00074918.2015.1061915
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
FIFTY YEARS OF TRADE POLICY IN INDONESIA: NEW
WORLD TRADE, OLD TREATMENTS
Mari Pangestu, Sjamsu Rahardja & Lili Yan Ing
To cite this article: Mari Pangestu, Sjamsu Rahardja & Lili Yan Ing (2015) FIFTY YEARS OF
TRADE POLICY IN INDONESIA: NEW WORLD TRADE, OLD TREATMENTS, Bulletin of Indonesian
Economic Studies, 51:2, 239-261, DOI: 10.1080/00074918.2015.1061915
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Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 239–61
Fifty Years of BIES
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FIFTY YEARS OF TRADE POLICY IN INDONESIA:
NEW WORLD TRADE, OLD TREATMENTS
Mari Pangestu*
University of Indonesia
Sjamsu Rahardja*
Jakarta, Indonesia
Lili Yan Ing*
Economic Research Institute for ASEAN and East Asia; University of Indonesia
Indonesia’s trade policy has evolved over the last 50 years. It has been inluenced
by the country’s level of development and the conlict between openness and
protectionism; external developments, such as commodity booms and busts and
increased competition; and international commitments, whether multilateral or
regional. As a result, trade policy has often been ambivalent and ineffective. Given
that Indonesia has undergone various transformations and that the world is a different place from what it was in 1965, the country needs to take a more pragmatic and
forward-looking stance. Trade policy needs to be part of a comprehensive strategy
to improve competitiveness and diversify exports. If Indonesia is to be part of the
new paradigm, where the production of goods and services is based on production
networks and global value chains, its policy focus will need to shift from protecting
and favouring sectors to promoting trade and industrial policies that encourage the
low of goods, services, and people.
Keywords: trade policy, political economy, export strategy, integration, globalisation
JEL classiication: F5, F6, F13
INTRODUCTION
Indonesia’s international trade has undergone many transformations in the last 50
years. Changes in its growth and structure have relected changes in the country’s
comparative advantages and trade and development policies, as well as inconstant global circumstances and the evolving rules of the multilateral, regional, and
bilateral trade agreements in which Indonesia has participated. This article traces
these transformations across ive phases, with an emphasis on their coverage in
this journal, the Bulletin of Indonesian Economic Studies (BIES). The focus here will
* The authors would like to thank Rizki Siregar, Muhammad Rizqy, and Skotlastika Indasari
for their excellent research assistance.
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000239-23
http://dx.doi.org/10.1080/00074918.2015.1061915
© 2015 Indonesia Project ANU
240
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
BOX 1 Five Phases of Indonesia’s Trade Policy, 1965–2015
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1965–71: From Chaos to Rehabilitation
Sukarno’s Old Order ended in chaos and was characterised by trade controls, including import bans, quotas, tariffs, and foreign-exchange allocation. Soeharto’s New
Order, in contrast, uniied the exchange rate, opened up the capital account, welcomed foreign investment, and normalised trade policy.
1971–85: Import Substitution
An oil boom sparked an episode of Dutch disease and increased Indonesia’s dependency on oil exports and revenues. The government’s import-substitution policy escalated effective rates of protection. Some policies promoted local content, strategic
industries, and directed lending, while others banned timber and rattan exports. This
period also saw the devaluation of the rupiah in 1978, continued import substitution,
and import licensing that beneited vested interests.
1985–99: Devaluation, Bold Deregulation, and Export Diversiication
The end of the oil boom, in the mid-1980s, coincided with a worldwide recession. The
government responded with bold deregulation and an aggressive export-diversiication strategy. Indonesia’s trade policy was inluenced by the establishment of the
ASEAN Free Trade Area in 1991, liberalisation in the lead-up to the Bogor goals of
the 1994 APEC Leaders’ Meeting, and the formation of the WTO in 1995. But at the
same time import monopolies emerged and the country embarked on the development of a national car. Economic overheating in Asia during 1993–97 culminated in
the 1997–98 Asian inancial crisis, which caused dramatic economic, inancial, and
political upheaval.
1999–2004: Recovery and Soul-Searching
The IMF program dominated this phase—along with the removal of all import restrictions, a reduction of tariffs, the importing of agricultural products, and major institutional changes, including the establishment of Bulog (the National Logistics Agency).
Ambivalence about the program during 2002–4 saw the reintroduction of import and
export restrictions and instances of creeping protectionism. As chair of ASEAN in
2003, Indonesia initiated the ASEAN Economic Community and participated in the
ASEAN Plus One free-trade agreements (FTAs), having signed the ASEAN–China
Free Trade Agreement in 2002.
2004–15: More Reform, More Dutch Disease, and the Global Financial Crisis
The Yudhoyono government sought to simplify trade policy by reducing trade restrictions and increasing transparency. In international trade negotiations, Indonesia
adopted a multitrack approach: multilateral, regional, and bilateral. A commodity
boom during 2004–11 saw exports triple and brought on a second episode of Dutch
disease. During 2012–14, in the wake of the global inancial crisis and the collapse of
commodity prices, exports declined, creating a trade deicit. Creeping protectionism
led to many trade restrictions being reintroduced, while ambivalence about openness
did little to solve the ongoing problem of how to diversify exports.
be trade policy: its aims, the instruments used by different governments to implement it, and its evolution. We start with the chaotic period at the end of Sukarno’s
Old Order; assess different phases of Soeharto’s New Order, which ended during
the 1997–98 Asian inancial crisis; and move from the aftermath of the crisis to the
post-crisis reform period and into more recent times (box 1).
Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
241
FIGURE 1 Proportion of Indonesia’s Merchandise Exports by Industry, 1967–2013 (%)
100
Others
90
80
M
70
E&C
60
Textiles
Mining
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50
C
40
30
Furn.
Forestry
Oil & gas
20
10
Agriculture
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: Authors’ calculations based on data from UN Comtrade.
Note: Resource-based exports are shaded. M = machinery. E&C = electronics and computers.
Furn. = furniture. C = chemicals.
An overview of exports, imports, and net trade in Indonesia over the last 50
years reveals a number of important trends. In the irst two decades, 1965–85,
commodity exports dominated agriculture, forestry, and especially oil and gas,
which accounted for 80% of exports. Subsequently, from 1985, the government
sought to diversify exports, including manufactured exports, and the share of oil
and gas decreased to around 25%. After the early 2000s, however, the importance
of mining- and agriculture-based exports increased again, whereas the share of
manufactured exports declined and the share of oil and gas exports continued to
fall (igure 1). The current share of resource-based exports is around 60%. Given
the bias in Indonesia’s manufacturing industry towards capital-intensive commodity processing, imports of machinery (capital goods) and intermediate goods
(chemicals, electronics, and computers) have been dominant (igure 2). Oil’s share
of imports has grown as domestic production has declined and demand has
increased.
Indonesia’s trade balance has been in surplus for most of the last 50 years.
Exports more than doubled during the oil boom of the 1970s and 1980s, from $11
billion in 1978 to $25 billion in 1985. They doubled again during the diversiication from commodities to manufactured products in 1985–96, from $25 billion to
$49 billion. After the 1997–98 Asian inancial crisis, exports more than tripled—
mainly owing to another commodity boom—from $56 billion in 2004 to $200
billion in 2011. In the last few years, however, declines in the demand for and
prices of commodities and a sharp rise in oil imports, which made Indonesia a net
importer of oil and oil products in 2012, pushed the trade balance into deicit for
the irst time (igure 3). As in the mid-1980s, this deicit requires Indonesia to consider diversifying and increasing its exports, and to identify policies that would
encourage export competitiveness.
FIGURE 2 Proportion of Indonesia’s Merchandise Imports by Industry, 1967–2013 (%)
100
Others
90
80
Machinery
70
60
E&C
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50
Chemicals
40
T
30
Forestry
20
Mining
Oil & gas
10
Agriculture
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: Authors’ calculations based on data from UN Comtrade.
Note: Resource-based imports are shaded. Furniture imports were negligible. E&C = electronics and
computers. T = textiles.
FIGURE 3 Indonesia’s Exports, Imports, and Trade Balance, 1967–2013 ($ billion)
110
220
100
200
180
160
140
90
Exports (lhs)
Imports (lhs)
Net trade (rhs)
80
70
120
60
100
50
80
40
60
30
40
20
20
10
0
0
-20
1967
1972
1977
1982
1987
1992
1997
Source: Authors’ calculations based on data from UN Comtrade.
2002
2007
2012
-10
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
243
1965–71: FROM CHAOS TO REHABILITATION
1965–66: End of the Old Order
During the Old Order (1950–65), the main objectives of trade policy were to raise
public revenue and control foreign-exchange earnings, combined with a growing emphasis on increasing indigenous Indonesian control over all aspects of
economic activity. Under President Sukarno’s Guided Economy and Berdikari
(self-reliance) principles, economic policy veered towards centralised planning,
nationalisation, and government control of foreign trade. Import restrictions limited foreign-exchange earnings; imports were replaced by domestically produced
substitutes, wherever possible; and state-owned enterprises were used as a base
for industrial development.
Trade during the Old Order was characterised by complex and continually
changing regulations on exchange rates, import and export duties, import prepayment schemes, and quantitative restrictions. A large part of imports was
dominated by ive Dutch trading companies and, after nationalisation, by stateowned trading houses, which had monopoly rights to import categories of
goods that together composed 75% of imports (Pangestu and Boediono 1986).
Exports were mainly resource-based: eight commodities accounted for 80%–90%
of exports, the two most important being rubber and, increasingly, oil and oil
products. The other major export commodities were tobacco, tea, coffee, palm
oil, copra, and tin ore.
During the irst three quarters of 1965, Indonesia’s exports declined sharply
because of low prices, increasing competition in world commodity markets, and a
more discriminatory use of preferential tariffs within competing economic blocs.
As the situation worsened, foreign-exchange shortages and other factors reduced
industrial production to below 20% of capacity (Arndt 1966). The production of
most state-controlled agricultural products, apart from rice, continued to stagnate
or decline. This period ended in chaos, marked by corruption, rampant smuggling, and current account and budgetary deicits, which in turn led to money
printing, hyperinlation, and a scarcity of goods.
1966–71: Beginning of the New Order
After the failed communist coup on 30 September 1965 and the transition to the
New Order, President Soeharto’s government, which was advised by Westerntrained economists, responded to the inherited chaos by substantially liberalising
trade and investment policies. Part of a rehabilitation and stabilisation program,
these policies aimed to ration scarce foreign exchange more effectively and inluence the level and composition of imports. The recognition that there had been
inadequate investment in maintaining and expanding production in the oil industry and by agricultural estates led to an open-door policy on foreign investment
in 1967.
In mid-1967, new foreign-exchange regulations gave additional incentives to
exporters and extra protection to import-competing industries (Arndt 1967). The
new regulations were an improvement, even though it took until 1970 for the
multiple exchange rate to be abolished. A year later, in 1971, the rupiah was devalued by 10%, after the loating of the US dollar (Pangestu 1997).
In 1968, trade taxes were still used mainly as a source of public revenue, accounting for 38% of government revenues. The production of some manufactured goods
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Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
increased, notably in the textile industry; import tariffs were introduced on competing goods; and investment inlows started (Pangestu 1996).
In an analysis of Indonesia’s export potential at this time, Thomas and
Panglaykim (1966, 89) emphasised the need to diversify and develop exports
through ‘an enlightened and vigorous government policy’—that is, because of
government dominance in rubber, oil palm, and other agricultural production—
as well as through new investment, new farming techniques, and replanting
(especially of rubber trees and oil palms). Thomas and Panglaykim also highlighted the pressing need for improvements in transport and logistics in order
to resume trade lows, after the withdrawal of the Dutch interisland shipping
company KPM in 1958.
1971–85: IMPORT SUBSTITUTION
In the period after rehabilitation and stabilisation, Indonesia’s economic and
political circumstances were changed dramatically by an oil boom that alleviated foreign-exchange shortages and increased public revenues (Grenville 1974).1
However, growing anti-foreign sentiment culminated in anti-Japanese riots in
Jakarta in 1974, during the visit of Japanese prime minister Kakuei Tanaka, giving rise to restrictions on foreign investment (Arndt 1975). Trade and other policies were introduced to foster import substitution in rice and in manufacturing,
beginning with consumer goods and followed by intermediate and capital goods.
Rising oil revenues allowed the government to increase its intervention in the
economy, and new state-owned enterprises were created in strategic industries
such as cement, fertilisers, and aircraft. Oil revenues were channelled through
state-owned banks and provided as low-interest credit to priority recipients such
as plantations, downstream developers of plywood and similar products, and
import-substitution industries. Non-oil export specialisation focused on primary
commodities and import-substitution manufacturing, creating a bias against
other sectors.
Tariffs and non-tariff barriers (NTBs) were the main instruments used to escalate protection. High rates of nominal and effective protection were a consequence
of local-content requirements, especially in the automotive sector; the proliferation of administrative procedures; the control of entry through investment licensing and restrictions on, or the closure of sectors to, private participation, foreign
participation, or both; and bans on exports of primary commodities in order to
encourage downstream processing.
Although international trade increased signiicantly during this period, non-oil
exports had few opportunities to facilitate development (Rice 1983): the protection
regime that promoted industrialisation hindered exports. As Warr (1992) noted,
Indonesia’s most protected industries continued to be those with the least comparative advantage. Import substitution and the protection of infant industries
fostered neither comparative advantages nor economic eficiency. Consumers
paid higher prices for domestically produced products, and producers paid
higher than international prices for inputs.
1. The price of oil more than tripled between April 1972 and January 1974.
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
245
Trade liberalisation and institutional reform continued. In 1978, several steps
were taken to try to offset the declining competitiveness of non-oil tradables compared with oil tradables, or Dutch disease, in anticipation of a fall in oil prices.
The rupiah was devalued by 50%, tariffs on around 1,000 goods were reduced by
50%, and import taxes were reduced by 50%. There was an emphasis on the need
to promote non-oil exports and reduce the export dependence on oil (Dick 1979).
Policymakers attempted to offset the bias against exports and counter Dutch
disease by introducing an export certiication scheme. This scheme amounted
to a subsidy, because the reimbursements of duties paid by exporters on their
imported inputs tended to be more than the duties themselves. Some of this subsidy helped to start the production and export of textiles and garments.
In 1979, however, oil prices rose rather than fell, halting the push for deregulation and liberalisation (Dick 1979). With monetary authorities unable to sterilise oil
revenues, the effects of Dutch disease created inlationary pressures and eroded
the export price advantage gained by the 1978 devaluation. Since no other measures were taken to ensure the competitiveness of exports (such as reducing highcost-economy factors), non-oil exports stagnated. Real effective exchange rates
came back to 1978 levels after two years, and tariff reductions were also rolled
back as exporters failed to lobby for further reforms (Pangestu 1997). Although
still high, average nominal and effective rates of protection (weighted by production) fell to 33% and 56% in 1980, from 70% and 115% in 1975 Import-competing
sectors were enjoying weighted average nominal and effective rates of protection
of 37% and 60%, compared with 27% and 32% for exported goods (Pangestu and
Boediono 1986).
A further reduction of tariffs and import sales taxes was undertaken at the
beginning of 1981. The oficial reason given was that Indonesia needed to comply with the multilateral General Agreement on Tariffs and Trade (GATT) and
its Tokyo Round of negotiations, but it is likely that a critical World Bank (1981)
report, which recommended reducing and simplifying the protection system, also
had an inluence. When oil prices inally began to fall, in 1981, in the wake of a
global recession, the government limited the impact by taking effective macroeconomic decisions in the iscal and inancial sectors. These decisions included
cutting government expenditure and devaluing the rupiah by 28% in March 1983,
introducing reforms to the banking system (Arndt 1983), and reforming taxation
(Booth 1984).
These were appropriate responses, but the reforms of this period have often
been described as being contrary to conventional wisdom. Structural reforms
to remove distortions in the real sector (through changing trade, industrial, and
investment policies) are normally undertaken before reforms in the inancial sector, leaving the opening up of the capital account until last. Indonesia’s capital
account had been open since the 1970s, and inancial-sector liberalisation preceded real-sector reforms. In fact, owing to the policy of limiting imports to save
foreign exchange and protect domestic industries during downturns, trade policy became more protectionist. In addition, vested interests pressed for import
substitution, especially for cement, chemicals, fertilisers, and motor-vehicle
engines. Since tariffs were already high, the increase in protection during 1982–85
involved a range of quantitative restrictions on imports and the establishment of
an ‘approved importer’ system (tata niaga impor).
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Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
Log exports were also banned, to encourage domestic processing of raw
materials and increase value added, and ostensibly to prevent the overexploitation of natural resources. The ban was combined with low-cost loans; regulations that linked forest concessions to processing (by Indonesian sawn wood,
plywood, and pulpwood mills); and controls over production and prices. The
ban on rattan followed the same model. It is unclear, however, whether the bans
were effective in increasing value added, creating net jobs and foreign exchange,
or reducing resource exploitation, owing to the incentive they provided for illegal exports (Resosudarmo and Yusuf 2006). By the end of this period, protection
and regulatory controls remained high, economic growth and industrialisation
were still driven by government controls and state-owned enterprises, and 80% of
Indonesia’s exports and government revenues continued to be derived from oil.
1985–99: DEVALUATION, BOLD DEREGULATION, AND EXPORT
DIVERSIFICATION
1985–96: Deregulation and Export Orientation
In 1985, amid a sharp slowdown in economic growth to only 2.5%, and with oil
prices expected to decline, a strong push for deregulation and reform emerged.
The main aim was to diversify exports and public revenues away from the dominance of oil. The export-oriented industrialisation strategy sought to reduce the
high costs of doing business, increase access to internationally priced inputs, and
remove distortions caused by escalating protection (Dick 1985).
The government introduced several bold measures and reforms as part of this
strategy. First, in 1985, it decided to ‘close down’ Indonesian customs, one of the
most corrupt institutions at the time, by asking all customs oficials to take a leave
of absence. A Swiss surveyor company, Société Générale de Surveillance, was contracted to take over customs clearance (Dick 1985). The intention was to reduce
the costs of exporting and importing and to prepare Indonesian customs to work
more eficiently in the future.
Second, in 1986, Indonesia substantially improved its duty drawback scheme
by introducing the 6 May Policy Package (Muir 1986, 22–23). (A year earlier, under
US pressure, Indonesia had become a signatory to the GATT Code on Subsidies
and Countervailing Duties.) The subsidy component of the export certiication
scheme was removed by basing the calculations on an audited input–output
basis, and the administration of the scheme was made transparent and became
better governed—and included arm’s-length processing—under an independent
entity. At the same time, many tariffs were reduced and a new, lower ceiling of
40% was put in place, reining the tariff schedule by reducing the number of split
lines. In September 1986, the rupiah was devalued by 31% against the US dollar.
Third, during 1986–90, a series of trade-reform packages removed NTBs—in
line, this time, with conventional wisdom—and replaced them with more transparent, equivalent tariffs (Pangestu 1987). During this period, the proportion of
items subject to NTBs fell from 31% to 16% and, in terms of import value, from
43% to 21% (Wymenga 1991). Removing two monopolies on imports of steel and
plastic and granting them to associates of President Soeharto, in November 1988,
was probably the most signiicant reform. However, import licensing still covered
65% of food crops, mainly rice, and Bulog (the National Logistics Agency) still
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
247
played a key role in importing agriculture commodities and managing the rice
buffer stock.
Fourth, the announcement in 1986 that there would be three more deregulation
packages was a form of pre-signalling that had not happened before. It provided
an important indication of the way forward and showed that the government was
serious about undertaking reforms.
The results of these reforms were positive: non-oil exports grew by around
30% in 1987–88 (Hill 1987)—albeit from a low base—and by 17% annually during
1989–94. Exporters credited the boost in exports to the devaluation and reforms,
especially the eficient and ‘clean’ mechanism of duty reimbursement that enabled them to produce with internationally priced inputs. Exports of resourcebased manufactured goods (such as furniture, rubber products, and processed
wood) and labour-intensive manufactured goods (such as textiles, garments, and
footwear) increased rapidly. Garment companies appear to have been the main
beneiciaries of the duty drawback scheme. By 1989, of $22 billion of exports, the
share of oil had fallen to 38%, compared with 65% in 1981.
During this period, Indonesia’s internationalisation came of age and affected
domestic policies and reforms. Besides the bold deregulations undertaken during
1985–88, Indonesia’s increased conidence about opening up was evident when,
in early 1992, it inally supported the creation of the ASEAN Free Trade Area
(AFTA), agreeing to reduce tariffs on intra-ASEAN trade to zero by 2005 (Tomich
1992). This was shortly followed by two even more important reforms.
First was the decision to allow 100% foreign ownership of export-oriented companies. Indonesia’s hosting of the APEC Economic Leaders’ Meeting in 1994 would
produce the now famous Bogor goals, which sought to achieve regional free trade
and investment by 2010 for industrialised countries and by 2020 for developing
countries. Indonesia’s unilateral reforms were attributed to Soeharto’s economic
technocrats, who ensured that Indonesia’s reforms were in line with APEC principles. Around this time, Soeharto issued an important statement, arguing that,
whether Indonesia liked it or not, and whether it was ready or not, it had to face
globalisation (Soesastro 2004, 5–6).
Second was Indonesia’s introduction, in 1995, of a comprehensive tariffreduction program in order to meet its obligations to the newly created WTO (and
to AFTA by 2005). The government reduced the tariff bracket from 0%–40% in 1995
to 0%–10% by 2003, and removed local-content requirements for automotive, electronic, and dairy products. It also enacted a number of laws related to trade remedies (anti-dumping and safeguards), customs, and intellectual property rights.
Indonesia’s exports would continue to grow until the 1997–98 Asian inancial
crisis, but in 1993 they came under competitive pressure when minimum-wage
increases exceeded productivity growth and inlation. The ‘managed’ depreciation of the Indonesian rupiah by 5% per year during 1986–97 helped to offset the
wage increases.
Despite the internationalisation of Indonesia’s economy and the reforms undertaken since the mid-1980s, cronyism favouring those close to the centre of power,
including Soeharto’s children, increased. Policy interventions created import
monopolies, forestry concessions, privatised toll roads, and private TV stations.
One of the most blatant examples was the national-car policy introduced in 1996:
under this policy, a joint venture between one of Soeharto’s sons and Korea’s
248
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
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Kia Motors was given the privilege of importing fully built cars into Indonesia
duty free, before the WTO halted it. This case ironically provides a lesson on how
international commitments in the end disciplined such blatant policies and gave
Indonesia its irst experience in dealing with the WTO. After consultations failed
in May 1997, Japan, the European Union, and the United States requested a panel
be created to arbitrate the dispute, and the case was one of the irst to test the
WTO dispute-settlement process. Indonesia ultimately lost the case because it had
violated the most sacred principle of GATT 1994—Article I:1 on most-favourednation treatment.
1997–99: The Asian Financial Crisis and the IMF Program
The 1997–98 Asian inancial crisis, which started in Thailand in July 1997, quickly
spread to several other Asian economies. Amid pronouncements of Indonesia’s
fundamentals being sound, the government introduced a deregulation package
in September 1997, but a month later it resorted to an IMF loan program to shore
up business conidence. The ensuing structural reforms to trade and investment
focused on reducing tariffs and including industries that had been excluded
from trade reforms, such as chemicals, steel, and ishery products. All NTBs were
removed, except those based on accepted health, safety, environmental, and security grounds. These included all the controversial import monopolies aside from
rice, sugar, and cloves. The reforms also lifted export bans and reduced export
taxes for three years, and opened up the retail sector, among others, to foreign
investment (Feridhanusetyawan and Pangestu 2003).
Despite this comprehensive package, the closure of 16 banks at the end of 1997,
combined with clear signals that the government was reluctant to implement
the reforms, exposed Indonesia’s vulnerabilities and led to a crisis of conidence,
which in turn led to a sharp increase in capital outlows in late 1997 and into
1998. The rupiah was loated in August 1997 and depreciated from Rp 2,500 to
Rp 17,000 against the US dollar by January 1998 (Soesastro and Basri 1998). It
eventually settled at around Rp 12,000 per dollar, boosting commodity exports as
non-oil exports continued to grow. Exports of agricultural products increased by
29% in dollar value and 98% in volume, while manufactured products increased
by 8% and 68%, respectively, so overall exports still grew during 1997–98 (Evans
1998, 32).
The severity of the economic crisis led, however, to a 13% contraction in GDP,
an inlation rate of 58%, a 244% drop in the exchange rate, and the collapse of the
banking sector and many afiliated companies in 1998. By 1999, owing to inlation
in food prices and disruption in distribution, around 13 million people had fallen
into poverty because of the crisis; the poverty rate increased to 23.4%, up from
17.3% in 1996 (Suryahadi, Hadiwijaya, and Sumarto 2012). All of this happened in
uncertain political circumstances and amid deteriorating domestic security.
Severe problems experienced by the corporate and banking sectors hindered
trade, as it was dificult for Indonesian businesses to inance imports or obtain
pre-inancing for their exports (Pangestu and Habir 2002). Most surviving commercial banks lost their networks of international correspondents or held operating licences that did not cover foreign-exchange transactions (Magiera 2003).
With the restructuring that took place in the banking sector and among private
companies, many foreign banks cut their country exposure to Indonesian banks
Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
249
TABLE 1 Share and Growth of Non–Oil and Gas Exports, 1999–2004 (%)
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Share of non–oil
& gas exports
Agricultural commodities
Fresh ish & shrimp
Rubber
Vegetable oil
Mining & minerals
Copper
Coal
Forestry products
Manufactured products
Textiles & footwear
Computers & electronics
Others
Non–oil and gas
Growth
1999
2004
1999
2000
2004
1999–2004
12.8
3.3
1.9
3.1
11.8
4.8
3.7
13.6
61.8
21.4
17.7
22.7
19.0
2.6
4.0
7.5
13.8
4.6
4.9
10.8
56.3
16.3
16.1
23.9
2.9
–4.4
–22.4
45.5
–3.5
11.7
–3.3
20.3
–12.4
35.2
25.4
–38.8
–2.0
3.4
5.9
–1.5
18.0
32.1
–0.7
9.1
34.5
17.2
125.8
12.2
28.8
1.7
45.6
46.2
33.1
2.6
37.2
1.7
15.0
9.3
17.6
17.6
10.8
0.4
20.8
20.3
14.0
11.0
16.1
–0.1
7.0
1.3
17.5
6.4
100.0
100.0
–5.1
22.9
18.0
4.0
Source: Authors’ calculations based on data from Badan Pusat Statistik (BPS).
or lowered the creditworthiness of trade-related transactions with Indonesian
businesses.2
1999–2004: RECOVERY AND SOUL-SEARCHING
The massive currency depreciation and the IMF program’s trade reforms did
boost exports, but the currencies of other Asian countries also depreciated and
therefore these countries’ exports competed against Indonesia’s (Thee 2002).
Although the exports of some products increased, total non–oil and gas exports
contracted by 5.1% in 1999 (table 1). Non–oil and gas exports increased in subsequent years, initially because of price competitiveness due to the weak rupiah, but
also because demand, especially for palm oil and mining products, started to rise.
The weak exchange rate attracted foreign buyers, who inanced raw and intermediate inputs and engaged in original-equipment-manufacturer transactions with
Indonesian suppliers of textiles, garments, and furniture. Foreign buyers also purchased raw materials directly, including coal and palm oil, and paid for them after
the materials arrived or had been shipped.
Table 1 shows that Indonesia was beginning to experience competitiveness
problems by 2004, particularly in its labour-intensive sectors (World Bank 2012).
Between 1999 and 2004, the share of textiles and footwear in non–oil and gas
exports dropped from 21% to 16% and grew by only 1.3%, on average, largely
2. For instance, many offshore corresponding banks declined letters of credit issued by
Indonesian banks.
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
250
FIGURE 4 Real Effective Exchange Rates, Indonesia and
Selected Asian Countries, 1995–2015 (2010 = 100)
140
130
Malaysia
China
120
110
100
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90
80
Thailand
70
60
Indonesia
50
40
30
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Data from the Bank for International Settlements, via the CEIC Global Database.
because of a decline in investment, an appreciation of the nominal exchange rate,
and other factors that eroded the cost competitiveness of Indonesia’s manufacturing exports.
Net foreign direct investment was negative between 1999 and 2003, with
outlows of 2.8% and 1.9% of GDP in 1999 and 2000 (Basri and Soesastro 2005).
Despite the relatively open foreign-investment policy, investment did not pick up,
owing in part to uncertainty about political reforms and domestic security. There
were also concerns about the country’s irst democratically elected government,
which lacked managerial proiciency and seemed unable to deliver on its promises (Boediono 2005).
Indonesia’s nominal and real exchange rates depreciated dramatically during
the crisis and remained weak until 2001. Inlation was also high, at double-digit
levels, owing to the impact of rupiah depreciation on the prices of imported goods,
as well as to price increases in fuel and electricity as subsidies were reduced.
Starting in 2001, on the back of improving economic growth and increasing export
revenues, the exchange rate began to strengthen in both nominal and real terms
(igure 4). By 2003, Indonesia’s real exchange rate was catching up with those of
its major competitors in Asia, such as China and Thailand.
Aside from the appreciation of the real exchange rate, other factors began
to affect the competitiveness of Indonesia’s manufacturing exports. During
1995–2005, as the WTO phased out quotas that had been part of its Multiibre
Arrangement for textiles and clothing (James, Ray, and Minor 2003), competition
increased in the European and US markets from lower-cost producers such as
Bangladesh and Vietnam.3 The greatest competition, however, came from China;
3. Formerly, a quota system was used to govern the international trade of textiles and clothing. The WTO’s 1995 Agreement on Textiles and Clothing, which was determined during
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
251
its accession to the WTO in 2001 allowed it to take advantage of the phasing out
of these quotas.
Indonesia’s competitiveness in manufacturing also suffered from rising labour
costs, which were due to new-found militancy among labour unions and rigid
new labour legislation. In 2000 and 2001, minimum wages in Jakarta increased
by 49% and 39%—higher than the growth of labour productivity. Meanwhile,
populist labour legislation in 2001 increased the costs of hiring and replacing
employees and led to much collective bargaining in the streets (as opposed to at
the negotiating table). Local regulations proliferated after Indonesia’s decentralisation; as local governments sought to raise revenue, businesses had to comply
with more local taxes and administrative procedures.
On the positive side, tariff reductions between 1990 and 2001 reduced the cost
of inputs and increased productivity (Amiti and Konings 2007). Indonesia also
actively participated in ASEAN and, in 2003, while chair, endorsed the establishment of the ASEAN Economic Community by 2015. In 2001, Indonesia and ASEAN
responded positively to China’s proposal for a free-trade area. Negotiations began
in 2002 and were completed in mid-2004.
Updating earlier calculations, Marks and Rahardja (2012) found that the sharp
decline in the effective rate of protection across sectors was consistent with unilateral reforms, schedules for tariff reductions in regional trade agreements, and
subsidy reductions. Tariffs for industries that were highly protected or subsidised
in the 1990s, such as machinery and transport equipment, had been reduced and
state support for projects such as the national car had been removed. By 2008,
Indonesia had low tariff barriers to trade, but these low tariffs were offset by a
proliferation of NTBs, such as those for beef, sugar, rice, and steel.
Despite reforms, the government seemed hesitant to commit to deeper structural reforms during 1999–2004. Grossman and Helpman (1994) suggested that
an equilibrium between openness and protection had to be struck in the political
economy sense. In other words, achieving political reform as well as freedom,
democracy, and increased political participation in Indonesia involved balancing
the interests of government, individual politicians, and the private sector. Around
this time, the government revived the role of Bulog by restoring its function as the
importer of rice, as well as a buyer of sugar and cattle. The government, through
the Ministry of Industry and Trade, also reintroduced the requirement that sugar,
steel, and textiles could be imported only by certain licensed importers. It reintroduced export bans on logs in 2001 and on rattan in 2004.
As would be expected, disagreements over the role of trade policy are more
nuanced in democratic Indonesia, which has an open and inclusive political process for shaping government policies. The central government has less control
over policy implementation than it did during the Soeharto era, as decentralisation has given local governments the upper hand in budgeting and policy-making
at the local level. Under Soeharto, particularly during the period of what Soesastro
(1989, 866–67) called ‘low politics’, economic policy-making was relatively easy:
technocrats were in control and focused on convincing the president to undertake
reforms and act on policy. In the democratic era, the absence of institutions with
the Uruguay Round of negotiations, had the objective of gradually reintegrating trade in
textiles and clothing into a new world trading system that prohibited quotas.
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252
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
strong analytical capacity has weakened the position of proponents of an open
trade and policy regime (Aswicahyono, Bird, and Hill 2009). Furthermore, in the
aftermath of the Asian inancial crisis, resentment arose about foreign involvement in the Indonesian economy. This resentment was mostly about the perceived
causes of the crisis or about the restrictions that the IMF placed on Indonesia.
Against this background, protectionist policies became easy and popular instruments to deploy in order to shield Indonesian businesses from international
competition.
Global commodity prices started to increase in 2003, partly as a result of
increased demand from China. High international commodity prices marked a
shift in the structural balance of production in Indonesia, where manufacturing
was no longer considered as attractive for businesses as the commodity-based
and non-tradable sectors. This marked the beginning of a second period of Dutch
disease.
2004–15: MORE REFORM, MORE DUTCH DISEASE, AND THE
GLOBAL FINANCIAL CRISIS
The Ministry of Trade; Reforms and Institutional Strengthening
In October 2004, in the country’s irst direct elections, Susilo Bambang Yudhoyono
was elected president. By 2003, or ive years after the Asian inancial crisis,
Indonesia had regained its macroeconomic stability and the functioning of its
inancial sector had started to improve. The new government therefore focused
on implementing structural reforms in order to regain conidence, attract investment, and rebuild the real sector.
In 2004, the Ministry of Trade was again separated from the Ministry of Industry
and Trade. It was tasked with increasing investment and creating a conducive
investment climate, increasing export growth, and improving the eficiency and
effectiveness of domestic distribution. In recognition of the link between trade
and investment, investment policy and the Investment Coordinating Board came
under the coordination of the Ministry of Trade. One of the outcomes was the passage of Law 25/2007 on Investment.4
By 2003, most-favoured-nation tariffs were already low. The government sought
to strengthen decision-making on tariffs and export duties by ensuring that its
Tariff Team, which was chaired by the Ministry of Finance and co-chaired by the
Ministry of Trade, operated on the principles of sound policy analysis, effective
coordination, and reasoned decision-making. In a regional perspective, by January
2010 Indonesia found itself a signatory to several ASEAN Plus One FTAs, with six
key trading partners: Australia, New Zealand, China, India, Japan, and Korea.
Apart from introducing cross-border measures and taking part in trade
negotiations, Indonesia undertook a number of other important reforms and
institution-building activities. Important domestically was stabilising prices and
4. The new investment law combined Law 6/1968 on Domestic Investment and Law
1/1967 on Foreign Investment. It included principles of transparency and national treatment, a negative-list approach, and protection against nationalisation, as well as provisions
for dispute settlement. The criteria for the negative list would soon become clear, although
implementation proved complicated.
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
253
institutionalising databases for decisions on the import of basic foods. Lessons
were learned from spikes in domestic prices, such as the increase in rice prices in
2006 (McCulloch and Timmer 2008) and the sharp rise in food prices in 2008 prior
to the global inancial crisis.
The government also committed to improving investment and exports by
revitalising the National Team for the Enhancement of Exports and Investment
(Timnas PEPI) in 2006, which was led directly by the president and chaired by the
coordinating minister of economic affairs. However, Timnas PEPI could not work
optimally as a platform for coordinating investment and export policies, because
support in the form of a full-time secretariat of professionals did not materialise.
Nevertheless, during 2008–11, Timnas PEPI contributed to legislation and regulations, monitored implementation, and dealt with ad-hoc problem-solving related
to investment and trade. On top of introducing unilateral reforms, the government responded to its ASEAN commitment by simplifying border-clearance procedures through initiatives such as the Indonesia National Single Window and
INATRADE (an electronic system of export and import licensing).
Resource-Based Export Boom and Competitiveness
Indonesia’s exports almost tripled during 2004–11, from $71 billion to $201 billion, with an average growth rate of 16% per year. Much of this growth rode on
commodity prices and on high levels of demand for raw materials in China and,
to a lesser extent, India. Indonesia’s exports of palm oil and coal increased dramatically in this period. In the wake of the 2008 global inancial crisis, however,
and owing partly to slowing growth in China since 2007, export revenues contracted by an annual average of 5.8% in 2013 and 2014, falling to $180 billion.
Total exports fell from $203 billion to $176 billion during 2011–14, with an average
contraction rate of 4.4%. In 2012, Indonesia trade balance went into deicit for the
irst time in 50 years.
The recent export boom is reminiscent of past commodity booms in resourcerich Indonesia. Despite some success in diversifying exports, Indonesia’s resourcebased exports continue to dominate. Resource-intensive industries, such as oil and
gas, mining, agriculture, and forestry, accounted for 96% of total exports in 1980,
62% in 1990, and 41% in 2000. The share of exports of mining products in total
exports would soon increase sharply, however, from 5% in 2000 to 18% in 2013.
The share of other resource-intensive goods, particularly palm oil, also increased
signiicantly, so that by 2013 around 60% of Indonesia’s exports were resourcebased. The share of exports of manufactured goods in total exports decreased
from 59% in 2000 to 41% in 2013.5 Furthermore, manufactured exports did not
diversify much, and continued to be dominated in the 1990s by unskilled-labourintensive goods such as textiles, clothing, and footwear, with moderate increases
in the 2000s in semi-skilled-labour-intensive goods such as electronics and transport parts and components.
5. According to the modiied Harvard Institute for International Development method (reined by the World Bank ofice in Jakarta on the basis of data for Indonesia), manufactured
goods contributed 49% to total goods exports in 2000 and 34% in 2010 (Ing, Fukunaga, and
Isono 2014).
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
254
FIGURE 5 Indonesia’s Export Portfolio, by Cluster, 2010–13 (irst quadrant)
Share of world
exports, 2013 (%)
19.09
Coal & briquettes:
$24.8 bn
17.09
15.09
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13.09
11.09
Footwear: $3.9 bn
9.09
7.09
Fishing & fishery products: $2.9 bn
Processed foods:
$26.0 bn
5.09
3.09
Tobacco: $0.9 bn
Medical devices: $0.4 bn
P&P
Chemical products: $5.2 bn
1.09
-0.03 0.17 0.37 0.57 0.77 0.97 1.17 1.37
1.57
1.77 1.97
2.17
2.37 2.57
Change in share of world exports, 2010–13 (%)
Sources: Authors’ calculations using Harmonization System codes for 2007. The boundaries of the irst
quadrant are deined using Porter’s (2003) methodology. Data for services are from the United Nations
Conference on Trade and Development. Data for goods are from the World Bank’s World Integrated
Trade Solution.
Note: P&P = Publishing and printing products: $1.7 bn.
By 2013, nine out of ten of Indonesia’s main export commodities were resourceintensive: coal, natural gas, vegetable oils, petroleum, rubber, paper, copper,
residual petroleum, and nickel. Footwear was the exception, while textiles ranked
eleventh. These ten main commodities contributed more than 50% of the value
of total exports. This was reminiscent of the early 1960s—when eight out of ten
of Indonesia’s main export commodities were resource-intensive (Thomas and
Panglaykim 1966)—despite the government-stated strategy since then of diversifying exports.
On the basis of Indonesia’s export portfolio by cluster, the country’s exports
in the irst quadrant— the boundaries of which are deined using Porter’s (2003)
methodology—show positive shares and positive changes during 2010–13 (igure 5). Most of these exports are resource-intensive (coal and tobacco), while the
manufactured goods are resource-intensive (ish and ishery products and publishing and printing products), capital-intensive (medical devices and chemical
products), or unskilled-labour-intensive (footwear and processed food).
The share of machinery goods and parts in exports is a widely used measure
of the degree of participation in international production networks. In Indonesia,
in 2010, this share remained low, at 13% of total exports (igure 6), and lagged
behind those of the Philippines, Singapore, China, Malaysia, the Philipp
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
FIFTY YEARS OF TRADE POLICY IN INDONESIA: NEW
WORLD TRADE, OLD TREATMENTS
Mari Pangestu, Sjamsu Rahardja & Lili Yan Ing
To cite this article: Mari Pangestu, Sjamsu Rahardja & Lili Yan Ing (2015) FIFTY YEARS OF
TRADE POLICY IN INDONESIA: NEW WORLD TRADE, OLD TREATMENTS, Bulletin of Indonesian
Economic Studies, 51:2, 239-261, DOI: 10.1080/00074918.2015.1061915
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Date: 17 January 2016, At: 23:14
Bulletin of Indonesian Economic Studies, Vol. 51, No. 2, 2015: 239–61
Fifty Years of BIES
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FIFTY YEARS OF TRADE POLICY IN INDONESIA:
NEW WORLD TRADE, OLD TREATMENTS
Mari Pangestu*
University of Indonesia
Sjamsu Rahardja*
Jakarta, Indonesia
Lili Yan Ing*
Economic Research Institute for ASEAN and East Asia; University of Indonesia
Indonesia’s trade policy has evolved over the last 50 years. It has been inluenced
by the country’s level of development and the conlict between openness and
protectionism; external developments, such as commodity booms and busts and
increased competition; and international commitments, whether multilateral or
regional. As a result, trade policy has often been ambivalent and ineffective. Given
that Indonesia has undergone various transformations and that the world is a different place from what it was in 1965, the country needs to take a more pragmatic and
forward-looking stance. Trade policy needs to be part of a comprehensive strategy
to improve competitiveness and diversify exports. If Indonesia is to be part of the
new paradigm, where the production of goods and services is based on production
networks and global value chains, its policy focus will need to shift from protecting
and favouring sectors to promoting trade and industrial policies that encourage the
low of goods, services, and people.
Keywords: trade policy, political economy, export strategy, integration, globalisation
JEL classiication: F5, F6, F13
INTRODUCTION
Indonesia’s international trade has undergone many transformations in the last 50
years. Changes in its growth and structure have relected changes in the country’s
comparative advantages and trade and development policies, as well as inconstant global circumstances and the evolving rules of the multilateral, regional, and
bilateral trade agreements in which Indonesia has participated. This article traces
these transformations across ive phases, with an emphasis on their coverage in
this journal, the Bulletin of Indonesian Economic Studies (BIES). The focus here will
* The authors would like to thank Rizki Siregar, Muhammad Rizqy, and Skotlastika Indasari
for their excellent research assistance.
ISSN 0007-4918 print/ISSN 1472-7234 online/15/000239-23
http://dx.doi.org/10.1080/00074918.2015.1061915
© 2015 Indonesia Project ANU
240
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
BOX 1 Five Phases of Indonesia’s Trade Policy, 1965–2015
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1965–71: From Chaos to Rehabilitation
Sukarno’s Old Order ended in chaos and was characterised by trade controls, including import bans, quotas, tariffs, and foreign-exchange allocation. Soeharto’s New
Order, in contrast, uniied the exchange rate, opened up the capital account, welcomed foreign investment, and normalised trade policy.
1971–85: Import Substitution
An oil boom sparked an episode of Dutch disease and increased Indonesia’s dependency on oil exports and revenues. The government’s import-substitution policy escalated effective rates of protection. Some policies promoted local content, strategic
industries, and directed lending, while others banned timber and rattan exports. This
period also saw the devaluation of the rupiah in 1978, continued import substitution,
and import licensing that beneited vested interests.
1985–99: Devaluation, Bold Deregulation, and Export Diversiication
The end of the oil boom, in the mid-1980s, coincided with a worldwide recession. The
government responded with bold deregulation and an aggressive export-diversiication strategy. Indonesia’s trade policy was inluenced by the establishment of the
ASEAN Free Trade Area in 1991, liberalisation in the lead-up to the Bogor goals of
the 1994 APEC Leaders’ Meeting, and the formation of the WTO in 1995. But at the
same time import monopolies emerged and the country embarked on the development of a national car. Economic overheating in Asia during 1993–97 culminated in
the 1997–98 Asian inancial crisis, which caused dramatic economic, inancial, and
political upheaval.
1999–2004: Recovery and Soul-Searching
The IMF program dominated this phase—along with the removal of all import restrictions, a reduction of tariffs, the importing of agricultural products, and major institutional changes, including the establishment of Bulog (the National Logistics Agency).
Ambivalence about the program during 2002–4 saw the reintroduction of import and
export restrictions and instances of creeping protectionism. As chair of ASEAN in
2003, Indonesia initiated the ASEAN Economic Community and participated in the
ASEAN Plus One free-trade agreements (FTAs), having signed the ASEAN–China
Free Trade Agreement in 2002.
2004–15: More Reform, More Dutch Disease, and the Global Financial Crisis
The Yudhoyono government sought to simplify trade policy by reducing trade restrictions and increasing transparency. In international trade negotiations, Indonesia
adopted a multitrack approach: multilateral, regional, and bilateral. A commodity
boom during 2004–11 saw exports triple and brought on a second episode of Dutch
disease. During 2012–14, in the wake of the global inancial crisis and the collapse of
commodity prices, exports declined, creating a trade deicit. Creeping protectionism
led to many trade restrictions being reintroduced, while ambivalence about openness
did little to solve the ongoing problem of how to diversify exports.
be trade policy: its aims, the instruments used by different governments to implement it, and its evolution. We start with the chaotic period at the end of Sukarno’s
Old Order; assess different phases of Soeharto’s New Order, which ended during
the 1997–98 Asian inancial crisis; and move from the aftermath of the crisis to the
post-crisis reform period and into more recent times (box 1).
Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
241
FIGURE 1 Proportion of Indonesia’s Merchandise Exports by Industry, 1967–2013 (%)
100
Others
90
80
M
70
E&C
60
Textiles
Mining
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50
C
40
30
Furn.
Forestry
Oil & gas
20
10
Agriculture
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: Authors’ calculations based on data from UN Comtrade.
Note: Resource-based exports are shaded. M = machinery. E&C = electronics and computers.
Furn. = furniture. C = chemicals.
An overview of exports, imports, and net trade in Indonesia over the last 50
years reveals a number of important trends. In the irst two decades, 1965–85,
commodity exports dominated agriculture, forestry, and especially oil and gas,
which accounted for 80% of exports. Subsequently, from 1985, the government
sought to diversify exports, including manufactured exports, and the share of oil
and gas decreased to around 25%. After the early 2000s, however, the importance
of mining- and agriculture-based exports increased again, whereas the share of
manufactured exports declined and the share of oil and gas exports continued to
fall (igure 1). The current share of resource-based exports is around 60%. Given
the bias in Indonesia’s manufacturing industry towards capital-intensive commodity processing, imports of machinery (capital goods) and intermediate goods
(chemicals, electronics, and computers) have been dominant (igure 2). Oil’s share
of imports has grown as domestic production has declined and demand has
increased.
Indonesia’s trade balance has been in surplus for most of the last 50 years.
Exports more than doubled during the oil boom of the 1970s and 1980s, from $11
billion in 1978 to $25 billion in 1985. They doubled again during the diversiication from commodities to manufactured products in 1985–96, from $25 billion to
$49 billion. After the 1997–98 Asian inancial crisis, exports more than tripled—
mainly owing to another commodity boom—from $56 billion in 2004 to $200
billion in 2011. In the last few years, however, declines in the demand for and
prices of commodities and a sharp rise in oil imports, which made Indonesia a net
importer of oil and oil products in 2012, pushed the trade balance into deicit for
the irst time (igure 3). As in the mid-1980s, this deicit requires Indonesia to consider diversifying and increasing its exports, and to identify policies that would
encourage export competitiveness.
FIGURE 2 Proportion of Indonesia’s Merchandise Imports by Industry, 1967–2013 (%)
100
Others
90
80
Machinery
70
60
E&C
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50
Chemicals
40
T
30
Forestry
20
Mining
Oil & gas
10
Agriculture
0
1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Source: Authors’ calculations based on data from UN Comtrade.
Note: Resource-based imports are shaded. Furniture imports were negligible. E&C = electronics and
computers. T = textiles.
FIGURE 3 Indonesia’s Exports, Imports, and Trade Balance, 1967–2013 ($ billion)
110
220
100
200
180
160
140
90
Exports (lhs)
Imports (lhs)
Net trade (rhs)
80
70
120
60
100
50
80
40
60
30
40
20
20
10
0
0
-20
1967
1972
1977
1982
1987
1992
1997
Source: Authors’ calculations based on data from UN Comtrade.
2002
2007
2012
-10
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
243
1965–71: FROM CHAOS TO REHABILITATION
1965–66: End of the Old Order
During the Old Order (1950–65), the main objectives of trade policy were to raise
public revenue and control foreign-exchange earnings, combined with a growing emphasis on increasing indigenous Indonesian control over all aspects of
economic activity. Under President Sukarno’s Guided Economy and Berdikari
(self-reliance) principles, economic policy veered towards centralised planning,
nationalisation, and government control of foreign trade. Import restrictions limited foreign-exchange earnings; imports were replaced by domestically produced
substitutes, wherever possible; and state-owned enterprises were used as a base
for industrial development.
Trade during the Old Order was characterised by complex and continually
changing regulations on exchange rates, import and export duties, import prepayment schemes, and quantitative restrictions. A large part of imports was
dominated by ive Dutch trading companies and, after nationalisation, by stateowned trading houses, which had monopoly rights to import categories of
goods that together composed 75% of imports (Pangestu and Boediono 1986).
Exports were mainly resource-based: eight commodities accounted for 80%–90%
of exports, the two most important being rubber and, increasingly, oil and oil
products. The other major export commodities were tobacco, tea, coffee, palm
oil, copra, and tin ore.
During the irst three quarters of 1965, Indonesia’s exports declined sharply
because of low prices, increasing competition in world commodity markets, and a
more discriminatory use of preferential tariffs within competing economic blocs.
As the situation worsened, foreign-exchange shortages and other factors reduced
industrial production to below 20% of capacity (Arndt 1966). The production of
most state-controlled agricultural products, apart from rice, continued to stagnate
or decline. This period ended in chaos, marked by corruption, rampant smuggling, and current account and budgetary deicits, which in turn led to money
printing, hyperinlation, and a scarcity of goods.
1966–71: Beginning of the New Order
After the failed communist coup on 30 September 1965 and the transition to the
New Order, President Soeharto’s government, which was advised by Westerntrained economists, responded to the inherited chaos by substantially liberalising
trade and investment policies. Part of a rehabilitation and stabilisation program,
these policies aimed to ration scarce foreign exchange more effectively and inluence the level and composition of imports. The recognition that there had been
inadequate investment in maintaining and expanding production in the oil industry and by agricultural estates led to an open-door policy on foreign investment
in 1967.
In mid-1967, new foreign-exchange regulations gave additional incentives to
exporters and extra protection to import-competing industries (Arndt 1967). The
new regulations were an improvement, even though it took until 1970 for the
multiple exchange rate to be abolished. A year later, in 1971, the rupiah was devalued by 10%, after the loating of the US dollar (Pangestu 1997).
In 1968, trade taxes were still used mainly as a source of public revenue, accounting for 38% of government revenues. The production of some manufactured goods
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244
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
increased, notably in the textile industry; import tariffs were introduced on competing goods; and investment inlows started (Pangestu 1996).
In an analysis of Indonesia’s export potential at this time, Thomas and
Panglaykim (1966, 89) emphasised the need to diversify and develop exports
through ‘an enlightened and vigorous government policy’—that is, because of
government dominance in rubber, oil palm, and other agricultural production—
as well as through new investment, new farming techniques, and replanting
(especially of rubber trees and oil palms). Thomas and Panglaykim also highlighted the pressing need for improvements in transport and logistics in order
to resume trade lows, after the withdrawal of the Dutch interisland shipping
company KPM in 1958.
1971–85: IMPORT SUBSTITUTION
In the period after rehabilitation and stabilisation, Indonesia’s economic and
political circumstances were changed dramatically by an oil boom that alleviated foreign-exchange shortages and increased public revenues (Grenville 1974).1
However, growing anti-foreign sentiment culminated in anti-Japanese riots in
Jakarta in 1974, during the visit of Japanese prime minister Kakuei Tanaka, giving rise to restrictions on foreign investment (Arndt 1975). Trade and other policies were introduced to foster import substitution in rice and in manufacturing,
beginning with consumer goods and followed by intermediate and capital goods.
Rising oil revenues allowed the government to increase its intervention in the
economy, and new state-owned enterprises were created in strategic industries
such as cement, fertilisers, and aircraft. Oil revenues were channelled through
state-owned banks and provided as low-interest credit to priority recipients such
as plantations, downstream developers of plywood and similar products, and
import-substitution industries. Non-oil export specialisation focused on primary
commodities and import-substitution manufacturing, creating a bias against
other sectors.
Tariffs and non-tariff barriers (NTBs) were the main instruments used to escalate protection. High rates of nominal and effective protection were a consequence
of local-content requirements, especially in the automotive sector; the proliferation of administrative procedures; the control of entry through investment licensing and restrictions on, or the closure of sectors to, private participation, foreign
participation, or both; and bans on exports of primary commodities in order to
encourage downstream processing.
Although international trade increased signiicantly during this period, non-oil
exports had few opportunities to facilitate development (Rice 1983): the protection
regime that promoted industrialisation hindered exports. As Warr (1992) noted,
Indonesia’s most protected industries continued to be those with the least comparative advantage. Import substitution and the protection of infant industries
fostered neither comparative advantages nor economic eficiency. Consumers
paid higher prices for domestically produced products, and producers paid
higher than international prices for inputs.
1. The price of oil more than tripled between April 1972 and January 1974.
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
245
Trade liberalisation and institutional reform continued. In 1978, several steps
were taken to try to offset the declining competitiveness of non-oil tradables compared with oil tradables, or Dutch disease, in anticipation of a fall in oil prices.
The rupiah was devalued by 50%, tariffs on around 1,000 goods were reduced by
50%, and import taxes were reduced by 50%. There was an emphasis on the need
to promote non-oil exports and reduce the export dependence on oil (Dick 1979).
Policymakers attempted to offset the bias against exports and counter Dutch
disease by introducing an export certiication scheme. This scheme amounted
to a subsidy, because the reimbursements of duties paid by exporters on their
imported inputs tended to be more than the duties themselves. Some of this subsidy helped to start the production and export of textiles and garments.
In 1979, however, oil prices rose rather than fell, halting the push for deregulation and liberalisation (Dick 1979). With monetary authorities unable to sterilise oil
revenues, the effects of Dutch disease created inlationary pressures and eroded
the export price advantage gained by the 1978 devaluation. Since no other measures were taken to ensure the competitiveness of exports (such as reducing highcost-economy factors), non-oil exports stagnated. Real effective exchange rates
came back to 1978 levels after two years, and tariff reductions were also rolled
back as exporters failed to lobby for further reforms (Pangestu 1997). Although
still high, average nominal and effective rates of protection (weighted by production) fell to 33% and 56% in 1980, from 70% and 115% in 1975 Import-competing
sectors were enjoying weighted average nominal and effective rates of protection
of 37% and 60%, compared with 27% and 32% for exported goods (Pangestu and
Boediono 1986).
A further reduction of tariffs and import sales taxes was undertaken at the
beginning of 1981. The oficial reason given was that Indonesia needed to comply with the multilateral General Agreement on Tariffs and Trade (GATT) and
its Tokyo Round of negotiations, but it is likely that a critical World Bank (1981)
report, which recommended reducing and simplifying the protection system, also
had an inluence. When oil prices inally began to fall, in 1981, in the wake of a
global recession, the government limited the impact by taking effective macroeconomic decisions in the iscal and inancial sectors. These decisions included
cutting government expenditure and devaluing the rupiah by 28% in March 1983,
introducing reforms to the banking system (Arndt 1983), and reforming taxation
(Booth 1984).
These were appropriate responses, but the reforms of this period have often
been described as being contrary to conventional wisdom. Structural reforms
to remove distortions in the real sector (through changing trade, industrial, and
investment policies) are normally undertaken before reforms in the inancial sector, leaving the opening up of the capital account until last. Indonesia’s capital
account had been open since the 1970s, and inancial-sector liberalisation preceded real-sector reforms. In fact, owing to the policy of limiting imports to save
foreign exchange and protect domestic industries during downturns, trade policy became more protectionist. In addition, vested interests pressed for import
substitution, especially for cement, chemicals, fertilisers, and motor-vehicle
engines. Since tariffs were already high, the increase in protection during 1982–85
involved a range of quantitative restrictions on imports and the establishment of
an ‘approved importer’ system (tata niaga impor).
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Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
Log exports were also banned, to encourage domestic processing of raw
materials and increase value added, and ostensibly to prevent the overexploitation of natural resources. The ban was combined with low-cost loans; regulations that linked forest concessions to processing (by Indonesian sawn wood,
plywood, and pulpwood mills); and controls over production and prices. The
ban on rattan followed the same model. It is unclear, however, whether the bans
were effective in increasing value added, creating net jobs and foreign exchange,
or reducing resource exploitation, owing to the incentive they provided for illegal exports (Resosudarmo and Yusuf 2006). By the end of this period, protection
and regulatory controls remained high, economic growth and industrialisation
were still driven by government controls and state-owned enterprises, and 80% of
Indonesia’s exports and government revenues continued to be derived from oil.
1985–99: DEVALUATION, BOLD DEREGULATION, AND EXPORT
DIVERSIFICATION
1985–96: Deregulation and Export Orientation
In 1985, amid a sharp slowdown in economic growth to only 2.5%, and with oil
prices expected to decline, a strong push for deregulation and reform emerged.
The main aim was to diversify exports and public revenues away from the dominance of oil. The export-oriented industrialisation strategy sought to reduce the
high costs of doing business, increase access to internationally priced inputs, and
remove distortions caused by escalating protection (Dick 1985).
The government introduced several bold measures and reforms as part of this
strategy. First, in 1985, it decided to ‘close down’ Indonesian customs, one of the
most corrupt institutions at the time, by asking all customs oficials to take a leave
of absence. A Swiss surveyor company, Société Générale de Surveillance, was contracted to take over customs clearance (Dick 1985). The intention was to reduce
the costs of exporting and importing and to prepare Indonesian customs to work
more eficiently in the future.
Second, in 1986, Indonesia substantially improved its duty drawback scheme
by introducing the 6 May Policy Package (Muir 1986, 22–23). (A year earlier, under
US pressure, Indonesia had become a signatory to the GATT Code on Subsidies
and Countervailing Duties.) The subsidy component of the export certiication
scheme was removed by basing the calculations on an audited input–output
basis, and the administration of the scheme was made transparent and became
better governed—and included arm’s-length processing—under an independent
entity. At the same time, many tariffs were reduced and a new, lower ceiling of
40% was put in place, reining the tariff schedule by reducing the number of split
lines. In September 1986, the rupiah was devalued by 31% against the US dollar.
Third, during 1986–90, a series of trade-reform packages removed NTBs—in
line, this time, with conventional wisdom—and replaced them with more transparent, equivalent tariffs (Pangestu 1987). During this period, the proportion of
items subject to NTBs fell from 31% to 16% and, in terms of import value, from
43% to 21% (Wymenga 1991). Removing two monopolies on imports of steel and
plastic and granting them to associates of President Soeharto, in November 1988,
was probably the most signiicant reform. However, import licensing still covered
65% of food crops, mainly rice, and Bulog (the National Logistics Agency) still
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
247
played a key role in importing agriculture commodities and managing the rice
buffer stock.
Fourth, the announcement in 1986 that there would be three more deregulation
packages was a form of pre-signalling that had not happened before. It provided
an important indication of the way forward and showed that the government was
serious about undertaking reforms.
The results of these reforms were positive: non-oil exports grew by around
30% in 1987–88 (Hill 1987)—albeit from a low base—and by 17% annually during
1989–94. Exporters credited the boost in exports to the devaluation and reforms,
especially the eficient and ‘clean’ mechanism of duty reimbursement that enabled them to produce with internationally priced inputs. Exports of resourcebased manufactured goods (such as furniture, rubber products, and processed
wood) and labour-intensive manufactured goods (such as textiles, garments, and
footwear) increased rapidly. Garment companies appear to have been the main
beneiciaries of the duty drawback scheme. By 1989, of $22 billion of exports, the
share of oil had fallen to 38%, compared with 65% in 1981.
During this period, Indonesia’s internationalisation came of age and affected
domestic policies and reforms. Besides the bold deregulations undertaken during
1985–88, Indonesia’s increased conidence about opening up was evident when,
in early 1992, it inally supported the creation of the ASEAN Free Trade Area
(AFTA), agreeing to reduce tariffs on intra-ASEAN trade to zero by 2005 (Tomich
1992). This was shortly followed by two even more important reforms.
First was the decision to allow 100% foreign ownership of export-oriented companies. Indonesia’s hosting of the APEC Economic Leaders’ Meeting in 1994 would
produce the now famous Bogor goals, which sought to achieve regional free trade
and investment by 2010 for industrialised countries and by 2020 for developing
countries. Indonesia’s unilateral reforms were attributed to Soeharto’s economic
technocrats, who ensured that Indonesia’s reforms were in line with APEC principles. Around this time, Soeharto issued an important statement, arguing that,
whether Indonesia liked it or not, and whether it was ready or not, it had to face
globalisation (Soesastro 2004, 5–6).
Second was Indonesia’s introduction, in 1995, of a comprehensive tariffreduction program in order to meet its obligations to the newly created WTO (and
to AFTA by 2005). The government reduced the tariff bracket from 0%–40% in 1995
to 0%–10% by 2003, and removed local-content requirements for automotive, electronic, and dairy products. It also enacted a number of laws related to trade remedies (anti-dumping and safeguards), customs, and intellectual property rights.
Indonesia’s exports would continue to grow until the 1997–98 Asian inancial
crisis, but in 1993 they came under competitive pressure when minimum-wage
increases exceeded productivity growth and inlation. The ‘managed’ depreciation of the Indonesian rupiah by 5% per year during 1986–97 helped to offset the
wage increases.
Despite the internationalisation of Indonesia’s economy and the reforms undertaken since the mid-1980s, cronyism favouring those close to the centre of power,
including Soeharto’s children, increased. Policy interventions created import
monopolies, forestry concessions, privatised toll roads, and private TV stations.
One of the most blatant examples was the national-car policy introduced in 1996:
under this policy, a joint venture between one of Soeharto’s sons and Korea’s
248
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
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Kia Motors was given the privilege of importing fully built cars into Indonesia
duty free, before the WTO halted it. This case ironically provides a lesson on how
international commitments in the end disciplined such blatant policies and gave
Indonesia its irst experience in dealing with the WTO. After consultations failed
in May 1997, Japan, the European Union, and the United States requested a panel
be created to arbitrate the dispute, and the case was one of the irst to test the
WTO dispute-settlement process. Indonesia ultimately lost the case because it had
violated the most sacred principle of GATT 1994—Article I:1 on most-favourednation treatment.
1997–99: The Asian Financial Crisis and the IMF Program
The 1997–98 Asian inancial crisis, which started in Thailand in July 1997, quickly
spread to several other Asian economies. Amid pronouncements of Indonesia’s
fundamentals being sound, the government introduced a deregulation package
in September 1997, but a month later it resorted to an IMF loan program to shore
up business conidence. The ensuing structural reforms to trade and investment
focused on reducing tariffs and including industries that had been excluded
from trade reforms, such as chemicals, steel, and ishery products. All NTBs were
removed, except those based on accepted health, safety, environmental, and security grounds. These included all the controversial import monopolies aside from
rice, sugar, and cloves. The reforms also lifted export bans and reduced export
taxes for three years, and opened up the retail sector, among others, to foreign
investment (Feridhanusetyawan and Pangestu 2003).
Despite this comprehensive package, the closure of 16 banks at the end of 1997,
combined with clear signals that the government was reluctant to implement
the reforms, exposed Indonesia’s vulnerabilities and led to a crisis of conidence,
which in turn led to a sharp increase in capital outlows in late 1997 and into
1998. The rupiah was loated in August 1997 and depreciated from Rp 2,500 to
Rp 17,000 against the US dollar by January 1998 (Soesastro and Basri 1998). It
eventually settled at around Rp 12,000 per dollar, boosting commodity exports as
non-oil exports continued to grow. Exports of agricultural products increased by
29% in dollar value and 98% in volume, while manufactured products increased
by 8% and 68%, respectively, so overall exports still grew during 1997–98 (Evans
1998, 32).
The severity of the economic crisis led, however, to a 13% contraction in GDP,
an inlation rate of 58%, a 244% drop in the exchange rate, and the collapse of the
banking sector and many afiliated companies in 1998. By 1999, owing to inlation
in food prices and disruption in distribution, around 13 million people had fallen
into poverty because of the crisis; the poverty rate increased to 23.4%, up from
17.3% in 1996 (Suryahadi, Hadiwijaya, and Sumarto 2012). All of this happened in
uncertain political circumstances and amid deteriorating domestic security.
Severe problems experienced by the corporate and banking sectors hindered
trade, as it was dificult for Indonesian businesses to inance imports or obtain
pre-inancing for their exports (Pangestu and Habir 2002). Most surviving commercial banks lost their networks of international correspondents or held operating licences that did not cover foreign-exchange transactions (Magiera 2003).
With the restructuring that took place in the banking sector and among private
companies, many foreign banks cut their country exposure to Indonesian banks
Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
249
TABLE 1 Share and Growth of Non–Oil and Gas Exports, 1999–2004 (%)
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Share of non–oil
& gas exports
Agricultural commodities
Fresh ish & shrimp
Rubber
Vegetable oil
Mining & minerals
Copper
Coal
Forestry products
Manufactured products
Textiles & footwear
Computers & electronics
Others
Non–oil and gas
Growth
1999
2004
1999
2000
2004
1999–2004
12.8
3.3
1.9
3.1
11.8
4.8
3.7
13.6
61.8
21.4
17.7
22.7
19.0
2.6
4.0
7.5
13.8
4.6
4.9
10.8
56.3
16.3
16.1
23.9
2.9
–4.4
–22.4
45.5
–3.5
11.7
–3.3
20.3
–12.4
35.2
25.4
–38.8
–2.0
3.4
5.9
–1.5
18.0
32.1
–0.7
9.1
34.5
17.2
125.8
12.2
28.8
1.7
45.6
46.2
33.1
2.6
37.2
1.7
15.0
9.3
17.6
17.6
10.8
0.4
20.8
20.3
14.0
11.0
16.1
–0.1
7.0
1.3
17.5
6.4
100.0
100.0
–5.1
22.9
18.0
4.0
Source: Authors’ calculations based on data from Badan Pusat Statistik (BPS).
or lowered the creditworthiness of trade-related transactions with Indonesian
businesses.2
1999–2004: RECOVERY AND SOUL-SEARCHING
The massive currency depreciation and the IMF program’s trade reforms did
boost exports, but the currencies of other Asian countries also depreciated and
therefore these countries’ exports competed against Indonesia’s (Thee 2002).
Although the exports of some products increased, total non–oil and gas exports
contracted by 5.1% in 1999 (table 1). Non–oil and gas exports increased in subsequent years, initially because of price competitiveness due to the weak rupiah, but
also because demand, especially for palm oil and mining products, started to rise.
The weak exchange rate attracted foreign buyers, who inanced raw and intermediate inputs and engaged in original-equipment-manufacturer transactions with
Indonesian suppliers of textiles, garments, and furniture. Foreign buyers also purchased raw materials directly, including coal and palm oil, and paid for them after
the materials arrived or had been shipped.
Table 1 shows that Indonesia was beginning to experience competitiveness
problems by 2004, particularly in its labour-intensive sectors (World Bank 2012).
Between 1999 and 2004, the share of textiles and footwear in non–oil and gas
exports dropped from 21% to 16% and grew by only 1.3%, on average, largely
2. For instance, many offshore corresponding banks declined letters of credit issued by
Indonesian banks.
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
250
FIGURE 4 Real Effective Exchange Rates, Indonesia and
Selected Asian Countries, 1995–2015 (2010 = 100)
140
130
Malaysia
China
120
110
100
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90
80
Thailand
70
60
Indonesia
50
40
30
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Source: Data from the Bank for International Settlements, via the CEIC Global Database.
because of a decline in investment, an appreciation of the nominal exchange rate,
and other factors that eroded the cost competitiveness of Indonesia’s manufacturing exports.
Net foreign direct investment was negative between 1999 and 2003, with
outlows of 2.8% and 1.9% of GDP in 1999 and 2000 (Basri and Soesastro 2005).
Despite the relatively open foreign-investment policy, investment did not pick up,
owing in part to uncertainty about political reforms and domestic security. There
were also concerns about the country’s irst democratically elected government,
which lacked managerial proiciency and seemed unable to deliver on its promises (Boediono 2005).
Indonesia’s nominal and real exchange rates depreciated dramatically during
the crisis and remained weak until 2001. Inlation was also high, at double-digit
levels, owing to the impact of rupiah depreciation on the prices of imported goods,
as well as to price increases in fuel and electricity as subsidies were reduced.
Starting in 2001, on the back of improving economic growth and increasing export
revenues, the exchange rate began to strengthen in both nominal and real terms
(igure 4). By 2003, Indonesia’s real exchange rate was catching up with those of
its major competitors in Asia, such as China and Thailand.
Aside from the appreciation of the real exchange rate, other factors began
to affect the competitiveness of Indonesia’s manufacturing exports. During
1995–2005, as the WTO phased out quotas that had been part of its Multiibre
Arrangement for textiles and clothing (James, Ray, and Minor 2003), competition
increased in the European and US markets from lower-cost producers such as
Bangladesh and Vietnam.3 The greatest competition, however, came from China;
3. Formerly, a quota system was used to govern the international trade of textiles and clothing. The WTO’s 1995 Agreement on Textiles and Clothing, which was determined during
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
251
its accession to the WTO in 2001 allowed it to take advantage of the phasing out
of these quotas.
Indonesia’s competitiveness in manufacturing also suffered from rising labour
costs, which were due to new-found militancy among labour unions and rigid
new labour legislation. In 2000 and 2001, minimum wages in Jakarta increased
by 49% and 39%—higher than the growth of labour productivity. Meanwhile,
populist labour legislation in 2001 increased the costs of hiring and replacing
employees and led to much collective bargaining in the streets (as opposed to at
the negotiating table). Local regulations proliferated after Indonesia’s decentralisation; as local governments sought to raise revenue, businesses had to comply
with more local taxes and administrative procedures.
On the positive side, tariff reductions between 1990 and 2001 reduced the cost
of inputs and increased productivity (Amiti and Konings 2007). Indonesia also
actively participated in ASEAN and, in 2003, while chair, endorsed the establishment of the ASEAN Economic Community by 2015. In 2001, Indonesia and ASEAN
responded positively to China’s proposal for a free-trade area. Negotiations began
in 2002 and were completed in mid-2004.
Updating earlier calculations, Marks and Rahardja (2012) found that the sharp
decline in the effective rate of protection across sectors was consistent with unilateral reforms, schedules for tariff reductions in regional trade agreements, and
subsidy reductions. Tariffs for industries that were highly protected or subsidised
in the 1990s, such as machinery and transport equipment, had been reduced and
state support for projects such as the national car had been removed. By 2008,
Indonesia had low tariff barriers to trade, but these low tariffs were offset by a
proliferation of NTBs, such as those for beef, sugar, rice, and steel.
Despite reforms, the government seemed hesitant to commit to deeper structural reforms during 1999–2004. Grossman and Helpman (1994) suggested that
an equilibrium between openness and protection had to be struck in the political
economy sense. In other words, achieving political reform as well as freedom,
democracy, and increased political participation in Indonesia involved balancing
the interests of government, individual politicians, and the private sector. Around
this time, the government revived the role of Bulog by restoring its function as the
importer of rice, as well as a buyer of sugar and cattle. The government, through
the Ministry of Industry and Trade, also reintroduced the requirement that sugar,
steel, and textiles could be imported only by certain licensed importers. It reintroduced export bans on logs in 2001 and on rattan in 2004.
As would be expected, disagreements over the role of trade policy are more
nuanced in democratic Indonesia, which has an open and inclusive political process for shaping government policies. The central government has less control
over policy implementation than it did during the Soeharto era, as decentralisation has given local governments the upper hand in budgeting and policy-making
at the local level. Under Soeharto, particularly during the period of what Soesastro
(1989, 866–67) called ‘low politics’, economic policy-making was relatively easy:
technocrats were in control and focused on convincing the president to undertake
reforms and act on policy. In the democratic era, the absence of institutions with
the Uruguay Round of negotiations, had the objective of gradually reintegrating trade in
textiles and clothing into a new world trading system that prohibited quotas.
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252
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
strong analytical capacity has weakened the position of proponents of an open
trade and policy regime (Aswicahyono, Bird, and Hill 2009). Furthermore, in the
aftermath of the Asian inancial crisis, resentment arose about foreign involvement in the Indonesian economy. This resentment was mostly about the perceived
causes of the crisis or about the restrictions that the IMF placed on Indonesia.
Against this background, protectionist policies became easy and popular instruments to deploy in order to shield Indonesian businesses from international
competition.
Global commodity prices started to increase in 2003, partly as a result of
increased demand from China. High international commodity prices marked a
shift in the structural balance of production in Indonesia, where manufacturing
was no longer considered as attractive for businesses as the commodity-based
and non-tradable sectors. This marked the beginning of a second period of Dutch
disease.
2004–15: MORE REFORM, MORE DUTCH DISEASE, AND THE
GLOBAL FINANCIAL CRISIS
The Ministry of Trade; Reforms and Institutional Strengthening
In October 2004, in the country’s irst direct elections, Susilo Bambang Yudhoyono
was elected president. By 2003, or ive years after the Asian inancial crisis,
Indonesia had regained its macroeconomic stability and the functioning of its
inancial sector had started to improve. The new government therefore focused
on implementing structural reforms in order to regain conidence, attract investment, and rebuild the real sector.
In 2004, the Ministry of Trade was again separated from the Ministry of Industry
and Trade. It was tasked with increasing investment and creating a conducive
investment climate, increasing export growth, and improving the eficiency and
effectiveness of domestic distribution. In recognition of the link between trade
and investment, investment policy and the Investment Coordinating Board came
under the coordination of the Ministry of Trade. One of the outcomes was the passage of Law 25/2007 on Investment.4
By 2003, most-favoured-nation tariffs were already low. The government sought
to strengthen decision-making on tariffs and export duties by ensuring that its
Tariff Team, which was chaired by the Ministry of Finance and co-chaired by the
Ministry of Trade, operated on the principles of sound policy analysis, effective
coordination, and reasoned decision-making. In a regional perspective, by January
2010 Indonesia found itself a signatory to several ASEAN Plus One FTAs, with six
key trading partners: Australia, New Zealand, China, India, Japan, and Korea.
Apart from introducing cross-border measures and taking part in trade
negotiations, Indonesia undertook a number of other important reforms and
institution-building activities. Important domestically was stabilising prices and
4. The new investment law combined Law 6/1968 on Domestic Investment and Law
1/1967 on Foreign Investment. It included principles of transparency and national treatment, a negative-list approach, and protection against nationalisation, as well as provisions
for dispute settlement. The criteria for the negative list would soon become clear, although
implementation proved complicated.
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Fifty Years of Trade Policy in Indonesia: New World Trade, Old Treatments
253
institutionalising databases for decisions on the import of basic foods. Lessons
were learned from spikes in domestic prices, such as the increase in rice prices in
2006 (McCulloch and Timmer 2008) and the sharp rise in food prices in 2008 prior
to the global inancial crisis.
The government also committed to improving investment and exports by
revitalising the National Team for the Enhancement of Exports and Investment
(Timnas PEPI) in 2006, which was led directly by the president and chaired by the
coordinating minister of economic affairs. However, Timnas PEPI could not work
optimally as a platform for coordinating investment and export policies, because
support in the form of a full-time secretariat of professionals did not materialise.
Nevertheless, during 2008–11, Timnas PEPI contributed to legislation and regulations, monitored implementation, and dealt with ad-hoc problem-solving related
to investment and trade. On top of introducing unilateral reforms, the government responded to its ASEAN commitment by simplifying border-clearance procedures through initiatives such as the Indonesia National Single Window and
INATRADE (an electronic system of export and import licensing).
Resource-Based Export Boom and Competitiveness
Indonesia’s exports almost tripled during 2004–11, from $71 billion to $201 billion, with an average growth rate of 16% per year. Much of this growth rode on
commodity prices and on high levels of demand for raw materials in China and,
to a lesser extent, India. Indonesia’s exports of palm oil and coal increased dramatically in this period. In the wake of the 2008 global inancial crisis, however,
and owing partly to slowing growth in China since 2007, export revenues contracted by an annual average of 5.8% in 2013 and 2014, falling to $180 billion.
Total exports fell from $203 billion to $176 billion during 2011–14, with an average
contraction rate of 4.4%. In 2012, Indonesia trade balance went into deicit for the
irst time in 50 years.
The recent export boom is reminiscent of past commodity booms in resourcerich Indonesia. Despite some success in diversifying exports, Indonesia’s resourcebased exports continue to dominate. Resource-intensive industries, such as oil and
gas, mining, agriculture, and forestry, accounted for 96% of total exports in 1980,
62% in 1990, and 41% in 2000. The share of exports of mining products in total
exports would soon increase sharply, however, from 5% in 2000 to 18% in 2013.
The share of other resource-intensive goods, particularly palm oil, also increased
signiicantly, so that by 2013 around 60% of Indonesia’s exports were resourcebased. The share of exports of manufactured goods in total exports decreased
from 59% in 2000 to 41% in 2013.5 Furthermore, manufactured exports did not
diversify much, and continued to be dominated in the 1990s by unskilled-labourintensive goods such as textiles, clothing, and footwear, with moderate increases
in the 2000s in semi-skilled-labour-intensive goods such as electronics and transport parts and components.
5. According to the modiied Harvard Institute for International Development method (reined by the World Bank ofice in Jakarta on the basis of data for Indonesia), manufactured
goods contributed 49% to total goods exports in 2000 and 34% in 2010 (Ing, Fukunaga, and
Isono 2014).
Mari Pangestu, Sjamsu Rahardja, and Lili Yan Ing
254
FIGURE 5 Indonesia’s Export Portfolio, by Cluster, 2010–13 (irst quadrant)
Share of world
exports, 2013 (%)
19.09
Coal & briquettes:
$24.8 bn
17.09
15.09
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13.09
11.09
Footwear: $3.9 bn
9.09
7.09
Fishing & fishery products: $2.9 bn
Processed foods:
$26.0 bn
5.09
3.09
Tobacco: $0.9 bn
Medical devices: $0.4 bn
P&P
Chemical products: $5.2 bn
1.09
-0.03 0.17 0.37 0.57 0.77 0.97 1.17 1.37
1.57
1.77 1.97
2.17
2.37 2.57
Change in share of world exports, 2010–13 (%)
Sources: Authors’ calculations using Harmonization System codes for 2007. The boundaries of the irst
quadrant are deined using Porter’s (2003) methodology. Data for services are from the United Nations
Conference on Trade and Development. Data for goods are from the World Bank’s World Integrated
Trade Solution.
Note: P&P = Publishing and printing products: $1.7 bn.
By 2013, nine out of ten of Indonesia’s main export commodities were resourceintensive: coal, natural gas, vegetable oils, petroleum, rubber, paper, copper,
residual petroleum, and nickel. Footwear was the exception, while textiles ranked
eleventh. These ten main commodities contributed more than 50% of the value
of total exports. This was reminiscent of the early 1960s—when eight out of ten
of Indonesia’s main export commodities were resource-intensive (Thomas and
Panglaykim 1966)—despite the government-stated strategy since then of diversifying exports.
On the basis of Indonesia’s export portfolio by cluster, the country’s exports
in the irst quadrant— the boundaries of which are deined using Porter’s (2003)
methodology—show positive shares and positive changes during 2010–13 (igure 5). Most of these exports are resource-intensive (coal and tobacco), while the
manufactured goods are resource-intensive (ish and ishery products and publishing and printing products), capital-intensive (medical devices and chemical
products), or unskilled-labour-intensive (footwear and processed food).
The share of machinery goods and parts in exports is a widely used measure
of the degree of participation in international production networks. In Indonesia,
in 2010, this share remained low, at 13% of total exports (igure 6), and lagged
behind those of the Philippines, Singapore, China, Malaysia, the Philipp