, 12 in manufacturing and fivein the agriculture, mining and maritime sectors. Bilateral or limited multilateraltrade agreements are not the best approach to trade policy, not least because theycan result in trade diversion as well as trade creation. Trade diversion refers


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to the shift of imports from more efficient producer countries in the rest of theworld to less efficient producers within the free trade area (FTA). This could beavoided if countries within the FTA applied the same tariff levels to the rest ofthe world as to their partner countries, but that approach is rarely followed. As

a consequence, FTAs require highly complex rules of origin to prevent efficient,low-cost producers in the rest of the world exporting to member countries, indi-rectly, via members with the lowest tariffs against non-members. As the numberof agreements joined by a country increases, there is the potential for a spaghetti-bowl effect (Bhagwati 2008: 6171), in which the trade agreements criss-crossand overlap, and the same commodity may be subjected to several different tariffrates and rules of origin. This leads to confusion and increased transactions costs,including bigger bureaucratic hurdles. The ACFTA risks adding to the rather wor-rying global trend towards trade dis-integration and trade diversion, because ofits reliance on preferential rather than non-discriminatory tariff reductions not

to mention the far superior options of moving toward freer trade through globaltrade agreements or unilateral action. Nevertheless, the sheer size of the ACFTAshould mean that losses from trade diversion will be small relative to gains fromtrade creation.

Shortly after the agreement was signed, the ASEAN Secretariat warned that

the ensuing intensified competition in each regions domestic market given thesimilarity in industrial structures of ASEAN and China may entail short-run costsin the form of displacement of workers and rationalisation of some industries andfirms. And as such, there would be the need for adjustments amongst workers andenterprises. (Cordenillo 2005)

Although Indonesian firms had had five years to prepare for this new environ-ment, there were many media reports in late 2009 and early 2010 of manufactur-ers concern about the new competitive pressures they now faced. Respondingto these pressures, the Minister of Trade reportedly wrote to the ASEAN Secre-tariat requesting re-negotiation of some tariff posts (JP, 6/1/2010), although theveracity of this report is open to doubt. The ASEAN Secretary General deniedthat the government had explicitly requested any re-negotiation, but acknowl-edged receiving a letter voicing concern about the impact on local industries. Thegovernments position was later clarified by the Coordinating Minister for Eco-nomic Affairs (AntaraNews, 19/1/2010): Indonesia would re-negotiate directly

with China on 228 items, while alsoimproving infrastructure, logistics and theinvestment climate.The parliament, meanwhile, continued to urge the government to do more

to protect domestic producers. Members argued that no less than 15 of the 17sectors needed protection: textiles and textile products; food and beverages;petrochemicals; agricultural machinery and equipment; footwear; synthetic fibre;electronics; cables and electrical equipment; machinery; steel; automotive com-ponents; cosmetics and traditional herbal medicines; furniture; rubber products;and engineering, procurement and construction services (Suharmoko and Afrida2010). The analytical basis for this long list is not readily apparent, but it would

seem to suggest that the parliamentarians have little understanding of the reasonswhy nations trade or why protection diminishes the potential gains from trade.Simply put, nations trade in order to increase their access to goods and services,


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given their own endowments of productive resources. Industries that competewith imports are forced to become efficient and thus enable the country to reapthe gains from trade. An industry that needs continuous protection is inefficient,and the country as a whole will be better off if its productive resources are allo-

cated elsewhere.At least one large manufacturer, the state-owned PT Krakatau Steel (Indonesias

largest steel producer) remains optimistic in the face of the ACFTA. This optimismwould appear to rest, however, on the expected continuation of protection, ratherthan on the firms inherent ability to compete with other producers within theFTA. The companys key products directed mainly to the domestic market arehot-rolled coil (HRC), cold roll (CR) and wire rope (WR). HRC falls under Nor-mal Track 1 of the agreement (that is, products whose tariffs had to be scrappedin 2010), but Krakatau Steel has obtained an SNI (Indonesian National Standard)certificate, issued by the National Standardisation Agency (Badan Standardisasi

Nasional, BSN), for this product. The SNI serves as a technical barrier to mini-mise impact from international competition, because imported HRC is requiredunder Ministry of Industry Regulation 1/M-IND/PER/2009 to have the samecertificate. As for WR and CR, the deadlines for removal of their protective tariffsare not until 2012 and 2018, respectively, because WR falls under Normal Track2 of the agreement and CR under its Sensitive List (JP, 15/1/2010). Arguably thecompanys optimism is misplaced. While the World Trade Organizations Dohadevelopment agenda is currently in limbo, it is expected that the use of SNI cer-tificates for protection will not be allowed in the future.9 Furthermore,withoutsignificant improvement in efficiency it will not be surprising if Krakatau Steelrequests further protection as the 2012 and 2018 deadlines for WR and CR tariffremoval approach. The companys plan to make an initial public offering in thesecond half of 2010 should increase its capital resources, but it cannot be assumedthat this will improve its performance sufficiently to enable it to compete withoutprotection especially since it will remain a state-owned enterprise, with the rela-tively weak management capability that this usually implies.

Despite the concerns of individual firms and industries, Sadewa (2010) argues,using a Global Trade Analysis Project (GTAP) simulation, that the expected netwelfare impact for Indonesia from joining the ACFTA (as measured by the utilityreceived by Indonesian households) is positive. His impact exercise found thateasier market access to China will significantly improve Indonesias export per-

formance. Sectors that will gain include rubber products, mineral products, andmachinery and equipment, whereas sectors that will experience pressures forcontraction include leather products, garments and metal products. Sadewasanalysis showed that Indonesia would benefit more if it were a member of bothACFTA and the ASEAN Free Trade Agreement than if it belonged only to thelatter (assuming that the other ASEAN countries were members of both). In anycase, economic integration of Indonesia with China had been increasing rapidlyeven before the advent of the ACFTA. Between 2004 and 2008, annual average

9 The Ministry of Industry is quite open about the protective intent of the regulation justmentioned, notwithstanding the cost to downstream users. According to its Director Gen-eral for the Metal, Machinery, Textiles and Multifarious Industries, [the] local steel indus-try needs to be protected (Jati 2009).


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growth rates of exports of fruit, footwear and clothing to China were higher thanthose to any other destination, while Indonesias imports from China in the formof capital goods have also been increasing (Rahardja 2010).

The governments decision to re-negotiate the ACFTA is clearly a setback. A

previous government negotiated this agreement, realising that the whole popu-lation would benefit in net terms, even though it would be beneficial for someindustries but not for others. To fail to uphold its commitments under this long-standing agreement makes Indonesia appear unreliable as an economic partner.To delay the implementation of, or withdraw from, a trade agreement with acountry with a population of 1.3 billion and an economy that grows by 89%annually is not good policy for Indonesia. In the longer run, the Indonesian econ-omy will benefit not only through trade but also through increases in investmentand productivity.

16 February 2010

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Indonesian Economic Studies 42 (3): 295319.Bhagwati, Jagdish (2008) Termites in the Trading System: How Preferential Agreements Under-

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BPS (Badan Pusat Statistik, Central Statistics Agency) (2010) Perkembangan ekspor danimpor Indonesia Desember 2009 [Indonesias export and import development, Decem-ber 2009], Berita Resmi Statistik [Official Statistical News], No. 07/02/XIII, 1 February.

Cordenillo, Raul L. (2005) The economic benefits to ASEAN of the ASEANChina FreeTrade Area (ACFTA), ASEAN Secretariat, Jakarta, 18 January, available at .

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