00074918.2011.619048
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Chris Manning & Raden M. Purnagunawan
To cite this article: Chris Manning & Raden M. Purnagunawan (2011) Survey of
recent developments, Bulletin of Indonesian Economic Studies, 47:3, 303-332, DOI:
10.1080/00074918.2011.619048
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Date: 18 January 2016, At: 19:18
Bulletin of Indonesian Economic Studies, Vol. 47, No. 3, 2011: 303–32
SURVEY OF RECENT DEVELOPMENTS
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Chris Manning
Australian National University
Raden M. Purnagunawan
Padjadjaran University, Bandung
SUMMARY
There is a growing conidence in policy, business and inance circles about Indonesia’s ability to withstand global economic and inancial shocks, and a renewed belief in domestic
sources of growth. Despite uncertainty in Europe and slower than expected recovery in
the US, Indonesia is well placed for moderately high growth in the medium term, and
economic stability in the shorter term. At the end of June 2011, foreign reserves were at
a record high, inlation was down, annual growth was steady at 6.5%, and investment –
especially foreign direct investment (FDI) – was up signiicantly.
Consumer price inlation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising
the effects of capital inlows. However, turmoil in international markets led to a sharp
fall in the Indonesia stock exchange index and a mild currency depreciation in August–
September, prompting central bank intervention in the foreign exchange market. Fiscal
policy has remained conservative, aiming for a balanced budget by 2014. However, the
government has still not moved to reduce growing fuel and energy subsidies.
While the service sectors have continued to record high rates of growth, there has been
a revival of manufacturing in 2011. This is partly underpinned by strong inlows of FDI,
and is especially evident in the labour-intensive textiles, clothing and footwear industries
after a decade of stagnation. Multinationals have announced plans to expand operations in
Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia’s growing middle class – a result partly of higher
rural incomes driven by the commodity boom outside Java.
Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist lavour. A cabinet reshufle in October may signal a more dirigiste
approach to industrial policy – especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy.
One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been
fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain
to add to labour supply pressures among young people.
The government is now considering how to mobilise its large population base, abundant
natural resources and strategic location to play a greater role in the world economy. These
assets are central to the ambitious ‘Master Plan’ for longer-term development (2011–25),
announced in May. It focuses on developing the resource-rich Outer Island regions, with
massive investments in energy and ‘connectivity’ to link the major centres and islands with
each other, and centres with their hinterlands. Funding (to come mainly from the private
sector), implementation and coordination are all major challenges.
Keywords: growth, economic policy, industrial policy, labour, migration, economic planning
ISSN 0007-4918 print/ISSN 1472-7234 online/11/030303-30
DOI: 10.1080/00074918.2011.619048
© 2011 Indonesia Project ANU
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Chris Manning and Raden M. Purnagunawan
INTRODUCTION
The launching of the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (known as MP3EI) by President Susilo Bambang
Yudhoyono (SBY) in May 2011 symbolised a growing conidence among policy
makers, politicians and business people in Indonesia’s economic future, and at
the same time pointed to a revival of economic nationalism. In some respects, the
atmosphere resembles the heady days of the late Soeharto era, when there was
growing conidence in cooperation between big business and the state to promote
economic transformation.1 The Asian inancial crisis (AFC) put those ambitions on
hold with a jolt. For nearly a decade after the AFC and the accompanying regime
change, the nation moved forward with conidence politically. Economic policy
makers, in sharp contrast, were seeking to put to rest the trauma of the sudden
and deep economic disruption of 1998. International investors in turn were wary
of Indonesia, with its radically different and contested political environment and
the massive changes in political and administrative arrangements heralded by
decentralisation from 2001.
The revived conidence can be attributed to a number of factors. Economic
recovery from the AFC and its aftermath had been consolidated by the mid-2000s.
Although somewhat adversely affected by the global inancial crisis (GFC) of
2008–09, growth has maintained a gradual upward trend through to 2011. Indonesia’s recent GDP growth has been more stable than that of its peers in the region,
even though it has been less rapid than that of its Southeast Asian neighbour Vietnam (igure 1), and much slower than that of China and India. SBY’s re-election
in 2009 followed Indonesia’s joining the G-20 leaders forum in 2008.2 For the irst
time, Indonesia was being seriously discussed as a candidate to join the BRICS
(Brazil, Russia, India, China and South Africa), the irst tier of large developing
countries (Thee 2010). In 2011, Indonesia became chair of ASEAN, and in 2013 it
will chair APEC for the irst time since 1994. Further, buoyant commodity prices
and Indonesia’s rich supply of natural resources, in great demand in Japan, China
and India, have provided some insurance against the immediate negative effects
of the slower than expected recovery in the US and the debt crisis in Europe.
There is a second, more subtle dimension to this growing conidence, also
relected in the tenor of the Master Plan. First, while public documents clearly
acknowledge that its economic fortunes are inter-twined with those of the East
Asian and world economies, there is a strong feeling that Indonesia’s economy is
now large and prosperous enough for domestic resources, both human and physical, to play a more dominant role in national development and industrial growth.
Several factors have been at play here. While exports have continued to grow
quite strongly, a return to moderately high growth has been achieved without reliance on a single export commodity (or set of commodities) acting as the engine of
growth – a role played by oil in the 1970s and by labour-intensive manufacturing
exports in the 1980s, and in the 1990s until the AFC. The small communications
1 At this time economic growth and investment rates were high by regional standards;
Indonesia also chaired a ground-breaking APEC leaders meeting in 1994, afirming the
country’s place as a signiicant regional power in economic and political affairs.
2 In 2009, Indonesia had the third highest economic growth rate in East Asia (4.5%), after
China and Vietnam.
Survey of recent developments
305
FIGURE 1 Average Growth of Real GDP for Selected Countries in Southeast Asia
(% p.a.)
12
2005–08
10
2008–10
8
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6
4
2
0
Indonesia
Cambodia
Malaysia
Philippines
Thailand
Vietnam
Source: ADB (2011).
and utilities (electricity, water and gas) sectors have been Indonesia’s fastest
growing sectors for several years, and growth in the non-tradables sector has
been more than twice that in tradables for most years since the crisis. Investment
has recovered somewhat in the past three years (OECD 2010). Inluential policy
makers, politicians and business people have concluded from the experience of
the GFC that heavy dependence on the global economy can be costly in terms
of extreme luctuations in total demand, and this has reinforced a belief in the
importance of domestic sources of growth.
In his introduction to the Master Plan, President Yudhoyono referred to this
national self-conidence and ambition for the future:
The Republic of Indonesia is a nation blessed with almost all of the prerequisites for
transformation into a great economic power. With its abundant natural resources,
large, productive and young population and strategic access to the global mobility
network, these assets and access empower Indonesia to establish itself in its rightful
place among the leading economies of the world.
From an economic standpoint, the potency of these national assets is relected in
the absolute size of Indonesia’s growing middle class, especially in the second half
of the past decade. According to one estimate, the middle class grew by over 50%,
from 80 to 130 million, in just seven years (2003–10) (World Bank 2011a: 37–41).3 This
has already meant a substantial increase in the consumption of consumer durables
such as television sets, motor-cycles and cars. But it also signals a signiicant shift
in consumption patterns to higher-quality services (such as health care, education,
3 This igure is based on a broad deinition of the middle class, covering all households
earning more than $2 per capita per day. The number of households with a daily income
per capita of $4–6 has grown especially fast in both urban and rural areas (the absolute
numbers are roughly equivalent in both).
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Chris Manning and Raden M. Purnagunawan
information technology and leisure activities) and the use of more sophisticated
inancial services, including insurance and social security (ADB 2010).4
Thus Indonesian policy makers appear quietly conident that the national
economy should be able to weather the impact of most shocks. Indeed, Indonesia
seems to have beneited from global uncertainty, with investors discovering it as
something of a safe haven, as well as a longer-term prospect.
This is not all good news, however. While there is no indication of a planned
sudden shift away from Indonesia’s open stance on both trade and investment,
there are some signs that international investors are being lured to Indonesia
partly because of its growing, and potentially more protected, domestic market.
Moreover, the increased conidence within Indonesia does not appear to arise from
improved competitiveness at home. Rather, there is a conidence in the beneits
of greater cooperation between big business and government (‘Indonesia Inc.’) in
promoting economic growth by mobilising capital domestically and raising value
added at home (the latter through selective tax and trade policies that target certain industries, and that focus on the domestic processing of natural resources).
One legitimate question is whether this new more dirigiste approach (discussed
further below) will be consistent with the higher economic growth targets of 7–8%
that the government has set itself in the medium to longer term.
Thus the Master Plan does lag a change in emphasis that has been evolving
over the past couple of years within the economic policy team, especially since the
departure of former inance minister Sri Mulyani Indrawati (Baird and Wihardja
2010: 144–6). We examine some of its features below, after irst looking at recent
developments in the economy and in industry and trade policy, and their implications for the labour market.
MACROECONOMIC DEVELOPMENTS AND POLICY
In the second and third quarters of 2011, Indonesia could hardly have been better
prepared for what is now almost certain to be a sharper downturn in the world
economy in 2011 and 2012, and a slower recovery, than had been expected earlier
in the year. At the end of the second quarter (Q2) of 2011, foreign reserves reached
a record high at just under $120 billion, inlation was down to below 5%, investment (especially FDI) was up signiicantly and growth was steady at 6.5% year
on year. Macroeconomic policy makers are not ignoring the potential impact of
another global recession. However, Indonesia seems likely to have been relatively
little affected in the immediate to medium term by the August news of a slower
than expected US recovery, and the unresolved debt crisis in Europe (The Economist, 6/8/2011: 32).
Growth
GDP growth remained steady in Q2 2011 (table 1a), despite the poorer performance of some sectors, especially mining and quarrying, in the past quarter
(table 1b). Growth of 6.5% year on year, similar to that recorded in Q1, suggests
that the quarterly year-on-year growth rates for 2011 may have moved up into the
4 ADB (2010, part I) explores some of the changing consumption patterns of the middle
class in Asia, and includes data for Indonesia.
Survey of recent developments
307
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
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Gross domestic product
GDP excluding oil & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water
supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Services
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
5.6
6.1
6.1
6.5
5.8
6.2
6.9
7.4
6.5
6.9
6.5
7.0
2.7
–7.6
8.0
7.3
7.2
22.3
4.3
20.0
22.6
3.4
–7.3
8.0
7.2
14.0
9.4
–0.4
14.6
18.4
5.1
4.8
9.2
6.8
23.8
8.5
2.4
9.6
12.2
4.9
7.3
8.7
6.7
22.5
1.7
5.1
16.1
16.9
4.3
2.8
7.3
5.3
20.0
5.5
0.0
12.3
15.6
4.6
4.5
9.2
7.4
19.9
6.2
5.4
17.4
16.0
3.5
4.0
3.3
4.7
4.5
4.5
3.0
3.1
3.9
4.3
3.1
3.9
4.5
5.1
1.8
2.7
4.3
4.9
3.8
4.2
5.3
6.0
3.6
4.3
5.0
5.8
3.9
0.8
6.1
6.6
7.6
8.1
8.2
8.8
8.3
8.2
8.8
7.3
8.6
5.1
16.9
5.1
7.2
9.1
6.2
17.8
3.4
6.8
8.7
6.6
17.8
4.3
6.7
8.4
9.3
19.8
4.3
5.3
7.9
9.5
16.4
3.9
7.4
9.6
8.6
12.0
4.8
4.7
5.6
5.3
5.9
6.4
6.3
7.5
7.3
7.0
6.9
5.7
Source: CEIC Asia Database.
6.5–7% range, one percentage point above the range recorded for the four quarters
of 2010 (5.5–6.0%). Whether these new growth rates can be sustained in the short
to medium term will depend on what happens in Europe and the US in the next
3–6 months.5
A clear trend is now emerging in the form of a revival of growth in manufacturing – already commented on by Suryadarma and Sumarto (2011) – and in tradables
more generally. Agricultural production has also been steady, partly because of a
5 In light of these developments, the World Bank has already down-graded its 2011 growth
forecast for Indonesia from 6.7 to 6.3% (World Bank 2011c: 5).
308
Chris Manning and Raden M. Purnagunawan
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TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; a % quarter on quarter, annualised rates)
By expenditure
Private consumption
Government consumption
Not seasonally adjusted a
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water
supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Services
Mar-10
Jun-10
5.1
–17.2
–90.5
5.4
3.0
135.6
7.9
12.5
37.3
12.4
–14.5
–9.0
Sep-10
Dec-10
Mar-11
Jun-11
5.0
17.9
61.6
3.0
10.4
265.0
4.9
–9.6
–92.0
5.2
9.0
152.3
5.2
14.3
–10.5
–10.9
11.2
24.8
6.5
44.7
27.6
3.9
18.3
14.0
7.4
20.6
–11.9
17.6
61.7
44.4
5.4
1.8
6.0
–8.0
–25.3
–13.0
9.0
14.7
–4.4
9.6
32.9
26.3
2.7
1.7
3.1
4.3
3.0
6.4
6.3
5.7
2.9
3.1
4.6
5.6
4.3
3.1
7.1
7.8
3.3
–1.2
2.3
4.6
3.5
–3.2
10.6
8.0
0.4
7.2
7.4
4.0
18.1
5.5
5.7
7.8
11.9
24.1
2.2
6.7
7.0
7.8
21.6
8.3
6.6
11.3
13.3
15.6
1.3
6.0
5.7
5.1
5.3
4.3
7.7
14.4
8.3
6.2
5.7
5.0
7.5
9.7
6.1
6.5
5.8
8.3
9.8
3.8
5.7
4.7
a Quarter-on-quarter growth is typically distorted by seasonal factors. The data in this table have been
seasonally adjusted so as to remove these distortions.
Source: CEIC Asia Database.
good main rice harvest in Q1 2011.6 The disaggregated data show that food recovered from its poor showing in 2010, plantation crop growth was up in the irst half
of 2011 and isheries grew strongly. In manufacturing, the biggest surprise in 2011
has been a revival of the textiles, clothing and footwear (TCF) industries after a
decade in the doldrums: this sector grew by an average of 9% (year on year) in the
irst half of 2011, compared with barely 1% in 2010. It is reported that Chinese and
other international investors have turned their attention to these labour-intensive
6 Nevertheless there is concern about the potential impact of resurgent infestation of the
rice crop by the brown planthopper or wereng (box 1).
Survey of recent developments
309
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BOX 1 ThreaTs TO rice PrOducTiOn
On 5 November 1986, in response to Indonesia’s most serious brown planthopper
(bph) infestation, which had resulted in the loss of over a million tonnes of rice,
then President Soeharto issued a Presidential Instruction (Inpres 3/1986) banning 57
named resurgence-causing pesticides, and initiated the irst stages of integrated pest
management. Combined with the introduction of a new variety of resistant rice, IR 64,
this Inpres effectively provided Indonesia with the basis for more than two decades
of steadily increasing rice production without serious pest problems. Rice production
climbed from 37.7 million tonnes in 1986 to 66.4 million tonnes in 2010.
The brown planthopper (Nilaparvata lugens [Stål]) has been a scourge on rice in
Asia since the beginnings of the Green Revolution. It is a tiny fast-breeding insect that
combines high fertility with high mobility, allowing it to invade rice ields with ease.
Females can produce 400 eggs in a single generation of 20 days, and every alternate
generation becomes mobile and can take light. In large numbers, the hopper can
destroy a rice crop in a single day, producing what is called ‘hopperburn’. In addition,
the bph is the carrier of two virulent rice viruses: Grassy Stunt and Ragged Stunt.
Losses from these viruses can often be worse than direct hopperburn.
Spraying pesticides rarely obliterates an entire bph population. Instead, spraying
‘selects’ hoppers capable of developing resistance. Thus pesticides that may initially
be effective invariably lose their effectiveness as hopper populations mutate. Scientiic
studies have shown that some pesticides can actually increase hopper fertility. Far
more seriously, pesticides destroy the natural enemies of the bph, which can feed upon
hopper eggs embedded in the rice stems. Without such predators, the bph populations
can grow with no constraint, and reach outbreak proportions.
Farmers who have little understanding of the chemical compounds they are using
often mix a cocktail of pesticides that can mute the effect of the individual components,
making them even less effective on the insects. Similarly, under heavy pesticide use the
bph can mutate rapidly to overcome resistance bred into rice varieties. Since 1967,
Indonesia has introduced dozens of resistant varieties that have subsequently lost
their resistance.
Since 2005 Indonesia has dramatically increased its reliance on pesticides. With this
has occurred a breakdown of resistance in previously resistant rice varieties, including
IR 64. Since 2010, there have been serious outbreaks of bph infestation across Java.
Particularly severe outbreaks have taken place in the rice baskets of Jember, Lamongan,
Pati–Kudus, Klaten–Boyolali–Sukoharjo (with spillover to Yogyakarta), Subang–
Indramayu and Lebak, with both hopperburn and widespread virus infestation
occurring. Crop losses in these high-production areas have been notable.
A consistent response to date has been to increase the use of pesticides. Other
measures necessary to break the cycle of the bph require curtailment of the successive
planting of rice, and the substitution of secondary crops in place of rice. A fallow
period followed by synchronised planting over a wide area has so far been dificult to
achieve. All of these measures have the effect of reducing future rice production.
For the moment, Indonesia has only one possibly resistant rice variety, Inpari 13,
which is now being introduced in Java. However, the release of Inpari 13 in Polanharjo,
Klaten, has been accompanied by massive prophylactic pesticide spraying. It is
impossible to know how resistant this variety will be, since such mass spraying is
likely to do more harm than good. More generally, under present conditions, it is
impossible to predict the prospects for future rice production.
James J. Fox
Australian National University
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310
Chris Manning and Raden M. Purnagunawan
industries in Indonesia as wages have begun to escalate in southeastern China.
For example, Indonesia’s footwear industry association reports that the value of
exports grew by more than 50% in 2010, and was on target to grow by another
20–30% in 2011, although spokespeople were nervous about the possible impact
of a global downturn in 2012 (Investor Daily, 14/09/2011).
Growth rates of processed food, beverages and tobacco have also bounced back
(to just under 7% in the irst half of 2011), after a poor showing in 2010. At the same
time, quite high recent growth in both total investment and investment in machinery and equipment (table 1a) supports the picture of a reasonably robust expansion
in more capital-intensive industries in both manufacturing and mining.
Service sectors continue to record high rates of growth, still led by the rapid
expansion of communications (although growth of the latter declined to 12%
in Q2 2011). Indonesians are among the world’s largest users of mobile phones,
Facebook (second largest user) and Twitter (largest user). This, together with creative talents channelled into design activities associated with computers, has been
identiied frequently in the media as a strong contributor to the country’s comparative advantage in service-related activities. Non-tradables sector growth is
still well above that of tradables, and growth in other non-tradables sectors such
as transport remains strong. But the gap between tradables and non-tradables has
narrowed somewhat in the past six months.
Investment and exports
Investment grew strongly at over 9% in Q2 2011, up from 7% in Q1, and it continued to expand much faster than consumption (table 1a). Partly this can be attributed to continuing high rates of capital inlow, much of it FDI. From Q1 2010,
realised direct investment recorded by Bank Indonesia (BI) had begun to rise
quite steeply, picking up after the GFC. The quarterly average rose from a paltry
$0.7 billion in 2009 to around $2.7 billion in 2010, and $2.9 billion in the irst half
of 2011 (table 2). FDI continues to be dominated by manufacturing but has also
been signiicant in mining and, surprisingly, the trade sector (table 3), including
hotels and restaurants.
According to data on investment approvals from the Investment Coordinating
Board (Badan Koordinasi Penanaman Modal, BKPM), capital-intensive sectors in
manufacturing (chemicals, base metals and machinery) were the main targets of
FDI, although some projects were directed into more labour-intensive industries
such as electronics. Big multinationals such as Toyota and Nissan have announced
plans in the past six months to expand operations in Indonesia. While they may be
attracted by Indonesia’s export potential, its large domestic market seems to have
been a major consideration in announcements by industry spokespeople. Toyota,
for example, recently announced that its goal was primarily to expand its already
large presence in the domestic market, but it also signalled a secondary objective
of expanding exports into the Asia Paciic region (Jakarta Post, 14/09/2011). Other
companies such as Hyundai and Hankook Tire are similarly reporting a mix of output directed to the domestic market as well as for exporting (World Bank 2011b: 25).
This resurgence of FDI in Indonesia is a positive sign, and perhaps evidence of
a mood change, given the pessimism about the domestic investment environment
and the poor investment and output record in manufacturing for most of the postAFC period (Thee and Negara 2010: 287–9). While appreciation of the exchange
Survey of recent developments
311
TABLE 2 Balance of Payments
($ billion per quarter)
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Average Mar-10
2009
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Current account
Exports
Non-oil & gas
Oil & gas
Imports
Non-oil & gas
Oil & gas
Merchandise trade
balance
Non-oil & gas
Oil & gas
Services
Income
Current transfers
2.7
29.9
24.8
5.2
22.2
18.4
3.8
1.9
35.1
28.5
6.6
28.1
22.7
5.4
1.4
37.4
30.3
7.1
30.6
24.4
6.2
1.2
39.7
32.8
6.9
32.1
26.2
6.0
1.1
45.8
37.8
8.0
36.6
28.7
7.9
2.1
45.8
37.1
8.7
37.1
28.5
8.7
0.2
51.5
42.0
9.5
41.7
31.4
10.4
7.8
7.0
6.1
7.4
8.9
7.6
8.8
6.6
1.2
–2.4
–3.8
1.1
6.1
0.9
–2.1
–4.0
1.1
5.4
0.8
–2.3
–4.3
1.1
6.6
0.9
–2.2
–5.4
1.2
8.9
–0.1
–2.8
–6.7
1.3
7.8
–0.2
–2.3
–5.3
1.0
10.1
–1.2
–3.6
–6.9
1.0
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
0.0
1.2
0.7
2.6
–2.1
0.0
5.6
2.5
6.2
–3.1
0.0
3.7
2.3
1.1
0.3
0.0
7.4
1.7
4.5
1.2
0.0
9.5
4.2
1.4
3.8
0.0
6.4
3.0
3.8
–0.4
0.0
12.5
2.7
5.7
4.1
Errors & omissions
Overall balance
Foreign reserves
–0.7
3.1
60.2
–0.9
6.6
71.8
0.3
5.4
76.3
–1.6
7.0
86.6
0.6
11.3
96.2
–0.9
7.7
105.7
–0.9
11.9
119.7
Source: CEIC Asia Database.
TABLE 3 Share of Foreign Direct Investment by Sector, 2005–11
(%)
2005
2006
2007
2008
2009
2010
Semester 1
2010
Mining
Manufacturing
Finance
Trade
Other
2011
15
7
26
39
27
16
14
30
63
9
1
12
100
34
21
8
30
100
33
19
3
19
100
25
21
12
3
100
32
3
2
37
100
42
0
21
21
100
51
–1
23
13
100
34
3
13
20
100
Source: Bank Indonesia.
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312
Chris Manning and Raden M. Purnagunawan
rate may have hampered competitiveness, other factors are clearly working to
Indonesia’s advantage. For example, a JETRO (Japan External Trade Organization) study of irms in the Asia Paciic region suggests that rising wages in both
China and Vietnam, in textiles, transport and electronics, are likely to increase
the attractiveness of Indonesia as a destination country (World Bank 2011b: 26).7
Uncertainty of labour supply also seems to have been a major consideration in the
decisions of investors moving from China.
Domestic investment realisation, which accounts for 2–3 times the value of foreign investment recorded by BKPM, has also grown rapidly over the same period,
after collapsing in 2008 during the GFC.8 Here the focus in Q2 of 2011 was on primary industries, food and plantation crops (mainly oil palm), paper, base metals
and transport.
Domestic and foreign investments have been encouraged by growth in rural
incomes in the resource-abundant regions outside Java, which in turn have beneited from rising commodity prices over the past few years. A perceptive article in
the Wall Street Journal (Bellman 2011) describes the impact of higher prices of palm
oil, cocoa, rubber and coal on sales of consumer durables such as motor-cycles and
television sets, as well as on improved housing. Relecting an important development for consumer goods companies, Bellman quotes a Unilever spokesperson
as saying that the Outer Islands will soon constitute half the company’s sales,
the large majority of which have been on Java in the past. Unilever’s president
director is quoted as saying: ‘Rural areas are getting richer from plantations and
natural resources, the money is spreading’.
In Q2 2011, exports picked up, growing by 17.4% on an annual basis (table 1a),
although more recent data announced by the Central Statistics Agency (BPS)
point to a 5% decline in July compared with the previous month and then a recovery in August. The biggest gains were in oils and fats (mainly oil palm products),
minerals (mainly coal) and chemicals. The rapid growth in exports of coal and oil
palm over the past ive years in particular has shifted the locus of export activities
away from Java, where the once dynamic labour-intensive TCF industries had
been growing quite slowly for a decade before the recent recovery (McLeod 2011).
In discussions of the potential impact on Indonesian exports of slower world
economic growth in the next couple of years, Mari Pangestu, the former trade
minister (replaced on 18 October), has drawn attention to planned trade promotion efforts to diversify exports, especially to Africa, where Indonesia already has
a foothold through oil and gas exports to South Africa (Jakarta Post, 7/9/2011).9
7 The study reports US dollar wages to be 40% lower in Indonesia than in China, and the
gap was only slightly smaller with India and the Philippines (JETRO 2010: 51). Wage indices from the Economist Intelligence Unit point to much more rapid increases in real wages
in China from 2005 than in a selection of East Asian countries, including Indonesia and
Vietnam (World Bank Economic Sector, Jakarta, work in progress on Indonesia’s manufacturing sector).
8 The BKPM igure for domestic investment is itself a gross under-estimate, since BKPM
data cover only larger investors.
9 The focus of these efforts is to be on the more rapidly growing ‘South’ economies. For an
overview of South–South trade and investment ties, see Jha and McCawley (2011).
Survey of recent developments
313
FIGURE 2 Inlation and Its Components
(% per annum)
20
15
10
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5
0
CPI
Administered
Core
Volatile
-5
-10
Jan-2009
Jul-2009
Jan-2010
Jul-2010
Jan-2011
Jul-2011
Source: CEIC Asia Database.
Inlation, exchange rates and monetary policy
Global economic and inancial instability and uncertainty intensiied in August–
September, just when Indonesia’s growth rate had recovered to pre-GFC levels.
While well placed in many respects to weather the storm, Indonesia is not immune
to its effects, with short-term capital outlows impacting on the stock market and
the exchange rate in August and September. The troubles in Europe, Japan and
the US were also predicted to affect commodity prices, although most had already
begun to fall in the irst quarter of 2011, after the recovery in world prices from the
GFC during most of 2010.
The consumer price index (CPI) continued to slow through the second quarter
of 2011, after rising sharply in late 2010 owing to food price hikes. It rose only
very slightly in the Ramadan month of August (igure 2). The decline continued
to be driven by falling food prices (which accounted almost entirely for the fall in
‘volatile’ inlation shown in igure 2), and was helped by a still healthy stockpile
of just under one million tonnes of imported rice. Administered price inlation
remained steady until July, relecting to a considerable extent the government’s
decision to keep the main subsidised prices (fuel and energy) stable during 2011.
‘Core inlation’ has gradually increased, exceeding 5% for the irst time in two
years; this is reportedly connected with sharply rising gold prices, and with some
pass-through of other international prices to the general index.
There do not seem to be major threats from domestic supply for food prices
over the rest of 2011. But increases in world prices need to be monitored closely,
given the signiicant impact that rice price increases can have on ‘poverty basket’
inlation (World Bank 2011b: 16).
Inlation has remained low despite continuing high levels of capital inlow
and an exchange rate that remained relatively stable at around Rp 8,500/$ over
the three months to August (igure 3). The turmoil in international markets
314
Chris Manning and Raden M. Purnagunawan
FIGURE 3 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
4,500
Rp/$
11,000
CSPI
4,000
10,000
9,000
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3,500
Exchange rate
3,000
0
8,000
7,000
0
29-Sep-2010
29-Sep-10 26-Nov-2010
26-Nov-10 26-Jan-2011
26-Jan-11 25-Mar-2011
25-Mar-11 25-May-2011
25-May-11 19-Jul-2011
19-Jul-11 15-Sep-2011
15-Sep-11
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
contributed to a light to the dollar; a sell-off of shares especially by foreign owners; and a sharp fall in the value of the rupiah in September. The exchange rate
had strengthened to Rp 8,800/$ by the end of the month (after depreciating to
above Rp 9,000/$), with BI reportedly intervening in the market to slow the slide
in its value (Jakarta Globe, 14/9/2011).10
A number of factors appear to have contributed to inlation’s low level by
Indonesian standards. The government continued to sterilise the effects of capital
inlow through the issue of Bank Indonesia Certiicates (SBIs). Following sharp
commodity price rises through 2010 and early in 2011, the prices of oil, coal, palm
oil, cocoa and coffee had begun to plateau or decline by mid-2011 (igures 4a and
4b). The price of oil fell appreciably in early August, following news of signiicantly slower growth prospects in the US and mounting problems in Europe, but
remained reasonably steady through September. Coal, copper and nickel prices
fell by close to 5–10% from January to June, as did the prices of palm oil and cocoa,
while rubber prices fell even more steeply from their peak in February.
Money supply growth (proxied by currency in circulation) remained steady
within a 15–20% band year to year during the irst seven months of 2011 (igure 5),
although it rose sharply in August–September. Lower inlation led the real SBI
rate back into positive territory around March 2011. Given these relatively stable
conditions, it was no surprise that BI decided in September to keep interest rates
on hold, at 6.75%, for the sixth successive month. However, in light of jittery markets through into October, it took the decision to reduce the policy rate by 25 basis
points in the second week of October.
Through the irst two quarters of 2011, the balance of payments shows strong
growth in trade and capital inlows (table 2). However, turbulence on markets
10 The rupiah fell less in nominal terms than several other regional currencies in August–
September (World Bank 2011c: 8).
Survey of recent developments
315
FIGURE 4a International Prices of Selected Mineral and Petroleum Commodities
(September 2010 = 100)
150
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100
50
Nickel
Crude oil
Gold
Copper
Coal
0
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
Aug-2011
Source: Index Mundi, .
FIGURE 4b International Prices of Selected Agricultural Commodities
(September 2010 = 100)
200
150
100
Cocoa
Robusta coffee
Rubber
Rice
Palm oil
50
0
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
Aug-2011
Source: Index Mundi, .
abroad spilled over to stock exchanges worldwide, with quite large falls being
registered in Europe and the US, and to a lesser extent in Asia. Indonesia has
not been immune from these movements. After peaking at slightly over 4,000
in early August, the composite stock price index declined quite sharply from
early September, to 3,300, as a result of sell-offs by fund managers (Jakarta Post,
28/09/2011). It recovered slightly at the end of the month to just over 3,500
(igure 3). These falls, while signiicant, were not out of line with similar movements in other regional stock market indices (World Bank 2011c: 8).
316
Chris Manning and Raden M. Purnagunawan
FIGURE 5 Monetary Policy and Inlation a
(% p.a.)
8
25
Policy rate
7
20
6
5
CPI inflation
15
4
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Currency in circulation (rhs)
3
10
2
1
Real SBI rate
5
0
-1
Aug-2010
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
0
Aug-2011
a Currency in circulation is used as the indicator of money supply in preference to base money
because of the distorting impact of occasional changes in banks’ minimum reserve requirements on
the effective supply of base money; currency is the major component (about 75%) of base money. The
growth rate shown has been smoothed based on 3-month moving averages to clarify the underlying
trend. The real SBI (Bank Indonesia Certiicate) rate is approximated by the nominal rate less the contemporaneous CPI (consumer price index) inlation rate.
Source: CEIC Asia Database.
While Indonesia is in good shape to face immediate threats of a slowdown in the
world economy, one major gap has been regulations on the authority to deal with
an unexpected bank failure. The Financial System Safety Net (Jaring Pengaman
Sistem Keuangan, or JPSK) Law, designed to provide authority for government
oficials to act under such circumstances, has been delayed for several years and
had not been passed by the parliament by late October 2011. Several commentators have been urging the government and the parliament to give its passage high
priority, to ensure that policy makers have adequate protection to enable them to
take quick decisions to stabilise any situation that threatens inancial market and
macroeconomic stability. This legislation is considered critical in light of the political fallout in 2009–10 from the controversial 2008 decision to bail out Bank Century
(Baird and Wihardja 2010; Patunru and Von Luebke 2010: 10–12). There is concern
that without it senior decision makers may be unwilling to make a similar call in
the event of a future banking collapse.11
The 2012 budget
The president presented the draft budget for 2012 to parliament on 16 August.
There were no big surprises. Spending is planned to rise 7.4% to Rp 1,400 trillion,
lagging a decline in the deicit to 1.5% of GDP, down from the revised 2011 budget
estimate of 2.1% (table 4). This seems a tiny spending increase, given population
11 See, for example, M. Chatib Basri in an opinion piece in Kompas, 29/9/2011.
Survey of recent developments
317
TABLE 4 Budgets for 2009, 2010 and 2011
(Rp trillion)
2010
2011
2012
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Actual Proposed Revised Changea Proposed Changea
(%)
(%)
REVENUES & GRANTS
Domestic revenues
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non-tax
Natural resource revenues
Proits of state-owned enterprises
Revenue from public service centres
Other
Grants
995.3
992.2
723.3
694.4
357.0
230.6
106.7
28.9
268.9
168.8
30.1
59.4
10.6
3.0
1,086.3
1,082.6
839.5
816.4
414.5
309.3
92.6
23.1
243.1
158.2
26.6
14.9
43.4
3.7
1,169.9
1,165.3
878.7
831.7
432.0
298.4
101.3
46.9
286.6
192.0
28.8
50.3
15.4
4.7
17.5
17.4
21.5
19.8
21.0
29.4
–5.1
62.3
6.6
13.7
–4.2
–15.3
45.6
54.2
1,292.9
1,292.1
1,019.3
976.9
512.8
350.3
113.7
42.4
272.7
172.9
27.6
54.4
17.9
0.8
10.5
10.9
16.0
17.5
18.7
17.4
12.2
–9.6
–4.8
–10.0
–4.3
8.1
15.9
–82.3
1,042.1
697.4
148.1
97.6
80.3
88.4
192.7
140.0
82.4
57.6
52.8
0.1
68.6
21.7
344.7
1,202.0
823.6
180.6
131.5
121.7
116.4
184.8
133.8
92.8
41.0
51.0
0.8
61.5
26.3
378.4
1,320.8
908.2
182.9
142.8
141.0
106.6
237.2
195.3
129.7
65.6
41.9
0.4
81.8
15.6
412.5
26.7
30.2
23.5
46.3
75.6
20.6
23.1
39.5
57.5
13.8
–20.6
478.4
19.2
–28.0
19.7
1,418.5
954.1
215.7
138.5
168.1
123.1
208.9
168.6
123.6
45.0
40.3
1.8
63.6
34.5
464.4
7.4
5.1
18.0
–3.0
19.3
15.5
–11.9
–13.7
–4.7
–31.4
–3.9
343.7
–22.3
121.3
12.6
DEFICIT
(% of GDP)
46.8
0.7
115.7
1.7
150.8
2.1
222.0
200.0
125.6
1.5
–16.7
–28.6
FINANCING
Domestic inancing
Foreign inancing (net)
91.6
96.1
–4.6
115.7
118.7
–3.0
150.8
153.6
–2.8
64.8
59.8
–39.2
125.6
125.9
–0.3
–16.7
–18.0
–89.5
6.1
7.0
9,087
6.6
79.4
6.3
5.3
9,300
6.5
80.0
6.5
5.7
8,700
5.6
95.0
6.7
5.3
8,800
6.5
90.0
954
970
945
950
EXPENDITURES
Central government
Personnel
Material
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
BASIC ASSUMPTIONS
GDP growth (%)
Inlation (%)
Exchange rate (average Rp/$)
SBI interest rate (average %)
Crude oil price (average $/barrel)
Oil production (average ‘000 barrels/
day)
a The 2011 change is the difference between the revised 2011 budget and the 2010 ‘actual’ igure; the
2012 change is the difference between the proposed 2012 budget and the revised 2011 budget.
Source: MOF (2011).
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318
Chris Manning and Raden M. Purnagunawan
growth and inlation, and the need for public spending on infrastructure and
social sectors. As the table suggests, the proposed budget announced in August
often bears a weak relationship to the revised budget, since the government habitually proposes a conservative budget plan to parliament.
Nevertheless, the conservative budget plan for 2012 is in line with the president’s commitment to achieving a balanced budget by 2014. Based on the budget
assumptions, subsidies are planned to fall by an ambitious 12%, and the fuel subsidy by almost 5%. This does not factor in any direct reduction in the subsidy, with
anticipated cuts being due largely to better management of fuel rationing and the
development of alternative fuels.12 The main factor driving the projected fall in
total subsidies is a planned increase in electricity prices of 10%. The government
has yet to gain approval for this from the parliament (which in 2010 denied a government request for a 15% price increase in the proposed 2011 budget).
Capital spending is slated to rise by a signiicant 19%. Besides the standard
allocation for roads and bridges, the budget makes provision for a tiny increase
of 150 km of new railways and 14 new airports, and also apportions a signiicant
share for the maintenance of 36,000 km of roads and over 100 existing airports.
Airports appear to have been given priority in the context of a strong focus on
connectivity in the Master Plan. Civil service salaries are to be increased by 10%
(a real increase of around 5%), and transfers to the regions by 13%.13 Financing is
projected to be funded mainly through quite large increases in tax revenues (both
income taxes and VAT collections), complemented by small increases in net government bond issues (by 6%, accounting for around 10% of total revenue).
Three points should be noted in regard to next year’s budget. First, its growth
forecast of 6.7% now appears optimistic, given trends in the world economy.
There has already been talk of reducing it to 6.5%, but the government may need
to be preparing for possibly larger falls in annual GDP growth in 2012, to closer
to 6%, or even lower in a worst-case scenario. Given that commitments to salaries
and subsidies account for a large share of the total budget, this would mean cutting planned capital expenditure and putting many pressing infrastructure needs
on hold for another year (and also delaying some of the key spending projected in
the Master Plan), unless the budget deicit was allowed to increase.14
Second, slow disbursements in capital spending continue to plague development programs. While the president is said to be putting pressure on ministers to
speed up spending, only 27% of total capital spending had been disbursed in the
irst eight months of 2011, according to the inance minister.15
12 The latter strategies were already part of the policy package in the 2011 budget, but appear unlikely to affect the consumption of subsidised fuel (McLeod 2011).
13 The inance ministry is considering the option of offering early retirement to a portion
of the 20% of civil servants aged over 50, in an attempt to free up more money for capital
expenditures (Jakarta Post, 19/8/2011).
14 However, a major world recession would result in a signiicant fall in international oil
prices, and hence reduce the burden of the fuel subsidy.
15 Economist Haryo Aswicahyono, cited in the Jakarta Post (13/09/2011), highlighted the
importance of understanding the reasons for the slow speed of allocations to the regions: in
areas such as education, spending is often delayed intentionally by regional governments,
who gain revenue from irst depositing the funds in bank accounts.
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Survey of recent developments
319
Finally, the cost of energy subsidies was almost 40% higher in the revised
than in the proposed 2011 budget (rising from Rp 134 to Rp 196 trillion). This
was associated with both the increase in world oil prices (and hence the value
of subsidy to consumers of subsidised premium fuel), and parliament’s refusal
to permit an increase in electricity prices. The government’s failure to act on fuel
subsidies is severely limiting its ability to promote longer-term development
through increased spending on public works. As previous surveys have noted,
this approach, in turn, puts structural pressure on the supply side of the economy
and contributes to a ‘high-cost’ economy.
In the context of tight political constraints, the president’s commitment to cut
the budget deicit to zero in 2014 is likely to squeeze spending on public works
even more. Several agencies in Jakarta have calculated how a balanced budget
might be achieved by raising fuel and energy prices, the revenue from which
could be used to compensate losers (especially the poor) as well as freeing up
money for spending on public works.16 This signiicance of the squeeze is even
the greater, given the ambitious targets for capital spending under the Master
Plan (see below).
INDUSTRY POLICY: A MORE DIRIGISTE STANCE
The government has announced a number of moves towards greater intervention in industry and trade policy in recent months. We consider recent policy
announcements or proposed policies in four areas. The irst relates to tax incentives, the second to protection of domestic salt producers, the third to protection
of local luxury goods producers, and the fourth to the regulation of domestic
processing of natural resources, speciically of thermal coal. These illustrate two
dimensions of economic policy and policy making: a tendency towards rather
easy options involving direct support for domestic industry or particular sectors
and investors, and signs of some disharmony in policy directions within the economics team under coordinating minister Hatta Rajasa.
On 15 August the inance minister, Agus Martowardojo, announced the introduction of a 5–10 year tax holiday for companies investing at least Rp 1 trillion
(approximately $117 million). Not only are the tax incentives selective, giving
a boost to large investors; they also focus on downstream and capital-intensive
investors. The tax incentive regulation covers ive key sectors: base metals; oil
reining; petrochemicals; machinery; and telecommunications equipment. The
minister also announced (subject to presidential approval) a revision of tax allowances for irms investing a minimum of Rp 500 billion (approximately $55–60 million), contingent on the employment of a minimum number of workers.17 The
Korean multinational Posco (a steel maker), Kuwait Petroleum (with a mooted
16 One such calculation notes that without a reduction in expenditure on subsidies, a balanced budget could be achieved only by a freeze on nominal material, capital and social
spending.
17 The incentives are to be offered if the irm satisies a list of other criteria such as operating in an isolated environment; collaborating with small and medium enterprises; and
supporting the Master Plan. Establishing ground rules is likely be dificult, and the overall
administration of such tax breaks is likely to be corruption prone.
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320
Chris Manning and Raden M. Purnagunawan
investment of $6–7 billion) and Hankook Tire (interested in investing $353 million)
were all mentioned explicitly in the media as contenders for the tax concessions
(Jakarta Globe, 10–11/9/2011).18 Clearly the government was upbeat about the
announcements. To quote Gita Wirjawan, then Investment Coordinating Board
chair and now the new trade minister, echoing the enthusiasm of industry minister Hidayat: ‘The
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Chris Manning & Raden M. Purnagunawan
To cite this article: Chris Manning & Raden M. Purnagunawan (2011) Survey of
recent developments, Bulletin of Indonesian Economic Studies, 47:3, 303-332, DOI:
10.1080/00074918.2011.619048
To link to this article: http://dx.doi.org/10.1080/00074918.2011.619048
Published online: 16 Nov 2011.
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Date: 18 January 2016, At: 19:18
Bulletin of Indonesian Economic Studies, Vol. 47, No. 3, 2011: 303–32
SURVEY OF RECENT DEVELOPMENTS
Downloaded by [Universitas Maritim Raja Ali Haji] at 19:18 18 January 2016
Chris Manning
Australian National University
Raden M. Purnagunawan
Padjadjaran University, Bandung
SUMMARY
There is a growing conidence in policy, business and inance circles about Indonesia’s ability to withstand global economic and inancial shocks, and a renewed belief in domestic
sources of growth. Despite uncertainty in Europe and slower than expected recovery in
the US, Indonesia is well placed for moderately high growth in the medium term, and
economic stability in the shorter term. At the end of June 2011, foreign reserves were at
a record high, inlation was down, annual growth was steady at 6.5%, and investment –
especially foreign direct investment (FDI) – was up signiicantly.
Consumer price inlation had fallen to just below 5% by August, from double-digit levels earlier in the year. This was due partly to low food prices and success in sterilising
the effects of capital inlows. However, turmoil in international markets led to a sharp
fall in the Indonesia stock exchange index and a mild currency depreciation in August–
September, prompting central bank intervention in the foreign exchange market. Fiscal
policy has remained conservative, aiming for a balanced budget by 2014. However, the
government has still not moved to reduce growing fuel and energy subsidies.
While the service sectors have continued to record high rates of growth, there has been
a revival of manufacturing in 2011. This is partly underpinned by strong inlows of FDI,
and is especially evident in the labour-intensive textiles, clothing and footwear industries
after a decade of stagnation. Multinationals have announced plans to expand operations in
Indonesia in the past six months to take advantage of new tax incentives. Overseas investors have also been attracted by Indonesia’s growing middle class – a result partly of higher
rural incomes driven by the commodity boom outside Java.
Some recent ministerial announcements about initiatives to promote domestic industry have a protectionist lavour. A cabinet reshufle in October may signal a more dirigiste
approach to industrial policy – especially the shifting of internationally respected economist Mari Pangestu from the trade portfolio to that of tourism and creative economy.
One important outcome of recent growth has been falling unemployment rates. However, youth unemployment remains a major problem, and efforts to overcome it have been
fragmentary. A recent ban on overseas migration of domestic helpers (maids) seems certain
to add to labour supply pressures among young people.
The government is now considering how to mobilise its large population base, abundant
natural resources and strategic location to play a greater role in the world economy. These
assets are central to the ambitious ‘Master Plan’ for longer-term development (2011–25),
announced in May. It focuses on developing the resource-rich Outer Island regions, with
massive investments in energy and ‘connectivity’ to link the major centres and islands with
each other, and centres with their hinterlands. Funding (to come mainly from the private
sector), implementation and coordination are all major challenges.
Keywords: growth, economic policy, industrial policy, labour, migration, economic planning
ISSN 0007-4918 print/ISSN 1472-7234 online/11/030303-30
DOI: 10.1080/00074918.2011.619048
© 2011 Indonesia Project ANU
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Chris Manning and Raden M. Purnagunawan
INTRODUCTION
The launching of the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (known as MP3EI) by President Susilo Bambang
Yudhoyono (SBY) in May 2011 symbolised a growing conidence among policy
makers, politicians and business people in Indonesia’s economic future, and at
the same time pointed to a revival of economic nationalism. In some respects, the
atmosphere resembles the heady days of the late Soeharto era, when there was
growing conidence in cooperation between big business and the state to promote
economic transformation.1 The Asian inancial crisis (AFC) put those ambitions on
hold with a jolt. For nearly a decade after the AFC and the accompanying regime
change, the nation moved forward with conidence politically. Economic policy
makers, in sharp contrast, were seeking to put to rest the trauma of the sudden
and deep economic disruption of 1998. International investors in turn were wary
of Indonesia, with its radically different and contested political environment and
the massive changes in political and administrative arrangements heralded by
decentralisation from 2001.
The revived conidence can be attributed to a number of factors. Economic
recovery from the AFC and its aftermath had been consolidated by the mid-2000s.
Although somewhat adversely affected by the global inancial crisis (GFC) of
2008–09, growth has maintained a gradual upward trend through to 2011. Indonesia’s recent GDP growth has been more stable than that of its peers in the region,
even though it has been less rapid than that of its Southeast Asian neighbour Vietnam (igure 1), and much slower than that of China and India. SBY’s re-election
in 2009 followed Indonesia’s joining the G-20 leaders forum in 2008.2 For the irst
time, Indonesia was being seriously discussed as a candidate to join the BRICS
(Brazil, Russia, India, China and South Africa), the irst tier of large developing
countries (Thee 2010). In 2011, Indonesia became chair of ASEAN, and in 2013 it
will chair APEC for the irst time since 1994. Further, buoyant commodity prices
and Indonesia’s rich supply of natural resources, in great demand in Japan, China
and India, have provided some insurance against the immediate negative effects
of the slower than expected recovery in the US and the debt crisis in Europe.
There is a second, more subtle dimension to this growing conidence, also
relected in the tenor of the Master Plan. First, while public documents clearly
acknowledge that its economic fortunes are inter-twined with those of the East
Asian and world economies, there is a strong feeling that Indonesia’s economy is
now large and prosperous enough for domestic resources, both human and physical, to play a more dominant role in national development and industrial growth.
Several factors have been at play here. While exports have continued to grow
quite strongly, a return to moderately high growth has been achieved without reliance on a single export commodity (or set of commodities) acting as the engine of
growth – a role played by oil in the 1970s and by labour-intensive manufacturing
exports in the 1980s, and in the 1990s until the AFC. The small communications
1 At this time economic growth and investment rates were high by regional standards;
Indonesia also chaired a ground-breaking APEC leaders meeting in 1994, afirming the
country’s place as a signiicant regional power in economic and political affairs.
2 In 2009, Indonesia had the third highest economic growth rate in East Asia (4.5%), after
China and Vietnam.
Survey of recent developments
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FIGURE 1 Average Growth of Real GDP for Selected Countries in Southeast Asia
(% p.a.)
12
2005–08
10
2008–10
8
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6
4
2
0
Indonesia
Cambodia
Malaysia
Philippines
Thailand
Vietnam
Source: ADB (2011).
and utilities (electricity, water and gas) sectors have been Indonesia’s fastest
growing sectors for several years, and growth in the non-tradables sector has
been more than twice that in tradables for most years since the crisis. Investment
has recovered somewhat in the past three years (OECD 2010). Inluential policy
makers, politicians and business people have concluded from the experience of
the GFC that heavy dependence on the global economy can be costly in terms
of extreme luctuations in total demand, and this has reinforced a belief in the
importance of domestic sources of growth.
In his introduction to the Master Plan, President Yudhoyono referred to this
national self-conidence and ambition for the future:
The Republic of Indonesia is a nation blessed with almost all of the prerequisites for
transformation into a great economic power. With its abundant natural resources,
large, productive and young population and strategic access to the global mobility
network, these assets and access empower Indonesia to establish itself in its rightful
place among the leading economies of the world.
From an economic standpoint, the potency of these national assets is relected in
the absolute size of Indonesia’s growing middle class, especially in the second half
of the past decade. According to one estimate, the middle class grew by over 50%,
from 80 to 130 million, in just seven years (2003–10) (World Bank 2011a: 37–41).3 This
has already meant a substantial increase in the consumption of consumer durables
such as television sets, motor-cycles and cars. But it also signals a signiicant shift
in consumption patterns to higher-quality services (such as health care, education,
3 This igure is based on a broad deinition of the middle class, covering all households
earning more than $2 per capita per day. The number of households with a daily income
per capita of $4–6 has grown especially fast in both urban and rural areas (the absolute
numbers are roughly equivalent in both).
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Chris Manning and Raden M. Purnagunawan
information technology and leisure activities) and the use of more sophisticated
inancial services, including insurance and social security (ADB 2010).4
Thus Indonesian policy makers appear quietly conident that the national
economy should be able to weather the impact of most shocks. Indeed, Indonesia
seems to have beneited from global uncertainty, with investors discovering it as
something of a safe haven, as well as a longer-term prospect.
This is not all good news, however. While there is no indication of a planned
sudden shift away from Indonesia’s open stance on both trade and investment,
there are some signs that international investors are being lured to Indonesia
partly because of its growing, and potentially more protected, domestic market.
Moreover, the increased conidence within Indonesia does not appear to arise from
improved competitiveness at home. Rather, there is a conidence in the beneits
of greater cooperation between big business and government (‘Indonesia Inc.’) in
promoting economic growth by mobilising capital domestically and raising value
added at home (the latter through selective tax and trade policies that target certain industries, and that focus on the domestic processing of natural resources).
One legitimate question is whether this new more dirigiste approach (discussed
further below) will be consistent with the higher economic growth targets of 7–8%
that the government has set itself in the medium to longer term.
Thus the Master Plan does lag a change in emphasis that has been evolving
over the past couple of years within the economic policy team, especially since the
departure of former inance minister Sri Mulyani Indrawati (Baird and Wihardja
2010: 144–6). We examine some of its features below, after irst looking at recent
developments in the economy and in industry and trade policy, and their implications for the labour market.
MACROECONOMIC DEVELOPMENTS AND POLICY
In the second and third quarters of 2011, Indonesia could hardly have been better
prepared for what is now almost certain to be a sharper downturn in the world
economy in 2011 and 2012, and a slower recovery, than had been expected earlier
in the year. At the end of the second quarter (Q2) of 2011, foreign reserves reached
a record high at just under $120 billion, inlation was down to below 5%, investment (especially FDI) was up signiicantly and growth was steady at 6.5% year
on year. Macroeconomic policy makers are not ignoring the potential impact of
another global recession. However, Indonesia seems likely to have been relatively
little affected in the immediate to medium term by the August news of a slower
than expected US recovery, and the unresolved debt crisis in Europe (The Economist, 6/8/2011: 32).
Growth
GDP growth remained steady in Q2 2011 (table 1a), despite the poorer performance of some sectors, especially mining and quarrying, in the past quarter
(table 1b). Growth of 6.5% year on year, similar to that recorded in Q1, suggests
that the quarterly year-on-year growth rates for 2011 may have moved up into the
4 ADB (2010, part I) explores some of the changing consumption patterns of the middle
class in Asia, and includes data for Indonesia.
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307
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
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Gross domestic product
GDP excluding oil & gas
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water
supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Services
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
5.6
6.1
6.1
6.5
5.8
6.2
6.9
7.4
6.5
6.9
6.5
7.0
2.7
–7.6
8.0
7.3
7.2
22.3
4.3
20.0
22.6
3.4
–7.3
8.0
7.2
14.0
9.4
–0.4
14.6
18.4
5.1
4.8
9.2
6.8
23.8
8.5
2.4
9.6
12.2
4.9
7.3
8.7
6.7
22.5
1.7
5.1
16.1
16.9
4.3
2.8
7.3
5.3
20.0
5.5
0.0
12.3
15.6
4.6
4.5
9.2
7.4
19.9
6.2
5.4
17.4
16.0
3.5
4.0
3.3
4.7
4.5
4.5
3.0
3.1
3.9
4.3
3.1
3.9
4.5
5.1
1.8
2.7
4.3
4.9
3.8
4.2
5.3
6.0
3.6
4.3
5.0
5.8
3.9
0.8
6.1
6.6
7.6
8.1
8.2
8.8
8.3
8.2
8.8
7.3
8.6
5.1
16.9
5.1
7.2
9.1
6.2
17.8
3.4
6.8
8.7
6.6
17.8
4.3
6.7
8.4
9.3
19.8
4.3
5.3
7.9
9.5
16.4
3.9
7.4
9.6
8.6
12.0
4.8
4.7
5.6
5.3
5.9
6.4
6.3
7.5
7.3
7.0
6.9
5.7
Source: CEIC Asia Database.
6.5–7% range, one percentage point above the range recorded for the four quarters
of 2010 (5.5–6.0%). Whether these new growth rates can be sustained in the short
to medium term will depend on what happens in Europe and the US in the next
3–6 months.5
A clear trend is now emerging in the form of a revival of growth in manufacturing – already commented on by Suryadarma and Sumarto (2011) – and in tradables
more generally. Agricultural production has also been steady, partly because of a
5 In light of these developments, the World Bank has already down-graded its 2011 growth
forecast for Indonesia from 6.7 to 6.3% (World Bank 2011c: 5).
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Chris Manning and Raden M. Purnagunawan
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TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; a % quarter on quarter, annualised rates)
By expenditure
Private consumption
Government consumption
Not seasonally adjusted a
Investment
Construction
Machinery & equipment
Transport
Other
Exports
Imports
By sector
Tradables
Agriculture, livestock,
forestry & isheries
Mining & quarrying
Manufacturing
Excluding oil & gas
Non-tradables
Electricity, gas & water
supply
Construction
Trade, hotels & restaurants
Transport
Communications
Financial, rental & business
services
Services
Mar-10
Jun-10
5.1
–17.2
–90.5
5.4
3.0
135.6
7.9
12.5
37.3
12.4
–14.5
–9.0
Sep-10
Dec-10
Mar-11
Jun-11
5.0
17.9
61.6
3.0
10.4
265.0
4.9
–9.6
–92.0
5.2
9.0
152.3
5.2
14.3
–10.5
–10.9
11.2
24.8
6.5
44.7
27.6
3.9
18.3
14.0
7.4
20.6
–11.9
17.6
61.7
44.4
5.4
1.8
6.0
–8.0
–25.3
–13.0
9.0
14.7
–4.4
9.6
32.9
26.3
2.7
1.7
3.1
4.3
3.0
6.4
6.3
5.7
2.9
3.1
4.6
5.6
4.3
3.1
7.1
7.8
3.3
–1.2
2.3
4.6
3.5
–3.2
10.6
8.0
0.4
7.2
7.4
4.0
18.1
5.5
5.7
7.8
11.9
24.1
2.2
6.7
7.0
7.8
21.6
8.3
6.6
11.3
13.3
15.6
1.3
6.0
5.7
5.1
5.3
4.3
7.7
14.4
8.3
6.2
5.7
5.0
7.5
9.7
6.1
6.5
5.8
8.3
9.8
3.8
5.7
4.7
a Quarter-on-quarter growth is typically distorted by seasonal factors. The data in this table have been
seasonally adjusted so as to remove these distortions.
Source: CEIC Asia Database.
good main rice harvest in Q1 2011.6 The disaggregated data show that food recovered from its poor showing in 2010, plantation crop growth was up in the irst half
of 2011 and isheries grew strongly. In manufacturing, the biggest surprise in 2011
has been a revival of the textiles, clothing and footwear (TCF) industries after a
decade in the doldrums: this sector grew by an average of 9% (year on year) in the
irst half of 2011, compared with barely 1% in 2010. It is reported that Chinese and
other international investors have turned their attention to these labour-intensive
6 Nevertheless there is concern about the potential impact of resurgent infestation of the
rice crop by the brown planthopper or wereng (box 1).
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BOX 1 ThreaTs TO rice PrOducTiOn
On 5 November 1986, in response to Indonesia’s most serious brown planthopper
(bph) infestation, which had resulted in the loss of over a million tonnes of rice,
then President Soeharto issued a Presidential Instruction (Inpres 3/1986) banning 57
named resurgence-causing pesticides, and initiated the irst stages of integrated pest
management. Combined with the introduction of a new variety of resistant rice, IR 64,
this Inpres effectively provided Indonesia with the basis for more than two decades
of steadily increasing rice production without serious pest problems. Rice production
climbed from 37.7 million tonnes in 1986 to 66.4 million tonnes in 2010.
The brown planthopper (Nilaparvata lugens [Stål]) has been a scourge on rice in
Asia since the beginnings of the Green Revolution. It is a tiny fast-breeding insect that
combines high fertility with high mobility, allowing it to invade rice ields with ease.
Females can produce 400 eggs in a single generation of 20 days, and every alternate
generation becomes mobile and can take light. In large numbers, the hopper can
destroy a rice crop in a single day, producing what is called ‘hopperburn’. In addition,
the bph is the carrier of two virulent rice viruses: Grassy Stunt and Ragged Stunt.
Losses from these viruses can often be worse than direct hopperburn.
Spraying pesticides rarely obliterates an entire bph population. Instead, spraying
‘selects’ hoppers capable of developing resistance. Thus pesticides that may initially
be effective invariably lose their effectiveness as hopper populations mutate. Scientiic
studies have shown that some pesticides can actually increase hopper fertility. Far
more seriously, pesticides destroy the natural enemies of the bph, which can feed upon
hopper eggs embedded in the rice stems. Without such predators, the bph populations
can grow with no constraint, and reach outbreak proportions.
Farmers who have little understanding of the chemical compounds they are using
often mix a cocktail of pesticides that can mute the effect of the individual components,
making them even less effective on the insects. Similarly, under heavy pesticide use the
bph can mutate rapidly to overcome resistance bred into rice varieties. Since 1967,
Indonesia has introduced dozens of resistant varieties that have subsequently lost
their resistance.
Since 2005 Indonesia has dramatically increased its reliance on pesticides. With this
has occurred a breakdown of resistance in previously resistant rice varieties, including
IR 64. Since 2010, there have been serious outbreaks of bph infestation across Java.
Particularly severe outbreaks have taken place in the rice baskets of Jember, Lamongan,
Pati–Kudus, Klaten–Boyolali–Sukoharjo (with spillover to Yogyakarta), Subang–
Indramayu and Lebak, with both hopperburn and widespread virus infestation
occurring. Crop losses in these high-production areas have been notable.
A consistent response to date has been to increase the use of pesticides. Other
measures necessary to break the cycle of the bph require curtailment of the successive
planting of rice, and the substitution of secondary crops in place of rice. A fallow
period followed by synchronised planting over a wide area has so far been dificult to
achieve. All of these measures have the effect of reducing future rice production.
For the moment, Indonesia has only one possibly resistant rice variety, Inpari 13,
which is now being introduced in Java. However, the release of Inpari 13 in Polanharjo,
Klaten, has been accompanied by massive prophylactic pesticide spraying. It is
impossible to know how resistant this variety will be, since such mass spraying is
likely to do more harm than good. More generally, under present conditions, it is
impossible to predict the prospects for future rice production.
James J. Fox
Australian National University
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310
Chris Manning and Raden M. Purnagunawan
industries in Indonesia as wages have begun to escalate in southeastern China.
For example, Indonesia’s footwear industry association reports that the value of
exports grew by more than 50% in 2010, and was on target to grow by another
20–30% in 2011, although spokespeople were nervous about the possible impact
of a global downturn in 2012 (Investor Daily, 14/09/2011).
Growth rates of processed food, beverages and tobacco have also bounced back
(to just under 7% in the irst half of 2011), after a poor showing in 2010. At the same
time, quite high recent growth in both total investment and investment in machinery and equipment (table 1a) supports the picture of a reasonably robust expansion
in more capital-intensive industries in both manufacturing and mining.
Service sectors continue to record high rates of growth, still led by the rapid
expansion of communications (although growth of the latter declined to 12%
in Q2 2011). Indonesians are among the world’s largest users of mobile phones,
Facebook (second largest user) and Twitter (largest user). This, together with creative talents channelled into design activities associated with computers, has been
identiied frequently in the media as a strong contributor to the country’s comparative advantage in service-related activities. Non-tradables sector growth is
still well above that of tradables, and growth in other non-tradables sectors such
as transport remains strong. But the gap between tradables and non-tradables has
narrowed somewhat in the past six months.
Investment and exports
Investment grew strongly at over 9% in Q2 2011, up from 7% in Q1, and it continued to expand much faster than consumption (table 1a). Partly this can be attributed to continuing high rates of capital inlow, much of it FDI. From Q1 2010,
realised direct investment recorded by Bank Indonesia (BI) had begun to rise
quite steeply, picking up after the GFC. The quarterly average rose from a paltry
$0.7 billion in 2009 to around $2.7 billion in 2010, and $2.9 billion in the irst half
of 2011 (table 2). FDI continues to be dominated by manufacturing but has also
been signiicant in mining and, surprisingly, the trade sector (table 3), including
hotels and restaurants.
According to data on investment approvals from the Investment Coordinating
Board (Badan Koordinasi Penanaman Modal, BKPM), capital-intensive sectors in
manufacturing (chemicals, base metals and machinery) were the main targets of
FDI, although some projects were directed into more labour-intensive industries
such as electronics. Big multinationals such as Toyota and Nissan have announced
plans in the past six months to expand operations in Indonesia. While they may be
attracted by Indonesia’s export potential, its large domestic market seems to have
been a major consideration in announcements by industry spokespeople. Toyota,
for example, recently announced that its goal was primarily to expand its already
large presence in the domestic market, but it also signalled a secondary objective
of expanding exports into the Asia Paciic region (Jakarta Post, 14/09/2011). Other
companies such as Hyundai and Hankook Tire are similarly reporting a mix of output directed to the domestic market as well as for exporting (World Bank 2011b: 25).
This resurgence of FDI in Indonesia is a positive sign, and perhaps evidence of
a mood change, given the pessimism about the domestic investment environment
and the poor investment and output record in manufacturing for most of the postAFC period (Thee and Negara 2010: 287–9). While appreciation of the exchange
Survey of recent developments
311
TABLE 2 Balance of Payments
($ billion per quarter)
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Average Mar-10
2009
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Current account
Exports
Non-oil & gas
Oil & gas
Imports
Non-oil & gas
Oil & gas
Merchandise trade
balance
Non-oil & gas
Oil & gas
Services
Income
Current transfers
2.7
29.9
24.8
5.2
22.2
18.4
3.8
1.9
35.1
28.5
6.6
28.1
22.7
5.4
1.4
37.4
30.3
7.1
30.6
24.4
6.2
1.2
39.7
32.8
6.9
32.1
26.2
6.0
1.1
45.8
37.8
8.0
36.6
28.7
7.9
2.1
45.8
37.1
8.7
37.1
28.5
8.7
0.2
51.5
42.0
9.5
41.7
31.4
10.4
7.8
7.0
6.1
7.4
8.9
7.6
8.8
6.6
1.2
–2.4
–3.8
1.1
6.1
0.9
–2.1
–4.0
1.1
5.4
0.8
–2.3
–4.3
1.1
6.6
0.9
–2.2
–5.4
1.2
8.9
–0.1
–2.8
–6.7
1.3
7.8
–0.2
–2.3
–5.3
1.0
10.1
–1.2
–3.6
–6.9
1.0
Capital account
Financial account
Direct investment
Portfolio investment
Other investment
0.0
1.2
0.7
2.6
–2.1
0.0
5.6
2.5
6.2
–3.1
0.0
3.7
2.3
1.1
0.3
0.0
7.4
1.7
4.5
1.2
0.0
9.5
4.2
1.4
3.8
0.0
6.4
3.0
3.8
–0.4
0.0
12.5
2.7
5.7
4.1
Errors & omissions
Overall balance
Foreign reserves
–0.7
3.1
60.2
–0.9
6.6
71.8
0.3
5.4
76.3
–1.6
7.0
86.6
0.6
11.3
96.2
–0.9
7.7
105.7
–0.9
11.9
119.7
Source: CEIC Asia Database.
TABLE 3 Share of Foreign Direct Investment by Sector, 2005–11
(%)
2005
2006
2007
2008
2009
2010
Semester 1
2010
Mining
Manufacturing
Finance
Trade
Other
2011
15
7
26
39
27
16
14
30
63
9
1
12
100
34
21
8
30
100
33
19
3
19
100
25
21
12
3
100
32
3
2
37
100
42
0
21
21
100
51
–1
23
13
100
34
3
13
20
100
Source: Bank Indonesia.
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Chris Manning and Raden M. Purnagunawan
rate may have hampered competitiveness, other factors are clearly working to
Indonesia’s advantage. For example, a JETRO (Japan External Trade Organization) study of irms in the Asia Paciic region suggests that rising wages in both
China and Vietnam, in textiles, transport and electronics, are likely to increase
the attractiveness of Indonesia as a destination country (World Bank 2011b: 26).7
Uncertainty of labour supply also seems to have been a major consideration in the
decisions of investors moving from China.
Domestic investment realisation, which accounts for 2–3 times the value of foreign investment recorded by BKPM, has also grown rapidly over the same period,
after collapsing in 2008 during the GFC.8 Here the focus in Q2 of 2011 was on primary industries, food and plantation crops (mainly oil palm), paper, base metals
and transport.
Domestic and foreign investments have been encouraged by growth in rural
incomes in the resource-abundant regions outside Java, which in turn have beneited from rising commodity prices over the past few years. A perceptive article in
the Wall Street Journal (Bellman 2011) describes the impact of higher prices of palm
oil, cocoa, rubber and coal on sales of consumer durables such as motor-cycles and
television sets, as well as on improved housing. Relecting an important development for consumer goods companies, Bellman quotes a Unilever spokesperson
as saying that the Outer Islands will soon constitute half the company’s sales,
the large majority of which have been on Java in the past. Unilever’s president
director is quoted as saying: ‘Rural areas are getting richer from plantations and
natural resources, the money is spreading’.
In Q2 2011, exports picked up, growing by 17.4% on an annual basis (table 1a),
although more recent data announced by the Central Statistics Agency (BPS)
point to a 5% decline in July compared with the previous month and then a recovery in August. The biggest gains were in oils and fats (mainly oil palm products),
minerals (mainly coal) and chemicals. The rapid growth in exports of coal and oil
palm over the past ive years in particular has shifted the locus of export activities
away from Java, where the once dynamic labour-intensive TCF industries had
been growing quite slowly for a decade before the recent recovery (McLeod 2011).
In discussions of the potential impact on Indonesian exports of slower world
economic growth in the next couple of years, Mari Pangestu, the former trade
minister (replaced on 18 October), has drawn attention to planned trade promotion efforts to diversify exports, especially to Africa, where Indonesia already has
a foothold through oil and gas exports to South Africa (Jakarta Post, 7/9/2011).9
7 The study reports US dollar wages to be 40% lower in Indonesia than in China, and the
gap was only slightly smaller with India and the Philippines (JETRO 2010: 51). Wage indices from the Economist Intelligence Unit point to much more rapid increases in real wages
in China from 2005 than in a selection of East Asian countries, including Indonesia and
Vietnam (World Bank Economic Sector, Jakarta, work in progress on Indonesia’s manufacturing sector).
8 The BKPM igure for domestic investment is itself a gross under-estimate, since BKPM
data cover only larger investors.
9 The focus of these efforts is to be on the more rapidly growing ‘South’ economies. For an
overview of South–South trade and investment ties, see Jha and McCawley (2011).
Survey of recent developments
313
FIGURE 2 Inlation and Its Components
(% per annum)
20
15
10
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5
0
CPI
Administered
Core
Volatile
-5
-10
Jan-2009
Jul-2009
Jan-2010
Jul-2010
Jan-2011
Jul-2011
Source: CEIC Asia Database.
Inlation, exchange rates and monetary policy
Global economic and inancial instability and uncertainty intensiied in August–
September, just when Indonesia’s growth rate had recovered to pre-GFC levels.
While well placed in many respects to weather the storm, Indonesia is not immune
to its effects, with short-term capital outlows impacting on the stock market and
the exchange rate in August and September. The troubles in Europe, Japan and
the US were also predicted to affect commodity prices, although most had already
begun to fall in the irst quarter of 2011, after the recovery in world prices from the
GFC during most of 2010.
The consumer price index (CPI) continued to slow through the second quarter
of 2011, after rising sharply in late 2010 owing to food price hikes. It rose only
very slightly in the Ramadan month of August (igure 2). The decline continued
to be driven by falling food prices (which accounted almost entirely for the fall in
‘volatile’ inlation shown in igure 2), and was helped by a still healthy stockpile
of just under one million tonnes of imported rice. Administered price inlation
remained steady until July, relecting to a considerable extent the government’s
decision to keep the main subsidised prices (fuel and energy) stable during 2011.
‘Core inlation’ has gradually increased, exceeding 5% for the irst time in two
years; this is reportedly connected with sharply rising gold prices, and with some
pass-through of other international prices to the general index.
There do not seem to be major threats from domestic supply for food prices
over the rest of 2011. But increases in world prices need to be monitored closely,
given the signiicant impact that rice price increases can have on ‘poverty basket’
inlation (World Bank 2011b: 16).
Inlation has remained low despite continuing high levels of capital inlow
and an exchange rate that remained relatively stable at around Rp 8,500/$ over
the three months to August (igure 3). The turmoil in international markets
314
Chris Manning and Raden M. Purnagunawan
FIGURE 3 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
4,500
Rp/$
11,000
CSPI
4,000
10,000
9,000
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3,500
Exchange rate
3,000
0
8,000
7,000
0
29-Sep-2010
29-Sep-10 26-Nov-2010
26-Nov-10 26-Jan-2011
26-Jan-11 25-Mar-2011
25-Mar-11 25-May-2011
25-May-11 19-Jul-2011
19-Jul-11 15-Sep-2011
15-Sep-11
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
contributed to a light to the dollar; a sell-off of shares especially by foreign owners; and a sharp fall in the value of the rupiah in September. The exchange rate
had strengthened to Rp 8,800/$ by the end of the month (after depreciating to
above Rp 9,000/$), with BI reportedly intervening in the market to slow the slide
in its value (Jakarta Globe, 14/9/2011).10
A number of factors appear to have contributed to inlation’s low level by
Indonesian standards. The government continued to sterilise the effects of capital
inlow through the issue of Bank Indonesia Certiicates (SBIs). Following sharp
commodity price rises through 2010 and early in 2011, the prices of oil, coal, palm
oil, cocoa and coffee had begun to plateau or decline by mid-2011 (igures 4a and
4b). The price of oil fell appreciably in early August, following news of signiicantly slower growth prospects in the US and mounting problems in Europe, but
remained reasonably steady through September. Coal, copper and nickel prices
fell by close to 5–10% from January to June, as did the prices of palm oil and cocoa,
while rubber prices fell even more steeply from their peak in February.
Money supply growth (proxied by currency in circulation) remained steady
within a 15–20% band year to year during the irst seven months of 2011 (igure 5),
although it rose sharply in August–September. Lower inlation led the real SBI
rate back into positive territory around March 2011. Given these relatively stable
conditions, it was no surprise that BI decided in September to keep interest rates
on hold, at 6.75%, for the sixth successive month. However, in light of jittery markets through into October, it took the decision to reduce the policy rate by 25 basis
points in the second week of October.
Through the irst two quarters of 2011, the balance of payments shows strong
growth in trade and capital inlows (table 2). However, turbulence on markets
10 The rupiah fell less in nominal terms than several other regional currencies in August–
September (World Bank 2011c: 8).
Survey of recent developments
315
FIGURE 4a International Prices of Selected Mineral and Petroleum Commodities
(September 2010 = 100)
150
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100
50
Nickel
Crude oil
Gold
Copper
Coal
0
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
Aug-2011
Source: Index Mundi, .
FIGURE 4b International Prices of Selected Agricultural Commodities
(September 2010 = 100)
200
150
100
Cocoa
Robusta coffee
Rubber
Rice
Palm oil
50
0
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
Aug-2011
Source: Index Mundi, .
abroad spilled over to stock exchanges worldwide, with quite large falls being
registered in Europe and the US, and to a lesser extent in Asia. Indonesia has
not been immune from these movements. After peaking at slightly over 4,000
in early August, the composite stock price index declined quite sharply from
early September, to 3,300, as a result of sell-offs by fund managers (Jakarta Post,
28/09/2011). It recovered slightly at the end of the month to just over 3,500
(igure 3). These falls, while signiicant, were not out of line with similar movements in other regional stock market indices (World Bank 2011c: 8).
316
Chris Manning and Raden M. Purnagunawan
FIGURE 5 Monetary Policy and Inlation a
(% p.a.)
8
25
Policy rate
7
20
6
5
CPI inflation
15
4
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Currency in circulation (rhs)
3
10
2
1
Real SBI rate
5
0
-1
Aug-2010
Oct-2010
Dec-2010
Feb-2011
Apr-2011
Jun-2011
0
Aug-2011
a Currency in circulation is used as the indicator of money supply in preference to base money
because of the distorting impact of occasional changes in banks’ minimum reserve requirements on
the effective supply of base money; currency is the major component (about 75%) of base money. The
growth rate shown has been smoothed based on 3-month moving averages to clarify the underlying
trend. The real SBI (Bank Indonesia Certiicate) rate is approximated by the nominal rate less the contemporaneous CPI (consumer price index) inlation rate.
Source: CEIC Asia Database.
While Indonesia is in good shape to face immediate threats of a slowdown in the
world economy, one major gap has been regulations on the authority to deal with
an unexpected bank failure. The Financial System Safety Net (Jaring Pengaman
Sistem Keuangan, or JPSK) Law, designed to provide authority for government
oficials to act under such circumstances, has been delayed for several years and
had not been passed by the parliament by late October 2011. Several commentators have been urging the government and the parliament to give its passage high
priority, to ensure that policy makers have adequate protection to enable them to
take quick decisions to stabilise any situation that threatens inancial market and
macroeconomic stability. This legislation is considered critical in light of the political fallout in 2009–10 from the controversial 2008 decision to bail out Bank Century
(Baird and Wihardja 2010; Patunru and Von Luebke 2010: 10–12). There is concern
that without it senior decision makers may be unwilling to make a similar call in
the event of a future banking collapse.11
The 2012 budget
The president presented the draft budget for 2012 to parliament on 16 August.
There were no big surprises. Spending is planned to rise 7.4% to Rp 1,400 trillion,
lagging a decline in the deicit to 1.5% of GDP, down from the revised 2011 budget
estimate of 2.1% (table 4). This seems a tiny spending increase, given population
11 See, for example, M. Chatib Basri in an opinion piece in Kompas, 29/9/2011.
Survey of recent developments
317
TABLE 4 Budgets for 2009, 2010 and 2011
(Rp trillion)
2010
2011
2012
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Actual Proposed Revised Changea Proposed Changea
(%)
(%)
REVENUES & GRANTS
Domestic revenues
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non-tax
Natural resource revenues
Proits of state-owned enterprises
Revenue from public service centres
Other
Grants
995.3
992.2
723.3
694.4
357.0
230.6
106.7
28.9
268.9
168.8
30.1
59.4
10.6
3.0
1,086.3
1,082.6
839.5
816.4
414.5
309.3
92.6
23.1
243.1
158.2
26.6
14.9
43.4
3.7
1,169.9
1,165.3
878.7
831.7
432.0
298.4
101.3
46.9
286.6
192.0
28.8
50.3
15.4
4.7
17.5
17.4
21.5
19.8
21.0
29.4
–5.1
62.3
6.6
13.7
–4.2
–15.3
45.6
54.2
1,292.9
1,292.1
1,019.3
976.9
512.8
350.3
113.7
42.4
272.7
172.9
27.6
54.4
17.9
0.8
10.5
10.9
16.0
17.5
18.7
17.4
12.2
–9.6
–4.8
–10.0
–4.3
8.1
15.9
–82.3
1,042.1
697.4
148.1
97.6
80.3
88.4
192.7
140.0
82.4
57.6
52.8
0.1
68.6
21.7
344.7
1,202.0
823.6
180.6
131.5
121.7
116.4
184.8
133.8
92.8
41.0
51.0
0.8
61.5
26.3
378.4
1,320.8
908.2
182.9
142.8
141.0
106.6
237.2
195.3
129.7
65.6
41.9
0.4
81.8
15.6
412.5
26.7
30.2
23.5
46.3
75.6
20.6
23.1
39.5
57.5
13.8
–20.6
478.4
19.2
–28.0
19.7
1,418.5
954.1
215.7
138.5
168.1
123.1
208.9
168.6
123.6
45.0
40.3
1.8
63.6
34.5
464.4
7.4
5.1
18.0
–3.0
19.3
15.5
–11.9
–13.7
–4.7
–31.4
–3.9
343.7
–22.3
121.3
12.6
DEFICIT
(% of GDP)
46.8
0.7
115.7
1.7
150.8
2.1
222.0
200.0
125.6
1.5
–16.7
–28.6
FINANCING
Domestic inancing
Foreign inancing (net)
91.6
96.1
–4.6
115.7
118.7
–3.0
150.8
153.6
–2.8
64.8
59.8
–39.2
125.6
125.9
–0.3
–16.7
–18.0
–89.5
6.1
7.0
9,087
6.6
79.4
6.3
5.3
9,300
6.5
80.0
6.5
5.7
8,700
5.6
95.0
6.7
5.3
8,800
6.5
90.0
954
970
945
950
EXPENDITURES
Central government
Personnel
Material
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
BASIC ASSUMPTIONS
GDP growth (%)
Inlation (%)
Exchange rate (average Rp/$)
SBI interest rate (average %)
Crude oil price (average $/barrel)
Oil production (average ‘000 barrels/
day)
a The 2011 change is the difference between the revised 2011 budget and the 2010 ‘actual’ igure; the
2012 change is the difference between the proposed 2012 budget and the revised 2011 budget.
Source: MOF (2011).
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Chris Manning and Raden M. Purnagunawan
growth and inlation, and the need for public spending on infrastructure and
social sectors. As the table suggests, the proposed budget announced in August
often bears a weak relationship to the revised budget, since the government habitually proposes a conservative budget plan to parliament.
Nevertheless, the conservative budget plan for 2012 is in line with the president’s commitment to achieving a balanced budget by 2014. Based on the budget
assumptions, subsidies are planned to fall by an ambitious 12%, and the fuel subsidy by almost 5%. This does not factor in any direct reduction in the subsidy, with
anticipated cuts being due largely to better management of fuel rationing and the
development of alternative fuels.12 The main factor driving the projected fall in
total subsidies is a planned increase in electricity prices of 10%. The government
has yet to gain approval for this from the parliament (which in 2010 denied a government request for a 15% price increase in the proposed 2011 budget).
Capital spending is slated to rise by a signiicant 19%. Besides the standard
allocation for roads and bridges, the budget makes provision for a tiny increase
of 150 km of new railways and 14 new airports, and also apportions a signiicant
share for the maintenance of 36,000 km of roads and over 100 existing airports.
Airports appear to have been given priority in the context of a strong focus on
connectivity in the Master Plan. Civil service salaries are to be increased by 10%
(a real increase of around 5%), and transfers to the regions by 13%.13 Financing is
projected to be funded mainly through quite large increases in tax revenues (both
income taxes and VAT collections), complemented by small increases in net government bond issues (by 6%, accounting for around 10% of total revenue).
Three points should be noted in regard to next year’s budget. First, its growth
forecast of 6.7% now appears optimistic, given trends in the world economy.
There has already been talk of reducing it to 6.5%, but the government may need
to be preparing for possibly larger falls in annual GDP growth in 2012, to closer
to 6%, or even lower in a worst-case scenario. Given that commitments to salaries
and subsidies account for a large share of the total budget, this would mean cutting planned capital expenditure and putting many pressing infrastructure needs
on hold for another year (and also delaying some of the key spending projected in
the Master Plan), unless the budget deicit was allowed to increase.14
Second, slow disbursements in capital spending continue to plague development programs. While the president is said to be putting pressure on ministers to
speed up spending, only 27% of total capital spending had been disbursed in the
irst eight months of 2011, according to the inance minister.15
12 The latter strategies were already part of the policy package in the 2011 budget, but appear unlikely to affect the consumption of subsidised fuel (McLeod 2011).
13 The inance ministry is considering the option of offering early retirement to a portion
of the 20% of civil servants aged over 50, in an attempt to free up more money for capital
expenditures (Jakarta Post, 19/8/2011).
14 However, a major world recession would result in a signiicant fall in international oil
prices, and hence reduce the burden of the fuel subsidy.
15 Economist Haryo Aswicahyono, cited in the Jakarta Post (13/09/2011), highlighted the
importance of understanding the reasons for the slow speed of allocations to the regions: in
areas such as education, spending is often delayed intentionally by regional governments,
who gain revenue from irst depositing the funds in bank accounts.
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Survey of recent developments
319
Finally, the cost of energy subsidies was almost 40% higher in the revised
than in the proposed 2011 budget (rising from Rp 134 to Rp 196 trillion). This
was associated with both the increase in world oil prices (and hence the value
of subsidy to consumers of subsidised premium fuel), and parliament’s refusal
to permit an increase in electricity prices. The government’s failure to act on fuel
subsidies is severely limiting its ability to promote longer-term development
through increased spending on public works. As previous surveys have noted,
this approach, in turn, puts structural pressure on the supply side of the economy
and contributes to a ‘high-cost’ economy.
In the context of tight political constraints, the president’s commitment to cut
the budget deicit to zero in 2014 is likely to squeeze spending on public works
even more. Several agencies in Jakarta have calculated how a balanced budget
might be achieved by raising fuel and energy prices, the revenue from which
could be used to compensate losers (especially the poor) as well as freeing up
money for spending on public works.16 This signiicance of the squeeze is even
the greater, given the ambitious targets for capital spending under the Master
Plan (see below).
INDUSTRY POLICY: A MORE DIRIGISTE STANCE
The government has announced a number of moves towards greater intervention in industry and trade policy in recent months. We consider recent policy
announcements or proposed policies in four areas. The irst relates to tax incentives, the second to protection of domestic salt producers, the third to protection
of local luxury goods producers, and the fourth to the regulation of domestic
processing of natural resources, speciically of thermal coal. These illustrate two
dimensions of economic policy and policy making: a tendency towards rather
easy options involving direct support for domestic industry or particular sectors
and investors, and signs of some disharmony in policy directions within the economics team under coordinating minister Hatta Rajasa.
On 15 August the inance minister, Agus Martowardojo, announced the introduction of a 5–10 year tax holiday for companies investing at least Rp 1 trillion
(approximately $117 million). Not only are the tax incentives selective, giving
a boost to large investors; they also focus on downstream and capital-intensive
investors. The tax incentive regulation covers ive key sectors: base metals; oil
reining; petrochemicals; machinery; and telecommunications equipment. The
minister also announced (subject to presidential approval) a revision of tax allowances for irms investing a minimum of Rp 500 billion (approximately $55–60 million), contingent on the employment of a minimum number of workers.17 The
Korean multinational Posco (a steel maker), Kuwait Petroleum (with a mooted
16 One such calculation notes that without a reduction in expenditure on subsidies, a balanced budget could be achieved only by a freeze on nominal material, capital and social
spending.
17 The incentives are to be offered if the irm satisies a list of other criteria such as operating in an isolated environment; collaborating with small and medium enterprises; and
supporting the Master Plan. Establishing ground rules is likely be dificult, and the overall
administration of such tax breaks is likely to be corruption prone.
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Chris Manning and Raden M. Purnagunawan
investment of $6–7 billion) and Hankook Tire (interested in investing $353 million)
were all mentioned explicitly in the media as contenders for the tax concessions
(Jakarta Globe, 10–11/9/2011).18 Clearly the government was upbeat about the
announcements. To quote Gita Wirjawan, then Investment Coordinating Board
chair and now the new trade minister, echoing the enthusiasm of industry minister Hidayat: ‘The