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Bulletin of Indonesian Economic Studies

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SURVEY OF RECENT DEVELOPMENTS

Prema-Chandra Athukorala

To cite this article: Prema-Chandra Athukorala (2002) SURVEY OF RECENT DEVELOPMENTS, Bulletin of Indonesian Economic Studies, 38:2, 141-162, DOI: 10.1080/000749102320145020

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ISSN0007-4918print/ISSN1472-7234online/02/020141-22 ©2002IndonesiaProjectANU

SURVEY

OF

RECENT

DEVELOPMENTS

Prema-chandraAthukorala*

AustralianNationalUniversity

SUMMARY

Macroeconomic conditions have been improvingslowlybutsteadilysincethe beginningoftheyear.Theexchangerate had strengthened tobelowRp8,700/$ bymid June.Stockpriceshavealsore -bounded. Inflation has been declining sinceFebruaryafterincreasingsteadily foralmosttwoyears.Realinterestrates are now belowpre-crisis levels. These developments havebeensupportedby acombination ofpositivemovesonthe policyfrontandanimprovement inre -lations with the international commu -nity.Afterseveralmonthsofindifferent performance theMegawatigovernment hasmadesomeprogressinseveralkey areas of the reform program, as evi -dencedbythelongdelayeddivestment ofBankCentralAsia,aflickeroflifein thestalledprivatisation program,some significanttaxationreform,andtheabo -lition ofcostlysubsidies.InApril 2002 theInternational MonetaryFund(IMF) approvedthedisbursement ofafurther $347millionloan,andtheParisClubof creditor nations agreed to reschedule $5.4 billion of Indonesia’s debtservice payments.Outputgrewby2.5%inthe yearto Q12002. While thiswaslower thanforecast,thereisconsensusamong analyststhatgrowthof3.5–4%incalen -dar 2002 is within reach. Weak first quartergrowthcanbeattributedpartly tofactorsoutsidethegovernment’scon

-trol:severefloodsinFebruaryandcon -tinuationoftheglobaleconomicslump thatbeganin2001.

Nevertheless there is no room for complacency. The recovery has been fuelled mainly by consumer demand. Improvements in investor confidence hav e been reflected so far o nly in portfolio investmentflows, while the netforeigndirect investmentoutflow has continued unabated. Investment spending is still contracting, and the bankingsystemremainsfragile.There islittleroomformanoeuvreonthefis -calfrontbecauseofthehugedomestic debtserviceburdenresultingfromthe governmentguaranteeofbankdepos -its,and theplannedbudgetdeficitfor 2002 may be exceeded unless more rapid progress withprivatisation and divestmentofbanksectorassetscanbe achieved. Corruption in the customs serviceiscreatingadragonrecovery— especia lly for ex porters and other producers dependentonimportedin -puts—while there seems to be an in -creasing tendencyfor thecourtsto be usedasinstrumentsofextortion,espe -ciallyinrelationtoforeigncompanies. Muchremainstobedoneinsettingup aviablesetofarrangementsinrelation todecentralisation,especiallyindelin -eatingtheboundariesof authorityfor differentlevelsofgovernment.

POLITICSAND ECONOMICPOLICY

Indonesia’s spell of relative political tranquillity continues. This has been madepossiblepartlybyavoidingsome far-reachingreforms for fear of upset -tingvestedinterestscapableofcausing trouble. But although the Megawati cabinetseemedtoachievelittle during her first half year in office, in recent monthsithasbeguntomoveaheadwith somereforms,albeitratherslowly.1

Aftertwoyearsofdelay,theMinistry of State-OwnedEnterprises finally an -nouncedinMarchthesaleofacontrol -ling stake in Bank Central Asia to a consortium led by an American firm, FarallonCapital Management, for$542 million.Whilethelistofbanksstilltobe soldislong,observershailedthissaleas anindicationofgovernment’sprepared -nesstoselloffnationalisedbankstore -deemsomeofitshugedomesticdebt,and tobreathenewlifeintothebankingsys -tem. The privatisation program, a key elementoftheIMFsupportpackageon whichnothinghadbeenachievedforal -mosttwoyears,receivedaboostwiththe saleofan8.1%stakeinthestate-owned internationalcalloperatorPTIndosatin April.Therehavealsobeensomesignifi -cantachievementsintheareasoftaxre -form and subsidyreduction, including thesubstantialdismantlingofthecontro -versialfuelsubsidythat threatenedfis -calsustainabilityandhadbeenamajor sticking point inIndonesia’s relations withtheIMF.

Theseachievementshavebeeninstru -mentalinrestoringIndonesia’srelation -ship wit h the international d onor community. Inits quarterly review in FebruarytheConsultative GrouponIn -donesia (CGI), which coordinates aid fromforeigndonors,concludedthatthe government had made good progress with macroeconomic policy, and had initiatedsomeoftheprocessesnecessary

toachievestructuralreforms.Thefifth performance review under the IMF’s Extended Fund Facility program was completedinApril,openingthewayfor thedisbursement ofanadditional$347 million.2_{Thepositiveassessmentbythe} IMFwascrucialforthesubsequentParis Clubmeeting,alsoinApril,atwhichit wasagreedtoreschedulerepaymentson $5.4billionofIndonesiandebt.Forthe first time, creditors allowedIndonesia to delayrepayment of interest as well asprincipal.3

The IMF and thegovernment com -pletedtheinitialroundofdiscussionson thesixthreviewofthecountry’sreform programinMay.Thereviewwastopro -videthebasisforanewLetterofIntent (LOI)relatingtothedisbursementofthe next IMF loan tranche, expected to be around $350 millio n. The IMF com -mendedthegovernment’s‘strengthened performance undertheprogram’,while reiteratingtheneedtomaintainprogress withprivatisation andother reformsin the nearfuture—noting that there was ‘no room forcomplacency’ (IMF News

Brief No. 02/38, 26 April2002). Recent

months have seen a shift in the IMF’s emphasisonwhathad beenreferredto as‘pervasiveandcounterproductivein -volvement… in“micromanagement”’ (PangestuandGoeltom2001:146)topro -vidingbroaderguidelinesforpolicy.This mayreflectboth improving confidence inthenewIndonesianleadershipandthe IMF’sown‘learningbydoing’inrelation toproblematic aspectsofitshandlingof thecrisissofar.Anadditionalfactormay bethenegativeattitudeoftheplanning minister,KwikKianGie,whohasopenly argued for discontinuance of theIMF supportprogram,althoughhehasbeen stronglyopposedinthisbythecoordinat -ing ministerfor economics,Dorodjatun Kuntjoro-djakti(JP,18/6/02).

Moody’s InvestorsService raisedits outlook on Indonesia from ‘stable’ to

‘positive’ inlateApril,citingimproved confidenceinthecountry’sdebt situa -tion after theParis Clubrescheduling, althoughtheratingremainswellbelow investmentgrade(AWSJ,26/4/02).The agencystatedthattheParisClubagree -ment and Indonesia’s improved rela -tions with the IM F meant that the countrywasunlikelytofacealiquidity crisis inthe nearfuture.Moody’s BBB rating on Indonesia’s long-term debt remained unchanged, butthe positive outlooksignalsthelikelihoodofanup -gradinginthenearfuture.

Despitethesepositivedevelopments, much remains to be done in order to achievelastingpoliticalstability,policy transparency andastandardofgover -nancesufficienttoprovideaconducive settingforself-sustainedgrowth.Prob -lems persist on a number of fronts, includingwidespreadcorruption, diffi -culties with the decentralisation pro -gram, communal unrest in Maluku, continuing calls for independence in PapuaandAceh,and theneedtocon -tainradicalIslamicelements.

Corruption

Corruption remains attheforefrontof publicdebate,andtherearesomeindi -cationsthatitisontheincrease.In2001, Indonesiawas ranked88th _{worstin re}

-lation tocorruptionoutof91countries surveyed by Transparency Interna -tional, cominglevelwith Uganda,and just ahead of Nigeria and Bangladesh

(Transparency International, 27/6/01,

http://www.transparency.org/cpi/ 2001/cpi2001.html).In2000ithadbeen 85th_{onthelist.Thosewhoexpectedthe} shiftofpowertoelectedrepresentatives andawayfromthepresidenttohavea significant impact on corruption after thedemiseofSoehartohavebeengreatly disappointed thusfar. Indeed,thereis littledoubtthatmembersofthelegisla -ture themselves regularly demand

bribestovoteonewayoranotherinre -lation to new legislation and tosenior appointments to the bureaucracy, the centralbankandthemilitary.

Inrecentmonthsthecourtshavebeen busywithanumberofhighprofilecor -ruptionandothercriminalcases.Cen -tralbankgovernorSyahrilSabirinwas sentenced in March to a three-year prisontermforhisallegedinvolvement inthe$80million BankBalislushfund scandal(Booth1999:5).Thecaseagainst AkbarTandjung(speakeroftheparlia -ment and chair of theGolkar party), whofacestheseriouschargeofhaving beeninvolved inthe misappropriation offundsfromthestatelogisticsagency, Bulog(McLeod2000:7)andofusingthe proceedstohelpfundGolkar’selection campaignin1999,hasnowgonetotrial. The start ofthetrial was expedited to forestall a proposed parliamentary in -quiry intoAkbar’salleged corruption. Theformerministeroftradeandindus -try,Rahardi Ramelan,wentontrialin March, charged withmisappropriating a totalofRp 63 billion from Bulog (JP, 20/3/02).AsmuchasRp40billionofthis isalleged tohavegonetoAkbar, mak -ingRahardi akey to the prosecution’s caseagainst the Golkar leader.Also in March,prosecutorsdetainedtheSwitzer -land-basedbusinessman,HashimDjojo -hadikusumo, oncharges relating to a violation of the bankingregulations as long ago as 1994. Hutomo M andala Putera(‘TommySoeharto’)hasalsobeen ontrialoverthemurderinJuly2001ofa SupremeCourtJudge,SyafiuddinKarta -sasmita,oneofthejudgeswhohadfound Tommyguiltyina previouscorruption case.

Butthesestepshavedonelittletocon -vince the public of the government’s commitmenttoattackcronyismandcor -ruptiondecisively. Themediahavein -terpreted someof them asattemptsto ‘get only the weakest ones and those

withnopoliticalsupport’(TheEconomist, 23/3/02:30)inanattempttobalancethe need to assuage internationalopinion againstthegovernment’s owndomes -tic interests. Despite supporting the prosecution ofAkbar,thepresidenthas resistedmoves fora parliamentary in -vestigation into the Bulog scandal, which would inevitably have been highly politicised. Megawati’s PDI-P partymaystandtogain fromdisarray inAkbar Tandjung’s Golkar, the next strongestofalltheotherparties.Onthe otherhand,thereisariskofGolkarstrik -ingbackatPDI-Pby callingintoques -tionvariousactionsofthepresidentor her associates, such as herdecisionto allocatesomeRp30billiontoproviding improvements to military and police hostels (Kompas Cybermedia, 10/5/02). Therehave been criticisms of thecon -ductof Tommy’s trial, and numerous delays, including those caused by the failureof keywitnesses to appear(JP, 1/6/02);scepticismabout theeventual outcomewasboostedby thedetention of his lawyeron suspicion of bribing witnesses (JP, 24/5/02). The central bankgovernorisoneofaveryfewkey figuresto have been foundguilty and sentencedtoimprisonment, yethestill remainsinofficeasheappealsthever -dict.Finally,yetanotherexampleofthe appalling state of the legal system emergedinJune,whenthebankruptcy court was able to be persuaded that Indonesia’sfourthlargestlifeinsurer,PT Asuransi Jiwa M anulife Indonesia, shouldbefoundtobebankruptonpa -tentlyspuriousgrounds(box1);within days,aMinistry ofFinanceofficialan -nouncedpubliclythatitwasfinancially sound(AFR,19/6/02).

Meanwhile 100 or more bankersal -legedlyinvolved inmisusingBankIn -donesia (BI) liquidity support at the heightofthecrisis stillenjoytheirfree -dom.Itisdifficultforthepublictoun

-derstand how major figures such as SyamsulNursalim andUsmanAdma -djaja, respective president directors of BankBDNIandBankDanamon,which betweenthem areunderstood to have received someRp60trillion incentral bankfunding(McBethandDjalal2002: 14),canremainatlarge.

Corruption and malpractice have onceagainbecomerampantinthecus -toms service (JP, 28/5/02), and in recentmonths‘almostall industryas -sociations and foreign chambers of commercehaveurgedthegovernment to deal firmly’ with it (JP, 5/2/02). Under Law 10/1995, a person who bringsgoodswithfalsedocumentsinto the country can only be fined, while peoplewhobringgoodsintothecoun -try without any documents face the prospect of both imprisonment and fines. This encourages smuggling by theuse of falsedocuments. A nation -wide study of corruption conducted last year confirmed that the customs serviceandthetaxofficewereregarded asthemostcorrupt publicinstitutions inthecountry.

InFebruary,news ofthedisappear -ance of 14containers loadedwith Rp 20.5billion($2million)worthofluxury carsandelectronicgoodsfromthecus -tomsofficeattheportofCireboninWest Java hit the headlines (JP, 25/2/02). Customs officers’ detection of the at -tempttosmuggletheseitemshadbeen hailed initiallyas a success inthewar against corruption, but ateam oflocal legislators foundoutseveraldayslater that the containers had disappeared fromcustody.Theywerelaterfoundin thewarehouse of a local businessman allegedtohavetieswiththemilitary.

A recentstudybytheEconomicand SocialResearch Institute(LPEM)at the University of Indonesiafound that un -dervaluation ofimportshadresulted in thelossof$1.2billionincustomsrevenue

fortheyear2000(JP,5/2/02).(Thestudy didnotaddressadditionallossesarising fromunderpaymentofluxurysalestaxes imposed on imports, and income tax lossesresulting fromunderreporting of incomes of firms involved in import trade.)Revenue losses aside, delaysin obtainingclearancesforimportedinputs and/ortheneedtomakeunder-the-table paymentsto expedite suchclearances makeexportslesscompetitive andpro -ductionforthehomemarketmoreexpen -sive. The study recommended that the

governmentshouldreintroducethesys -tem of pre-shipment inspectionof im -ports thatoperated between1985 and 1997 (box2).Thisproposalhasalso re -ceivedstrongsupportfromtheIndone -sianImportersAssociation.

PROBLEMSOF

DECENTRALISATION

Nowwellintoitssecondyearofimple -mentation,Indonesia’sambitiousdecen -tralisation programremainsinastateof flux.Bymid2002,thegovernmenthad

BOX1 THESAGAOFPTASURANSIJIWAMANULIFEINDONESIA

Earlierchapters intheManulife story haveappeared inaprevious Survey (Dick2001:30).Themostrecentinstalmentoftheattemptbyformerdomes -ticjointventurepartner,theDharmalagroup,torecoveritsposition(having hadits 40% stakesold at auctioninpartial settlementofits debtsto Bank Indonesiaas a result ofthe bankingcrisis in1997–98) played outin June. Dharmalapetitioned to have Manulife declared bankrupt, onthegrounds thatthefirmhadnotpaidadividendin1999.Foritspart,Manulifeargued thatnodividendhadbeenpaidbecausenonehadbeendeclared:thereis,of course,nolegal obligationonanycompanytopayadividendtoits share -holdersatanyparticulartime.The absenceofadividendintheperiod just followingthefinancialupheavalof1997–98ishardlysurprising.

Thisepisodeisfurtherevidenceofatendencytousethecourtsystemasa meansofextortingpaymentsofonekindoranotherfromlegitimatebusinesses, especiallyforeign-ownedones(seealsothecaseofKaltimPrimaCoal,below). Ithardlyneedstobesaidthatsuchcasesweighveryheavilyonthemindsof foreignfirms with activities in Indonesia,or others thinkingof establishing suchactivities.AsprominentforeignbusinessmanJamesCastleputit:‘There isnolegalrecourseforcompanies. It’soneofthefundamental reasonswhy there’snonewinvestmentcomingin’(WallStreetJournal,14/6/02).

Thiscasehasanadditionaldisturbingelement.During theSoehartoera, fewbusinessesputmuchtrustinthelegalsystem,andakeytosurvivalfor foreignfirmswastotakeonadomesticpartnertheyfelttheycouldtrust— mostoften,onethatenjoyedthesupportofthepresidentorhiscloseassoci -ates. The Dharmala–Manulife case shows clearly that this is a very risky strategy,becausewithchangingcircumstances thedomesticpartnercanturn againstthe foreignpartner unexpectedly, withdevastating effect.Thisis a seriousthreatnotonlytoforeignfirms,buttoIndonesianfirmsthatwantto formgenuineandmutuallyadvantageousrelationships withforeigninves -tors, thus increasing Indonesia’s access to foreign know-how and capital. UltimatelyitisathreattoIndonesia’srecoveryandfurtherdevelopment.

completedthetransferofabouttwomil -lionemployeestoregionalgovernment payrolls, and significant progress had beenmadeinsettinguprevenuesharing arrangements.However, considerable workremainstobedonetoestablishthe necessaryfiscal,legalandadministrative frameworkfor successful decentralisa -tion. The inter-agency decentralisation coordinating team has not yet made muchprogressindesigningandimple -menting the national framework for strengthening theregions’ institutions andcapacities. Part oftheexplanation fortheslowprogressliesinthelackof consensusamongtheconstituentparties oftheruling coalition aboutthedesir -abilityof thedecentralisation law pro

-mulgatedbytheHabibieregimeandof amendmentstothelaw.RecentlyMega -wati said thatthe governmenthad no intentionofrescindingtheregionalau -tonomylaw,butinsistedthatitneeded to be revised in order to maintain na -tionalunity.Thegovernment’smoveto revisethelawsufferedaseveresetback, however,afterGolkarjoinedotherpar -ties inopposition tothe plan,arguing that it is too early to modifythe law, which wentinto effectas recentlyas1 January2001.

The business community has com -plainedrepeatedlyabouttheintroduc -tio n o f new r egional r egulatio ns, especiallyintheareasof taxationand licensingandin-countrymovementof

BOX2 THEPRE-SHIPMENTINSPECTIONSYSTEM,1985–97

In1985,theSoehartoadministration introducedapre-shipmentinspection (PSI)scheme inresponse torampantcorruption andinordinate delaysin -volvedintheoperationofthecustomsservice(Dick1985;WTO1999).Under thescheme,anappointedsurveyor company(SociétéGénéraledeSurveil -lance,SGS)inspectedimportshipmentsattheportofloading.ThePSIsys -temminimisedphysicalcontactbetweenimportersandthecustomsservice, therebyminimisingthescopeforcollusionandcorruption. Itwaspraisedfor restoringasmoothflowofimports,withahighdegreeoftransparency and certainty.TheIndonesianImportersAssociation hasrecentlyassertedthatit cutthecostsofimportationbymorethan70%,whilereducingthetimeneeded toclearimportshipmentsby86%,bycomparisonwiththeprevioussystem. Similarly,Dick (1985:10)hadreportedthat20signatureswerereplacedby one, thatthetimetakentoclear shipmentswas reducedfrommore thana monthtoamatterofafewdays,andthatthecostofclearingshipmentsalso felldramatically, toabout20%ofitspreviouslevel.

Despitethesuccessofthenewsystem—orperhapsbecauseofit—thegov -ernmentdecidedin1995totransfercustomsadministrationgraduallybackto thecustomsservice.a_{InJuly1995,thepre}

-shipmentinspectionofgoodsenter -ingthecountrythroughseaportswastransferred fromSGStoitspartlygov -ernment-ownedjointventurecompany,PTSurveyorIndonesia,whilegoods importedthroughairportsweresubjecttoanarrivalinspectionbythecustoms service.ThecontractwithPTSurveyorIndonesiawasterminatedon31March 1997,returningfullresponsibilityforimportclearancetocustoms.

a_{Privatisation of thisfunction ofgovernmenthadremoveda significant sourceof}

rentsforthebureaucracy.

goods. It has been reported that over 1,000rulingsrelatingtolocaltaxesand charges have been issued by regional administrations since decentralisation began,placingaheavyburdenonbusi -nessoperations(JP,6/5/02).Anewcoal tax recently introduced by the South Kalimantanprovincialgovernmentwas annulledbythecentralgovernment,and another 14 such taxes are being re -viewedbyitbecauseofcomplaintsfrom mining companies operating in the province.Investorshavebeenbesieged by fresh, sometimes competing de -mandsfromtheregionalauthoritiesfor equitystakesincompaniesoperatingin their territories. The adverse implica -tions ofthesedemandsforthegeneral investment climate are vividly illus -trated bythe case of PTKaltim Prima CoalinEastKalimantanprovince.(The following discussion drawson AWSJ, 9/4/02, andAFR,15/5/02.)

PTKaltimPrimaCoal

PTKaltimPrimaCoal(KPC),ajointven -tureoftheBritishenergygiant,British Petroleum(BP),andtheAnglo-Austra -lian miningcompany, RioTinto,oper -atesIndonesia’slargestcoalmineinEast Kalimantan(Klingner1993:173–4).The company has been in operation since 1991, and theoutput targetfor 2002is 17 million tonnes, mainly for electric power companies and steelmakers in Japanandothercountries. Withatotal labourforceofover10,000workers,the minedominatestheeconomyoftheEast KutaidistrictofEastKalimantan.

The original investment agreement signed by BP and Rio Tinto in 1982 called forthesaleofa51%stakeinthe venturetoIndonesianinterestsby2002. InMarchthisyear,KPCandthecentral governmentagreedtovaluea51%stake at about $420million, pavingthe way forapossiblesale,buttheselectionofa potentialbuyerremainsunresolved.The

centralgovernmentdoesnothavesuf -ficientfundstobuythestakeonoffer— indeed,this would beat oddswith its commitmenttoprivatisation ofexisting stateenterprises—andtheEastKaliman -tan provincial governmentinsists that aninvestornominatedbythatprovince should be next in line. PT IntanBumi Inti Pradana, a company run by the property developer David Salim (a nephewofLiemSioeLiong,founderof theSalimgroup)seemstohavestrucka dealwiththeprovincialgovernmentto buytheshares onitsbehalf, underthe conditionthat5%ofcompanydividends willbepaidintotheprovince’scoffers. Frustratedbythedelayinfinalising this transaction, the East Kalimantan government recently filed a criminal complaint against KPC, BP and Rio Tinto, accusingthemof corruption by virtue oftheirnotyethavingsold the 51% stake, and seeking damages of $776millionforlostdividendincome. The provincial governor also warned thatlocalresidentsmighttrytoblock -adethemineiftheshareswerenotsold soon.BPandRioTintoinsistthatthey havenoobligationtosellthesharesto theprovincialgovernmentofEastKali -mantanoritsnominee,sincethereisno such stipulation in its original agree -mentwiththeIndonesiangovernment. A forced sale to a particular buyer wouldpresumablyresultinasaleprice far below the true marketvalue, thus resulting in effectiveexpropriation of theexistingowners’propertyrightsin KPC;clearly thedecentralisation laws wereneverintendedtoencouragesuch actionsonthepartofregionalgovern -ments.Asthelawsuitwaitstobeheard, a Jakarta court has issued an attach -ment order at the request of the pro -vincialgovernment,preventingBPand Rio Tinto from selling or transferring anyoftheirassetsinIndonesiatoother parties.

Thisactionalonecouldbeseriously damagingtoIndonesia’srecovery.For example,BPplanstospendsome$2bil -liontodeveloptheTangguhnaturalgas field,andwouldbeunlikelytoproceed intheabsenceofprotectionofitslegiti -mate entitlements by the courts. For thatreasonthecentralgovernmentin -tervenedrecentlytohavethisassetre -leasedfromtheattachmentorder.

Far more decisive action than this ‘bandaid’ solution is needed in cases such as this, however, if Indonesia’s reputationasasafeplaceforforeignin -vestment is not to beruined. Forex -ample,theoriginalcontractgoverning theKPCventurecouldbemodifiedand extended by agreement between the shareholders and the central govern -ment. Thereis noobvious gain to In

-donesiafromaforced divestment(ex -cept if the sale is coerced atan artifi -ciallylowprice).Afairsalepricewould simplyreflectthepresent valueof fu -tureprofitsexpectedtobegeneratedby themine,andthereisnoreasontobe -lieve thatthepresence ofanyIndone -sian entity as minority or majority shareholder would result in an im -provement in the quality of manage -ment;quitethecontrary.Itwouldmake moresensetorenegotiate ahigherlevel ofroyaltypaymentstothecentralgov -ernmentinreturnforleavingtheexist -ing shareholdings intact, bearing in mindthatunderthecurrentdecentral -isation laws the local governments wouldbenefitbyvirtueoftheirentitle -ment to a fixed share of these now higherrevenues.

TABLE1 GDPGrowth(Year-on-Year)

(1993prices,%)

Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02

GDP 6.9 4.8 3.8 3.1 1.6 2.5

Expenditure

Privateconsumption 4.7 4.0 4.7 5.8 9.2 9.9 Governmentconsumption 12.1 6.0 4.2 11.9 11.0 10.3 Investment 24.6 18.9 7.7 –0.8 –7.1 –6.1

Exports 32.3 18.4 8.0 –2.6 –12.9 –6.7

Imports 50.1 50.7 37.2 –3.7 –29.8 –25.8 Sector

Agriculture, livestock, 13.2 3.7 1.7 –0.4 –2.8 –1.8

forestry&fisheries

Mining&quarrying 12.6 6.8 –0.3 –2.4 –5.9 –0.9

Manufacturing 4.4 4.2 4.8 4.7 3.6 4.3 Electricity,gas&watersupply 7.7 7.3 9.9 8.9 7.6 9.8 Construction 4.7 6.2 5.7 3.5 0.7 1.0 Trade,hotels&restaurants 6.8 6.8 5.5 5.7 2.6 3.6 Transport&communications 7.8 6.4 7.0 7.6 8.9 8.9 Financial,rental& 3.6 3.9 3.4 2.7 2.0 2.3

businessservices

Services 2.3 1.3 1.6 2.3 2.7 1.6

Source:CEICAsiadatabase.

MACROECONOMICCONDITIONS Growth

Thedownwardtrendinquarterlyyear -on-yeargrowthrateswasreversedinthe firstquarterof2002,whenarateof2.5% wasrecorded (table1).Froma longer -termperspective,thecumulativeimpact ofthecrisis onIndonesia’sgrowthhas beensignificantly greaterthanthatfor theothercrisis-affectedcountriesinEast Asia, with the exception of Thailand (table2). Takingthefirst quarterGDP levelin1996asthebenchmark(onthe grounds that Thailand’s slowdown startedinthatyear,eventuallyprecipi -tating the region’s crisis in 1997–98), Indonesia’s GDP peaked in 1997 and thenfell drastically in 1998, notrecov -eringtotheQ11996leveluntilQ12000. Thailand took afurther year toregain thislevel,andstillremainswellbehind Indonesia.Theinterruption totheother countries’growthwasmuchlesssevere andmoreshort-lived.

On the demand side, consumption growthhas beenthe solesource ofre -coveryforthepastthreequarters,inthe faceofcontinuouscontraction ininvest -mentandsurprisingly poorexportper -formance(table1).IntheyeartoQ12002 private and government consumption expenditure increased by 9.9% and

10.3%, respectively—rates similar to those of the previous quarter.Bycon -trast,investmentcontinuedtocontract, albeit at a slightly lower year-on-year rate(6.1%)thaninthepreviousquarter (7.1%). This continued contraction is consideredbysomeobserversasamys -tery,perhapstheresultofdataproblems (World Bank2002).5 _{However,the de}

-clineisconsistentwithcontinuingweak -ness inconstruction activity, andwith fallingimportsofmachineryandequip -ment. Faltering business confidence duringthepoliticaltransitioninthesec -ondhalfof2001andtheadverseimpact oftheglobaleconomicdownturnonin -vestment inexport-oriented industries mayhaveunderpinned thedecline.On the basis of improvements in recent monthsinsomeleadingindicators,such as cement production, machinery and equipmentimports,andsalesofmotor vehicles,itisexpectedthatthenational accountsfor2002willshow amild re -covery in investment (CSIS 2002;DRI 2002). Both exports and imports have registerednegativeyear-on-yeargrowth forthelastthreequarters,althoughthe declinehasbeenfargreaterforimports; thispresumablyimpliesaswitchofcon -sumption towards domestically pro -ducedgoodsandservices.

TABLE 2 GDPLevelsinAsianCrisisCountries (Q11996=100)

Thailand Indonesia Philippines Malaysia Korea

Q1–96 100 100 100 100 100

Q1–97 101 108 105 108 105

Q1–98 94 103 108 106 100

Q1–00 99 100 113 117 120

Q1–01 100 105 116 121 124

Q1–02 – 107 120 122 131

–= notavailable. Source:Asfortable1.

On the production side, all sectors other than agriculture, livestock, for -estry and fisheries, and mining and quarryingrecorded positivegrowthin theyeartoQ12002(table1).Deteriora -tion in weatherpatterns following the exceptionally goodweatherin2000in -fluenced agricultural growth (World Bank2002).Liquefiednatural gaspro -ductionwas adversely affected by the faltering security situation in Aceh. Manufacturing grewby4.3%compared to3.6%inthepreviousquarter.Disag -gregated data for the manufacturing sectorshowthatimprovedoverallper -formancecamefromproductionforthe domestic market, which more than compensated forcontraction inexport -oriented subsectors such as such as textilesandapparel,footwear,andelec -trical equipmentand electronic goods. The manufacturing sector has beena primemoveroftherecoveryforthepast two years, recording an average year -on-yeargrowthrateofabove4.8%.

Theyear-on-yearGDPgrowthratefor Q12002 (2.5%)is one percentagepoint lowerthanBankIndonesia’sprediction of3.5%(BankIndonesia2002:iv).How -ever,givenearlierthanexpectedrecov -ery in the US and European Union economies,andtheimproveddomestic investmentenvironment, boththe gov -ernmentandindependentobserversare oftheviewthatBI’sgrowthprojectionof 3.5–4.0%forcalendar2002isachievable. Whenpresentingthedraft2003budget, theministeroffinance,Boediono,toldthe parliament (DPR) thatthe growth rate couldevenaccelerateto6%in2003(JP, 23/5/02);thisisonlylikelytoprovere -alistic, however, if the reform process continuesasscheduled,leadingtoarapid recoveryininvestment.

MainMacroeconomic Indicators

TheExchangeRate. Therupiahhascon

-tinued to str engthen fro m abo ut Rp 10,400/$ in late January to below Rp 8,700/$ in mid June, still slightly

FIGURE1 ExchangeRatesandSharePrices (June1997=100)

CSPI=CompositeSharePriceIndex.

Source:Asfortable1.

0 10 20 30 40 50

Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Exchange rates

0 20 40 60 80 100 CSPI

$/Rp Yen/Rp CSPI

weakerthanthelevelofRp8,550attained inAugust2001followingtheinaugura -tionofMegawatiaspresident(figure1). Therecentstrengtheningpartlyreflects theweakeningofthedollaragainstother currencies,butdomesticfactors—suchas improvingdomesticbusinessconfidence based on thecertificate ofgoodhouse -keepingfrom the IMFand BI’ssuccess inmeetingitsbasemoneytargetssince aboutAugust2001—seemtohaveplayed importantroles.Thecoveredinterestrate differential (theexcess ofthedollar in -terest rateover the rupiahinterest rate adjusted for the swap premium) nar -rowed persistently during the three months throughMay, reducingthe in -centiveforshiftingportfoliosfromrupiah to dollar assets, which had remained strongthroughout2001.

The Share Market. The JakartaStock

Exchangesharepriceindexhasincreased dramaticallyinrecentmonths(figure1), from380attheendofNovember2001to 531attheendofMay—ariseof40%.This partlyreflectsthegeneraltrendinshare

pricesinregionalmarkets,broughtabout bytheupturnintheUSstockmarketaf -teritfellsharplyintheimmediateafter -math of 11 September, and theearlier thanexpectedslowingofgrowthamong manyregionaleconomies.However,the upturn in Indonesiahas been sharper thanelsewhere inthe region,reflecting improveddomesticeconomicconditions.

Inflation. TherateofCPIinflationin

February 2002 (15.5% year-on-year) was thehighestsince mid1999.Some commentators have argued that this partly reflected theimpactofupward adjustments inJanuaryofadministered prices of a numberof goods and ser -vices(suchasfuel,electricity andclean water),andincreasesinprivatesector minimumwagesandcivilservicesala -ries. Inflation had been incr easing steadily since March 2000, however, andinfacthasdeclinedsinceFebruary 2002; by May the rate was down to 12.9% (figure2). Forthis reasonalone theemphasisontheimpactofadmin -istered price increases as an explana

-FIGURE2 InterestRatesandInflation (%p.a.)

Source:Asfortable1.

0 5 10 15 20

May-00 Aug-00 Nov-00 Feb-01 May-01 Aug-01 Nov-01 Feb-02 May-02

3-month SBI

3-month time deposits Inflation

Real SBI rate

tion for inflation is unconvincing. A monetaristexplanationfor thehalting ofthesteadyincreaseininflationwould em phasise the im plem entatio n o f tighter monetary policy since August 2001:thesupplyofbasemoneyinApril 2002 was less than 2% higher than it had been nine monthsearlier, and its year-on-yearrateofgrowthhadfallen from21%inNovember2001toonly9% in May 2002. An alternative explana -tion,whichseemsmoreplausibletothe writer,isthatthedeclineininflationis moreinline withthestrengthening of the exchange rate brought about by improvedmarketsentiment.

Onthebasisthattherecentstrength -eningoftherupiahis expected tocon -tinue for the rest of the year (and beyond)asaresultofimprovements in thebusinessclimate,andgiventhesuc -cessinrecentmonthsofBI’sattemptsto tameinflationary expectations by con -taining the expansion of base money, manyanalystsbelievethattheinflation targetof9–10%for2002iswithinreach.

InterestRates. Inlinewiththegradual

strengthening oftheexchangerateand declininginflation,interestratesbegan tofallfromaboutMarchthisyear(fig -ure2).Thenominal3-monthSBI(Bank IndonesiaCertificate)indicatorratewas 16.3% p.a. by late May, down from 17.6%atthebeginningoftheyear;nomi -nal time deposit rates have followed suit. Real rates—calculated using the contemporaneousCPI inflation rate— arenowlowerthantheirpre-crisislev -els; for example, the real3-month SBI rateinJuly1997was 5.4%,whereasin May2002itwasjust3.0%.

ConsumerandBusinessConfidence. The

consumerconfidenceindex(CCI)pub -lishedbytheDanareksaResearchInsti -tute(DRI)pointstoapersistentincrease in consumerconfidence from January this year.The index rose from 87.4 in Januaryto98.8inApril.(TheCCIiscon

-structed every month by interviewing atleast1,700householdsinsixmainre -gions across the country. The index rangesfrom0 to200, withzero mean -ing‘verypessimistic’ and200‘veryop -timistic’. If the index is below 100, pessimistic responsesoutnumber opti -misticones,andviceversa.)

TheBalanceofPayments. Merchandise

exports declined steadily during2001, while imports declined by a smaller amount, generatinga tradesurplus of $22.6billion,downfrom$25.0billionin 2000(table3).Thecapitalaccountwas indeficitinbothyears.In2000therewas persistent, large-scale private capital outflow, well in excess of net official capitalinflow insupport oftherecov -eryprogram.In2001privatecapitalout -flow was smaller, particularly in the fourthquarter,butofficialcapitalflows turnedslightlynegative.

FiscalPosition

InMay,theMinistryofFinanceadjusted thebudgetdeficitforecastfor2002mar -ginally upward from 2.5% to 2.6% of GDP,inlinewiththeQ12002national accounts data, which recorded slower than predicted growth; the budget spendingandrevenueestimatesthem -selvesremainunchanged.

Prospectsforachievingthe2002bud -getdeficittargethaveimprovedsome -what on a number of fronts in recent months.Thegovernmentstandstoreap a revenue windfallthrough increasing oilprices,whichhaverisenbyroughly 30%inthelastyear,6_{providedproduc}

-tionlevelsdonotdeteriorate. Ifthemild butsteadilydecliningtrend ininterest ratessincethebeginningoftheyearcan be maintained, the assumed average 14%rateon3-monthSBIsshouldbeable tobe met,ifnot improved upon, such thatinterestpaymentsonvariablerate bank recapitalisation bonds may be somewhat lower than expected. Ex

trapolation oftherecenttrendintheex -changeratesuggeststhattheassumed averagelevelofRp9,000/$canalsobe achieved;at thesame time,thedepre -ciation oftheyenrelativetothedollar during2002ishelpingtoreducethecost of ex ter nal d ebt repayments: yen -denominated foreigndebtaccountsfor around30%ofthetotal.7_Followingthe introduction of the new gasoline and fuelpricingpolicyinJanuary(Deuster 2002:23),theestimatedsubsidycompo -nent ofthebudgetshould alsoremain ontarget.

Thesebrightspotsnotwithstanding, whetherthegovernmentwillbeableto achieve the2002deficittargetremains

indoubt becauseof lacklustre perfor -manceso far in theprivatisationpro -gram and in IBRA (Indonesian Bank Restructuring Agency)assetsales.Dur -ingthefirstquarterof2002only13.3% of thecombined revenuetarget of Rp 22.5 trillion from these sources was achieved,verylittle ofwhichresulted from privatisation. The long awaited saleofthegovernment’ssharesinBank Central Asia (BCA) was arranged in March,generatingsomeRp5.3trillion intwotranches,butmanyanalystsre -mainoftheviewthattheprivatisation anddivestmenttargetswillnotbemet. Shares in several other banks (Bank Niaga, Bank Internasional Indonesia

TABLE3 BalanceofPayments ($billion)

2000 2001

Total Q1 Q2 Q3 Q4 Total

Exports 65.4 15.4 15.0 14.2 12.9 57.5 Non-oil&gas 50.3 11.6 11.7 11.3 10.3 44.9

Oil 8.0 2.1 1.9 1.5 1.3 6.8

LNG&LPG 7.1 1.7 1.4 1.4 1.3 5.8 Imports –40.4 –9.2 –9.5 –8.4 –7.8 –34.9

Merchandise tradebalance 25.0 6.2 5.5 5.8 5.1 22.6 Services –17.1 –4.1 –4.2 –3.3 –4.5 –16.1

Currentaccount 8.0 2.1 1.3 2.5 0.6 6.5

Officialcapital 3.2 –0.1 –0.2 –0.2 –0.2 –0.8

Inflows 7.5 1.4 1.2 1.4 1.8 5.7

CGI 2.4 0.5 0.4 0.4 0.6 2.0

Non-CGI 5.1 0.9 0.7 1.0 1.1 3.8

Debtrepayments –4.3 –1.5 –1.4 –1.6 –2.0 –6.5

Privatecapital –10.0 –3.1 –2.5 –2.5 –0.6 –8.6

Directinvestment –4.6 –2.2 –1.9 –1.1 –0.5 –5.7

Other –5.4 –0.9 –0.6 –1.4 –0.1 –2.9

Capitalaccount –6.8 –3.2 –2.7 –2.7 –0.7 –9.4

Overallbalance 5.0 –0.7 0.0 0.3 –0.9 –1.4

Capital&currentaccount,net 1.2 –1.2 –1.4 –0.2 –0.2 –2.9

Errors&omissions 3.8 0.5 1.3 0.5 –0.8 1.5

Source:Asfortable1.

(BII),BankDanamonandLippoBank) are to be divested, but BCA was re -gardedasthejewelinthecrown; itis difficulttoseethattheseotherdivest -mentswill generate similar sums. In -deed,IBRAhasrecentlyputonholdits plan to sell a majority stake in Bank Niaga to a strategic investor, arguing thatbidsreceivedinMayweresignifi -cantlylessthanhadbeenhopedfor.At thesametime,ithasbecomeapparent that, far from generating revenue for the government from its sale, BII has become insolvent again and will in -stead require additional government funding(box3).Moreover,fundingfor regionaldevelopment,whichaccounts for29%oftotalbudgetedexpenditure, islikelytoexceeditstarget,givensome slippagein theimplementation ofthe decentralisationprogram.

Inanunusualmove,theministerof finance discussed the draftbudget for 2003withtheDPRinMay—morethan fivemonths before thebudgetis tobe passedintolaw,andsevenmonthsbe

-foreitwilltakeeffect.Theintentionmay have beento seize an opportunity to present an optimistic fiscal outlook in order to boost improvements in con -sumerconfidenceandthebusinessout -lookfurther.Inanycase,thereisprobably muchtobegainedfromkeepingthegen -eralpublic informed asto the govern -ment’sthinkingonthemacroeconomy, and from exposing its views tocritical analysisbyinformedobservers.

Thedeficitwaspredictedtofallto1% ofGDPin2003,andGDPgrowthtorise tosomewhereintherange4–6%.Most analysts seemed to think that the out -comewouldbe closertothe bottomof this rangethan the top.Theotherkey budgetassumptionsfor2003includean exchange rateof Rp8,500–9,500/$,in -flation at 7–9%, an interest rate on 3-monthSBIsof12.5–14.5%,andaworld oilpriceof$19–22perbarrel.Allofthese seem reasonable; indeed,theexchange rate,inflationandinterestrateassump -tionsmaywellprove overlyconserva -tive if BIcontinues to maintain slow

BOX3 FURTHERBANKBAILOUTCOSTS

Indonesia’ssixthlargestbank,BankInternasional Indonesia(BII),whichhas beenrecapitalised twice already atatotalcosttothe governmentofRp21 trillion,isagaininsolvent.ItsfinancialstatementsreleasedinMayshoweda loss of Rp 4.13trillion ($435million), a negative capital adequacy ratio of over 47%,andbadloansamountingtoalmost63%ofthetotal.Thegovern -mentcurrentlyowns75%ofthebank. InMayitdecidedtoallowBIItogo aheadwitharightsissuetoraiseaboutRp4.33trilliontobuildupitscapital adequacyratio toatleast 8% (contingent upon approval fromthe DPR).It seemsunlikelythatthepresentprivatesectorownerswillwanttoinjectmore capitalintothetroubledbank:indeed,ifthereported figuresare accurate, theycouldexpecttoloseheavilybydoingso.(ForeachRp55—i.e.Rp47+ Rp8—theysubscribedinnewcapital,theywouldendupwithequityofRp8.) Itwillthenfalltothegovernmenttoissuebondstobuildupthebank’seq -uitybase,thusworseningitsalreadyprecariousdebtsituation.Alternatively itcouldchoosetoclosedownthebank,butitwouldstillneedtomakegood thecapitaldeficiencyinordertohonour itsguaranteeofthebank’sliabili -ties;thenetcostwouldbethesame.

monetarygrowth.Presumablytheseas -sumptionswillberevisedinthelightof changing circumstances in coming months.

Indo nesia’s fis cal sustainability hingesdelicatelyonthemassivegovern -mentdebtaccumulated duringthe cri -sis.Thetotalinterestoutlayondomestic and foreign debt accounts for about a quarterofprojectedbudgetexpenditure for2002.Thegovernmenthassuggested ithopestobringtotaldebtsdownto60% of GDP by 2004.The assumptions un -derlying this projection are unclear, however.Ifrealgrowthaverages6%and inflation8%,forexample,andiftheprin -cipal outstanding and exchange rates remain constant, the target would be met,butitseemsunlikelythataverage realgrowthatthisratecanbeachieved inthis timeframe. Moreover, although the Paris Club meeting in April pro -videdforpostponinginterestaswellas principal paymentsfromApril 2002to December 2003, thissimplycausesthe principal amount outstanding to in -creaseduringthisperiod.Finally,ifthe downwardtrendininflationweretobe reversed, itcould beexpected thatthe rupiahwouldweakenagainstothercur -rencies, and nominal interest rates would beginto rise again.Thiswould increasetherupiahvalueofexistingfor -eign debt,aswellas increasing there -quired budgetary outlays on interest payments.

PRIVATISATION:PROGRESS?

Privatisation ofstate-ownedenterprises (SOEs)isakeypartofthegovernment’s broader reform effort. Speedy imple -mentationoftheprogram,whichaims toraisesomeRp6.5trillion(about$740 million)in2002,isconsideredvitalboth forimprovingoveralleconomicperfor -mance(giventhelargesizeofSOEsrela -tivetotheeconomyasawhole,andthe observation thatthegovernmentis far

less successful as a business manager than private sector owners), and for strengthening public sector finances (given thetight constraint on govern -mentspendingresultingfromtheneed toservice thehugepublicdebt).How -ever, this is the area where the least progress has beenmade over thepast twoyearsinmeetingthegovernment’s reformcommitments totheIMF.

Thesaleofan8.1%stakeinthestate -owned telecommunications company PT Indonesian Satellite Corporation (Indosat) through private placements hasgiven somehopeforbetterperfor -manceinthefuture.Thetotalvalueof thesale wasabout Rp 1 trillion(about $110million)(JP,20/5/02).TheSinga -po rean tele com municatio ns giant, Singtel, is believed to have bought $5 millionworthofshares,withthebalance takenupmostlybyinstitutional inves -tors from the US—their first such in -volvement in the Indonesian share marketforovertwoyears.

Thesalewasnotanunqualified suc -cess,however.Thegovernment’sorigi -nalplanhadbeentosellan11.32%stake inthecompany,andithadtoaccepta priceofonlyRp12,000pershare—lower than theprevious trading price of Rp 12,600. Foreign telecommunications companies’ reluctance to invest in the industryhasbeenattributedtoalackof clarityaboutfuturegovernmentpolicy for the sector; concerns about worker protestsintendedtoblockprivatisation ofSOEsarealsoastrongdeterrent(Dow

Jones Newswires, 22/5/02). Following

thissalethegovernmentretainsa57% stakeinIndosat.Itplanstosellafurther 30%staketoastrategicinvestorinOc -tober,butwhetherthiscanbeachieved seemsverymuchopentodoubt.

Thesmallness of thestake divested inMay isan indication ofthegovern -ment’sambivalentattitudetothewhole idea of privatisation. There are those

whobelievethatstateownershipisno bartoefficiency,despitealltheevidence to thecontrary intheIndonesian con -text.Othersfearoppositionfromwork -ersconcernedabouttheprospectofjob losses, or from economic nationalists whodislike the ideathatthe potential buyersofSOEsarelikelytobeforeign, or from other self-interested entities such as the provincial government in WestSumatra,whichcontinuestoblock thesale ofthe government’s sharesin PTSemenGresikto theMexican com -pany,Cemex(Deuster2002:11).Andof coursethereareotherswhoseeSOEsas cashcows, controlof which offers the prospectofgainto privateindividuals and political parties. One of the argu -mentsheardmostfrequentlyinopposi -tiontoprivatisation isthatthesaleprice willnotbehighenoughinpresentcon -ditions.Infact,whatmattersisnotthe price per se, but whether it can be ex -pectedtoriseorfallinreal,presentvalue termsinthefuture;thelatterseemsmore likely,soearlydivestmentispreferable.

Finally,itcanbenotedthatthegov -ernmenthasalsobeeninvolvedrecently in some reverse privatisation deals in whichithasbeenbuyingouttheshares offoreignpartnersinvarioussubsidiar -iesofIndosatandPTTelkom,theother majorstate-ownedtelecommunications company(JP,23/4/02;30/4/02).Ithas beensuggestedthatthisisa necessary firststepbeforedivestingthesesubsid -iaries in the future, but this seems a highlydubiousargument.

TRADE

ThreatofRenewedProtectionism

Furtherliberalisation oftradeisanother importantaspectofIndonesia’scurrent reform process. Besides tariff reduc -tions,Indonesiahas undertakento re -moveallnon-tariffbarriersandexport restrictions (other than thosejustified on health, safety or environmental

grounds);inaddition,localcontentre -quirements onproduction for thedo -mestic market have gradually been phasedout.

Resistancetofurthertradeliberalisa -tion and calls forhighertariff barriers hav e gained pr ominence in rec ent months,however.Theagriculture min -ister,BungaranSaragih,recentlyurged immediatemeasurestoprotect thedo -mesticproducers of fooditems—nota -bly rice and sugar—on food security grounds.Refinedsugarisalready sub -jectto20–25%importtariffsandriceto a30%tariff.Inanotherpushforprotec -tion,theIndonesianFarmersAssociation hasaskedthe MinistryofIndustryand Trade to increase the import tariff on chickenlegsfrom 5%to120%.Accord -ing to BPS (Central Statistics Agency) data,totalimportsofchickenincreased from347tonnesin1998to14,017tonnes in2000(JP,23/5/02).Theimportationof chickenlegshasbecomeacontroversial issue following a failed attemptby the previousgovernmenttobanchickenleg importsfromtheUS,theworld’slargest exporter;suchabanwouldhaveviolated WTO(WorldTradeOrganization)rules. FinanceministerBoediono(whoisin chargeofimporttariffs)andtradeand industryministerRiniSoewandi (who is responsible for domestic trade and otheraspectsofinternationaltrade)have so far been resisting protectionist de -mands. Any increase in farm product tariffswould simply raisefarmers’in -comeartificially attheexpenseofcon -sumers. The rice sector, which grew rapidlyinthepastwiththeextensionof theirrigationinfrastructure andthein -troductionofimproved plantvarieties andfertilisers, cannolongerkeeppace withconsumption, which continues to increasealongwithpopulationandris -ingincomes.Likewise,sugarcaneareas in Java, where irrigation systems are mostextensive,havebeendecreasingin

size, eitherbecauseof farmersdiversi -fying into other more profitable crops orbecauseoftheconversionoflandto industrial and commercial usage. In -creasing protection for these sectors wouldthwarttheshiftofagriculturalre -sources into theproduction of higher -valueproductsandactivitiessuchascut flowers,vegetablesandshrimpfarming. Moreover,inacontextinwhichsmug -glingseemstoberife,increasingtariffs withoutreforming thecustomsservice would simply encourage even more smuggling,generatinggreaterrentsfor smugglers and corrupt officials while leaving farmers’incomes virtually un -changed.

ExportPerformance

Fromaboutthelate1980suntiltheon -setofthecrisisin1997,vigorousexport expansion—withaheavyemphasison manufactured products—was aninte -gralpartofIndonesia’srapideconomic growth.By1990theshareofmanufac -turing in total exports had surpassed that of agricultural goods, and was

soon toovertakeoiland gas.Thedol -lar valueoftotalnon-oilexportsgrew atanaverageannualrateof17.5%dur -ing 1990–96, with manufacturing ex -ports growing even faster, at 19.6% (table 4). This impressive trend was dramaticallyreversedwiththeonsetof the crisis. Total non-oil exports con -tracted by 5.9% in 1997 and 7.3% in 1998, and tooktwo more years to re -gaintheirpre-crisislevel. Therewasa further8.5%contractionin2001,how -ever,largelyreflectingtheimpactofthe slowdownintheglobaleconomy.The averageannualgrowthoftotalnon-oil exportsfortheperiod1997–2001wasa mere 3.7%. Within this, the average growth rate of manufactured exports declinedto5.7%.

Thedeclineinthedollarvalueofex -portswasapatternobservedinallthe crisis-affectedcountries(figure3).This seemsto reflect the abilityof interna -tionalbuyerstopushdowndollarprices (inthecontextofhugewindfallgainsto exporters resulting from the massive depreciation oflocalcurrencies), which

TABLE4 Composition andGrowthofMerchandise Exports,1990–2001

SITC Category Composition Growth

No.a _{(%) (%p.a.)}

1990 2001 1990–96 1997 1998 1999 2000 2001

0,1,4 Food,beverages&tobacco 9.4 6.3 10.1 –6.2 5.2 –1.9 –3.9 –7.1

2 Agriculturalrawmaterials 4.8 3.4 16.6 –14.6 –10.4 –18.4 22.2 –10.5

3 Minerals(excl.oil&gas) 7.9 12.4 20.8 10.8 –19.4 14.2 13.8 0.3

33,34 Oil&gas 43.1 22.5 1.2 –0.6 –30.7 22.3 45.5 –12.1

Manufacturesb _{34.3 54.6 19.6}

–11.7 –4.3 20.4 34.9 –10.8

Totalnon-oilexports 56.9 77.5 17.5 –5.9 –7.3 13.4 26.7 –8.5

Totalexports 100 100 11.7 –4.7 –13.0 15.2 30.6 –9.3

a_{SITC=StandardInternational TradeClassification.} b_{SITC5through8lessSITC68.}

Source:Asfortable1.

overwhelmed volumegrowth.8_Inaddi -tion,thecrisis-drivencollapseindomes -ticdemandmayalsohaveencouraged exporterstopassonpartofthegainfrom depreciation aslowerpricesinorderto boostexportdemand(Rosner2000:63; Feridhanusetyawan2002:37).

However,theexportcontractioncon -tinued somewhat longer in Indonesia thaninKorea,Malaysia andThailand. Positiveexportgrowthresumedinthese threecountrieswithinfourtofivequar -ters,aidingtherecoveryprocess;export dollarvaluesexceededpre-crisislevels by early 1999.Indonesia’s export con -tractioncontinuedforsixquarters,and pre-crisisexport dollarvalues werere -gainedonlyinlate2000.Thisdifference suggeststheimportanceofsupply-side factors in explaining Indonesia’s post -crisisexportperformance.Differencesin thestructureofexportsalsoplayarole, however.Therecentcontraction inglo -baldemandforthesecountries’exports has affectedthem differently, depend

-ing on thepeculiarities of theirexport composition.Theexportperformanceof KoreaandMalaysia hassuffered more thanthatofIndonesiaandThailandbe -causeofKorea’sandMalaysia’sheavy concentration onelectronicsandrelated products,whichhavebeenmoreinflu -enced by the global slowdown than otherproducts.Evenso,Indonesia’sex -portdownturn in 2001was somewhat moreseverethanThailand’s.

Thereisadearthofstudiesonthede -terminantsofIndonesia’sexportperfor -mance. Difficulties faced by exporters —particularly small and medium-scale firms—inobtainingtradefinancing,the departureofsome foreign (particularly ChineseandTaiwanese)firmsfollowing theterrifyingviolencedirectedattheeth -nic Chinese communityin May 1998, endemiccorruptionin thecustomsser -vice, and thenegative impacton inter -national competitiveness in low-skill industries of rapid increases in real wages,areoftenhighlightedaskeysup

-Source:AsiaRecoveryInformation CenterDatabase,www.aric.adb.org. FIGURE3 GrowthofExportValue

($,year-on-year,%)

-30 0 30 60

Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02

Indonesia Malaysia Korea Thailand

ply-side constraints facedby exporters (Manning 2002). Detailed research is neededinordertoidentifythenatureand relativeimportanceoftheseissues,with aviewtoinformingthepolicydebate.

Supply-side constraints aside, fig -ure4shedssomelight,fromacompara -tiveperspective,onIndonesia’schanging internationalcompetitivenessduringthe post-crisis era,usinga measure of real exchangeratesforIndonesia,Chinaand Thailand. The initial improvement in international competitiveness brought about by the extraordinary deprecia -tionsof1997–98wasfargreaterinIndo -nesia than in Thailand (or Korea, the PhilippinesorMalaysia).Thedeprecia -tion also placed Indonesia in a much improvedcompetitive positionvis-à-vis China,whichisperceivedtobeamajor competitorforIndonesiainlightmanu

-facturedgoodsexportssuchasapparel and footwear. Much ofthisnewfound competitiveness was eroded in 1998, however,becauseofhighinflationand thestrongappreciation oftherupiahin the second half; this presumably re -flected a realisation inthemarket that the initialresponse of investors to the emergingcrisis had beenoverlypessi -mistic. The residual real depreciation stillleavesIndonesiantradablesproduc -ersbetterplacedthanthoseinThailand, andevenmoresothanthoseinChina. There has beenfurthererosion during the past yearasaresult ofIndonesia’s relatively high level of inflation, how -ever, and if thistrend is sustained(in theabsenceofrenewednominaldepre -ciation), the residual advantage over ThailandandChinawillevaporate.Itis important to note that Indonesia’s

FIGURE4 RealExchangeRatea

(JPMorganIndex,monthlyaverage1997=100)

a_{Theindexmeasuresdomesticwholesalepricesofnon}

-foodmanufacturesrelativetotrade

-weightedwholesaleprices(expressedinrupiah)ofnon-foodmanufacturedgoodsintrading

partnercountries.Anincreaseintheindeximpliesrealappreciation(declineininternational competitiveness).

Source:www.jpmorgan.com

0 20 40 60 80 100 120

Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Indonesia

China Thailand

manufacturing wage levels have in -creased in recent months at a much fasterratethan thegeneralpricelevel. This implies that the deterioration of Indonesia’s competitiveness over the post-crisis period in labour-intensive exportlines such as apparel, footwear and electronic component production andassemblywouldhavebeengreater thanisdepictedinfigure4.

Therelevanceoftheseobservations for understanding Indonesia’s future ex po r t c hallenge is r einfo rc ed by table5,whichsummarisesdataonre -cent patterns of selected developing countryexports to theworld’s largest

market,theUS.China’sdominantshare oftotalfootwearimportstotheUSfrom alldeveloping countrieshasincreased evenfurtherinrecent years,climbing to77%beforefallingbackto68%byQ1 2002. Vietnam is also making some headway,startingfromaverylowbase. FootwearimportstotheUS,unlikeap -parelimports, arefreefromquotasor otherrestrictions, sothesefiguresshow China’struestrengthunderfreetrade conditions. The upshot is that when import quotas under the Multi-Fibre Arrangement arephasedout by 2005, asagreedunder theWTO Agreement on Textiles and Clothing,China, as a

TABLE5 ShareofSelectedAsianCountriesinUSManufactured Imports,1999– Q12002 (%)

1999 2000 Q1–01 Q2–01 Q3–01 Q4–01 Q1–02

Totalmanufactures

Indonesia 1.01 1.13 1.15 1.1 1.16 1.04 0.95 China 10.76 13.15 11.77 12.47 15.18 14.17 12.35 Vietnam 0.03 0.03 0.03 0.03 0.03 0.03 0.05 ASEAN3a _{5.75 6.68 5.90 5.50 5.81 5.78 5.43} Textiles(SITC64)

Indonesia 1.33 1.56 1.51 1.45 1.36 1.45 1.27 China 12.72 14.64 13.26 16.28 14.89 15.22 15.77

Vietnam – 0.01 – – – 0.03 0.03

ASEAN3a _{4.44 4.74 4.57 4.39 4.41 4.23 4.53} Apparel(SITC84)

Indonesia 3.6 0.33 4.79 4.15 5.48 4.08 4.06 China 14.4 16.61 14.86 14.88 23.59 15.73 13.78 Vietnam – 0.10 0.10 0.11 0.10 0.08 0.28

ASEAN3a _{9.56 10.6 10.43 9.16 12.08 10.06 9.25} Footwear(SITC85)

Indonesia 5.43 5.35 5.97 5.97 4.65 4.76 5.45 China 61.2 66.98 73.6 72.63 77.26 59.35 67.88 Vietnam 1.07 0.91 0.99 0.99 0.85 1.05 1.18 ASEAN3a _{2.97 3.03 3.11 3.23 2.92 2.37 2.62}

a_{Malaysia,ThailandandthePhilippines.}

–=zeroorlessthan0.01%.

Source:CompiledfromUSInternational TradeCommissionwebsite,www.usitc.gov.

newmemberoftheWTO,willbeafor -midablecompetitorinapparelmarkets intheUS(andintheEuropeanUnion). If footwear is any indication, Indone -siaandotherdevelopingcountriesare boundtolosemarketshareunlessap

-propriate policy actions are takento improve their competitiveness and to removesupply-sideconstraintsonex -portperformance.

19June2002

NOTES

* TheauthorwishestothankHadiSoesas

-troandthestaffoftheCentreforStrate

-gic and International Studies, Iman Sugema,KellyBird,TheeKianWieand severalmembersofinternationalorgani

-sationsinJakartawhogaveinvaluableas

-sistanceduringfieldworkforthisSurvey. 1 Itisimportanttonotethatevenduring theearlymonths thepresidentdidnot giveineasilytopopulistdemands.Eco

-nomicpolicydecisionshavemoreoften beenmadeinlinewith thecontents of theLettersofIntentagreedwiththeIMF ratherthan reflectingpopular callsfor continuationofsubsidies,greaterprotec

-tion,debtmoratoria,andsoon.

2 Itisnotwidelyappreciatedthattheflow offundsbetweenIndonesiaandtheIMF isnolongeraone-waystreet.Indonesiais

alreadyintheprocessofrepayingsomeof theemergencyloansitreceivedearlyinthe crisis.Theamountofprincipalrepaidin 2001wasapproximately$1.7billion. 3 SomeParis Clubdonors,especiallyJa

-pan,wantedprivatesectorlenders(who currentlyholdabout$400millionworth ofIndonesiansovereignbonds)totake partindebtrescheduling.Buttheother maindonors,aswellasthegovernment itself,werenotenthusiasticaboutthis proposal becauseof thelikelyadverse effectonIndonesia’sabilitytoraisefunds inprivatecapitalmarketsinthefuture.

4 Privatisationofthisfunctionofgovern

-menthadremoved asignificant source ofrentsforthebureaucracy.

5 Therearewell-knownproblemswiththe

expenditure-based national accounts

datainIndonesia.Privateconsumption estimatesareparticularly pronetoerror, astheyarenotbasedonhouseholdsur

-veys butareextrapolated fromaggre

-gateGDPestimatedontheproduction side,with the help ofa consumption function. The data collection system used for estimating investment is be

-lievedtogivedisproportionateweight tothemodernbusinesssector,whichhas beenhitharderbythecrisisthansmall a nd m e dium-sca le busin es s. L a rg e

swingsinthechangesinstocksitem(not reportedhere),whichincludesstatisti

-calerrors,mayreflecttheinaccuracies intheestimationofhouseholdconsump

-tionandinvestment.

6 ING Baringshas forecastthe price of crudeoiltoincreasetoaround$35per barrelbytheendoftheyear,compared tothepriceof$22perbarrelassumedin preparingthebudgetestimatesfor2002. 7 Morerecentmovementsintheyen/$ex

-changeratehavebeenintheoppositedi

-rection,however.

8 Thisispartofthewell-known‘J-curve’

effectofcurrencydevaluation ordepre

-ciation.

REFERENCES

BankIndonesia(2002),AnnualReport2001, Jakarta.

Booth, Anne(1999),‘SurveyofRecentDe

-velopments’, BulletinofIndonesian Eco

-nomicStudies35(3):3–38.

CSIS(CentreforStrategicandInternational Studies) (2002),Economic and Political Developments in Indonesia: March 2002, CSIS,Jakarta.

Deuster,PaulR.(2002), ‘SurveyofRecent Developments’,BulletinofIndonesianEco

-nomicStudies38(1):5–37.

Dick,Howard(1985),‘SurveyofRecentDe

-velopments’,BulletinofIndonesian Eco

-nomicStudies21(3):1–29.

Dick,Howard(2001),‘SurveyofRecentDe

-velopments’,BulletinofIndonesian Eco

-nomicStudies37(1):7–41.

DRI(DanareksaResearchInstitute,(2002),

BusinessOutlook:May2002,DRI,Jakarta. Fe ridha nusetyaw an , Tuba gus (20 02 ), Indonesia’s Trade Policy and Perfor

-mance:AnOverview,Workingpaperin progress,CentreforStrategicandInter

-nationalStudies,Jakarta.

Klingner,G.D.(1993),‘LabourinMining:The KaltimPrimaCoalExperience’,inC.Man

-ningandJ.Hardjono(eds),IndonesiaAs

-sessment 199 3: Labour: Sharin g in the BenefitsofGrowth?, TheAustralianNa

-tionalUniversity, Canberra:173–85.

Manning,Chris(2002),MinimumWages:A PressingChallengeforMacroeconomic and Social Policy, Draft report, PEG, Bappenas,Jakarta.

McBeth,John, andDiniDjalal(2002), ‘The BenefitsofProsecution’,FarEasternEco

-nomicReview,28March2002:

McLeod,RossH.(2000),‘SurveyofRecent Developments’,BulletinofIndonesianEco

-nomicStudies36(2):5-40.

Pangestu,Mari, andMiranda S. Goeltom (2001),‘SurveyofRecentDevelopments’,

BulletinofIndonesianEconomicStudies37 (2):141–71.

Rosner,L.Peter(2000),‘Indonesia’sNon-oil

ExportPerformanceduringtheEconomic Crisis:DistinguishingPriceTrendsfrom Quantity Trends’,Bulletin ofIndonesian EconomicStudies36(2):61–95.

WorldBank(2002),Indonesia,WorldBank, Jakarta(mimeo).

WTO (WorldTrade Organization)(1999),

TradePolicyReviewIndonesia1998,WTO, Geneva.

size, eitherbecauseof farmersdiversi

-fying into other more profitable crops

orbecauseoftheconversionoflandto

industrial and commercial usage. In

-creasing protection for these sectors

wouldthwarttheshiftofagriculturalre

-sources into theproduction of higher

-valueproductsandactivitiessuchascut

flowers,vegetablesandshrimpfarming.

Moreover,inacontextinwhichsmug

-glingseemstoberife,increasingtariffs

withoutreforming thecustomsservice

would simply encourage even more

smuggling,generatinggreaterrentsfor

smugglers and corrupt officials while

leaving farmers’incomes virtually un

-changed.

ExportPerformance

Fromaboutthelate1980suntiltheon

-setofthecrisisin1997,vigorousexport

expansion—withaheavyemphasison

manufactured products—was aninte

-gralpartofIndonesia’srapideconomic

growth.By1990theshareofmanufac

-turing in total exports had surpassed

that of agricultural goods, and was

soon toovertakeoiland gas.Thedol

-lar valueoftotalnon-oilexportsgrew

atanaverageannualrateof17.5%dur

-ing 1990–96, with manufacturing ex

-ports growing even faster, at 19.6%

(table 4). This impressive trend was

dramaticallyreversedwiththeonsetof

the crisis. Total non-oil exports con

-tracted by 5.9% in 1997 and 7.3% in

1998, and tooktwo more years to re

-gaintheirpre-crisislevel. Therewasa

further8.5%contractionin2001,how

-ever,largelyreflectingtheimpactofthe

slowdownintheglobaleconomy.The

averageannualgrowthoftotalnon-oil

exportsfortheperiod1997–2001wasa

mere 3.7%. Within this, the average

growth rate of manufactured exports

declinedto5.7%.

Thedeclineinthedollarvalueofex

-portswasapatternobservedinallthe

crisis-affectedcountries(figure3).This

seemsto reflect the abilityof interna

-tionalbuyerstopushdowndollarprices

(inthecontextofhugewindfallgainsto

exporters resulting from the massive

depreciation oflocalcurrencies), which

TABLE4 Composition andGrowthofMerchandise Exports,1990–2001

SITC Category Composition Growth

No.a _{(%) (%p.a.)}

1990 2001 1990–96 1997 1998 1999 2000 2001

0,1,4 Food,beverages&tobacco 9.4 6.3 10.1 –6.2 5.2 –1.9 –3.9 –7.1 2 Agriculturalrawmaterials 4.8 3.4 16.6 –14.6 –10.4 –18.4 22.2 –10.5 3 Minerals(excl.oil&gas) 7.9 12.4 20.8 10.8 –19.4 14.2 13.8 0.3 33,34 Oil&gas 43.1 22.5 1.2 –0.6 –30.7 22.3 45.5 –12.1 Manufacturesb _{34.3 54.6 19.6 –11.7 –4.3 20.4 34.9 –10.8} Totalnon-oilexports 56.9 77.5 17.5 –5.9 –7.3 13.4 26.7 –8.5 Totalexports 100 100 11.7 –4.7 –13.0 15.2 30.6 –9.3

a_{SITC=StandardInternational TradeClassification.} b_{SITC5through8lessSITC68.}

Source:Asfortable1.

overwhelmed volumegrowth.8_Inaddi

-tion,thecrisis-drivencollapseindomes

-ticdemandmayalsohaveencouraged

exporterstopassonpartofthegainfrom

depreciation aslowerpricesinorderto

boostexportdemand(Rosner2000:63;

Feridhanusetyawan2002:37).

However,theexportcontractioncon

-tinued somewhat longer in Indonesia

thaninKorea,Malaysia andThailand.

Positiveexportgrowthresumedinthese

threecountrieswithinfourtofivequar

-ters,aidingtherecoveryprocess;export

dollarvaluesexceededpre-crisislevels

by early 1999.Indonesia’s export con

-tractioncontinuedforsixquarters,and

pre-crisisexport dollarvalues werere

-gainedonlyinlate2000.Thisdifference

suggeststheimportanceofsupply-side

factors in explaining Indonesia’s post

-crisisexportperformance.Differencesin

thestructureofexportsalsoplayarole,

however.Therecentcontraction inglo

-baldemandforthesecountries’exports

has affectedthem differently, depend

-ing on thepeculiarities of theirexport

composition.Theexportperformanceof

KoreaandMalaysia hassuffered more

thanthatofIndonesiaandThailandbe

-causeofKorea’sandMalaysia’sheavy

concentration onelectronicsandrelated

products,whichhavebeenmoreinflu

-enced by the global slowdown than

otherproducts.Evenso,Indonesia’sex

-portdownturn in 2001was somewhat

moreseverethanThailand’s.

Thereisadearthofstudiesonthede

-terminantsofIndonesia’sexportperfor

-mance. Difficulties faced by exporters

—particularly small and medium-scale

firms—inobtainingtradefinancing,the

departureofsome foreign (particularly

ChineseandTaiwanese)firmsfollowing

theterrifyingviolencedirectedattheeth

-nic Chinese communityin May 1998,

endemiccorruptionin thecustomsser

-vice, and thenegative impacton inter

-national competitiveness in low-skill

industries of rapid increases in real

wages,areoftenhighlightedaskeysup

-Source:AsiaRecoveryInformation CenterDatabase,www.aric.adb.org.

FIGURE3 GrowthofExportValue

($,year-on-year,%)

-30 0 30 60

Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02

Indonesia Malaysia Korea Thailand

ply-side constraints facedby exporters

(Manning 2002). Detailed research is

neededinordertoidentifythenatureand

relativeimportanceoftheseissues,with

aviewtoinformingthepolicydebate.

Supply-side constraints aside, fig

-ure4shedssomelight,fromacompara

-tiveperspective,onIndonesia’schanging

internationalcompetitivenessduringthe

post-crisis era,usinga measure of real

exchangeratesforIndonesia,Chinaand

Thailand. The initial improvement in

international competitiveness brought

about by the extraordinary deprecia

-tionsof1997–98wasfargreaterinIndo

-nesia than in Thailand (or Korea, the

PhilippinesorMalaysia).Thedeprecia

-tion also placed Indonesia in a much

improvedcompetitive positionvis-à-vis

China,whichisperceivedtobeamajor

competitorforIndonesiainlightmanu

-facturedgoodsexportssuchasapparel

and footwear. Much ofthisnewfound

competitiveness was eroded in 1998,

however,becauseofhighinflationand

thestrongappreciation oftherupiahin

the second half; this presumably re

-flected a realisation inthemarket that

the initialresponse of investors to the

emergingcrisis had beenoverlypessi

-mistic. The residual real depreciation

stillleavesIndonesiantradablesproduc

-ersbetterplacedthanthoseinThailand,

andevenmoresothanthoseinChina.

There has beenfurthererosion during

the past yearasaresult ofIndonesia’s

relatively high level of inflation, how

-ever, and if thistrend is sustained(in

theabsenceofrenewednominaldepre

-ciation), the residual advantage over

ThailandandChinawillevaporate.Itis

important to note that Indonesia’s

FIGURE4 RealExchangeRatea

(JPMorganIndex,monthlyaverage1997=100)

a_{Theindexmeasuresdomesticwholesalepricesofnon}

-foodmanufacturesrelativetotrade -weightedwholesaleprices(expressedinrupiah)ofnon-foodmanufacturedgoodsintrading partnercountries.Anincreaseintheindeximpliesrealappreciation(declineininternational competitiveness).

Source:www.jpmorgan.com

0 20 40 60 80 100 120

Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Indonesia

China Thailand

manufacturing wage levels have in

-creased in recent months at a much

fasterratethan thegeneralpricelevel.

This implies that the deterioration of

Indonesia’s competitiveness over the

post-crisis period in labour-intensive

exportlines such as apparel, footwear

and electronic component production

andassemblywouldhavebeengreater

thanisdepictedinfigure4.

Therelevanceoftheseobservations

for understanding Indonesia’s future

ex po r t c hallenge is r einfo rc ed by

table5,whichsummarisesdataonre

-cent patterns of selected developing

countryexports to theworld’s largest

market,theUS.China’sdominantshare

oftotalfootwearimportstotheUSfrom

alldeveloping countrieshasincreased

evenfurtherinrecent years,climbing

to77%beforefallingbackto68%byQ1

2002. Vietnam is also making some

headway,startingfromaverylowbase.

FootwearimportstotheUS,unlikeap

-parelimports, arefreefromquotasor

otherrestrictions, sothesefiguresshow

China’struestrengthunderfreetrade

conditions. The upshot is that when

import quotas under the Multi-Fibre

Arrangement arephasedout by 2005,

asagreedunder theWTO Agreement

on Textiles and Clothing,China, as a

TABLE5 ShareofSelectedAsianCountriesinUSManufactured Imports,1999–Q12002 (%)

1999 2000 Q1–01 Q2–01 Q3–01 Q4–01 Q1–02

Totalmanufactures

Indonesia 1.01 1.13 1.15 1.1 1.16 1.04 0.95

China 10.76 13.15 11.77 12.47 15.18 14.17 12.35

Vietnam 0.03 0.03 0.03 0.03 0.03 0.03 0.05

ASEAN3a _{5.75 6.68 5.90 5.50 5.81 5.78 5.43}

Textiles(SITC64)

Indonesia 1.33 1.56 1.51 1.45 1.36 1.45 1.27

China 12.72 14.64 13.26 16.28 14.89 15.22 15.77

Vietnam – 0.01 – – – 0.03 0.03

ASEAN3a _{4.44 4.74 4.57 4.39 4.41 4.23 4.53}

Apparel(SITC84)

Indonesia 3.6 0.33 4.79 4.15 5.48 4.08 4.06

China 14.4 16.61 14.86 14.88 23.59 15.73 13.78

Vietnam – 0.10 0.10 0.11 0.10 0.08 0.28

ASEAN3a _{9.56 10.6 10.43 9.16 12.08 10.06 9.25}

Footwear(SITC85)

Indonesia 5.43 5.35 5.97 5.97 4.65 4.76 5.45

China 61.2 66.98 73.6 72.63 77.26 59.35 67.88

Vietnam 1.07 0.91 0.99 0.99 0.85 1.05 1.18

ASEAN3a _{2.97 3.03 3.11 3.23 2.92 2.37 2.62}

a_{Malaysia,ThailandandthePhilippines.} –=zeroorlessthan0.01%.

Source:CompiledfromUSInternational TradeCommissionwebsite,www.usitc.gov.

newmemberoftheWTO,willbeafor

-midablecompetitorinapparelmarkets

intheUS(andintheEuropeanUnion).

If footwear is any indication, Indone

-siaandotherdevelopingcountriesare

boundtolosemarketshareunlessap

-propriate policy actions are takento

improve their competitiveness and to

removesupply-sideconstraintsonex

-portperformance.

19 June 2002

NOTES

* TheauthorwishestothankHadiSoesas -troandthestaffoftheCentreforStrate -gic and International Studies, Iman Sugema,KellyBird,TheeKianWieand severalmembersofinternational organi-sationsinJakartawhogaveinvaluableas -sistanceduringfieldworkforthisSurvey. 1 Itisimportanttonotethatevenduring theearlymonths thepresidentdidnot giveineasilytopopulistdemands. Eco-nomicpolicydecisionshavemoreoften beenmadeinlinewith thecontents of theLettersofIntentagreedwiththeIMF ratherthan reflectingpopular callsfor continuationofsubsidies,greater protec-tion,debtmoratoria,andsoon.

2 Itisnotwidelyappreciatedthattheflow offundsbetweenIndonesiaandtheIMF isnolongeraone-waystreet.Indonesiais alreadyintheprocessofrepayingsomeof theemergencyloansitreceivedearlyinthe crisis.Theamountofprincipalrepaidin 2001wasapproximately$1.7billion. 3 SomeParis Clubdonors,especially

Ja-pan,wantedprivatesectorlenders(who currentlyholdabout$400millionworth ofIndonesiansovereignbonds)totake partindebtrescheduling.Buttheother maindonors,aswellasthegovernment itself,werenotenthusiasticaboutthis proposal becauseof thelikelyadverse effectonIndonesia’sabilitytoraisefunds inprivatecapitalmarketsinthefuture.

4 Privatisationofthisfunctionof govern-menthadremoved asignificant source ofrentsforthebureaucracy.

5 Therearewell-knownproblemswiththe expenditure-based national accounts datainIndonesia.Privateconsumption estimatesareparticularly pronetoerror, astheyarenotbasedonhouseholdsur -veys butareextrapolated fromaggre -gateGDPestimatedontheproduction side,with the help ofa consumption function. The data collection system used for estimating investment is be -lievedtogivedisproportionateweight tothemodernbusinesssector,whichhas beenhitharderbythecrisisthansmall a nd m e dium-sca le busin es s. L a rg e swingsinthechangesinstocksitem(not reportedhere),whichincludesstatisti -calerrors,mayreflecttheinaccuracies intheestimationofhousehold consump-tionandinvestment.

6 ING Baringshas forecastthe price of crudeoiltoincreasetoaround$35per barrelbytheendoftheyear,compared tothepriceof$22perbarrelassumedin preparingthebudgetestimatesfor2002. 7 Morerecentmovementsintheyen/$ex -changeratehavebeenintheoppositedi -rection,however.

8 Thisispartofthewell-known‘J-curve’ effectofcurrencydevaluation or depre-ciation.

REFERENCES

BankIndonesia(2002),AnnualReport2001, Jakarta.

Booth, Anne(1999),‘SurveyofRecentDe -velopments’, BulletinofIndonesian

Eco-nomicStudies 35(3):3–38.

CSIS(CentreforStrategicandInternational Studies) (2002),Economic and Political

Developments in Indonesia: March 2002,

CSIS,Jakarta.

Deuster,PaulR.(2002), ‘SurveyofRecent Developments’,BulletinofIndonesian

Eco-nomicStudies 38(1):5–37.

Dick,Howard(1985),‘SurveyofRecentDe -velopments’,BulletinofIndonesian

Eco-nomicStudies 21(3):1–29.

Dick,Howard(2001),‘SurveyofRecent De-velopments’,BulletinofIndonesian Eco

-nomicStudies 37(1):7–41.

DRI(DanareksaResearchInstitute,(2002),

BusinessOutlook:May2002,DRI,Jakarta.

Fe ridha nusetyaw an , Tuba gus (20 02 ), Indonesia’s Trade Policy and Perfor-mance:AnOverview,Workingpaperin progress,CentreforStrategicandInter -nationalStudies,Jakarta.

Klingner,G.D.(1993),‘LabourinMining:The KaltimPrimaCoalExperience’,inC. Man-ningandJ.Hardjono(eds),IndonesiaAs

-sessment 199 3: Labour: Sharin g in the

BenefitsofGrowth?, TheAustralian

Na-tionalUniversity, Canberra:173–85. Manning,Chris(2002),MinimumWages:A

PressingChallengeforMacroeconomic and Social Policy, Draft report, PEG, Bappenas,Jakarta.

McBeth,John, andDiniDjalal(2002), ‘The BenefitsofProsecution’,FarEastern

Eco-nomicReview,28March2002:

McLeod,RossH.(2000),‘SurveyofRecent Developments’,BulletinofIndonesian

Eco-nomicStudies 36(2):5-40.

Pangestu,Mari, andMiranda S. Goeltom (2001),‘SurveyofRecentDevelopments’,

BulletinofIndonesianEconomicStudies 37

(2):141–71.

Rosner,L.Peter(2000),‘Indonesia’sNon-oil ExportPerformanceduringtheEconomic Crisis:DistinguishingPriceTrendsfrom Quantity Trends’,Bulletin ofIndonesian

EconomicStudies 36(2):61–95.

WorldBank(2002),Indonesia,WorldBank, Jakarta(mimeo).

WTO (WorldTrade Organization)(1999),

TradePolicyReviewIndonesia1998,WTO,

Geneva.