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Bulletin of Indonesian Economic Studies

ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20

SURVEY OF RECENT DEVELOPMENTS

Howard Dick

To cite this article: Howard Dick (2001) SURVEY OF RECENT DEVELOPMENTS, Bulletin of Indonesian Economic Studies, 37:1, 7-41, DOI: 10.1080/000749101300046474

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ISSN 0007-4918 print/ISSN 1472-7234 online/01/010007-35 © 2001 Indonesia Project ANU

SURVEY OF RECENT DEVELOPMENTS

Howard Dick*

Australian Centre for International Business University of Melbourne

SUMMARY

The year 2000 saw a divergence of eco-nomic and political trends. The real economy performed better than ex-pected, with growth of 4.8% for the cal-endar year. Despite pressures of inflation, rising interest rates and a fall-ing rupiah, there was strong economic recovery. The political trend, however, has been far worse than anyone ex-pected. Indonesia no longer has either a credible or an effective government. President Abdurrahman Wahid, who after his first 100 days had begun 2000 amidst popular goodwill (Smith 2001), squandered his political capital and by February 2001 was under parliamentary censure and politically isolated. During 2000 the view gained credence that there was a ‘decoupling’ of economics and politics. The economy remained buoy-ant despite political turmoil and poor government. However, the economic costs showed up in exchange rate depre-ciation, rising inflation and higher inter-est rates. These will bite harder in 2001. Nevertheless, for all its problems, in the first half of 2001 the Indonesian economy still has its best chance in the foreseeable future to move beyond recovery into sustained growth. Achiev-ing sustained growth is not fundamen-tally an economic proble m. In the

normal course of events, investment would accelerate in 2001 as capacity limits are reached in domestic and ex-port industries. The problem of sustain-ability is political drag rather than lack of economic momentum. Poor govern-ment, worsening corruption and politi-cal turmo il in Jakarta, wo rsening insecurity in the regions, and the many unpredictabilities associated with de-centralisation, are increasing risk and uncertainty and destroying investor confidence. Deterioration of the already poor business climate is also making it much harder to resolve the banking crisis, carry out corporate restructuring and service the massive public debt.

If by mid year there is no better gov-ernment, continuing slowdown in North America and Europe and further stagnation in Japan, the prospects for late 2001 are an economy slowing to a growth rate of less than 4% p.a., barely enough to maintain living standards. The elite faces a historic political choice between either a virtuous cycle of recov-ery and expansion, which requires eco-nomic and political discipline, or a vicious circle of economic slowdown and political infighting. One path leads gradually to prosperity, the other more quickly to mass poverty.

POLITICAL BACKGROUND

Since the end of January, Indonesia has again found itself in political crisis. Af-ter debate of the Special Committee’s re-port into the president’s role in the Bulog and Brunei financial scandals,1 _the

par-liament (DPR) passed a memorandum of censure, requiring the president to provide a formal explanation within three months. If no satisfactory expla-nation is forthcoming, parliament may after one more month call for impeach-ment before a special session of the Peo-ple’s Consultative Assembly (MPR). This drama has been accompanied by mass demonstrations in Jakarta and other cities, some calling for the presi-dent to step down, others in his support. In East Java, the president’s power base, roads have been blocked and the offices of the Golkar party (the party of former presidents Soeharto and Habibie) de-stroyed in violent demonstrations. The president’s survival is now in the hands of the v ic e president, M egawati Sukarnoputri, who supported the cen-sure but has so far resisted moves for impeachment. If the president’s annual report to the August session of the MPR were rejected as unsatisfactory, as was that of Habibie in 1999, Megawati would almost certainly become the next presi-dent by due process. Despite wide-spread misgivings as to the vice president’s abilities to take on the su-preme office, it appears th at m o st people are coming to the view that this is the only way the country can move forward. The proposal of the Supreme Advis ory Co uncil (Dew an Pertim-bangan Agung) that the president for-mally delegate executive powers to the vice president could become a workable compromise.

A key to understanding the present crisis is the very different constitutional situation that now applies compared with the 1950s. The accepted view of the

1950s is that it was a time of unstable gov ernm ent, when governm ents changed frequently and sometimes within months. In fact what changed were prime ministers and cabinets, not the president (Sukarno) or vice president (Hatta) (Feith 1962). Under the provi-sional 1950 constitution, which had replaced that of 1945, the president was a non-executive head of state whose role was to call upon the party leader with the greatest support in the parliament to act as as formateur of a new coalition and, if successful, to become prime min-ister. Governments were therefore made and unmade by parliament without con-stitutional instability. However, under the more authoritarian 1945 constitution, restored in 1959 by an arguably uncon-stitutional presidential decree, Indone-sia now has a parliamentary democracy under an executive president. The coa-lition that established the present gov-ernment has collapsed. However, the only way to change the government, other than by resignation of the presi-dent, is to impeach him before comple-tion of his term of office in 2004. This step is c onstitutio nally fraught. Megawati has therefore been wise to handle the matter in such a grave and deliberate manner. By contrast, the presi-dent himself seems to have great diffi-culty distinguishing his roles as president, chief executive and party leader. This is partly his own fault and partly that of a revolutionary constitu-tion that does not establish a balance of powers appropriate to a complex, mod-ern democracy. Megawati’s supporters believe that as president she would del-egate executive powers, something that Abdurrahman Wahid has so far been unwilling to do, despite his physical frailties.

It is important to distinguish between the trigger for the government’s loss of parliamentary support and the

lying causes. The findings of the Special Committee into the Bulog and Brunei scandals implicated the president in cor-rupt behaviour, but they did not find that the president himself was corrupt. This brought to a head genuine popular concern over the spread of corruption, while also providing a vehicle for the president’s enemies to attack him with popular support. However, the presi-dent had not won any support by refus-ing to testify, or by his generally abrasive relations with parliament, which were also manifest in the deadlock over the very important appointment of the new chief justice. The president seemed not to appreciate that he led a coalition gov-ernment from the weak position of con-trolling only 12.6% of votes from his own party. In mid January the Central Axis (Poros Tengah) of Islamic parties, which had delivered the presidency to Abdur-rahman Wahid, all but withdrew sup-port. Nevertheless, M egaw ati had quietly remained steadfast, and it was no small surprise on 1 February when she and her party actually supported the censure motion, probably reading very well the mood of the nation.

The most serious charge against the Abdurrahman Wahid go vernment, however, is not that it is corrupt, though that is certainly a concern, but that it is no longer minimally efficient or effec-tive. The criticisms are consistent across a wide range of experienced and well informed past or present ministers, sen-ior bureaucrats and advisers, and they have a number of aspects.2 _{First, the}

government has no clear goals, priori-ties or strategies. Second, cabinet is dys-functional as a coordinating body. Third, the president does not direct the busi-ness of government, but neither does he delegate responsibility and monitor per-formance, whether to the coordinating ministers or to ministers themselves. Fourth, although there are good

minis-ters, others are unfocused and unable to work with their departments, so that policy is made ‘on the run’ and without regard to implementation. It has often been said that the president runs the country like an Islamic schoo l (pesantren). Unfortunately the pres-sures on government mean that such a leisurely and haphazard approach, especially when combined with ruth-less pursuit of political self-interest, is utterly impractical. Far from manag-ing change, government is makmanag-ing the situation worse. Apart from all the weaknesses and failures of policy, the sheer confusion and uncertainty is sapping public confidence in the po-litical process and international con-fidence in Indonesia.

These problems may be highlighted in three areas. First, insecurity remains chronic, especially in Aceh, Kalimantan, Maluku and Irian Jaya. In none of these cases has the president been able either to prevent violence – and in some areas intimidation by disloyal elements in the armed forces – or to win local trust. Ja-karta itself and many other cities and towns have been subject to random bombings. Over Christmas almost 20 people were killed in a series of bomb attacks in front of crowded churches across Java and Sumatra. Arrests were made but the identity of the principals remained obscure. Then on Friday 19 January a woman was arrested carrying three bombs in the Mini Indonesia theme park in outer Jakarta. Under in-terrogation she made – and two days later withdrew – the remarkable ad-mission that she had been handed the bombs and given a personal cheque by none other than the fugitive Hutomo Mandala Putera (‘Tommy Soeharto’), previously accused by the president o f in v o lv e m en t i n th e Sep tem be r bo m bing o f the Jakarta Sto ck Ex -change (Tempo, 22/1/01).

The second area is the absence of co-ordination in economic policy. Appoint-ment in the August cabinet of Rizal Ramli as Coordinating Minister for Eco-nomic Affairs had promised some im-provement in economic policy making (Ramstetter 2000). Despite his profile in the media, results were not much appar-ent in the business of governmappar-ent. During January 2001 the continuing lack of coordination became very apparent in the field of tax. Provided they are con-sistent with existing legislation, new or revised taxes do not need parliamentary approval, but can be introduced by min-isterial decree. Taxes and regulations were being revised without due scrutiny, and w it ho ut pro per coo rdination between the coordinating minister, the minister of finance, other line ministries and Bank Indonesia (BI), so that neces-sary adjustments were having to be made ex post and in the full public gaze. Two decisions in particular pointed to a lack of common goals on the part of the government. One was the withdrawal from 1 January of tax relief on debt re-structuring, which was reinstated three weeks later after vigorous protests (JP, 16/1/01; Bisnis Indonesia, 19/1/01). The other was the withdrawal from 1 Feb-ruary of export facilitation measures such as prompt reimbursement of sales tax on inputs, which is still being con-tested (Bisnis Indonesia, 10/2/01, 12/2/01). In January, after a frank ex-change of views between the minister and members of the economics faculty at Gadjah Mada University, the coordi-nating minister announced the forma-tion of a Fiscal Synchronisaforma-tion Team to review new policies, including taxes (JP, 20/1/01; Bisnis Indonesia, 20/1/01).

Third, for want of overall coordina-tion, the implementation of decentrali-sation (regional auto no my) from 1 January 2001 has been chaotic. In ef-fect, each ministry has pushed ahead at

its own rate and with its own agenda, so that local governments and busi-nesses have been unable to ascertain government policy. Th e truth often seems to have been that the government as such has had no policy and is just re-spo nd ing to im mediate po litical pressures.

The IMF and Moral Hazard

Frustration with lack of progress under various heads of the Letters of Intent (LOI) culminated in December in sus-pension of further disbursement of IMF funds.ÊThen on 23 February the World Bank announced that it was sharply re-ducing its assistance to Indonesia under a new program. Restoration of higher funding levels would be conditional on economic reform and improved govern-ance (box 1).

The IMF has remained the strongest voice for policy discipline, but it is an open question whether continuing IMF tutelage is a good or a bad thing. The issue is one of ‘moral hazard’. The LOI mechanism creates perverse incentives for the government to act irresponsibly in public, while making excuses and apparent concessions in private. For-mally the government shares the IMF’s goal of ensuring that the ‘bail-out’ suc-ceeds and that Indonesia is set on the path of sustainable recovery. Under the current LOI, these goals are translated into specific policy objectives with a timetable for fulfilment. However, there is a perception in government that these are goals and objectives that the IMF has imposed upon Indonesia, not goals and objectives of the government that are backed by the IMF. Hence, in practice the LOI have become a set of rather an-noying external constraints in a policy vacuum. It has become all too easy for ministers to evade responsibility by por-traying the IMF as a foreign body im-posing harsh or unrealistic economic

BOX 1 HARDENING ATTITUDESOFTHE IMF ANDTHE WORLD BANK

In February the World Bank formally announced details of a previously fore-shadowed drastic cut in its annual loan program to Indonesia, from $1.2 bil-lion to $400 milbil-lion. As with the postponement of IMF loan disbursements in December, assistance in the future will depend on improvements in

govern-ance and economic reform. The new program will run for three years, with the option of funding being restored to $1 billion per year if adequate progress is made in areas such as macroeconomic management and bank and corporate re-structuring. About one-third of the program will be interest-free, 35-year matu-rity International Development Association loans. The Asian Development Bank announced subsequently that it would follow the World Bank’s initiative, rais-ing the spectre that other donors and creditors may do so as well.

Despite a perception that the World Bank’s new policy was imposed unilater-ally, the Bank insisted that it was merely accommodating previously expressed wishes of the government to reduce the country’s total debt service burden. But because the government has never put forward a realistic plan to finance its budget in the face of much reduced foreign aid, the impression remains that the Bank’s new policy towards Indonesia is the product of frustration or desperation with proven lack of absorptive capacity on the part of the government. Hence the new policy has the appearance of a ‘stick-and-carrot’ approach.

Meanwhile, the relationship between the government and the IMF is still un-der strain. Even though he himself drafted and signed the current Letter of In-tent to the IMF, Rizal Ramli, the economics coordinating minister, has complained publicly that the IMF has been pressing too hard, pointing out the difficulty of implementing every desired reform while the country is going through its bumpy transition to democracy.

There are some indications that the president and coordinating minister are desperately looking for other solutions to the government’s financial prob-lems (e.g. advances on, or securitisation of, future sales of oil and gas) rather than striving to regain the good housekeeping seal of the IMF to attract new inflows of funds. On the other hand, there are other signs to indicate that, when the chips are down, the government is not prepared to go so far as to disengage from the international financial institutions and the west. Thus Rizal Ramli visited Washington DC during the week of 19 February in order to meet with Stanley Fischer of the IMF and Paul O’Neill, the new secretary of the US Treasury.

Conceivably, the government will be able to make do with less foreign aid to cover its budget deficit. Doing away with fuel subsidies would save some $4 billion annually, and raising tax revenues by some 2% of GDP would save a further $3 billion. The precondition, however, is a strong government, and this evidently cannot be met for the time being, as the Wahid government is deeply embroiled in a crisis of survival. Ultimately, Indonesia should be pre-pared for the worst, since the new Bush administration and the US Congress may not readily support the IMF and the World Bank when they require new funding.

M. Sadli

Chairman, Indonesia Forum Foundation, Jakarta

discipline. Indo nesian econo mists arguing for a more responsible policy are in turn vulnerable to political accusa-tions that they are promoting a foreign or IMF/World Bank agenda.

Suspension in December of IMF dis-bursements was a blow to Indonesia’s foreign credibility, but serv ed the government’s political agenda by show-ing the government as standshow-ing up to foreign pressure. Now that Indonesia holds foreign exchange reserves of $29 billion and is no longer in immediate need of IMF funds, the balance of power

is shifting to the IMF’s disadvantage. There continues to be pressure on the government to implement the LOI, how-ever reluctantly, and to negotiate a new agreement, lest the March meeting of the Paris Club suspend all assistance, which would seriously endanger both the budget and Indonesia’s foreign credibil-ity. Nevertheless, the IMF is now as much hostage to the government as vice-versa. To secure its objectives, the IMF has been drawn more closely into the political process, meeting with party leaders to argue the case for monetary BOX 2 HOW INDEPENDENTIS ‘INDEPENDENT’?

Parliamentary debate over amendments to Bank Indonesia Act No. 23/1999 has focused attention on the independence of BI, the nature of policy coordination and the responsibility for bank supervision. Modelled on the legislation of the German Bundesbank (Bisnis Indonesia, 6/2/01), this still new Act transforms the relationship between the central bank and government, but without the under-pinning of informal institutions governing those relations or a politically neutral starting point. Since the 1960s governors have been political appointees, includ-ing the present governor, Syahril Sabirin, regarded by the current government as a Soeharto crony. During the Bank Bali scandal of 1999, the integrity of the gov-ernor came into public question over disbursement of Rp 904 billion of Indone-sian Bank Restructuring Agency funds (Fane 2000; Kompas, 22/1/01). The governor denied responsibility and refused to resign and, under the new Act, the government had no power to dismiss him (McLeod 2000). In June he was placed under house arrest. Released in December, he defiantly resumed his posi-tion, was then charged and placed on trial, but remained actively at his post (see also Hamilton-Hart 2001, in this issue). These extraordinary events have soured relations between the government and BI and highly politicised the issue of ‘in-dependence’. Even basic policy coordination is coming to be regarded as politi-cal interference. For example, in January an increased tax on deposit interest earnings was announced by the minister of finance without consultation with BI. In such a hostile climate, the amendments to the Act cannot receive calm consideration. The IMF has openly stated its expectation that the government will maintain the complete independence of BI, and the local IMF representative met in parliament with party leaders to explain the reasons for this stance. Since neither BI nor the government any longer enjoys public trust, it might be well if amendments were deferred pending resolution of the political crisis and the out-come of the trial. That will also give the BI board more time to carry out internal reforms to identify and purge corrupt officials.

and fiscal rectitude, including protection for the independence of BI (box 2). Conversely, political and business fig-ures seek IMF endorsement of their par-tisan agendas. Means and ends are thereby losing clarity. The IMF is being forced to become involved in local poli-tics in order to explain and secure its agenda, but there are risks that this becomes non-transparent and perhaps advantages some political players over others.

Corruption and Law

In late January, Indonesia Corruption Watch (ICW) issued its annual report for 2000 and its outlook for 2001. Its damn-ing assessment was that over the past year corruption had become more open, and now involved the DPR and politi-cal parties as instruments of money poli-tics (ICW 2001). In contrast with the Soeharto era, however, corruption is no longer organised and controlled from the palace. Conglomerates have formed patronage networks with more than one of the large parties. Texmaco, Gajah Tunggal and Barito Pacific were singled out as enjoying special favour after the dismissal of former minister Laksamana Sukardi, but ICW (2001) cites many other cases.

That corruption has so quickly be-come systemic in the new political sys-tem demolishes naive arguments that it is simply a product of personal faults (Soeharto) or vested interests (cronyism) (see also Hamilton-Hart 2001, in this is-sue). It may be taken as given that Indo-nesia does indeed have a culture of corruption, which is extraordinarily adaptable to institutional change and is not readily amenable to control. Re-spected Muslim scholar Nurcholish M ad jid has calle d for a renewed com mitm ent to fight c orruption (JP, 18/1/01), as have students demon-strating against the president and

government. Nevertheless, a new gov-ernm ent is unlikely to be any less corrupt than the present one, and some of the key figures may well remain unchanged.

The weakness of law identified in the last Survey (Tim Lindsey, ‘The Failure of Law Reform’, box 1 in Ramstetter 2000: 9) has continued to show up in the feeble prosecution of cases of corruption under the old regime. ‘Tommy Soeharto’ was convicted over a fraudulent land swap, but remains at large despite a police search. Only in late January, after he had been implicated in an attempted bombing, did it occur to the authorities to track down and close his bank accounts. After 10 months in gaol, the tycoon and Soeharto crony Moh. (Bob) Hasan was in February convicted of embezzling $75 m illion from Ministry of Forestry funds, though ex-onerated over charges of fraud arising from a $168 million aerial mapping project (JP, 5/2/01). The prosecutor had sought a sentence of eight years gaol, payment of $244 million in compensa-tion and a Rp 30 million fine. In the event, he was required to pay $1.5 lion in compensation and a Rp 15 mil-lion (about $1,500) fine, and to spend 14 months in prison. The court justified its leniency on the grounds that ‘the de-fendant was polite throughout the trial, that he was elderly, and that he had dedi-cated himself to the pro motio n of national sports’ (JP, 5/2/01, 14/2/01). The court also decided that Soeharto himself should not stand trial until his health improved, which in the circum-stances may be regarded as tantamount to immunity from prosecution.

Relations with Singapore

Indonesia’s relations with Singapore continue to see-saw. At the beginning of 2000, Singapore’s Prime Minister Goh Chok Tong had visited Jakarta to pledge

generous assistance for Indonesia’s recovery. By November relations had become very strained after Indonesia’s president had made an intemperate attack on elder statesman Lee Kuan Yew for remarks allegedly critical of the Indonesian government. Apparently at his request, on 15 January President Abdurrahman Wahid visited Singa-pore with a delegation of senior min-isters, to join with the prime minister in opening the 656-kilom etre West Natuna–Singapore natural gas

pipe-line (JP, 16/1/01). In the same week, however, financial and commodity markets were thrown into turmoil by unexpected restrictions on offshore rupia h transactions (box 3). Better news was that a draft bill was circu-lating to declare Batam island (adja-cent to Singapore) a free trade zone (JP, 10/2/01). In view of the vital commer-cial nexus between Indonesia and Sin-gapo re, a more stable rela tionship would boost business confidence and benefit both countries.

BOX 3 THE STRANGE TALEOFTHE OFFSHORE RUPIAH ACCOUNTS

On 15 January 2001, Bank Indonesia surprised the business community in Indonesia and Singapore by announcing a complex regulation to curb the supply of rupiah to foreigners and offshore accounts. Rupiah trans-actions with foreigners or Indonesians permanently resident overseas were prohibited, and allowable forward currency transactions and bank positions were reduced from $5 million to $3 million, except for invest-ment hedging. Parties were allowed until 7 February to settle outstand-ing positions. The rationale was to restrict speculation against the rupiah. Some speculation had been occurring because the very low foreign cur-rency spreads in Singapore enabled anyone with substantial rupiah de-posits to make money by forward swaps against small day-to-day movements in the rupiah. This was easy money for anyone with knowl-edge of forthcoming policy announcements or political events. Never-theless, it was not the kind of speculation claimed by BI. Day-to-day swaps would certainly have increased the volatility of the rupiah, but there is no reason to believe that they influenced the underlying trend.

The policy has therefore been of mixed benefit. There is some logic to restricting the flow of rupiah to this very short-term market. BI insists that it is not a capital control, but it is certainly a currency control, and it has increased uncertainty and transactions costs for bona fide trade and investment. Indonesian business needs to hedge its foreign currency ex-posure, as so many failed to do before the crisis. Moreover, offshore funds need not be lost to the Indonesian economy. Indonesian principals can draw on or borrow against them to finance trade and working capital. Given that the same principals and banks are represented in both Jakarta and Singapore, back-to-back financing is straightforward and market sensitive. The government should be trying to facilitate it. The really dif-ficult problem is that of transfer pricing and reporting tax liability.

MACROECONOMIC OVERVIEW AND 2001 BUDGET

At the beginning of 2000 the official growth target of 4% had seemed highly optimistic, a view reinforced by a politi-cally turbulent first half year. Neverthe-less, the economy performed strongly in the third quarter (Ramstetter 2000). According to preliminary BPS (Central Statistics Agency) figures, calendar year growth for 2000 was 4.8%, despite a con-traction of 0.7% between the third and fourth quarters (table 1; BPS: www. bps.go.id/releases). All sectors contrib-uted to this performance, with manufac-turing and utilities, construction, trade, and transport and communications grow-ing more rapidly than the aggregate rate. These figures are consistent with un-derlying private sector activity. Retail chains Alfa (45%), Ramayana (36%) and M atahari (33%) enjoyed high sales growth between September 1999 and September 2000 (Tempo, 7/1/01). Matahari reported calendar year growth of over 20% for existing stores. Sales of

tele vision sets grew 70% , almo st reaching pre-crisis levels (Bisnis Indone-sia, 24/1/01). Automobile and motor cycle sales boomed, with growth of 175% and 77% respectively, while lead-ing producer Astra reported growth of almost 160%, mainly in domestic sales (AWSJ, 17/1/01). Most sectors of the real estate market seem to have bottomed out, with some increase in retail rents (Colliers Jardine 2000; Procon Indah 2000). Although these indicators are biased towards main cities, recovery ap-pears to have been broadly based. A very good indication is increased activity in household renovations, not only in middle-class suburbs but also in many low er-class kampung. Construction workers laid off in 1998 are now again finding casual work (kerja borongan) in a lot of small jobs. Indonesia’s recovery has been more belated, but of a similar rate to that occurring in Thailand, though much slower than in Malaysia.

There is no mystery behind this phenomenon. Economies can quickly

TABLE 1 GDP by Sector, 1999 and 2000

Sector Market Prices Constant 1993 Prices Growth (Rp trillion) (Rp trillion) (%)

1999 2000 1999 2000

Primary (non-mining) 216.9 218.4 65.3 66.4 1.7 Mining 110.0 166.6 36.6 37.4 2.3 Manufacturing 287.7 336.1 98.9 105.1 6.2 Utilities 13.4 15.1 6.1 6.6 8.8 Construction 74.5 92.2 22.3 23.8 6.8 Trade, hotels, restaurants 176.7 196.0 60.2 63.6 5.7 Transport & communications 55.2 64.6 26.8 29.3 9.4 Finance, rents, business services 70.6 80.0 26.1 27.4 4.7 Other services 105.0 121.8 37.2 38.0 2.2

GDP 1,110.0 1,290.7 379.6 397.7 4.8

Source: BPS: www.bps.go.id/releases/pdb-20peb01.pdf.

bounce back from recession by bringing idle capacity back into production. Indonesia’s crisis of 1997–98 was more sudden and deeper than most trade cycle recessions, but the same process applied in terms of injections to aggre-gate demand (table 2). First, the massive devaluation – even after inflation – stimulated a rapid expansion of exports that continued through 2000; devalua-tion also switched demand from imports to domestic production, as seen in slug-gish growth of consumption imports. Second, increased uncertainty and a sharp reduction in real wealth during the crisis seem s to hav e c aused a sudden downward shift in the con-sumption function, which was reversed in 1999–2000 in the form of catch-up spending. Those with assets offshore enjoyed an actual increase in rupiah purchasing power, while the incomes of those with funds on domestic deposit were boosted by very high nominal in-terest rates. Third, during 1999 and 2000 there was a further stimulus from the budget deficit, as manifest in govern-ment consumption expenditure. All three components of aggregate demand

– net exports, consumption and the budget deficit – produced conventional multiplier effects on employment and income that are still feeding through the economy.

The critical issue for 2001, and espe-cially for the second half of the year, is whether economic recovery can be translated into sustained economic growth. This requires a higher level of investment, to take up the slack from a declining stimulus in consumption and to increase capacity for continued expan-sion of output. Preliminary figures of an 18% recovery of investment in 2000 seem rather high, despite the very low base (table 2). Nevertheless, import figures up to November 2000 confirm the trend. While growth in imports of consump-tion goods has been sluggish compared with the same period of 1999, that of in-vestment goods has increased by almost 50% and of raw materials and interme-diate goods by around 40% (table 3). Circumstantial evidence suggests that firms are increasing or replacing ancil-lary plant and equipment, without as yet investing in new production lines. Im-ports of vehicles and parts increased by

TABLE 2 GDP by Expenditure, 1999 and 2000

Market Prices Constant 1993 Prices Growth (Rp trillion) (Rp trillion) (%)

1999 2000 1999 2000

Household consumption 813.2 868.0 272.1 282.0 3.6 Government consumption 72.6 90.8 27.0 28.8 6.5 Gross fixed investment 240.3 313.9 75.5 89.0 17.9 Changes in stocks –105.1 –83.3 –8.6 –16.1 – Exports 390.6 497.5 92.1 106.9 16.1 Less imports 301.7 396.2 78.5 92.8 18.2

GDP 1,110.0 1,290.7 379.6 397.7 4.8

Source: BPS: www.bps.go.id/releases/pdb-20peb01.pdf.

111% between 1999 and 2000, electrical equipment and machinery by 44%, and mechanical equipment and machinery by 31% (BPS: www.bps.go.id/releases). One noteworthy industry that is ex-panding capacity is modern retailing: the leading domestic chains Matahari, Ramayana, Rimo and Alfa, and the ag-gressive foreign entrant Carrefour, are all investing in new stores and renova-tions. However, no new modern office supply is expected for 2001 (Procon Indah 2000). In many sectors, net invest-ment is still negative, which is explained partly by excess capacity and partly by the worsening investment climate. To the extent that sites are still being taken up on industrial estates, the interest is mainly on the part of small and me-dium-sized firms (Procon Indah 2000; Bisnis Indonesia, 26/1/01).

Growth in the real economy has been achieved despite unfavourable macro-economic trends. Inflation turned out to be far worse than BI’s 5–7% target. The national calendar year figure was re-corded as 9.35%, but in some provinces such as East Java (10.35%) reached double-digit levels (Bisnis Indonesia, 27/1/01). The surge of 4.4% in the final quarter can be attributed to seasonal and cost-push facto rs, inclu ding rapid

depreciation of the rupiah and higher domestic fuel prices. However, the better explanation is that cost-push fac-tors were accommodated – and in the case of the rupiah even caused – by a disastrous loosening of monetary policy. By late December base or reserve money (mainly currency and deposits with BI) had blown out to Rp 125 trillion, com-pared with a target of around Rp 93 tril-lion (BI: www.bi.go.id). This was far more than could be explained by the temporary need for additional currency over the festive seasons of Lebaran and Christmas, and may reflect the fact that the BI board was at the time dis-tracted by scandals and resignations. By the en d o f Jan uar y 2001, base money had been brought back to Rp 103 trillion and that month’s inflation had been held do wn to just 0.33% (BPS: www.bps.go.id/releases). Meet-ing the 2001 inflation target of 4–6% will require BI to be cautious in acced-ing to strong pressure from the gov-ernment for lower interest rates to ease the burden of debt finance .

The more serious problem is the state of the rupiah. After plumbing the depths of Rp 16,000/$ in June 1998, the currency recovered to around Rp 6,800 in mid 1999, but since October 1999 has been

TABLE 3 Imports by Category, 1999 and 2000 (January–November)

Value Growth ($ billion c.i.f.) (%)

1999 2000

Consumption goods 2.3 2.5 8 Raw materials, intermediate goods 16.75 23.5 40 Investment goods 2.75 4.1 48

Total 21.8 30.1 38

Source: BPS: www.bps.go.id/releases/pdb-02peb01.pdf.

on a steady downward trend (figure 1). From Rp 7,100/$ in December 1999, it had fallen to almost Rp 9,600 by the end of December 2000, and was still at that level in late February 2001. This phe-nomenon was partly explained by the strength of the dollar. During 2000, the rupiah depreciated 35% against the dollar but only 25% against the deutsch-mark and 20% against the weaker yen. A popular explanation, given some cre-dence by recent statements from BI, is that the weakening rupiah has been the result of speculation (box 3). A better economic explanation is a combination of lax monetary policy and very low con-fidence in the prospects for the Indone-sian economy. As long as the rupiah’s downward trend is expected to con-tinue, conversion into foreign exchange is precautionary even at a poor exchange rate. Funds will not be remitted back to Indonesia until interest rates rise much higher to incorporate a very high coun-try-risk premium, or until better

govern-ment reduces the risks of doing business in Indonesia (see also BT, 6/2/01).

The economic outlook is therefore for a slowdown during 2001. Consumer confidence has been falling since mid 2000 in both urban and rural areas and in most provinces (Danareksa 2000; BI 2001b). Exports seem also to be slowing. The expectation is for slower growth in both North America and Europe during 2001, but local factors are also further weakening export performance. Despite high prices, Indonesia did not meet its OPEC oil production quota in 2000. Tim-ber and plywood exports have been hit by strife in Maluku and Irian Jaya. In January there was much discussion about multinational footwear and toy producers choosing to expand capacity elsewhere than in Indonesia. Increasing pressure may therefore be placed upon the budget deficit to maintain demand, but this will be held back by agreements w it h the IM F and by financing constraints. Although the economics

co-FIGURE 1 Selected Foreign Exchange Middle Rates against Rupiah at BI, 1996–2001 (Rp ‘000/USD; Rp ‘000/100 JPY; Rp ‘000/DEM)

Source: BI, Weekly Report, various issues. 0

2 4 6 8 1 0

Jan-99 Apr-99 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01

USD JPY DE M

ordinating minister has predicted 6–7% growth in 2001, in the absence of better government the figure is unlikely to ex-ceed 4%, and could fall below that rate by year’s end. In this context it is worth noting that in late January the Thai central bank cut a percentage point from its growth projection, from 4–5.5% to 3–4.5% (BT, 30/1/01).

The Budget

As is its right under Indonesia’s new democratic processes, parliament made significant revisions to the draft budget summarised in the last Survey (Ram-stetter 2000: 20). These arose from changes to several of the underlying as-sumptions (table 4). The new assump-tions are that revenues will rise from 17.3% to 18.4% of GDP, and expendi-tures from 21.0% to 22.2%, but that the deficit will be held constant at 3.7%.

Most of the revised assumptions look to be difficult to achieve. The inflation target is achievable with a tighter mon-etary policy, but the growth rate is likely to be closer to 4% than to 5%, and inter-est rates are unlikely to fall to as low as 11.5% from almost 15% in January 2001, thus increasing the cost of servicing the large domestic debt. A tighter monetary policy would relieve some pressure on the rupiah, but it is unlikely to fall from its range of Rp 9,500–9,600/$ in January–

February to its targeted average level of Rp 7,800/$. The net burden on the budget of a depreciation by Rp 500/$ is around Rp 5 trillion (table 5).

Nor are high oil prices any longer a windfall to the central government. In the past, high oil prices were a boon for the budget through higher oil tax rev-enue, only part of which was paid out in domestic oil price subsidies. The more generous distribution of oil revenues to producer regions under Fiscal Balance Law No. 25/1999 means that higher oil prices will become a net revenue drain to the central government. For example, according to Ministry of Finance esti-mates, increasing the oil price from $22 to $23 per barrel would boost central government revenues by Rp 2.9 trillion, but the gain would be more than ab-sorbed in a Rp 2.5 trillion increase in fuel subsidies and Rp 1.4 trillion in transfers to the regions, leaving the central gov-ernment Rp 1 trillion worse off. Thus, even if in 2001 OPEC production cuts maintain the oil price at around $24 per barrel and Indonesia meets its reduced quota of 1.3 million barrels per day (1.46 million bpd in the revised budget), there is no longer a revenue benefit to the cen-tral government, which would now ben-efit from lower prices.

Higher oil prices, the weak rupiah and the pressures of decentralisation

TABLE 4 Budget 2001: Revised Assumptions

Assumption Draft Budget Revised Budget

Growth (%) 4.5 5.0

Oil price ($/barrel) 22 24 Inflation (% p.a.) 7.0 7.2 Interest rate on 3-month SBI

(Bank Indonesia Certificates) (% p.a.) 11.0 11.5 Exchange rate (Rp/$) 7,300 7,800

Source: Ministry of Finance.

together provide the government with very strong grounds to press ahead with the 20% increase in domestic oil prices due in April under the LOI, and already approved by parliament. Whereas the subsidy was originally a means of dis-tributing the gains of higher oil prices directly to consumers, it may now better be seen as a quasi-grant to the re-gions in proportion to fuel consumption. It is highly inequitable because the great-est benefit per capita goes to those who consume the most fuel, namely the mid-dle class and the rich, who are concen-trated in the main cities. It leads to smuggling of domestic fuel supplies out of Indonesia (Kompas, 22/1/01), and during 2000 a 63% increase in imports of crude and oil fuels (BPS: www. bps.go.id/releases). It also makes no sense to subsidise domestic consump-tion of one of the country’s main exports, when using other fuels would be more economic at proper scarcity prices. The distortion is showing up most starkly in the artificially low price of power, which provides no incentive for new invest-ment in power plants. Given the long lead times in power plant construction, the state electricity corporation (PLN) predicts blackouts by 2003 or 2004. Nev-ertheless, despite the strong macro- and

microeconomic arguments, a weak government may yet baulk at pushing through this politically unpopular m easure. The issue needs to be much better explained, especially to parliamentarians.

Domestic and foreign debt service constitutes 24% of budgeted expendi-ture. Not quite half of this is offset by domestic non-bank financing, consisting of Rp 27 trillion in gross asset recovery by the Indonesian Bank Restructuring Agency (IBRA) and another Rp 6.5 tril-lion from privatisation. IBRA met its Rp 19 trillion asset recovery target in 2000 but may have difficulty in achieving Rp 27 trillion in 2001. The privatisation tar-get may also be difficult to achieve if state enterprise managers and board members resort to political tactics and nationalist rhetoric to defend their sine-cures. Foreign investors perceive high risks, especially in minority stakes that do not give control. It may be noted that one of the early ‘successes’ of privatisa-tion, cem ent manufacturer Semen Gresik, will revert to its former compo-nents of Semen Gresik (Java), Semen Padang (West Sumatra) and Semen Tonasa (South Sulawesi), some two years after Mexican cement firm Cemex paid $114 million for a 25% stake (JP,

TABLE 5 Impact on Central Budget of Rupiah Depreciation from Rp 7,300/$ to Rp 7,800/$

Oil Price $22 Oil Price $24

Revenue increase 4.9 5.5

Less extra fuel subsidies 4.3 4.7 Less extra interest on foreign debt –2.0 –2.0 Less extra transfers to regions –1.9 –1.9 Less extra project costs –1.5 –1.6 Less extra routine expenditure –0.2 –0.2

Net cost to budget –5.0 –4.9

Source: Ministry of Finance, 2001 budget simulations.

6/2/01). This highlights the vulnerabil-ity of minorvulnerabil-ity foreign shareholders in state enterprises (CSIS 2000).

Asset recovery and privatisation must take account of a feeble local stock mar-ket. Dur ing 1999 the Jakarta and Surabaya exchanges briefly regained pre-crisis levels with impetus from the stock market boom in the US. During 2000, however, the market steadily sank before bottoming out in the last quarter (figure 2). Apart from a brief rally in mid February, the Jakarta market index has stayed in the range 420–430.

Nevertheless, even if things go badly wrong and the budget deficit blows out beyond the target of 3.7% of GDP, it may not be a disaster. If demand weakens during the year, a larger budgetary stimulus can probably be accommo-dated. The dangers are further erosion of confidence in the government’s abil-ity to manage the economy and an even greater increase in government debt.

BANK AND CORPORATE RESTRUCTURING

At least on paper, IBRA met most of its LOI targets for 2000. Officially, bank recapitalisation has been completed, most corporate debtors have become party to restructuring, and the rate of asset sales and divestiture is at last ac-celerating. IBRA met its revenue target by remitting Rp 20.7 trillion to the Min-istry o f Finance in 2000, and is required to raise Rp 27 trillion in 2001 (IBRA 2001). Disposal of IBRA’s major-ity equmajor-ity in Bank Central Asia (BCA) and Bank Niaga has been rescheduled for the first half of 2001, after deferral in late 2000; sale of a remaining 36% stake in BCA is expected to raise Rp 7.5 tril-lion if parliamentary approval can at last be gained (JP, 7/2/01).

The ultimate goals of the program, however, look to be unattainable. First, the banking system has no t been properly recapitalised and the cost is

FIGURE 2 Stock Exchange Index, Jakarta and Surabaya, 1996–2000

Source: BI, Weekly Report, various issues. 0

2 0 0 4 0 0 6 0 0 8 0 0

M ar-99 Jun-99 Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Jakarta

Surabaya

96 97 98

continuing to escalate, albeit in less transparent ways. With a further Rp 150 trillion in bonds issued during 2000, the final recapitalisation issue reached Rp 660 trillion, of which Rp 432 trillion are held by the banks as interest-earning assets and the balance of Rp 228 trillion by Bank Indonesia. With positive spreads and rising bank profitability, officially there is confidence that the recapitalised banks will achieve the targeted 8% minimum capital ad-equacy ratio (CAR) by the end of 2001. However, the assets represented by loan portfolios and collateral have been over-valued, as also has the equity injected by way of bonds. As explained in the August 2000 Survey (McLeod 2000: 24–7), interest rates have been set too low to match the par value of the bonds, a fact that is being disguised by the ab-sence of an active secondary market. Re-ported CAR s are therefore m uch overstated. These problems are showing up in the case of the main state banks,

especially Bank Mandiri, and the for-merly private Bank Internasional Indo-nesia (BII), in which IBRA is now the main shareholder.

The four main state banks (Mandiri, BNI, BRI and BTN) account for two-thirds of the recapitalisation bonds. Bank Mandiri, a recent merger of four state banks, alone accounts for 42% (tab le 6). B an k M and iri, w h ich is proposing to float 30% of its capital in September, claims a 23% CAR (JP, 24/1/01). What is not explained in the bank’s public relations statements is the method of valuing the bonds that now make up 78% of its assets. Due diligence will require this to be done. The official CARs of BCA, Bank Danamon, Bank Niaga and Bank Bali also look healthy, but the same problem of overvaluation will be encountered in their release from IBRA control.

The immediate crisis, however, has been in one of the seven recapitalised and formerly private banks, BII. This has

TABLE 6 Eleven Main Recapitalised Banks: Bonds and Total Assets, September 2000

Banka _{Assets Bonds Ratio}

(Rp trillion) (Rp trillion) (%)

Mandiri 232.6 181.2 78

BNI 114.3 61.8 54

BCA 96.9 59.6 62

Danamon 60.5 47.5 79

BRI 54.0 29.1 54

BTN 20.5 9.8 48

Niaga 17.6 9.5 54

BII 40.1 6.5 16

Lippo 21.8 6.0 28

Bali 5.7 5.3 94

Universal 11.3 4.2 37

Total 675.3 420.5 62

a_{State banks in italics.}

Source: Infobank, January 2001: 53.

been triggered by further turmoil in the affairs of the affiliated Sinar Mas conglomerate. When taken over by IBRA, more than half of BII’s loans comprised intra-group loans, breach-ing le gal lendbreach-ing lim its by a huge margin (BT, 30/1/01). By agreement with IBRA in early 2000, Sinar Mas had pledged Rp 12 trillion ($1.25 bil-lion) in assets as collateral for a gov-ernm ent guarantee to the bank on behalf of depositors and other credi-tors. On recapitalisation, IBRA became majority owner of the bank. Later in 2000 Sinar Mas sought to finance expan-sion and refinance debt by a large junk bond issue in New York by its Singa-pore-registered subsidiary Asia Pulp & Paper (APP), raising APP’s borrowings to about $11 billion and, according to the ratings agency Moody’s, making it one of Asia’s most indebted companies (BT, 2/2/01). A PP’s str ategy o f expanding production in Indonesia and China at a time of falling pulp and paper prices, together with its high in-debtedness, led to re-evaluation of its shares and bonds (AFR, 15/2/01). In January APP was warned that its bonds would be delisted if they continued to trade below minimum agreed value, thereby triggering a clause for redemp-tion of $870 million in opredemp-tions within 100 days (JP, 19/1/01). This in turn cast doubt on the value of assets pledged to IBRA and the solvency of BII.

Fearing collapse of BII and a possible domino effect upon other recapitalised banks, the government examined its options. An asset swap or a new issue of further recapitalisation bonds was rejected as looking too much like a bail-out of the Sinar Mas group (Kompas, 1/2/01). Instead the government agreed to transfer the Sinar Mas loans at book value from BII’s portfolio to IBRA, thereby boosting the (risk-weighted) CAR; in return, Sinar Mas agreed to

transfer to IBRA assets valued at Rp 17.5 trillion to cover 145% of the value of the government guarantee (Bisnis Indonesia, 6/2/01). The government insisted that this was not a bail-out, because its guar-antee was limited to interest payments in the event of default, and was well covered by the pledge of Sinar Mas do-mestic assets. The reality is that the gov-ernment has increased its exposure to a huge and financially unstable group which has $2 billion of debt falling due in 2001, whose subsidiaries are already in default, and whose international credit-worthiness is fast deteriorating (Bisnis Indonesia, 7/2/01). IBRA would be wise to realise the assets as soon as possible and release the government from its guarantee. Concern is being ex-pressed that other recapitalised banks may face problems of uncovered expo-sure to intra-group lending and that the Sinar Mas arrangement could well be a precedent (BT, 6/2/01; Bisnis Indonesia, 7/2/01).

A second underlying weakness of IBRA’s debt restructuring is the slow rate of restructuring bank debt. During 2000, almost $200 million was recovered in two tranches from disposal of large cor-porate loans. The balance of outstand-ing small loans below Rp 5 billion were also sold off in the second half of the year, at an average recovery rate of 32% on book value (IBRA 2001). However, a significant proportion of these loans have been acquired by banks under IBRA’s control, in effect reshuffling the government’s asset portfolio, and there-fore not in fact contributing to the gov-ernment’s debt recovery. Progress in restructuring the largest debtors, all well known conglomerates, continues to be disappointing. Table 7 shows the tre-mendous variability among the 21 larg-est debtors. At year end, 74% of the outstanding Rp 89 trillion had been brought within memoranda of

standing (MOU) and a further 7% were subject to legal proceedings. However, not too much weight can be placed on these MOU: only 17% of agreements were actually being implemented, and just 3% of the debt had been paid out (IBRA 2001). The corrupt legal system gives no ‘teeth’ to IBRA’s sanctions.

By contrast, in the second half of 2000 the Jakarta Initiative Task Force (JITF) had considerable success with out-of-court settlements following expiry of the repayment moratorium in February 2000. Under the guidelines of the Finan-cial Sector Policy Committee, JITF’s role is to complement IBRA by acting as facilitator and mediator in settlement of

corporate debts totalling more than Rp 100 billion or involving foreign creditors, but where IBRA’s interest is less than 50%. It can offer inducements in terms of tax exemptions on debt–equity or debt–asset swaps and a period of grace against de-listing from the local stock exchange, and has the weak sanction of referring uncooperative parties to the attorney general. By January 2001 some 38 cases totalling $9.4 billion had been settled, of which about 50% involved rescheduling, 30% debt–equity swaps, 15% debt–asset swaps, and only 5% write-offs (JITF data, January 2001). Cases involving a further $8.2 billion are still under negotiation.

TABLE 7 IBRA: Progress with Recovery from the 21 Largest Debtors

Group Debts Under MOU In Court (Rp trillion) (%) (%)

Texmaco 17.3 99.9 –

Barito 8.4 93 –

Bakrie 6.0 70 –

Humpuss 5.7 95 4

Moh. Hasan 5.2 99.6 0.4

PSP 4.9 12 88

Napan 4.2 93 –

Tirtamas 3.9 69 25

Bimantara 3.1 77 –

Bahana 3.0 99 –

Danamon 3.0 72 –

Tirtobumi 2.9 – –

Djajanti 2.9 97 3

Gunung Sewu 2.8 100 –

Darmala 2.7 22 44

Ongko 2.7 6 68

Raja Garuda Mas 2.7 96 –

Rajawali 2.7 100 –

Nugra Santana 2.2 46 14

Argo Pantes 1.9 98 –

Kodel 1.0 94 –

Total 89 78 10

Source: IBRA (January 2001).

The third weakness of IBRA’s debt restructuring process is that, by recent estimates, only 21% of the book value of IBRA’s assets is likely to be recover-able from asset sales and divestiture (table 8). This is considerably worse than previous estimates that about one-third of book value might be recoverable. The gap arose because assets taken over from insolvent banks and debtors were en-tered at unrealistic book values, giving the false impression that IBRA’s debts were covered by asset values. It has wid-ened because of loss of confidence on the part of potential buyers, deterioration of assets, manipulation of asset pledges, the weakness of legal sanctions, politi-cal interference and parliamentary delays. An interesting sign of the times is that the Association of Indonesian Creditors (Asosiasi Perusahaan Pem-biayaan Indonesia, APPI) is launching a website to allow creditors to cross-check for double-pledged collateral (Bisnis In-donesia, 6/2/01). IBRA’s senior execu-tives face tremendous pressure to do special deals and apply discriminatory

treatment. It is symptomatic that it is now under its fifth chairman in three years and that between October and January it lost three of its five deputy chairmen (JP, 24/1/01). Parliament has for some months refused to approve the sale of BCA and Bank Niaga, while also strongly criticising IBRA for the sale last November of 260,000 hectares of Salim Group oil palm plantations to Malaysia’s Guthrie Group (JP, 14/2/01; Bisnis Indonesia, 25/1/01).

The falling recovery rate has not yet registered politically, because in the short term the cash recovery rate has met budget targets. Nevertheless, eventually the question will have be faced of what to do about up to 80% of the book value of IBRA’s assets that is likely to be unrecoverable, equivalent to almost Rp 350 trillion of unredeemed recapit-alisation bonds. Moreover, rising inter-est rates – the 3-month SBI rate reached almost 15% in December and January – have increased the already large burden on the budget of the variable-interest bonds, while depressing the value of the

TABLE 8 IBRA: Estimated Asset Values and Recovery Rates, December 2000

Book Value Market Value Recovery Rate (Rp trillion) (Rp trillion) (%)

Core assetsa _{256 53 21}

Non-core assetsb _{8 4 50}

Settlement assetsc _{104 35 34}

Equity in banksd _{148 16 11}

Total 516 108 21

a_{Loan and non-loan facilities.}

b_{Land, buildings, office equipment, vehicles, etc.}

c_{Assets pledged by shareholders under Master Settlement and Acquisition Agreements.} d_{IBRA’s equity in bank share capital.}

Source: BI.

fixed-interest bonds. To date the govern-ment has been insulated from the need to worry much about maintaining the value of the bonds because there is no active secondary market. As part of the regulations for a secondary market, the government has recently announced that it will allow pension trusts to invest up to 100% of their funds in government bonds (JP, 25/1/01). This would be a gross breach of sound portfolio manage-ment. Fund managers must allow for the policy risk that in the future an irrespon-sible government may resort to inflation as a means of reducing the real value of domestic debt, thereby shifting the burden onto bondholders.

In a rapidly growing economy, the huge domestic debt burden incurred in recapitalising the banking system could be steadily amortised through growth in the tax base and the rising value of gov-ernment shares in bank equity. In a slowly growing economy, as Indonesia’s is likely to become, conflict would inten-sify between the government and vested interests determined to avoid paying. Many principals in default do have a capacity to repay non-performing loans from family wealth, including offshore assets, but find it expedient not to do so. Indonesian law is too corrupt to be an effective sanction. Under the 2001 budget, the government has sought to

broaden the tax base by imposing a range of new taxes and increasing the rates of some existing ones. These changes include the increase from 15% to 20% in the tax on interest on bank deposits larger than Rp 7.5 million (pre-viously Rp 1 million), a new set of taxes of 10–75% on 41 ‘luxuries’, and VAT on traders in agricultural products with a turnover of more than Rp 1 billion. Each of these taxes has generated a storm of protest, resulting in some compromises. Most of the protest comes from those who can afford to pay. For example, 95% of bank accounts are below the thresh-old of Rp 7.5 million (about $800), but the other 5% represent 60% by value of total national deposits (Bisnis Indonesia, 30/1/01). The more business and the middle class avoid and evade paying tax, the more the debt service burden w ill fall on ordinary Indonesians through reduced government spending, which means less funding of such things as education, health and public works. TRADE AND

INVESTMENT CLIMATE

Exports continued to drive the economy in 2000. Overall export growth in dol-lars was 27%, comprising a spectacular 45% growth in oil and gas exports and a more modest 23% growth in non-oil exports (table 9). The current account

TABLE 9 Oil and Non-oil Exports, 1999 and 2000 ($ billion)

Total Oil Non-oil

1999 48.7 9.8 38.9

2000 62.0 14.2 47.8

Increase (%) 27 45 23

Source: BPS: www.bps.go.id/releases/exim-02peb01.

could change, even within months. Cen-tral ministries will struggle to deal in minutiae with 336 local governments beyond Jakarta, and those local govern-m ents will find it frustrating and expensive – not least in air fares and accommodation – having to deal directly on so m any m ore matters. So me rebalancing of powers to the provinces might be a compromise that would satisfy all parties.

At present it is realistic to hope that decentralisation will allow Indonesia’s diversity to be better reflected in its po-litical institutions. Under the New Order, Sukarno’s slogan of ‘Unity in Di-versity’ had come to mean something like ‘Unity in Uniformity’. A weaker and more representative central government may come to accept a more democratic interpretation. If the process goes very badly wrong, however, the army would be in a strong position to step in as the only centralised organ of the state still structured along territorial lines. POPULATION, AGRICULTURE AND GROWTH

Population

In January 2001 BPS released the first official results of the 2000 Population Census. These give a population of 203.5 million and an intercensal growth rate between 1990 and 2000 of 1.35% p.a., well below the 1.97% rate over the pre-vious decade (BPS 2000). Probable biases in and adjustments to these figures are discussed by Jones (box 4) and by Hull (2001, in this issue). These figures are important because they affect all per capita estimates. Hitherto BPS’s income per capita growth estimates were based on population growth in 2000 of just under 1.5%, or about 10% higher than the new census figure. Updated national poverty estimates are not yet available, because results of the 2000 mini National Ho useho ld Expend it ure Survey

(Susenas) (of 65,000 households) have been held over pending determination of the official census figures, while a full Susenas of 210,000 households will be held this year. In the interim, attention may be directed towards some impor-tant general policy issues.

Agriculture

Primary sector output grew 1.7% in 2000 after a sharp 12.6% decline in the final quarter (table 1; BPS: www.bps.go.id). The final quarter weakness was attrib-utable not to fo od crops – paddy output rose 0.6% to 51.2 million tonnes, and go od harv ests are continuing into the w et seaso n of 2001 (BPS: www.bps.go.id) – but to the insecurity and institutional problems in planta-tions and forestry discussed earlier.

The dilemma of the food crop subsector is, if anything, that harvests are too good. Although the government raised the floor price of dry paddy (gabah kering giling) for the current season from Rp 1,400 to Rp 1,500 per kilogram, these farmgate prices cannot be sustained be-cause of high levels of production and the limited purchasing and storage ca-pacity of the local government logistics agencies (Dolog). In January 2001, paddy pric es in the rice bow l of Indramayu, West Java, were reported to be as low as Rp 700–800 per kilogram, or about half the official floor price (Kompas, 22/1/01). On the other hand, as argued by the author as long ago as the March 1982 Survey (Dick 1982: 29–31), floor prices have typically been a source of excess profit to well connected mid-dlemen between the farmer and Dolog, often through the local cooperative (KUD) (Kompas, 22/1/01). Meanwhile, local prices are being held down not only by good harvests but also, despite official suspension of import orders in the last quarter, by cheap international prices of around $170 per ton (f.o.b. Bangkok),

BOX 4 POPULATION GROWTHAND DECLINEIN INDONESIA’S CITIES The Indonesian Population Census of 2000 has shown a massive slowdown in city growth in the 1990s compared with the 1980s, according to recently pub-lished data from the 2000 Population Census. None of the large cities of Java recorded a growth rate even as high as 1% per annum over the 1990s (except for Bogor, Tangerang and Bekasi, but these cities are really part of the Jakarta ex-tended metropolitan area, of which more below). The small cities of Sukabumi and Salatiga were the only kotamadya in Java to record a high growth rate over the period (almost 8% per annum in Sukabumi; well over 4% in Salatiga). Some cities in Java (e.g. Yogyakarta, Kediri and Magelang) recorded an actual popula-tion decline since 1990.

City growth was more rapid in areas outside Java. Some cities such as Batam (a 16% average annual increase, to reach 434,000), Denpasar and Pekanbaru (both with populations now well over half a million) stand out for their rapid growth, and most cities showed some growth, generally in the range of 1–2% per annum. Ambon recorded a sharp decline in population (based partly on estimates rather than actual enumeration), but there were obviously special circumstances in this case.

City growth continued unabated in the first half of the 1990s. The slowdown was confined to the second half of the decade when, according to comparison of 1995 Supas (intercensal survey) and 2000 Census data, there was an absolute decline in population in more than half the cities of Java, as well as in quite a number of those outside Java. Possible reasons include the effect of the economic crisis on migration patterns, the low birth rates now recorded in the cities, the tendency for population growth to be concentrated in suburban areas outside official boundaries, and elements of non-comparability between the 1995 Supas and the 2000 Census. (The Supas was only designed to give reliable population estimates for provinces.)

Perhaps the most striking finding relates to the growth of Indonesia’s largest city, Jakarta. In sharp contrast to projections, its population grew by only 0.16% per annum over the 1990s, and population declines were recorded in both Cen-tral and South Jakarta. The former may well be true; the latter is hard to believe. Furthermore, comparison with the 1995 Supas figure indicates a decline of over 700,000 in Jakarta’s population in the second half of the 1990s.

Jakarta, however, has spilled far outside the borders of the DKI (Special Capi-tal Region). Although the growth rate of DKI from 1990–2000 was only 0.16% per annum, the recorded growth of Botabek (Bogor, Tangerang, Bekasi) was almost 3.7% per annum, and of the total Jabotabek area (Botabek plus Jakarta) 2.1% per annum. The total population of Jabotabek was over 21 million in 2000, of which over 16 million live in the extended Jakarta metropolis. The population growth rate of this metropolis would have somewhat exceeded the 2.1% per annum re-corded for the whole of Jabotabek. Like Jakarta, other large cities of Java have also spread outside their official boundaries (BPS 2000), so the low rates of growth of Java’s cities recorded by the 2000 Census are somewhat deceptive.

Gavin Jones

ANU

equivalent to only Rp 1,800 per kilogram at the retail level (Sadli 2001; BI, Weekly Report, 28/1/01). This is well below the retail floor price equivalent of Rp 2,400 for milled rice. In the first half of Janu-ary, reco rded prices fo r medium-quality rice varied from Rp 2,091 in Surabaya to Rp 2,461 in Jakarta.

Rice price policies inherited from the New Order are therefore in need of review. The obvious policy response is to ab and o n th e fi c titi o us f lo o r price, allow local retail prices to reflect world prices, and let farmers plant the crops they choose. This might well benefit both farmers and consumers. Rice is not the most profitable of crops, certainly not at Rp 800 per kilogram, so official pressure on farmers to grow rice actually leaves them worse off than they would be if operating on a commercial basis. Vegetables, fruit or even flowers offer much higher re-turns. The problem is that more profit-able crops require more working capital, which presently is rarely available to ordinary farmers except at very high rates from moneylenders. In theory plentiful cheap credit (Kredit Usaha Tani) is available at just 12% per annum from branches of the state-owned rural bank (BRI). In practice, it is still closely tied to the production of rice and ba-sic foodcrops, and even then is often not available in the vital month before planting. Th e first policy objective should therefore be to ensure that farmers have timely access to credit – timeliness being more important than the rate, which may not need to be subsidised. With access to credit and other inputs, the key to the success of the Green R evolution, farmers can better act co mm ercially and grow what is suitable to local conditions and markets, as well as allocating la-bour time to animal husbandry, crafts, construction or trading.

Decentralisation may make such a st r at eg y m u c h e a si er. A l th o u g h budgetary constraints have resulted in d r a st ic c u tb ac ks i n d e v e l o p m e n t f un d s, a b e n ef i c i al eff ec t o f t h e crisis has been to reinvigorate the in-formal sector, both in cities and in villages. Local autonomy gives gov-ernment from the village level up-wards the opportunity to make local decisions without being forced into the framework of standardised na-tional programs. At the nana-tional level the policy challenge is to determine how local initiatives may best be as-sisted. Apart from removing bottle-necks to the timely availability o f credit and inputs, maintaining irriga-tion systems, roads and communica-ti o n s n et w o r k s, an d p ro v i d i n g education and health services, local government can also provide funds for local initiatives. Under the Inpres system, development funds were tied to national programs, even if location and design was the product of local initia-tive. In fact there is no reason why de-velopment funds should be tied to anything at all, as long as they raise pro-ductivity and welfare and are properly audited. Provision in the form of match-ing grants would be sufficient to ensure a high level of local commitment. Growth and Quality of Growth Growth matters. Without growth there are no new jobs, no new incomes and no rising living standards. The force of this can be seen from a simple arith-metic calculation of GDP growth rates (table 11). If growth falls back to 4% during 2001 but holds that level in the following year, the loss of production during 1997–98 will be restored by the end of 2002. However, in per capita terms, even at the lower revised rate o f in terc ensal po pu lati o n gr o w th (1.35% p.a.), it would take another 2.5

years, that is until mid 2005, eight years after the crisis began, before GDP per capita was restored to pre-crisis levels. In other words, at modest economic growth of 4% p.a., by the end of Presi-dent Abdurrahman Wahid’s term in 2004, income per capita would still be no higher than its pre-crisis level. If rais-ing the welfare of the people is a good test of a government, such performance would surely constitute failure.

Economists need to reiterate these fundamental points because it is no longer apparent that the government is still committed to economic growth. Commitment involves not just state-ments and predictions but the imple-mentation of growth strategies. The economics coordinating minister has stated his expectation that growth in 2001 w ill be o f the order o f 6–7% (Tempo, 7/1/01). He has not yet shown how that can be achieved and what poli-cies must be set in place to do so. The experience of the past year suggests that political leaders are preoccupied not with growth but with distribution, and will readily trade long-term growth for short-term political advantage. As in the 1950s and 1960s, parties have quickly

become redistributive organisations. Their common interest in the growth and prosperity of the economy is merely notional.

Of course the quality of growth also matters (World Bank 2000). It is very important that economic expansion translates into a rising demand for la-bour and a reduction in poverty, and is backed by education, associated with improved living conditions and not traded off in environmental degrada-tion. Decentralisation may also be part of a better quality of growth. Neverthe-less, without strong growth momentum – and this means at least 6% p.a. – the quality of growth becomes fairly mean-ingless, like the quality of sound that cannot be heard.

The force of this logic may not yet be apparent, because an impact of the crisis has been to redistribute em-ployment back to the broad small-scale and informal sector, which has benefited from recovery in 2000. Low growth could be sustained for a dec-ade or more simply by living off the depreciation allowances from New Order investment in capital stock, in-terest and profits on funds and assets TABLE 11 Arithmetic Growth Rates of GDP and GDP per Capita (constant 1993 prices),

1998–2002 (%)

Year GDP Cumulative GDP per Capita Cumulative

(% p.a.) (at 1.35% p.a. population growth)

1998 –13.0 –13.0 –14.35 –14.05

1999 0.3 –12.7 –1.05 –15.40

2000 4.8a _{–7.9 3.45 –11.95}

2001 4.0b _{–3.9 2.65 –9.30}

2002 4.0b _{0.1 2.65 –6.65}

a_Provisional. b_{Hypothetical.}

held overseas, and remittances from Indonesian workers overseas. Never-theless, as in the Philippines, the long-run effect of a slow-growth economy will be that the rich do indeed get richer, including members of the government and leaders of political parties, but the

NOTES

* With contributions by M. Sadli (Indone-sia Forum Foundation) and Gavin Jones (ANU).

1 The Bulog scandal involved misappro-priation of Rp 35 billion (about $3.5 mil-lion) from the staff pension fund; the Brunei scandal concerned improper dis-bursement of a $2 million gift from the Sultan of Brunei for relief work in Aceh (McLeod 2000: 5–6).

2 T he comm ents of forme r min ister Laksamana Sukardi are worthy of note (AFR, 9/2/01).

3 Perhaps marking the end of an era, Pertamina’s former entrepreneurial head, Ibnu Sutowo, died on 12 January at the age of 86 (JP, 13/1/01). Previously army commander in South Sumatra, in 1957 he was appointed head of Permina and later, after its merger into Pertamina, head of the latter, before being forced to resign in 1976 over its sudden bankruptcy (McCawley 1978).

4 The term ‘decentralisation’ is more ap-propriate than the official term ‘regional autonomy’ (otonomi daerah). The word ‘autonomy’ comes not from English but

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