00074918.2011.556054
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Ross H. McLeod
To cite this article: Ross H. McLeod (2011) Survey of recent developments, Bulletin of
Indonesian Economic Studies, 47:1, 7-34
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Bulletin of Indonesian Economic Studies, Vol. 47, No. 1, 2011: 7–34
SURVEY OF RECENT DEVELOPMENTS
Ross H. McLeod
Australian National University
SUMMARY
The Indonesian public is becoming increasingly concerned about the gap between policy
rhetoric and action. A strong contributor to this has been a long-running corruption saga
involving a tax oficial, Gayus Tambunan, whose activities have helped conirm the public’s worst fears about the ineffectiveness of the anti-corruption campaign. Claims of progress in this and other ields, including the economy, are often overstated, and opinion
polls suggest that people are increasingly unwilling to take them at face value.
Nevertheless, the most recent data reveal a surprising surge of GDP growth, driven
mainly by investment spending. Inlation has been quite steady for the last six months,
albeit a little above the target range; this is disappointing, but not a major problem. In
response to surging food prices the government has temporarily removed tariffs on rice,
wheat and soybeans, and ordered increased rice imports. Energy subsidies continue to
weigh heavily on the budget; the plan to remove the subsidy from petrol used in private
cars but not from that used in motor cycles makes good political – if not economic – sense,
since motor cycle owners greatly outnumber car owners. The 2011 budget is unlikely to
have a stimulatory impact.
The composition of exports has altered quite dramatically over the last two decades,
albeit in unexpected directions. The pattern of export destinations has also undergone signiicant change, relecting the growing relative importance of Asia to the global economy.
The president’s proposal for a new capital as the solution to the congestion problem
in Jakarta is questionable. If policy makers fail to understand why existing cities perform
their diverse functions poorly, the creation of a new capital is more likely to replicate than
to solve problems. Cities are crucial to the modernisation of the economy, and are important vehicles for poverty reduction. City governments could greatly improve their performance by adopting a strategy of inancial self-reliance.
The decision to establish a single authority to supervise the entire inancial sector has
now been delayed for almost 11 years. The draft law currently under discussion suggests
that the central bank has no intention of giving up its role as supervisor of the banks.
This means there would be wasteful and confusing duplication of that function in the new
authority. In any case, it remains unclear exactly what purpose the authority’s establishment is intended to achieve.
There have been several reminders recently of Indonesia’s vulnerability to natural disasters, including multiple eruptions of Mount Merapi in central Java, which caused almost
400 fatalities and considerable damage to the local economy and infrastructure. Evacuation of residents of the area worst affected seems to have been handled well. An important
policy decision needs to be made about whether those who lost their houses, crops and
livestock should be permitted to return permanently to their villages.
ISSN 0007-4918 print/ISSN 1472-7234 online/11/010007-28
DOI: 10.1080/00074918.2011.556054
© 2011 Indonesia Project ANU
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Ross H. McLeod
POLITICAL DEVELOPMENTS
Although the popularity of President Susilo Bambang Yudhoyono (SBY) remains
remarkably high, there is little doubt that it is waning. The general public – or, at
least its more sophisticated, urban-based members – are increasingly conscious
of the gap between government rhetoric and action. According to a poll by the
Indonesia Survey Institute, the government’s overall approval rating fell from
85% in July 2009 to 63% in December 2010 (The Economist, 14/1/2011). Aside from
their concerns about prices, unemployment and poverty, only 51% of respondents
were satisied with the government’s efforts to ight corruption, compared with
84% previously. A strong contributor to this turnaround has been a protracted
corruption saga involving a relatively low-ranking tax oficial, Gayus Tambunan.
The story began in July 2009, when Gayus was found to have over $3 million in his bank accounts, and was named as a money-laundering suspect.1 His
assets were initially frozen by the police, but then somewhat surprisingly unfrozen in late November. In March 2010 the Tangerang district court cleared him of
the charges laid against him, but shortly afterwards the former chief of detectives, Susno Duadji, implicated two other police generals as ‘case brokers’ who
had helped to secure Gayus’s acquittal (Baird and Wihardja 2010: 145). Gayus
travelled to Singapore shortly afterwards but was persuaded in September to
return to Jakarta, where he was immediately re-arrested and put on trial for a
second time. Despite his repeated claims to have received payments from three
large companies associated with the Golkar Party chair, Aburizal Bakrie,2 Gayus
was charged only with mishandling the tax affairs of a small, unrelated company.
Although supposedly in detention during the period of his second trial, he was
photographed at a tennis tournament in Bali in November, following which nine
oficers from the Police Mobile Brigade were investigated. Later it emerged that
Gayus had been allowed to leave prison on scores of occasions, on one of which
he had travelled overseas on a false passport. He testiied that he had received
millions of dollars in bribes and fees from more than 150 individual and corporate
taxpayers, yet he was eventually found guilty only of having bribed a judge and
other law enforcement oficials to secure his original acquittal, thus leaving unresolved his own admissions of corrupt dealings with wealthy taxpayers. He was
sentenced to just seven years in gaol, and ined Rp 300 million (roughly 1% of the
amount that had been discovered in his bank deposits).3
The Gayus case seems to have conirmed the public’s worst fears about the ineffectiveness of the government’s campaign to reduce corruption. It demonstrated
that, despite the efforts of the reformist former inance minister, Sri Mulyani Indrawati (McLeod 2008: 197–201), the tax ofice remained far from free of corruption.
The fact that Gayus named Bakrie group companies as among those he had assisted
with their tax affairs added to concerns voiced at the time of the strong campaign
to oust Sri Mulyani (Patunru and Von Luebke 2010: 12). That he had managed
to secure his original acquittal by using high police oficials to bribe the judiciary reinforced the public’s low opinion of the various law enforcement agencies.
1 This brief summary draws on a chronology published in the Jakarta Globe (19/1/2011).
2 More recently Gayus has recanted this aspect of his testimony (Jakarta Globe, 5/2/2011).
3 At the time of writing it seemed likely that further charges would be laid against him,
however.
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9
His apparent capacity to bribe his way out of prison at any time added to public
disgust that Artalyta Suryani, also convicted of corrupt behaviour, had served her
prison term in a luxurious cell resembling a presidential suite, and was released
after serving only two-thirds of her original sentence (Jakarta Post, 29/1/2011).4
That he had no trouble acquiring a false passport suggested strongly that corruption extended to the immigration ofice in the Ministry of Justice and Human
Rights (Jakarta Globe, 20/1/2011). Of particular concern was the widespread perception that many ‘big ish’ – higher-level oficials and business tycoons seemingly involved in the same web of corruption as Gayus – appeared untouchable.
In this context, in early January 2011 a meeting of a kind that has become common in recent years was held under the banner ‘Fight Government Lies’. In what
appears to have been a rather rambling discussion, a number of prominent religious leaders and activists for the most part emphasised their own views or promoted their own ideologies, rather than providing evidence of government lies.
Initially this event seemed to arouse little interest, and might well have disappeared quickly from view, except that the lying accusation ‘sparked an angry backlash from senior cabinet ministers’ (Jakarta Globe, 19/1/2011). As a consequence,
the president met with the group behind closed doors about a week later. This
succeeded only in fuelling the controversy, encouraging many other commentators to add their voices to the original criticisms, so that subsequent reporting
resulted in an even longer list of concerns about the government’s performance.
Rather than ‘lies’, most items on this list can be thought of as ‘discrepancies
between the government’s words and actions’ (Jakarta Globe, 19/1/2010, quoting
a spokesman for the group). They fall in four main areas.
• Protection of citizens: that is, failure to support the constitutional requirement for
freedom of religion and, speciically, to protect religious minorities from attack
by extremists;5 failure to overcome the threat of terrorism; failure to defend
freedom of speech and of the press (in the face of attacks on journalists) (Basorie
2011); failure to act in relation to the murder of human rights activist Munir
(McLeod 2005: 134); failure to protect Indonesian migrant workers (who are
vulnerable to ill treatment by their employers overseas); and failure to protect
the interests of victims of the Lapindo mudlow disaster (McMichael 2009).
• Improvement in transparency and accountability: that is, failure in general to fulil
the promise of clean, well-behaved and ethical politics, and speciically to
explain clearly the circumstances in which Sri Mulyani resigned as inance
minister to join the World Bank (Baird and Wihardja 2010: 144–6).
• Reduction of corruption: that is, failure to make suficient progress in eradicating
corruption; to make any headway against the ‘judicial maia’; and properly to
investigate cases in which high-ranking police oficials had been found to have
large sums of money in their bank accounts.
• Reduction of poverty: that is, failure to reduce poverty (or to reduce it as much
as promised).
4 Sentence remissions for good behaviour are common in Indonesia.
5 In a recent serious incident, an attack on followers of the Ahmadiyah sect in Banten
province left at least three dead. This was soon followed by an attack on two churches in
Central Java by Islamic hard-liners (Allard 2011). The latter ‘had nothing to do with religious issues’, according to the Central Java police chief (Jakarta Globe, 9/2/2011).
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Ross H. McLeod
To this list may be added an assortment of other concerns, such as failure to protect
the environment, failure to manage the economy in the manner supposedly called
for by the Constitution, the alleged take-over of Indonesia’s natural resources by
foreign players, and even sexual promiscuity among teenagers (Jakarta Globe,
23/1/2010).
At a national working meeting with district heads, cabinet ministers and other
oficials in Jakarta on the same day as the meeting of religious leaders and activists, the president outlined 10 ‘achievements’ of 2010 and 10 ‘challenges to be
faced’ in 2011. For the most part, the latter could also have been described, less
charitably, as performance shortfalls of SBY’s presidency to date. Notable for its
absence was any mention of the need for better protection of citizens, other than
migrant workers. Some of the ‘challenges’ bore close resemblance to the concerns
of the other group: embezzlement and corruption, including in the tax ofice;
damage to the environment as a consequence of mining and forestry practices;
the increasing prevalence of money politics, which could harm democracy; and
various public services not working well – including education and health, and
services speciically targeted at the poor. Several additional challenges were mentioned, however: the danger posed by large increases in global food and energy
prices; the inadequacy of infrastructure; the problem of large budget subsidies
and evident shortcomings in using the budget to stimulate growth; obstacles to
investment; and lack of readiness to deal with natural disasters. By acknowledging these problems without demonstrating an intention to do more than exhort
those present to strive to overcome them, the president succeeded only in reminding his critics of what they see as his propensity to promise more than he is able
to deliver. As Patunru and Von Luebke (2010: 24–7) showed in relation to the
‘First 100 Days Program’, careful assessment of claims of progress and achievement typically shows them to be overstated. Opinion polls now suggest that such
claims are becoming less and less convincing to the general public.
MACROECONOMIC DEVELOPMENTS
Growth
National income accounts data for the fourth quarter (Q4) of 2010 reveal a surprising surge of GDP growth to 6.9% p.a. (table 1a). This reinforces the plausibility
of growth forecasts for 2011 from various sources: the central bank’s forecast of
6.0–6.5% (Nasution 2011), which is consistent with assumed growth of 6.3% in the
2011 budget; and the World Bank’s forecast of 6.2% (World Bank 2010: 2). Private
consumption spending accelerated somewhat in the second and third quarters of
2010, but fell back in Q4. It continues to hold GDP growth down as it has done
since Q4 2009 – contrary to the common assertion (for example, in ADB 2010: 144)
that private consumption is one of ‘the main drivers of growth on the demand
side’. The GDP growth rate is a weighted average of the growth rates of all the
demand components (the expenditure categories in table 1a), with the weights
equal to the share of each component in constant price GDP; any component that
grows more slowly than the average drags the growth rate down. Those who
argue that consumption is a major driver of growth misinterpret the typically
large contribution of private consumption, which is mainly a consequence of its
being by far the largest single component of aggregate demand. The fact that
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Survey of recent developments
11
TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
Sep-09 Dec-09 Mar-10 Jun-10
Gross domestic product (GDP)
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport services
Communication
Financial, rental & business services
Services
Sep-10 Dec-10
4.2
5.4
5.6
6.1
5.8
6.9
4.7
9.8
3.2
7.7
–12.7
–2.0
–7.8
–14.7
4.0
18.0
4.1
8.1
–3.7
–16.3
3.7
1.6
3.9
–7.6
8.0
7.3
7.2
22.3
20.0
22.6
5.0
–7.3
8.0
7.2
14.0
9.4
14.6
18.4
5.2
4.8
9.2
6.8
23.8
8.5
9.6
12.2
4.4
7.3
8.7
6.7
22.5
1.7
16.1
16.9
2.7
3.4
4.4
4.1
3.5
3.0
4.0
3.1
3.3
1.8
4.7
3.8
6.3
1.3
5.3
4.3
3.1
3.9
3.9
4.5
2.7
4.3
4.2
5.3
5.6
14.9
7.7
–0.1
7.6
22.9
4.9
6.1
6.2
14.9
8.1
3.7
6.8
16.6
3.8
5.8
7.6
8.8
7.3
8.6
5.1
16.9
4.8
4.7
8.1
5.1
7.2
9.1
6.2
17.8
5.6
5.3
8.2
3.4
6.8
8.7
6.6
17.8
5.9
6.4
8.8
4.3
6.7
8.4
9.3
19.8
6.3
7.5
Source: CEIC Asia Database.
private consumption is currently more than twice as large as investment (in 2000
prices) means that if its growth falls to, say, 0.5% below GDP growth, investment
growth would need to accelerate to more than 1.0% above GDP growth for the
latter to be sustained (assuming, for simplicity, that the other demand categories –
government consumption and net exports – are growing at the same rate as GDP).
In reality, investment spending was the only major demand category consistently
to grow faster than GDP during 2010, and only its acceleration over the last six
quarters has prevented economic growth from falling.
The optimistic notion that careful manipulation of government spending can
be used to offset the largely unpredictable business cycle becomes untenable in
the face of the enormous volatility of year-on-year growth rates of government
consumption evident in these data. Clearly, there is still a long way to go before
it will be feasible to use iscal policy as an effective stabilising macroeconomic
inluence. Many observers ind cause to celebrate in the rapid growth of exports
in 2010, but imports follow a very similar growth pattern, providing an opposite
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Ross H. McLeod
TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter, annualised rates)
Sep-09 Dec-09 Mar-10
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport services
Communication
Financial, rental & business services
Services
Jun-10 Sep-10 Dec-10
4.5
–10.5
4.2
16.2
5.2
–27.4
5.6
8.3
4.8
30.1
2.6
17.3
8.7
–0.2
11.5
41.1
41.7
7.3
26.8
–9.5
28.5
22.3
6.5
12.1
42.7
–14.5
–9.0
7.2
18.9
–11.4
11.2
24.8
6.7
44.0
20.7
18.3
14.0
7.2
16.7
–15.6
61.7
44.4
5.7
5.1
2.4
1.8
2.6
2.9
5.9
3.2
3.3
2.1
5.4
3.9
8.5
5.1
1.4
3.0
2.1
2.6
6.2
7.3
2.5
4.3
2.8
6.9
8.0
9.3
8.3
8.6
6.6
21.7
4.9
3.1
7.5
6.8
7.5
12.4
2.8
7.9
3.8
4.6
6.7
–1.7
6.5
6.2
2.6
18.1
6.6
4.2
10.3
6.4
7.0
9.4
13.1
24.1
7.1
9.4
8.5
2.8
6.9
7.0
8.4
21.6
6.1
7.5
9.7
9.8
7.0
10.9
13.3
15.6
5.4
9.0
Source: CEIC Asia Database.
impact of comparable magnitude on GDP growth. Net exports actually had a
slightly negative impact throughout 2010.
From the supply perspective, output of the tradables sectors collectively continued to grow at less than half the rate of non-tradables, on average, during 2010
(table 1a). Manufacturing performed somewhat better over the last year than both
the agriculture, livestock, forestry and isheries group and mining and quarrying.
Like private consumption on the demand side, however, manufacturing is still
holding back GDP growth, notwithstanding some acceleration during the year.
By contrast, most of the non-tradables sectors have recently been growing faster
than, or about as fast as, total GDP; the exception is the small utilities sub-sector
(that is, electricity, gas and water supply). By far the largest component of the nontradables sector is trade, hotels and restaurants, growth of which has averaged
nearly 9% p.a. during 2010.
The seasonally adjusted quarter-on-quarter growth data for selected components of GDP (table 1b) present much the same picture as the year-on-year data.
The deceleration of private consumption growth toward the end of the period
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FIGURE 1 Monetary Policy and Inlationa
(% p.a.)
16
12
8
Currency in circulation
SBI rate 6 months
CPI inflation
4
0
-4
Jan-2010
Real SBI rate
Mar-2010
May-2010
Jul-2010
Sep-2010
Nov-2010
Jan-2011
a Currency in circulation is used as the indicator of money supply in preference to base money
because of the distorting impact of occasional changes in banks’ minimum reserve requirements on
the effective supply of base money; currency is the major component (about 75%) of base money. The
growth rate shown has been smoothed based on 3-month moving averages to clarify the underlying
trend. The real SBI (Bank Indonesia Certiicate) rate is approximated by the nominal rate less the contemporaneous CPI (consumer price index) inlation rate.
Source: CEIC Asia Database.
shows up even more clearly on this basis, commencing in Q3 2010. The growth
rate of construction – the major component of investment spending – was quite
high and remarkably steady for the whole period shown in the table, whereas
the growth rates of the machinery and equipment and transport components
were very volatile. Export and import growth showed extreme volatility, and it is
noticeable that net export growth actually became increasingly rapid during the
second half of 2010, helping to offset the dampening impact of decelerating private consumption. On the supply side, all of the non-tradables sub-sectors grew
strongly in Q4 2010. Not too much should be made of this, however, because there
is considerable volatility from one quarter to the next.
Monetary and exchange rate policy and inlation
Central Statistics Agency data for December 2010 conirmed that inlation ended
the calendar year outside the central bank’s target range of 4–6% p.a., with the
rate inishing fractionally below 7% (igure 1). Much was made of an acceleration in January 2011 to just over 7%, but the increase was negligible given likely
measurement errors. Inlation was quite steady for the six months to January,
even if a little above the target range. Its level is a disappointing outcome rather
than a major problem. The acceleration of inlation in Q2 2010 and its subsequent stabilisation is consistent with the growth of the central bank’s monetary
liabilities (proxied here by currency in circulation), which declined signiicantly
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14
Ross H. McLeod
FIGURE 2 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
4,000
Rp/$
12,000
3,000
9,000
2,000
6,000
CSPI
Exchange rate
1,000
0
6-Jan-2010
23-Mar-2010
10-Jun-2010
27-Aug-2010
15-Nov-2010
3,000
0
2-Feb-2011
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
from the excessive peak in July 2010. It is a matter of concern, however, that this
tightening of monetary policy was not sustained through the end of the year –
as is also indicated by the reduction in the six-month Bank Indonesia Certiicate
(SBI) rate, and by the real SBI rate remaining negative.
In any event, Bank Indonesia (BI) responded to concerns about its performance
by raising its so-called ‘policy rate’ slightly, from 6.5% to 6.75%, in February 2011.
What this means for actual interest rates in the market can only be guessed at, however. The ‘policy rate’ has been often, though not always, identical with the 30-day
SBI rate, but BI no longer issues 30-day SBIs. In its 9 February auction, for example,
it issued only nine-month SBIs, so the yield on that instrument was the only concrete indicator of the actual stance of monetary policy at the time of writing.6 The
average yield was 6.71% – higher than the level in January (6.5%) but close to the
level in November, and lower than the new ‘policy rate’. In any case, since longer
maturity certiicates generally carry somewhat higher rates, the switch to longer
maturities implies that the policy rate increase may be more apparent than real.
Monetary policy and inlation outcomes continue to be driven largely by BI’s
commitment to keeping the exchange rate at about Rp 9,000/$. It has done this
very successfully, especially since mid-2010 (igure 2). The problem is that this
has required it to continue purchasing large quantities of foreign exchange in the
market. These purchases increase BI’s monetary liabilities (base money) and this,
in the absence of sterilisation, tends to cause inlation. Mindful of the problem, BI
has issued a large quantity of SBIs – although not enough to keep money growth
down to a level consistent with sustained low inlation, as we have just seen. BI’s
reluctance to issue even more SBIs presumably stems partly from the impact on
its own balance sheet and proitability. Speciically, its interest earnings on foreign
6 Figure 2 shows the six-month SBI rate, since nine-month SBIs were rarely issued in 2010.
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Survey of recent developments
15
exchange reserves are signiicantly lower than the interest paid to holders of
SBIs. Towards the end of 2010, the negative spread between the yield on reserves
and that on SBIs appeared to be about 4% p.a.7 With outstanding SBIs of around
Rp 340 trillion toward the end of 2010, the implied loss on this part of BI’s balance
sheet (that is, reserves funded by SBIs) was running at about Rp 13.6 trillion – or
$1.5 billion – annually.
BI has recently changed the banking regulations so as to increase signiicantly the
minimum amounts of deposits the commercial banks are required to keep with it
(BI Regulation No. 12/19/PBI/2010). This resulted in a huge Rp 266 trillion jump
in such deposits between September and November 2010. These deposits are, in
effect, a compulsory loan from the banks to BI, and have the same monetary impact
as the issue of SBIs in the same amount. Since they are compulsory, however, BI is
able to pay a low interest rate, and then only on a small portion of these deposits. In
this manner, some of the cost of maintaining its current monetary and exchange rate
policies is transferred to the banks – and through them to the wider community – in
the form of some combination of higher lending rates and lower deposit rates. The
cost to BI would also have been even higher but for the fact that the government
has continued to issue bonds well in excess of the gap between its spending requirements and its revenues. As a consequence, government deposits with BI increased
by Rp 64 trillion in the 12 months to November 2010, reducing base money by the
same amount. The implication of this was that the government was bearing part of
the hidden inancial cost of keeping the exchange rate constant. As Arman (2010)
has pointed out, the huge interest cost to the government of outstanding debt well
in excess of inancing requirements diverts funds that could instead be used to put
‘hundreds of thousands of impoverished children through school’.
Another explanation for BI’s reluctance to issue more SBIs is that to do so
would require an increase in interest rates. Besides strong political opposition to
such a move, higher interest rates would create an even more attractive arbitrage
opportunity for investors willing to accept the exchange rate risk of borrowing in
dollars and investing in rupiah. This concern is well founded. With international
reserves so high (almost $100 billion), the perceived risk of depreciation of the
currency appears small, so it is very tempting for investors to engage in this ‘carry
trade’ at the expense of the central bank.8 The strong performance of the stock
exchange during 2010 (igure 2) is one indicator of the attractiveness of this investment strategy. Pushing interest rates higher therefore risks generating higher capital inlow and an even greater need to undertake costly sterilisation. In short, BI
is now facing the consequences of trying to maintain an inconsistent combination
of prices (inlation), interest rates and exchange rates. Investors appear to be conscious of the problem BI is facing, which increases perceived risks because of the
policy uncertainty it creates. Reversal of the rising trend of stock prices around the
end of 2010 may relect this uncertainty.
7 This rough estimate is based on an average SBI rate of around 6.5%, and a yield on US
government 10-year bonds of around 2.8%. Shorter maturity bonds have lower yields, and
conversely, but the detailed composition of BI’s foreign exchange reserves is not publicly
available.
8 Similar policies in the mid-1990s resulted in similar investor behaviour, ultimately with
disastrous consequences.
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Ross H. McLeod
Food prices
Rapid food price increases in recent months have been of particular concern to the
government because of their deleterious impact on poverty. The price indices for
cereals (including rice), cassava and related products, and for vegetables, rose by
over 20% in the year to January 2011, and the index for spices (including chillies)
by some 60%. Though many refer to this as an inlation problem, in fact it is not.
Inlation is best thought of as a decline in the value of money, relecting generally
rising prices. The problem in this case is increases in the relative prices of these
products, partly because of unusually large rainfall, and partly because of delay
by Bulog (the logistics agency) in importing rice. Tightening monetary policy to
try to deal with this problem would reduce inlation, but would not reduce the
relative prices in question. Accordingly, the government has instead temporarily
removed import tariffs on rice, and on wheat and soybeans, and ordered Bulog to
increase rice imports.
The budget
One welcome consequence of public sector accounting reform, under way since
2003 (Kuncoro, Widodo and McLeod 2009: 171), is that data on the budget outcome are now available a few days, rather than a year or two, after the end of
the inancial year. The release of preliminary data for 2010 makes it possible not
only to compare outcomes with budgeted amounts, but also to undertake a more
meaningful assessment of the budget for 2011 (table 2).
Most of the larger revenue items in 2010 came in fairly close to target (column 3
of the table). Revenue overall was a little higher than planned, mainly because of
higher than expected non-tax revenues. By contrast, central government expenditures in most categories fell well short of the budgeted amounts. Some of the details
here are rather surprising. In keeping with the view that fear of being accused of
corruption has made oficials with procurement responsibilities overly cautious,
realised spending on both goods and services and capital items was only about 80%
of the planned totals. But this consideration does not apply in the case of spending
on personnel, which also fell noticeably short of budget. This is hard to comprehend, given that personnel numbers, ranks and remuneration would all appear to
be highly predictable. The much lower than planned amount of interest payments,
while welcome, is also surprising, given that interest rates have not changed markedly, and that the debt maturity proile is not subject to uncertainty. The reason for
the unexpectedly large amount of spending on non-energy subsidies is unclear.
The last two columns in the table show that it can be quite misleading to base
estimates of the extent of iscal stimulus (or contraction) on a comparison of the
new budget with the planned rather than the realised budget for the previous
year (although, of course, there is no simple alternative until the realised data
become available). Several of the igures in these two columns differ substantially from each other. Noteworthy among these are the implied growth rates for
VAT revenue, and for the major central government expenditure items, including
interest payments.
The projected increases in income tax and VAT (last column of table 2) seem
ambitious at irst glance, but their respective actual growth rates in 2010 (not
shown in the table) were 12.3% and 30.6%, so the 2011 igures of 16% and 23%
do not appear unreasonable. However, it seems implausible – in view of the
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17
TABLE 2 Budgets for 2010 and 2011
(Rp trillion)
2010
2011
Change: 2011
Relative to 2010
Revised Actual Actual: Proposed Revised
Budget
Budgeta
Budgeta
(%)
(%)
REVENUES & GRANTS
Revenues
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non Tax
Natural resource revenues
Proits of SOEs b
Revenue from public services
Other
Grants
EXPENDITURES
Central government
Personnel
Goods & services
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
DEFICIT
Actual a
(%)
992
991
743
721
362
263
96
23
247
165
30
9
43
2
1,014
1,011
744
715
357
252
107
29
267
170
30
8
59
2
102.1
102.1
100.1
99.2
98.4
95.8
111.7
127.9
108.1
103.2
101.9
84.3
135.8
127.4
1,086
1,083
840
816
415
309
93
23
243
158
27
15
43
4
9.5
9.3
12.9
13.3
14.4
17.6
–3.1
2.4
–1.6
–4.0
–9.8
57.1
–0.1
95.1
7.2
7.1
12.8
14.1
16.2
22.8
–13.2
–19.9
–9.0
–7.0
–11.5
86.3
–26.5
53.1
1,126
782
163
113
95
106
201
144
89
55
57
0
71
33
345
1,050
705
148
91
75
88
214
140
82
58
74
0
68
20
345
93.2
90.2
90.8
80.8
79.4
83.6
106.4
97.2
92.6
104.5
129.5
28.8
96.1
60.8
100.0
1,202
824
181
132
122
116
185
134
93
41
51
1
62
26
378
6.7
5.4
11.0
16.8
28.1
10.2
–8.2
–7.1
4.4
–25.6
–10.9
228.9
–13.6
–20.1
9.8
14.5
16.8
22.3
44.6
61.3
31.8
–13.7
–4.4
12.7
–28.8
–31.2
1,042.7
–10.0
31.3
9.8
134
36
27.0
116
–13.5
220.1
a Ratios and rates of change are calculated using unrounded data.
b SOE = state-owned enterprise.
Source: Ministry of Finance.
shortfalls in 2010, and in the absence of any known policy changes – that spending on personnel, goods and services and capital items will increase by 22%, 45%
and 61% respectively: the corresponding rises in 2010 were only 16%, 13% and
–0.5%. The level of energy subsidy payments depends crucially on movements
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Ross H. McLeod
in the world oil price, which is assumed in the 2011 budget to be $80 per barrel
(Thee and Negara 2010: 290). At the time of writing the actual igure was more
like $95 per barrel, but the government was resisting calls to change this assumption (Jakarta Globe, 4/2/2011). Given the obvious reluctance of the Coordinating
Minister for Economic Affairs, Hatta Rajasa, to allow fuel and electricity prices to
rise (Jakarta Globe, 4/1/2011), it seems unlikely that energy subsidies will, in fact,
decline in 2011.
The 2011 budget is predicated on assumed growth of 6.3% and inlation of
5.3%, which is equivalent to roughly 12% growth in nominal GDP. With the above
comments in mind, government expenditure is likely to grow by much less than
the planned 14.5%, and quite possibly by less than GDP itself, suggesting that any
expansionary impetus to the economy will have to come from somewhere other
than government spending. Moreover, continued rapid growth in income tax and
VAT revenues is likely to have a negative impact on private sector spending. In
short, the budget is unlikely to have a stimulatory impact in 2011.
Limiting fuel subsidies
The government is aware of the huge proportion of its natural resource revenues
that is being dissipated in subsidies to the consumption of fuel and electricity,
which accounted for over 13% of total government spending in 2010. It also understands the negative implications for income distribution – given that these subsidies low disproportionately to the wealthy and the middle class. One approach
to limiting these subsidies has been to reduce signiicantly the subsidy to highoctane petrol (Pertamax), the price of which now varies with changes in the world
oil price. It has become obvious, however, that even reasonably well-off individuals are prepared to continue purchasing lower-octane fuel (Premium), in order to
beneit from the heavy subsidy. Rather than risk a public backlash by reducing or
removing the subsidy to the latter, the government proposes to restrict the use of
Premium to motor cycles and public transport vehicles (Jakarta Globe, 14/12/2010).
Privately owned four-wheel vehicles are to be required to use Pertamax as from
the end of March. The policy is to be introduced in stages, beginning with Jakarta,
later extending to the rest of Java, and by 2013 covering the whole of Indonesia.
Immediate introduction of the scheme nationwide appears to be precluded by a
lack of separate storage tanks for Pertamax in illing stations, and by the limited
capacity of the state oil company, Pertamina, to produce this type of fuel (Jakarta
Globe, 8/2/2011). From a political point of view there is a certain logic to removing
the subsidy from petrol used in cars but not from that used in motor cycles, since
there are about ive times as many motor cycle owners (well over 50 million) as
car owners. Critics of this proposal point to the obvious opportunity it creates for
arbitrage. It is not dificult to imagine the emergence of a black market in which
ways will be found to divert the cheaper Premium fuel to privately owned motor
cars, thus limiting the effectiveness of the new policy.
The return of discretionary taxes
The re-appearance of an emphasis on discretionary tax treatment of business enterprises is disappointing. According to a new government regulation (No. 94/2010),
irms that can persuade the relevant oficial that they are ‘pioneers’ – deined as
those ‘having extensive linkages, providing high value added and externalities,
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FIGURE 3 Change in Export Composition, 1988–2010 a
(% of total value)
Chemicals
1988
Food & live animals
1996
Crude materials,
Crude materials,
inedible
inedible
2010
& oils
vegetable
Animal & Animal
vegetable
& fats
oils & fats
Mineral fuels
Manufactures
0
10
20
30
40
50
a 2010 data are for the year to October.
Source: CEIC Asia Database.
introducing new technology and having strategic value to the economy’ – may
now be granted unspeciied special income tax treatment. It is virtually impossible to provide meaningful operational deinitions of criteria such as these. The
only likely effect of the regulation is to provide a new set of opportunities for
mutually beneicial arrangements between irms and tax oficials at the expense
of the general public.
EXPORT TRENDS: A LONGER-TERM PERSPECTIVE
In the early 1990s, before the Asian inancial crisis (AFC), Indonesia’s exports
typically contributed 26–27% of GDP. Their contribution rose substantially after
the crisis – averaging around 40% during 1999–2001 – but has since slipped back
fairly steadily, falling somewhat below pre-AFC levels to about 24% since early
2009. The composition of exports has also altered quite dramatically over the
last two decades or so. Figure 3 shows the changing contribution of the six main
export categories to total exports between 1988 and 2010.9 Over this full period,
three of these categories declined in importance and three increased, although the
direction of change before and after the AFC was reversed in some cases. Exports
of manufactures increased their share dramatically to 1996, only to fall away
again subsequently, though still recording a net increase over the full period. The
rapidly expanding share of animal and vegetable oils and fats since the AFC is
particularly noteworthy, as is the declining importance of mineral fuels (oil, gas
and coal).
Turning to the components of the major categories, we see that exports of oil
(that is, petroleum and petroleum products) have plummeted by about twothirds since 1990, while those of gas have been fairly stagnant since about 1994
9 In the following discussion, data for 2010 refer to the year to October.
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Ross H. McLeod
FIGURE 4a Trends in Energy Exports a
(% of total exports)
30
25
Oil
20
15
Gas
10
5
Coal
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
a 2010 data are for the year to October.
Source: CEIC Asia Database.
(igure 4a). To some extent this is explained by the depletion of known reserves,
but certain government policies have also had an impact (Lindblad and Thee
2007: 22–3; Boyd et al. 2010). In contrast, exports of coal have expanded dramatically from almost negligible amounts in 1988; coal became Indonesia’s single biggest export in 2009 (accounting for 12% of the total), having overtaken both oil
and gas in that year.
Figure 4b shows trends in the key non-energy natural resource exports.
Clearly the outstanding performer is vegetable oil and fats. This category is
dominated by palm oil, and has grown from less than 2% of the total in the
early 1990s to over 9% in 2010, with nearly all of this expansion occurring in
the period since 2001. The only other category in this group to have expanded
its share is metalliferous ores and metal scrap, which grew to about 5–6% of
the total in the late 2000s from about 3% on average previously. Rubber exports
have varied cyclically without any clear trend over time, while other traditional
exports in the coffee, tea, cocoa and spices group have tended to decline, as have
those of seafood.
The performance of Indonesia’s key manufactured exports is shown in igure 4c.
The contribution of these categories to total exports has declined over the last decade, in contrast to the pattern of performance in the early to mid-1990s. Exports
of textiles and clothing had expanded rapidly until 1992 – leading Hill (1991) to
proclaim that ‘the emperor’s clothes can now be made in Indonesia’ – but they
began to decline almost as rapidly thereafter; there was a brief resurgence following the AFC, but this was not sustained (Thee 2009a). The concern that ‘if textile
and garment exports lounder, it is unlikely that Indonesia will be able to engineer
a strategy of rapidly growing and broad-based non-oil exports’ (Hill 1991: 90)
has not been borne out. Exports of wood (mainly plywood) manufactures had
been as important as those of gas in the late 1980s, because of the costly log
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21
FIGURE 4b Trends in Non-Energy Natural Resource Exports a
(% of total exports)
12
9
Vegetable oil & fats
Coffee, tea, cocoa & spices
Crude rubber
Seafood
Metalliferous ores & metal scrap
6
3
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
a 2010 data are for the year to October.
Source: CEIC Asia Database.
export ban introduced in 1981 (Lindsay 1989), but their contribution to the total
declined rapidly from the peak in 1993, and then somewhat less rapidly beyond
the AFC (Thee 2009b). Footwear had seemed a promising export category in the
early 1990s, but its contribution stagnated from around 1994 and has continued to
decline since then. The share of paper and cardboard exports had risen to almost
FIGURE 4c Trends in Key Manufactured Exports a
(% of total exports)
20
Textiles & clothing
16
Electrical & telecommunications
12
8
Wood manufactures
4
Footwear
Paper & cardboard
0
1988
1990
1992
1994
1996
a 2010 data are for the year to October.
Source: CEIC Asia Database.
1998
2000
2002
2004
2006
2008
2010
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Ross H. McLeod
FIGURE 5a Country Shares of Indonesian Oil and Gas Exports a
(%)
Others
Malaysia
Australia
Singapore
1997
China
2010
South Korea
Japan
0
10
20
30
40
50
a 2010 data are for the year to October.
Source: CEIC Asia Database.
4% by the turn of the century, but declined a little subsequently. Electrical and
telecommunications products grew from a negligible level in 1988 to become the
largest sub-category of exports in 2000, only to fall back again in the following
years. Nevertheless, with a share over 8% in 2010, this group continues to be one
of Indonesia’s main export categories.
Like commodity shares, the destinations of Indonesia’s exports have undergone signiicant change since the AFC. Oil and gas exports are concentrated on
a very few countries, among which Japan continues to dominate (igure 5a).
FIGURE 5b Country Shares of Indonesian Non-oil and Gas Exports a
(%)
Others
Malaysia
India
Singapore
China
1997
USA
2010
Japan
0
10
a 2010 data are for the year to October.
Source: CEIC Asia Database.
20
30
40
50
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Survey of recent developments
23
Nevertheless, Japan’s share has declined signiicantly, while those of Singapore
and Malaysia have markedly increased. Non-oil and gas exports are much more
widely diversiied as to destination, with only six countries accounting for individual shares in 2010 in excess of 6% of the total (igure 5b). The USA, Singapore and Japan have all witnessed large declines in their shares of the total, while
there have been rapid expansions in the shares of China, India and Malaysia. The
collective share of all countries other than those shown also declined somewhat
to about 43% of the total in 2010. The already quite small shares of European
countries have, almost without exception, declined or remained at very low levels during the period under consideration, while the reverse is true of the larger
developing economies in East and South Asia. Broadly speaking then, Indonesia
seems to have been very successful in harnessing rapidly growing demand from
the most dynamic performers in the global economy.
RETHINKING CITY MANAGEMENT
The previous survey raised the issue of congestion in Jakarta (Thee and Negara
2010: 304–6), and made brief mention of the president’s proposal for a new capital
or a new administrative capital as possible solutions to the congestion problem.
Implicit in such suggestions is the notion that congestion is a problem only in
Jakarta, which ignores the realities of daily life in other large cities such as Surabaya, Bandung and Medan. As for the idea of shifting government departments
and agencies out of Jakarta to some new site, sufice it to say that even if this ambitious notion were to be realised, the immense problems of Jakarta itself, and of the
other large cities, would remain, since most of their residents and workers seek
their livelihoods in the private sector. By way of illustration, the establishment
of the ‘government city’ of Canberra as Australia’s capital, arguably a success in
itself, has done virtually nothing to diminish congestion in the pre-existing large
cities of Sydney and Melbourne.10
The underlying problem needs to be interpreted much more widely, however,
as one of poor management of cities. Indonesia’s larger cities all suffer from trafic
congestion and the directly related inadequacy of public transport, but all of its
cities face many other problems as well.11 Their inhabitants lack access to highquality drinking water and sewerage systems. Their drainage systems are frequently overwhelmed by surface run-off from heavy rain, while in some cases
their sub-surface aquifers are being depleted by pumping in response to the lack of
piped water; in turn, ground-water depletion results in subsidence of the ground
surface (Thee and Negara 2010: 305). Public areas are poorly maintained, and
efforts to establish and maintain trees, bushes and ground-cover plants are limited and sporadic at best. Road surfaces deteriorate quickly – not least as a result
of looding – and repairs are subject to long delays. Garbage is often disposed of
in the street and in rivers and canals, reducing amenity and increasing lood risk;
to the extent it is collected there are gross inadequacies in subsequent handling,
occasionally resulting in loss of life (McLeod 2005: 149). The absence of sewerage
systems results in the spread of disease through contaminated ground-water and
10 This was not the planners’ intention, of course.
11 The case of Bandung is discussed by McLeod (2005: 150).
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24
Ross H. McLeod
rivers. E
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Ross H. McLeod
To cite this article: Ross H. McLeod (2011) Survey of recent developments, Bulletin of
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Bulletin of Indonesian Economic Studies, Vol. 47, No. 1, 2011: 7–34
SURVEY OF RECENT DEVELOPMENTS
Ross H. McLeod
Australian National University
SUMMARY
The Indonesian public is becoming increasingly concerned about the gap between policy
rhetoric and action. A strong contributor to this has been a long-running corruption saga
involving a tax oficial, Gayus Tambunan, whose activities have helped conirm the public’s worst fears about the ineffectiveness of the anti-corruption campaign. Claims of progress in this and other ields, including the economy, are often overstated, and opinion
polls suggest that people are increasingly unwilling to take them at face value.
Nevertheless, the most recent data reveal a surprising surge of GDP growth, driven
mainly by investment spending. Inlation has been quite steady for the last six months,
albeit a little above the target range; this is disappointing, but not a major problem. In
response to surging food prices the government has temporarily removed tariffs on rice,
wheat and soybeans, and ordered increased rice imports. Energy subsidies continue to
weigh heavily on the budget; the plan to remove the subsidy from petrol used in private
cars but not from that used in motor cycles makes good political – if not economic – sense,
since motor cycle owners greatly outnumber car owners. The 2011 budget is unlikely to
have a stimulatory impact.
The composition of exports has altered quite dramatically over the last two decades,
albeit in unexpected directions. The pattern of export destinations has also undergone signiicant change, relecting the growing relative importance of Asia to the global economy.
The president’s proposal for a new capital as the solution to the congestion problem
in Jakarta is questionable. If policy makers fail to understand why existing cities perform
their diverse functions poorly, the creation of a new capital is more likely to replicate than
to solve problems. Cities are crucial to the modernisation of the economy, and are important vehicles for poverty reduction. City governments could greatly improve their performance by adopting a strategy of inancial self-reliance.
The decision to establish a single authority to supervise the entire inancial sector has
now been delayed for almost 11 years. The draft law currently under discussion suggests
that the central bank has no intention of giving up its role as supervisor of the banks.
This means there would be wasteful and confusing duplication of that function in the new
authority. In any case, it remains unclear exactly what purpose the authority’s establishment is intended to achieve.
There have been several reminders recently of Indonesia’s vulnerability to natural disasters, including multiple eruptions of Mount Merapi in central Java, which caused almost
400 fatalities and considerable damage to the local economy and infrastructure. Evacuation of residents of the area worst affected seems to have been handled well. An important
policy decision needs to be made about whether those who lost their houses, crops and
livestock should be permitted to return permanently to their villages.
ISSN 0007-4918 print/ISSN 1472-7234 online/11/010007-28
DOI: 10.1080/00074918.2011.556054
© 2011 Indonesia Project ANU
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8
Ross H. McLeod
POLITICAL DEVELOPMENTS
Although the popularity of President Susilo Bambang Yudhoyono (SBY) remains
remarkably high, there is little doubt that it is waning. The general public – or, at
least its more sophisticated, urban-based members – are increasingly conscious
of the gap between government rhetoric and action. According to a poll by the
Indonesia Survey Institute, the government’s overall approval rating fell from
85% in July 2009 to 63% in December 2010 (The Economist, 14/1/2011). Aside from
their concerns about prices, unemployment and poverty, only 51% of respondents
were satisied with the government’s efforts to ight corruption, compared with
84% previously. A strong contributor to this turnaround has been a protracted
corruption saga involving a relatively low-ranking tax oficial, Gayus Tambunan.
The story began in July 2009, when Gayus was found to have over $3 million in his bank accounts, and was named as a money-laundering suspect.1 His
assets were initially frozen by the police, but then somewhat surprisingly unfrozen in late November. In March 2010 the Tangerang district court cleared him of
the charges laid against him, but shortly afterwards the former chief of detectives, Susno Duadji, implicated two other police generals as ‘case brokers’ who
had helped to secure Gayus’s acquittal (Baird and Wihardja 2010: 145). Gayus
travelled to Singapore shortly afterwards but was persuaded in September to
return to Jakarta, where he was immediately re-arrested and put on trial for a
second time. Despite his repeated claims to have received payments from three
large companies associated with the Golkar Party chair, Aburizal Bakrie,2 Gayus
was charged only with mishandling the tax affairs of a small, unrelated company.
Although supposedly in detention during the period of his second trial, he was
photographed at a tennis tournament in Bali in November, following which nine
oficers from the Police Mobile Brigade were investigated. Later it emerged that
Gayus had been allowed to leave prison on scores of occasions, on one of which
he had travelled overseas on a false passport. He testiied that he had received
millions of dollars in bribes and fees from more than 150 individual and corporate
taxpayers, yet he was eventually found guilty only of having bribed a judge and
other law enforcement oficials to secure his original acquittal, thus leaving unresolved his own admissions of corrupt dealings with wealthy taxpayers. He was
sentenced to just seven years in gaol, and ined Rp 300 million (roughly 1% of the
amount that had been discovered in his bank deposits).3
The Gayus case seems to have conirmed the public’s worst fears about the ineffectiveness of the government’s campaign to reduce corruption. It demonstrated
that, despite the efforts of the reformist former inance minister, Sri Mulyani Indrawati (McLeod 2008: 197–201), the tax ofice remained far from free of corruption.
The fact that Gayus named Bakrie group companies as among those he had assisted
with their tax affairs added to concerns voiced at the time of the strong campaign
to oust Sri Mulyani (Patunru and Von Luebke 2010: 12). That he had managed
to secure his original acquittal by using high police oficials to bribe the judiciary reinforced the public’s low opinion of the various law enforcement agencies.
1 This brief summary draws on a chronology published in the Jakarta Globe (19/1/2011).
2 More recently Gayus has recanted this aspect of his testimony (Jakarta Globe, 5/2/2011).
3 At the time of writing it seemed likely that further charges would be laid against him,
however.
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Survey of recent developments
9
His apparent capacity to bribe his way out of prison at any time added to public
disgust that Artalyta Suryani, also convicted of corrupt behaviour, had served her
prison term in a luxurious cell resembling a presidential suite, and was released
after serving only two-thirds of her original sentence (Jakarta Post, 29/1/2011).4
That he had no trouble acquiring a false passport suggested strongly that corruption extended to the immigration ofice in the Ministry of Justice and Human
Rights (Jakarta Globe, 20/1/2011). Of particular concern was the widespread perception that many ‘big ish’ – higher-level oficials and business tycoons seemingly involved in the same web of corruption as Gayus – appeared untouchable.
In this context, in early January 2011 a meeting of a kind that has become common in recent years was held under the banner ‘Fight Government Lies’. In what
appears to have been a rather rambling discussion, a number of prominent religious leaders and activists for the most part emphasised their own views or promoted their own ideologies, rather than providing evidence of government lies.
Initially this event seemed to arouse little interest, and might well have disappeared quickly from view, except that the lying accusation ‘sparked an angry backlash from senior cabinet ministers’ (Jakarta Globe, 19/1/2011). As a consequence,
the president met with the group behind closed doors about a week later. This
succeeded only in fuelling the controversy, encouraging many other commentators to add their voices to the original criticisms, so that subsequent reporting
resulted in an even longer list of concerns about the government’s performance.
Rather than ‘lies’, most items on this list can be thought of as ‘discrepancies
between the government’s words and actions’ (Jakarta Globe, 19/1/2010, quoting
a spokesman for the group). They fall in four main areas.
• Protection of citizens: that is, failure to support the constitutional requirement for
freedom of religion and, speciically, to protect religious minorities from attack
by extremists;5 failure to overcome the threat of terrorism; failure to defend
freedom of speech and of the press (in the face of attacks on journalists) (Basorie
2011); failure to act in relation to the murder of human rights activist Munir
(McLeod 2005: 134); failure to protect Indonesian migrant workers (who are
vulnerable to ill treatment by their employers overseas); and failure to protect
the interests of victims of the Lapindo mudlow disaster (McMichael 2009).
• Improvement in transparency and accountability: that is, failure in general to fulil
the promise of clean, well-behaved and ethical politics, and speciically to
explain clearly the circumstances in which Sri Mulyani resigned as inance
minister to join the World Bank (Baird and Wihardja 2010: 144–6).
• Reduction of corruption: that is, failure to make suficient progress in eradicating
corruption; to make any headway against the ‘judicial maia’; and properly to
investigate cases in which high-ranking police oficials had been found to have
large sums of money in their bank accounts.
• Reduction of poverty: that is, failure to reduce poverty (or to reduce it as much
as promised).
4 Sentence remissions for good behaviour are common in Indonesia.
5 In a recent serious incident, an attack on followers of the Ahmadiyah sect in Banten
province left at least three dead. This was soon followed by an attack on two churches in
Central Java by Islamic hard-liners (Allard 2011). The latter ‘had nothing to do with religious issues’, according to the Central Java police chief (Jakarta Globe, 9/2/2011).
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To this list may be added an assortment of other concerns, such as failure to protect
the environment, failure to manage the economy in the manner supposedly called
for by the Constitution, the alleged take-over of Indonesia’s natural resources by
foreign players, and even sexual promiscuity among teenagers (Jakarta Globe,
23/1/2010).
At a national working meeting with district heads, cabinet ministers and other
oficials in Jakarta on the same day as the meeting of religious leaders and activists, the president outlined 10 ‘achievements’ of 2010 and 10 ‘challenges to be
faced’ in 2011. For the most part, the latter could also have been described, less
charitably, as performance shortfalls of SBY’s presidency to date. Notable for its
absence was any mention of the need for better protection of citizens, other than
migrant workers. Some of the ‘challenges’ bore close resemblance to the concerns
of the other group: embezzlement and corruption, including in the tax ofice;
damage to the environment as a consequence of mining and forestry practices;
the increasing prevalence of money politics, which could harm democracy; and
various public services not working well – including education and health, and
services speciically targeted at the poor. Several additional challenges were mentioned, however: the danger posed by large increases in global food and energy
prices; the inadequacy of infrastructure; the problem of large budget subsidies
and evident shortcomings in using the budget to stimulate growth; obstacles to
investment; and lack of readiness to deal with natural disasters. By acknowledging these problems without demonstrating an intention to do more than exhort
those present to strive to overcome them, the president succeeded only in reminding his critics of what they see as his propensity to promise more than he is able
to deliver. As Patunru and Von Luebke (2010: 24–7) showed in relation to the
‘First 100 Days Program’, careful assessment of claims of progress and achievement typically shows them to be overstated. Opinion polls now suggest that such
claims are becoming less and less convincing to the general public.
MACROECONOMIC DEVELOPMENTS
Growth
National income accounts data for the fourth quarter (Q4) of 2010 reveal a surprising surge of GDP growth to 6.9% p.a. (table 1a). This reinforces the plausibility
of growth forecasts for 2011 from various sources: the central bank’s forecast of
6.0–6.5% (Nasution 2011), which is consistent with assumed growth of 6.3% in the
2011 budget; and the World Bank’s forecast of 6.2% (World Bank 2010: 2). Private
consumption spending accelerated somewhat in the second and third quarters of
2010, but fell back in Q4. It continues to hold GDP growth down as it has done
since Q4 2009 – contrary to the common assertion (for example, in ADB 2010: 144)
that private consumption is one of ‘the main drivers of growth on the demand
side’. The GDP growth rate is a weighted average of the growth rates of all the
demand components (the expenditure categories in table 1a), with the weights
equal to the share of each component in constant price GDP; any component that
grows more slowly than the average drags the growth rate down. Those who
argue that consumption is a major driver of growth misinterpret the typically
large contribution of private consumption, which is mainly a consequence of its
being by far the largest single component of aggregate demand. The fact that
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TABLE 1a Components of GDP Growth
(2000 prices; % year on year)
Sep-09 Dec-09 Mar-10 Jun-10
Gross domestic product (GDP)
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport services
Communication
Financial, rental & business services
Services
Sep-10 Dec-10
4.2
5.4
5.6
6.1
5.8
6.9
4.7
9.8
3.2
7.7
–12.7
–2.0
–7.8
–14.7
4.0
18.0
4.1
8.1
–3.7
–16.3
3.7
1.6
3.9
–7.6
8.0
7.3
7.2
22.3
20.0
22.6
5.0
–7.3
8.0
7.2
14.0
9.4
14.6
18.4
5.2
4.8
9.2
6.8
23.8
8.5
9.6
12.2
4.4
7.3
8.7
6.7
22.5
1.7
16.1
16.9
2.7
3.4
4.4
4.1
3.5
3.0
4.0
3.1
3.3
1.8
4.7
3.8
6.3
1.3
5.3
4.3
3.1
3.9
3.9
4.5
2.7
4.3
4.2
5.3
5.6
14.9
7.7
–0.1
7.6
22.9
4.9
6.1
6.2
14.9
8.1
3.7
6.8
16.6
3.8
5.8
7.6
8.8
7.3
8.6
5.1
16.9
4.8
4.7
8.1
5.1
7.2
9.1
6.2
17.8
5.6
5.3
8.2
3.4
6.8
8.7
6.6
17.8
5.9
6.4
8.8
4.3
6.7
8.4
9.3
19.8
6.3
7.5
Source: CEIC Asia Database.
private consumption is currently more than twice as large as investment (in 2000
prices) means that if its growth falls to, say, 0.5% below GDP growth, investment
growth would need to accelerate to more than 1.0% above GDP growth for the
latter to be sustained (assuming, for simplicity, that the other demand categories –
government consumption and net exports – are growing at the same rate as GDP).
In reality, investment spending was the only major demand category consistently
to grow faster than GDP during 2010, and only its acceleration over the last six
quarters has prevented economic growth from falling.
The optimistic notion that careful manipulation of government spending can
be used to offset the largely unpredictable business cycle becomes untenable in
the face of the enormous volatility of year-on-year growth rates of government
consumption evident in these data. Clearly, there is still a long way to go before
it will be feasible to use iscal policy as an effective stabilising macroeconomic
inluence. Many observers ind cause to celebrate in the rapid growth of exports
in 2010, but imports follow a very similar growth pattern, providing an opposite
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TABLE 1b Components of GDP Growth
(2000 prices; seasonally adjusted; % quarter on quarter, annualised rates)
Sep-09 Dec-09 Mar-10
By expenditure
Private consumption
Government consumption
Investment
Construction
Machinery & equipment
Transport
Exports
Imports
By sector
Tradables
Agriculture, livestock, forestry &
isheries
Mining & quarrying
Manufacturing
Non-tradables
Electricity, gas & water supply
Construction
Trade, hotels & restaurants
Transport services
Communication
Financial, rental & business services
Services
Jun-10 Sep-10 Dec-10
4.5
–10.5
4.2
16.2
5.2
–27.4
5.6
8.3
4.8
30.1
2.6
17.3
8.7
–0.2
11.5
41.1
41.7
7.3
26.8
–9.5
28.5
22.3
6.5
12.1
42.7
–14.5
–9.0
7.2
18.9
–11.4
11.2
24.8
6.7
44.0
20.7
18.3
14.0
7.2
16.7
–15.6
61.7
44.4
5.7
5.1
2.4
1.8
2.6
2.9
5.9
3.2
3.3
2.1
5.4
3.9
8.5
5.1
1.4
3.0
2.1
2.6
6.2
7.3
2.5
4.3
2.8
6.9
8.0
9.3
8.3
8.6
6.6
21.7
4.9
3.1
7.5
6.8
7.5
12.4
2.8
7.9
3.8
4.6
6.7
–1.7
6.5
6.2
2.6
18.1
6.6
4.2
10.3
6.4
7.0
9.4
13.1
24.1
7.1
9.4
8.5
2.8
6.9
7.0
8.4
21.6
6.1
7.5
9.7
9.8
7.0
10.9
13.3
15.6
5.4
9.0
Source: CEIC Asia Database.
impact of comparable magnitude on GDP growth. Net exports actually had a
slightly negative impact throughout 2010.
From the supply perspective, output of the tradables sectors collectively continued to grow at less than half the rate of non-tradables, on average, during 2010
(table 1a). Manufacturing performed somewhat better over the last year than both
the agriculture, livestock, forestry and isheries group and mining and quarrying.
Like private consumption on the demand side, however, manufacturing is still
holding back GDP growth, notwithstanding some acceleration during the year.
By contrast, most of the non-tradables sectors have recently been growing faster
than, or about as fast as, total GDP; the exception is the small utilities sub-sector
(that is, electricity, gas and water supply). By far the largest component of the nontradables sector is trade, hotels and restaurants, growth of which has averaged
nearly 9% p.a. during 2010.
The seasonally adjusted quarter-on-quarter growth data for selected components of GDP (table 1b) present much the same picture as the year-on-year data.
The deceleration of private consumption growth toward the end of the period
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FIGURE 1 Monetary Policy and Inlationa
(% p.a.)
16
12
8
Currency in circulation
SBI rate 6 months
CPI inflation
4
0
-4
Jan-2010
Real SBI rate
Mar-2010
May-2010
Jul-2010
Sep-2010
Nov-2010
Jan-2011
a Currency in circulation is used as the indicator of money supply in preference to base money
because of the distorting impact of occasional changes in banks’ minimum reserve requirements on
the effective supply of base money; currency is the major component (about 75%) of base money. The
growth rate shown has been smoothed based on 3-month moving averages to clarify the underlying
trend. The real SBI (Bank Indonesia Certiicate) rate is approximated by the nominal rate less the contemporaneous CPI (consumer price index) inlation rate.
Source: CEIC Asia Database.
shows up even more clearly on this basis, commencing in Q3 2010. The growth
rate of construction – the major component of investment spending – was quite
high and remarkably steady for the whole period shown in the table, whereas
the growth rates of the machinery and equipment and transport components
were very volatile. Export and import growth showed extreme volatility, and it is
noticeable that net export growth actually became increasingly rapid during the
second half of 2010, helping to offset the dampening impact of decelerating private consumption. On the supply side, all of the non-tradables sub-sectors grew
strongly in Q4 2010. Not too much should be made of this, however, because there
is considerable volatility from one quarter to the next.
Monetary and exchange rate policy and inlation
Central Statistics Agency data for December 2010 conirmed that inlation ended
the calendar year outside the central bank’s target range of 4–6% p.a., with the
rate inishing fractionally below 7% (igure 1). Much was made of an acceleration in January 2011 to just over 7%, but the increase was negligible given likely
measurement errors. Inlation was quite steady for the six months to January,
even if a little above the target range. Its level is a disappointing outcome rather
than a major problem. The acceleration of inlation in Q2 2010 and its subsequent stabilisation is consistent with the growth of the central bank’s monetary
liabilities (proxied here by currency in circulation), which declined signiicantly
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FIGURE 2 Composite Stock Price Index (CSPI) and Exchange Rate
CSPI
4,000
Rp/$
12,000
3,000
9,000
2,000
6,000
CSPI
Exchange rate
1,000
0
6-Jan-2010
23-Mar-2010
10-Jun-2010
27-Aug-2010
15-Nov-2010
3,000
0
2-Feb-2011
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
from the excessive peak in July 2010. It is a matter of concern, however, that this
tightening of monetary policy was not sustained through the end of the year –
as is also indicated by the reduction in the six-month Bank Indonesia Certiicate
(SBI) rate, and by the real SBI rate remaining negative.
In any event, Bank Indonesia (BI) responded to concerns about its performance
by raising its so-called ‘policy rate’ slightly, from 6.5% to 6.75%, in February 2011.
What this means for actual interest rates in the market can only be guessed at, however. The ‘policy rate’ has been often, though not always, identical with the 30-day
SBI rate, but BI no longer issues 30-day SBIs. In its 9 February auction, for example,
it issued only nine-month SBIs, so the yield on that instrument was the only concrete indicator of the actual stance of monetary policy at the time of writing.6 The
average yield was 6.71% – higher than the level in January (6.5%) but close to the
level in November, and lower than the new ‘policy rate’. In any case, since longer
maturity certiicates generally carry somewhat higher rates, the switch to longer
maturities implies that the policy rate increase may be more apparent than real.
Monetary policy and inlation outcomes continue to be driven largely by BI’s
commitment to keeping the exchange rate at about Rp 9,000/$. It has done this
very successfully, especially since mid-2010 (igure 2). The problem is that this
has required it to continue purchasing large quantities of foreign exchange in the
market. These purchases increase BI’s monetary liabilities (base money) and this,
in the absence of sterilisation, tends to cause inlation. Mindful of the problem, BI
has issued a large quantity of SBIs – although not enough to keep money growth
down to a level consistent with sustained low inlation, as we have just seen. BI’s
reluctance to issue even more SBIs presumably stems partly from the impact on
its own balance sheet and proitability. Speciically, its interest earnings on foreign
6 Figure 2 shows the six-month SBI rate, since nine-month SBIs were rarely issued in 2010.
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exchange reserves are signiicantly lower than the interest paid to holders of
SBIs. Towards the end of 2010, the negative spread between the yield on reserves
and that on SBIs appeared to be about 4% p.a.7 With outstanding SBIs of around
Rp 340 trillion toward the end of 2010, the implied loss on this part of BI’s balance
sheet (that is, reserves funded by SBIs) was running at about Rp 13.6 trillion – or
$1.5 billion – annually.
BI has recently changed the banking regulations so as to increase signiicantly the
minimum amounts of deposits the commercial banks are required to keep with it
(BI Regulation No. 12/19/PBI/2010). This resulted in a huge Rp 266 trillion jump
in such deposits between September and November 2010. These deposits are, in
effect, a compulsory loan from the banks to BI, and have the same monetary impact
as the issue of SBIs in the same amount. Since they are compulsory, however, BI is
able to pay a low interest rate, and then only on a small portion of these deposits. In
this manner, some of the cost of maintaining its current monetary and exchange rate
policies is transferred to the banks – and through them to the wider community – in
the form of some combination of higher lending rates and lower deposit rates. The
cost to BI would also have been even higher but for the fact that the government
has continued to issue bonds well in excess of the gap between its spending requirements and its revenues. As a consequence, government deposits with BI increased
by Rp 64 trillion in the 12 months to November 2010, reducing base money by the
same amount. The implication of this was that the government was bearing part of
the hidden inancial cost of keeping the exchange rate constant. As Arman (2010)
has pointed out, the huge interest cost to the government of outstanding debt well
in excess of inancing requirements diverts funds that could instead be used to put
‘hundreds of thousands of impoverished children through school’.
Another explanation for BI’s reluctance to issue more SBIs is that to do so
would require an increase in interest rates. Besides strong political opposition to
such a move, higher interest rates would create an even more attractive arbitrage
opportunity for investors willing to accept the exchange rate risk of borrowing in
dollars and investing in rupiah. This concern is well founded. With international
reserves so high (almost $100 billion), the perceived risk of depreciation of the
currency appears small, so it is very tempting for investors to engage in this ‘carry
trade’ at the expense of the central bank.8 The strong performance of the stock
exchange during 2010 (igure 2) is one indicator of the attractiveness of this investment strategy. Pushing interest rates higher therefore risks generating higher capital inlow and an even greater need to undertake costly sterilisation. In short, BI
is now facing the consequences of trying to maintain an inconsistent combination
of prices (inlation), interest rates and exchange rates. Investors appear to be conscious of the problem BI is facing, which increases perceived risks because of the
policy uncertainty it creates. Reversal of the rising trend of stock prices around the
end of 2010 may relect this uncertainty.
7 This rough estimate is based on an average SBI rate of around 6.5%, and a yield on US
government 10-year bonds of around 2.8%. Shorter maturity bonds have lower yields, and
conversely, but the detailed composition of BI’s foreign exchange reserves is not publicly
available.
8 Similar policies in the mid-1990s resulted in similar investor behaviour, ultimately with
disastrous consequences.
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Food prices
Rapid food price increases in recent months have been of particular concern to the
government because of their deleterious impact on poverty. The price indices for
cereals (including rice), cassava and related products, and for vegetables, rose by
over 20% in the year to January 2011, and the index for spices (including chillies)
by some 60%. Though many refer to this as an inlation problem, in fact it is not.
Inlation is best thought of as a decline in the value of money, relecting generally
rising prices. The problem in this case is increases in the relative prices of these
products, partly because of unusually large rainfall, and partly because of delay
by Bulog (the logistics agency) in importing rice. Tightening monetary policy to
try to deal with this problem would reduce inlation, but would not reduce the
relative prices in question. Accordingly, the government has instead temporarily
removed import tariffs on rice, and on wheat and soybeans, and ordered Bulog to
increase rice imports.
The budget
One welcome consequence of public sector accounting reform, under way since
2003 (Kuncoro, Widodo and McLeod 2009: 171), is that data on the budget outcome are now available a few days, rather than a year or two, after the end of
the inancial year. The release of preliminary data for 2010 makes it possible not
only to compare outcomes with budgeted amounts, but also to undertake a more
meaningful assessment of the budget for 2011 (table 2).
Most of the larger revenue items in 2010 came in fairly close to target (column 3
of the table). Revenue overall was a little higher than planned, mainly because of
higher than expected non-tax revenues. By contrast, central government expenditures in most categories fell well short of the budgeted amounts. Some of the details
here are rather surprising. In keeping with the view that fear of being accused of
corruption has made oficials with procurement responsibilities overly cautious,
realised spending on both goods and services and capital items was only about 80%
of the planned totals. But this consideration does not apply in the case of spending
on personnel, which also fell noticeably short of budget. This is hard to comprehend, given that personnel numbers, ranks and remuneration would all appear to
be highly predictable. The much lower than planned amount of interest payments,
while welcome, is also surprising, given that interest rates have not changed markedly, and that the debt maturity proile is not subject to uncertainty. The reason for
the unexpectedly large amount of spending on non-energy subsidies is unclear.
The last two columns in the table show that it can be quite misleading to base
estimates of the extent of iscal stimulus (or contraction) on a comparison of the
new budget with the planned rather than the realised budget for the previous
year (although, of course, there is no simple alternative until the realised data
become available). Several of the igures in these two columns differ substantially from each other. Noteworthy among these are the implied growth rates for
VAT revenue, and for the major central government expenditure items, including
interest payments.
The projected increases in income tax and VAT (last column of table 2) seem
ambitious at irst glance, but their respective actual growth rates in 2010 (not
shown in the table) were 12.3% and 30.6%, so the 2011 igures of 16% and 23%
do not appear unreasonable. However, it seems implausible – in view of the
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TABLE 2 Budgets for 2010 and 2011
(Rp trillion)
2010
2011
Change: 2011
Relative to 2010
Revised Actual Actual: Proposed Revised
Budget
Budgeta
Budgeta
(%)
(%)
REVENUES & GRANTS
Revenues
Tax
Domestic
Income tax
VAT
Other
International trade taxes
Non Tax
Natural resource revenues
Proits of SOEs b
Revenue from public services
Other
Grants
EXPENDITURES
Central government
Personnel
Goods & services
Capital
Interest
Subsidies
Energy
Fuel
Electricity
Non-energy
Grants expenditure
Social expenditure
Other
Transfers to regions
DEFICIT
Actual a
(%)
992
991
743
721
362
263
96
23
247
165
30
9
43
2
1,014
1,011
744
715
357
252
107
29
267
170
30
8
59
2
102.1
102.1
100.1
99.2
98.4
95.8
111.7
127.9
108.1
103.2
101.9
84.3
135.8
127.4
1,086
1,083
840
816
415
309
93
23
243
158
27
15
43
4
9.5
9.3
12.9
13.3
14.4
17.6
–3.1
2.4
–1.6
–4.0
–9.8
57.1
–0.1
95.1
7.2
7.1
12.8
14.1
16.2
22.8
–13.2
–19.9
–9.0
–7.0
–11.5
86.3
–26.5
53.1
1,126
782
163
113
95
106
201
144
89
55
57
0
71
33
345
1,050
705
148
91
75
88
214
140
82
58
74
0
68
20
345
93.2
90.2
90.8
80.8
79.4
83.6
106.4
97.2
92.6
104.5
129.5
28.8
96.1
60.8
100.0
1,202
824
181
132
122
116
185
134
93
41
51
1
62
26
378
6.7
5.4
11.0
16.8
28.1
10.2
–8.2
–7.1
4.4
–25.6
–10.9
228.9
–13.6
–20.1
9.8
14.5
16.8
22.3
44.6
61.3
31.8
–13.7
–4.4
12.7
–28.8
–31.2
1,042.7
–10.0
31.3
9.8
134
36
27.0
116
–13.5
220.1
a Ratios and rates of change are calculated using unrounded data.
b SOE = state-owned enterprise.
Source: Ministry of Finance.
shortfalls in 2010, and in the absence of any known policy changes – that spending on personnel, goods and services and capital items will increase by 22%, 45%
and 61% respectively: the corresponding rises in 2010 were only 16%, 13% and
–0.5%. The level of energy subsidy payments depends crucially on movements
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in the world oil price, which is assumed in the 2011 budget to be $80 per barrel
(Thee and Negara 2010: 290). At the time of writing the actual igure was more
like $95 per barrel, but the government was resisting calls to change this assumption (Jakarta Globe, 4/2/2011). Given the obvious reluctance of the Coordinating
Minister for Economic Affairs, Hatta Rajasa, to allow fuel and electricity prices to
rise (Jakarta Globe, 4/1/2011), it seems unlikely that energy subsidies will, in fact,
decline in 2011.
The 2011 budget is predicated on assumed growth of 6.3% and inlation of
5.3%, which is equivalent to roughly 12% growth in nominal GDP. With the above
comments in mind, government expenditure is likely to grow by much less than
the planned 14.5%, and quite possibly by less than GDP itself, suggesting that any
expansionary impetus to the economy will have to come from somewhere other
than government spending. Moreover, continued rapid growth in income tax and
VAT revenues is likely to have a negative impact on private sector spending. In
short, the budget is unlikely to have a stimulatory impact in 2011.
Limiting fuel subsidies
The government is aware of the huge proportion of its natural resource revenues
that is being dissipated in subsidies to the consumption of fuel and electricity,
which accounted for over 13% of total government spending in 2010. It also understands the negative implications for income distribution – given that these subsidies low disproportionately to the wealthy and the middle class. One approach
to limiting these subsidies has been to reduce signiicantly the subsidy to highoctane petrol (Pertamax), the price of which now varies with changes in the world
oil price. It has become obvious, however, that even reasonably well-off individuals are prepared to continue purchasing lower-octane fuel (Premium), in order to
beneit from the heavy subsidy. Rather than risk a public backlash by reducing or
removing the subsidy to the latter, the government proposes to restrict the use of
Premium to motor cycles and public transport vehicles (Jakarta Globe, 14/12/2010).
Privately owned four-wheel vehicles are to be required to use Pertamax as from
the end of March. The policy is to be introduced in stages, beginning with Jakarta,
later extending to the rest of Java, and by 2013 covering the whole of Indonesia.
Immediate introduction of the scheme nationwide appears to be precluded by a
lack of separate storage tanks for Pertamax in illing stations, and by the limited
capacity of the state oil company, Pertamina, to produce this type of fuel (Jakarta
Globe, 8/2/2011). From a political point of view there is a certain logic to removing
the subsidy from petrol used in cars but not from that used in motor cycles, since
there are about ive times as many motor cycle owners (well over 50 million) as
car owners. Critics of this proposal point to the obvious opportunity it creates for
arbitrage. It is not dificult to imagine the emergence of a black market in which
ways will be found to divert the cheaper Premium fuel to privately owned motor
cars, thus limiting the effectiveness of the new policy.
The return of discretionary taxes
The re-appearance of an emphasis on discretionary tax treatment of business enterprises is disappointing. According to a new government regulation (No. 94/2010),
irms that can persuade the relevant oficial that they are ‘pioneers’ – deined as
those ‘having extensive linkages, providing high value added and externalities,
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FIGURE 3 Change in Export Composition, 1988–2010 a
(% of total value)
Chemicals
1988
Food & live animals
1996
Crude materials,
Crude materials,
inedible
inedible
2010
& oils
vegetable
Animal & Animal
vegetable
& fats
oils & fats
Mineral fuels
Manufactures
0
10
20
30
40
50
a 2010 data are for the year to October.
Source: CEIC Asia Database.
introducing new technology and having strategic value to the economy’ – may
now be granted unspeciied special income tax treatment. It is virtually impossible to provide meaningful operational deinitions of criteria such as these. The
only likely effect of the regulation is to provide a new set of opportunities for
mutually beneicial arrangements between irms and tax oficials at the expense
of the general public.
EXPORT TRENDS: A LONGER-TERM PERSPECTIVE
In the early 1990s, before the Asian inancial crisis (AFC), Indonesia’s exports
typically contributed 26–27% of GDP. Their contribution rose substantially after
the crisis – averaging around 40% during 1999–2001 – but has since slipped back
fairly steadily, falling somewhat below pre-AFC levels to about 24% since early
2009. The composition of exports has also altered quite dramatically over the
last two decades or so. Figure 3 shows the changing contribution of the six main
export categories to total exports between 1988 and 2010.9 Over this full period,
three of these categories declined in importance and three increased, although the
direction of change before and after the AFC was reversed in some cases. Exports
of manufactures increased their share dramatically to 1996, only to fall away
again subsequently, though still recording a net increase over the full period. The
rapidly expanding share of animal and vegetable oils and fats since the AFC is
particularly noteworthy, as is the declining importance of mineral fuels (oil, gas
and coal).
Turning to the components of the major categories, we see that exports of oil
(that is, petroleum and petroleum products) have plummeted by about twothirds since 1990, while those of gas have been fairly stagnant since about 1994
9 In the following discussion, data for 2010 refer to the year to October.
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Ross H. McLeod
FIGURE 4a Trends in Energy Exports a
(% of total exports)
30
25
Oil
20
15
Gas
10
5
Coal
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
a 2010 data are for the year to October.
Source: CEIC Asia Database.
(igure 4a). To some extent this is explained by the depletion of known reserves,
but certain government policies have also had an impact (Lindblad and Thee
2007: 22–3; Boyd et al. 2010). In contrast, exports of coal have expanded dramatically from almost negligible amounts in 1988; coal became Indonesia’s single biggest export in 2009 (accounting for 12% of the total), having overtaken both oil
and gas in that year.
Figure 4b shows trends in the key non-energy natural resource exports.
Clearly the outstanding performer is vegetable oil and fats. This category is
dominated by palm oil, and has grown from less than 2% of the total in the
early 1990s to over 9% in 2010, with nearly all of this expansion occurring in
the period since 2001. The only other category in this group to have expanded
its share is metalliferous ores and metal scrap, which grew to about 5–6% of
the total in the late 2000s from about 3% on average previously. Rubber exports
have varied cyclically without any clear trend over time, while other traditional
exports in the coffee, tea, cocoa and spices group have tended to decline, as have
those of seafood.
The performance of Indonesia’s key manufactured exports is shown in igure 4c.
The contribution of these categories to total exports has declined over the last decade, in contrast to the pattern of performance in the early to mid-1990s. Exports
of textiles and clothing had expanded rapidly until 1992 – leading Hill (1991) to
proclaim that ‘the emperor’s clothes can now be made in Indonesia’ – but they
began to decline almost as rapidly thereafter; there was a brief resurgence following the AFC, but this was not sustained (Thee 2009a). The concern that ‘if textile
and garment exports lounder, it is unlikely that Indonesia will be able to engineer
a strategy of rapidly growing and broad-based non-oil exports’ (Hill 1991: 90)
has not been borne out. Exports of wood (mainly plywood) manufactures had
been as important as those of gas in the late 1980s, because of the costly log
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FIGURE 4b Trends in Non-Energy Natural Resource Exports a
(% of total exports)
12
9
Vegetable oil & fats
Coffee, tea, cocoa & spices
Crude rubber
Seafood
Metalliferous ores & metal scrap
6
3
0
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
a 2010 data are for the year to October.
Source: CEIC Asia Database.
export ban introduced in 1981 (Lindsay 1989), but their contribution to the total
declined rapidly from the peak in 1993, and then somewhat less rapidly beyond
the AFC (Thee 2009b). Footwear had seemed a promising export category in the
early 1990s, but its contribution stagnated from around 1994 and has continued to
decline since then. The share of paper and cardboard exports had risen to almost
FIGURE 4c Trends in Key Manufactured Exports a
(% of total exports)
20
Textiles & clothing
16
Electrical & telecommunications
12
8
Wood manufactures
4
Footwear
Paper & cardboard
0
1988
1990
1992
1994
1996
a 2010 data are for the year to October.
Source: CEIC Asia Database.
1998
2000
2002
2004
2006
2008
2010
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Ross H. McLeod
FIGURE 5a Country Shares of Indonesian Oil and Gas Exports a
(%)
Others
Malaysia
Australia
Singapore
1997
China
2010
South Korea
Japan
0
10
20
30
40
50
a 2010 data are for the year to October.
Source: CEIC Asia Database.
4% by the turn of the century, but declined a little subsequently. Electrical and
telecommunications products grew from a negligible level in 1988 to become the
largest sub-category of exports in 2000, only to fall back again in the following
years. Nevertheless, with a share over 8% in 2010, this group continues to be one
of Indonesia’s main export categories.
Like commodity shares, the destinations of Indonesia’s exports have undergone signiicant change since the AFC. Oil and gas exports are concentrated on
a very few countries, among which Japan continues to dominate (igure 5a).
FIGURE 5b Country Shares of Indonesian Non-oil and Gas Exports a
(%)
Others
Malaysia
India
Singapore
China
1997
USA
2010
Japan
0
10
a 2010 data are for the year to October.
Source: CEIC Asia Database.
20
30
40
50
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Nevertheless, Japan’s share has declined signiicantly, while those of Singapore
and Malaysia have markedly increased. Non-oil and gas exports are much more
widely diversiied as to destination, with only six countries accounting for individual shares in 2010 in excess of 6% of the total (igure 5b). The USA, Singapore and Japan have all witnessed large declines in their shares of the total, while
there have been rapid expansions in the shares of China, India and Malaysia. The
collective share of all countries other than those shown also declined somewhat
to about 43% of the total in 2010. The already quite small shares of European
countries have, almost without exception, declined or remained at very low levels during the period under consideration, while the reverse is true of the larger
developing economies in East and South Asia. Broadly speaking then, Indonesia
seems to have been very successful in harnessing rapidly growing demand from
the most dynamic performers in the global economy.
RETHINKING CITY MANAGEMENT
The previous survey raised the issue of congestion in Jakarta (Thee and Negara
2010: 304–6), and made brief mention of the president’s proposal for a new capital
or a new administrative capital as possible solutions to the congestion problem.
Implicit in such suggestions is the notion that congestion is a problem only in
Jakarta, which ignores the realities of daily life in other large cities such as Surabaya, Bandung and Medan. As for the idea of shifting government departments
and agencies out of Jakarta to some new site, sufice it to say that even if this ambitious notion were to be realised, the immense problems of Jakarta itself, and of the
other large cities, would remain, since most of their residents and workers seek
their livelihoods in the private sector. By way of illustration, the establishment
of the ‘government city’ of Canberra as Australia’s capital, arguably a success in
itself, has done virtually nothing to diminish congestion in the pre-existing large
cities of Sydney and Melbourne.10
The underlying problem needs to be interpreted much more widely, however,
as one of poor management of cities. Indonesia’s larger cities all suffer from trafic
congestion and the directly related inadequacy of public transport, but all of its
cities face many other problems as well.11 Their inhabitants lack access to highquality drinking water and sewerage systems. Their drainage systems are frequently overwhelmed by surface run-off from heavy rain, while in some cases
their sub-surface aquifers are being depleted by pumping in response to the lack of
piped water; in turn, ground-water depletion results in subsidence of the ground
surface (Thee and Negara 2010: 305). Public areas are poorly maintained, and
efforts to establish and maintain trees, bushes and ground-cover plants are limited and sporadic at best. Road surfaces deteriorate quickly – not least as a result
of looding – and repairs are subject to long delays. Garbage is often disposed of
in the street and in rivers and canals, reducing amenity and increasing lood risk;
to the extent it is collected there are gross inadequacies in subsequent handling,
occasionally resulting in loss of life (McLeod 2005: 149). The absence of sewerage
systems results in the spread of disease through contaminated ground-water and
10 This was not the planners’ intention, of course.
11 The case of Bandung is discussed by McLeod (2005: 150).
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rivers. E