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Survey of Recent Developments
Armida S. Alisjahbana & Chris Manning
To cite this article: Armida S. Alisjahbana & Chris Manning (2002) Survey of Recent Developments, Bulletin of Indonesian Economic Studies, 38:3, 277-305, DOI: 10.1080/00074910215539
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(2)
ISSN0007-4918print/ISSN1472-7234online/02/030277-29 ©2002IndonesiaProjectANU
SURVEY
OF
RECENT
DEVELOPMENTS
ArmidaS.Alisjahbana
PadjadjaranUniversity, Bandung
ChrisManning*
AustralianNationalUniversity
SUMMARY
TheIndonesianeconomycontinuedto
stabilisein2002, and torecoverinthe
second and third quarters of the year
frompoorerperformance intheprevi
-ousyear.Confidencewas helpedbya
successful MPR session in August,
which completed theroundof consti
-tutional reformsbegun several years
earlier, including provision for direct electionofthepresidentandvicepresi
-dent and a new bicameral elected
national assembly. Sadly, just when
macroeconomic conditions seemed
morefavourablethanforsometime,the tragiceventsinBaliinOctoberthrewa cloudovergrowthprospectsforthefi
-nalquarterandthecomingyear.
Alltheindicatorsofmacroeconomic
performance had turned around by
August–September.Theexchangerate
hadappreciated significantly, year-on
-year inflation was down from15% in
Februaryto10%byAugust,andnomi
-nalinterestrateshad fallen. Thesede
-velopments supported much more
favourable budget outcomesfor 2002.
Theassumptionsfortheproposed2003
budget appeared generally plausible,
althoughthe5%growthtargetseemed
alittletoooptimistic, themoresointhe
wakeoftheBalibombings.Divestment
ofsharesfrombothTelkomandIndosat
appeared tohave securedthe govern
-ment’s budget target fromIBRA sales
for2002,andthefiresaleofIBRAdebts addedanotherRp23trilliontothepub
-lic coffers. Although investment still
remainedflat,therehadalsobeensome importantsignsofcreditexpansionfor
small and medium enterprises. Some
breakthroughs were achieved in the
private sector,such as a resolutionin
the long-standing Kalimantan Prima
Coaldisputeondivestmentofitsma
-jority shareholding, and a favourable
court ruling in the Man ulife case
(Athukorala 2002:145and147–8).
At the same time, recovery in both
domesticdemandandexportswashalt
-ing. International confidence was not
helped by National Planning Agency
headKwikKianGie’scontinuingfocus
onearly‘graduation’fromtheIMFpro
-gram.Assetsalesweredelayedbecause
of haggling overthe disposal ofa 51%
shareinBankNiagaandthereweresigns
of spreading agricultural protection,
much of itintheform of NTBs.There
werestrongindicationsthatlabourregu
-lationandassociatedunrestwerebegin
-ning to affect the investment climate.
Labour-intensivemanufacturingexports
sufferedinparticular,raisingmuchcon
-cern aboutjobcreation.Thecrisis over repatriationoflargenumbersofoverseas
workersfromMalaysiafromearly 2002
didnothelpthelabourmarket,especially inEasternIndonesia.
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POLITICALDEVELOPMENTS
TheAugustMPR(People’sConsultative
Council) meetingmarkedthefourthand
final round of constitutional amend
-ments begun under formerPresident
Habibie.1Theamendmentspassedallow
thepublicdirectcontrolovertheelection
of the president, and take away the
MPR’s authorityto elect thepresident andthepresident’sdirectaccountability
to the MPR (with the accountability
speechtotheMPRnowreplacedbyan
annual report).Thetwomain amend
-mentsontheelectionofthepresidentand
the composition and role of the MPR
werepassedwithrelativelylittleoppo
-sition,afterextensivenegotiationamong themajorparties.Aconstitutionalcom
-missionwastobesetupthroughanMPR committeeoverthenextsixmonths,with amorelimitedagendathaninitiallyen
-visagedof‘synchronising’andimprov
-ingtheamendmentsalreadypassed.The
pushbyseveraloftheMuslim-oriented
parties forintroduction of syariat law through revision ofarticle 29 was de
-feated.However,theMPRmeetingalso
sawthecreationoftwoindependentju
-dicialbodies,aConstitutionalCourtand
an independent Judicial Commission
withresponsibility forsupreme court
appointmentsandjudicialethicsissues.
Thepassingofthetwoamendments
iscriticalforplanningofthe2004elec
-tion.Theyincludeprovisionsfordirect electionofthepresidentandvicepresi
-dent, and for the restructuring of the
MPR,forthe firsttimesinceitwas in
-augurated in 1960, intoa fully elected
bicameralassemblycomprisingparlia
-ment and a regional representative
council. A two-stage processof presi
-dential election was approved which
setsouta‘packet’systemwherebypar
-ties nominate ‘tickets’ of presidential and vice-presidential candidates. Ifno
ticketgainsthenecessarymajoritysup
-port,thetwohighestrankingticketsgo
through to a second round.Teams on
oneticketmustgainatleast20%ofthe votesinhalfofthecountry’sprovinces,
requiring thecandidates to cultivate
support inthemajorityofouterisland
provinces.Thereformensures thatthe
strongestpresidential–vice-presidential
teamswillprobablyconsistofcoalition candidatesfromthemajorparties.
In practice, the completion of the
round of constitutional amendments
reaffirms the unitary structureof the
state with ‘federal’ arrangements, in
-cludingthecreationoftwonewspecial
autonomousregionsinAcehandPapua.
Thebicameralsystemtoreplacethecur
-rentMPRwillconsistofanelectedDPR
(Dewan Perwakilan Rakyat, People’s
Representative Council)chamberanda
secondelectedchambertorepresentre
-gional interests, the DPD (Dewan
Perwakilan Daerah or Council of Re
-gionalRepresentatives). Interestgroup representativeswilldisappearfromthe MPRin2004,bringingaboutthehistoric
removal of the38 armed forces (TNI)
representatives, who would have re
-tained their seats until2009 under a previousdecree.2
The MPR alsotooktheboldstep of
mandatingan‘aspirational’20%alloca
-tionforeducationfromcentralanddis
-trictbudgetsandastipulation thatthe
social welfare system should be ex
-tended to ‘all the people’,although it wasnotclearhoweitherobjectivemight beachievedinpractice.
TwootherpoliticaleventsinSeptem
-berportrayedthegovernmentinaless
favourable light with pro-democracy
forces. The first was the decision of
AkbarTanjung(withimplicitpresiden
-tialsupport)nottostepdownfromany
of his present positions, including as
chairmanoftheDPR,whileheappeals
againstthethree-yeargaoltermhanded
downearlyinthemonthforembezzle
-mentofBulogfunds. Notlongafterthe
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Akbarruling,thecontroversial Jakarta governor,General(ret.)Soetiyoso,was votedinforasecondtermbythepro
-vincial assembly, with Megawati’s
blessingand amidst hugedemonstra
-tions.Theelectionwasmarkedbywell
documentedclaimsofsubstantial vote
buyingofcouncillorsintheregionalas
-sembly (DPRD) (JP, 5/9/02).3 This
came on top ofa detailed account of
spendingspreesbyDPRmembersfrom
huge increases in salaries and other
emolumentsinvariousregionsacross
thecountryatatimeoffiscalbelt-tight
-ening (Tempo, English Edition, 1–7
October2002).
Atthetimeofwriting,itwasstilltoo earlytoassessthepoliticalandeconomic
fallout fromthe huge bombblast that
claimedthelivesofover180people,the majorityofthemforeigners,inKuta,Bali on12October.Despiteearlierofficialde
-nials, the countryhas now been tragi
-callygivennoticethatitiswellandtruly onthe international terroristmap.The tragedy is likely to affect theBalinese
economy severely, especially through
dire consequences for tourism in the
immediatefuture.Itisalsolikelytopose afurtherdisincentivetoforeigninvest
-mentthroughoutIndonesia(andthere
-gion),thoughearlyfallsintheexchange rateandthestockexchange,while no
-ticeable,werenotaslargeassomehad feared.Thisdomesticshockoccurredat
a timeof heightened fears of a down
-turnintheinternationaleconomyinthe
wake of the US stock market decline,
andinlightofthependingUS,andpos
-siblyUN-supported,attackonIraq.
MACROECONOMIC PERFORMANCE
RegainedGrowthMomentum?
TheupwardtrendinGDPgrowththat
beganinQ12002continued,withGDP
expandinginthesecondquarterof2002 by3.5%year-on-year,wellupfromthe
Q42001figureofjust1.6%(table1).This
growthwasmainly supportedbycon
-sumption spending, withprivate and
governmentconsumptionincreasingby
6.4% and 9.4%, respectively, even
though total consumption growth fell
backslightlyduring thefirsthalf.Sec
-ondquarterinvestmentwas3.7%lower
than in2001, althoughthis rate ofde
-clinewaslessseverethaninthetwopre
-viousquarters.Exportscontinuedtofall
at a significant rate, while imports
slumpeddramaticallyineachofthelast threequarters.
Giventhecontinueddeclineininvest
-ment and exports,the contribution of
privateconsumptiongrowthtoeconomic
recoveryisimportant,sinceitaccounts
for morethan 70%of GDP(DRI2002).
Thecontinuedhealthygrowthinprivate
consumptionmayreflectperceptionsof
reduced risk relating to economicand
political conditions and,in particular,
increasing confidence engendered by
strengtheningoftherupiah.Therisein
net exports duringthe lastyear (with
importsdecliningmuch morethan ex
-ports)reflects theexpectedreallocation
of productive resources from non
-tradablegoodsandservicestotradables asaresultofthelargerealdepreciation oftherupiahfrommid1997.Thepersis
-tentdeclineininvestmentisduemainly
to continued lack of business confi
-dence—especiallyamongforeigninves
-tors; the adverse impact of theglobal
economic slowdown on investmentin
export-orientedindustries;theexistence
ofsignificantexcesscapacityinthemanu
-facturingsector;andpoorprofitperfor
-mances in the corporate sector
(Athukorala2002;ADB2002:7).
Ontheoutputside,relativelystrong
growth in the second quarter was
helped considerably by an impressive
turnaround in the agriculture sector,
which registered 6.3% year-on-year
growthaftermodestdeclinesinthepre
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TABLE1 GDPGrowth,Year-on-Year (1993prices,%)
Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02
GDP 4.8 3.8 3.1 1.6 2.2 3.5
Expenditure
Privateconsumption 4.0 4.7 5.8 9.2 7.1 6.4 Governmentconsumption 6.0 4.2 11.9 11.0 8.8 9.4 Investment 18.9 7.7 –0.8 –7.1 –6.9 –3.7
Exports 18.4 8.0 –2.6 –12.9 –5.2 –7.1
Imports 50.7 37.2 –3.7 –29.8 –25.7 –21.6 Sector
Agriculture,livestock,forestry
&fisheries 3.7 1.7 –0.4 –2.8 –1.4 6.3
Mining&quarrying 6.8 –0.3 –2.4 –5.9 -2.3 1.8
Manufacturing 4.2 4.8 4.7 3.6 3.7 2.5 Electricity,gas&watersupply 7.3 9.9 8.9 7.6 7.9 4.7 Construction 6.2 5.7 3.5 0.7 1.7 2.4 Trade,hotels&restaurants 6.8 5.5 5.7 2.6 3.4 3.7 Transport&communications 6.4 7.0 7.6 8.9 8.4 8.2 Finance,rental&businessservices 3.9 3.4 2.7 2.0 2.7 2.6 Otherservices 1.3 1.6 2.3 2.7 1.5 0.4
Source:CEICAsiaDatabase.
cedingthreequarters.Themanufactur
-ing and construction sectors grew
relativelyslowly,by2.5%and2.4%re
-spectively,whiletransportandcommu
-nicationscontinuedtooutperformother sectors,withgrowthof8.2%.Thesteady
declineinmanufacturinggrowth(from
4.7%year-on-yearinQ32001)provides
somecauseforconcern,butallinallit
appears that GDP growthfor 2002 is
likelytobeintherange3.5–3.8%inthe
absenceofanyexpectationofresurgence inexportsorinvestment.
Inlonger-termperspective,GDP re
-boundedrelativelyslowlyfromthepeak ofthecrisisin1998, onlybeginning to
growmoderatelyduringthelatterpart
of 1999. Somewhatsurprisingly, Indo
-nesia’s growth compared favourably
withthatoftheotherAsiancrisiscoun
-triesfromlate2000untilthethirdquar
-terof2001,andIndonesiacontinuedto
outperformMalaysiauntilQ22002(fig
-ure1).Ithasbeenarguedthatthiswas
because Indonesia was notaffected as
severelybytheslumpintheelectronics exportmarket,onwhichitislessdepen
-dent than countries such as Malaysia
and Korea (Pangestu and Goeltom
2001).Nevertheless,Indonesia’sgrowth ratedeclinedduring2001and,notwith
-standing recent acceleration, it had
fallen behindallthe othercountriesin thisgroupbymid2002.
FinancialIndicators
Exchange Rate. Therupiahappreciated
strongly between February and May
2002,butweakenedalittlefrommidyear toaroundRp9,000/$inSeptember(fig
-ure 2).(The Octoberbombings inBali
hadhadsurprisinglylittleimpactonthe currencyatthetimeofwriting.)Overall itappreciatedbysome15.4%againstthe
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FIGURE1 ComparativeGDPGrowth,Year-on-Year (1993prices,%)
Source:AsiaRecoveryInformationCenterDatabase,www.aric.adb.org.
-4
0 4 8 12 16
Q12000 Q12001 Q12002 Indonesia Malaysia Philippines Korea Thailand
FIGURE2 ExchangeRatesandSharePricesa (December1999=100)
aCSPI=CompositeSharePriceIndex. Source:CEICAsiaDatabase.
0 20 40 60 80 100
Sep-01 Dec-01 Mar-02 Jun-02 Sep-02
$/Rp Yen/Rp CSPI
(7)
dollarand6.8% againsttheyenduring thefirstthreequarters of2002—one of
thestrongerperformancesacrossthere
-gion.Thestrengtheningofthecurrency
hasalsobeenaccompaniedbyareduc
-tioninitsvolatility comparedwiththe
previous year (Bank Indonesia 2002).
Amongotherthings,these positivede
-velopmentspresumablyreflectbothin
-ternational and domestic responses to
Indonesia’s perceived commitmentto
moreprudentmacroeconomicmanage
-ment(LPEM–FEUI2002),includingbet
-tercontrolofmonetarygrowth.
Risk. Short-termriskindicatorssuch
astheswappremiumandcoveredinter
-est rate differentials declined during
2002.Theone-monthswappremiumfell
significantly from 16.7% at the endof
2001to12.2%bytheendofAugust2002, suggestingthatmarketplayerswerebe
-cominglessconcernedaboutweakening
oftherupiahinthenearfuture.Likewise, thecoveredinterestratedifferential(the excessofthedollarinterestrateoverthe rupiahinterestrateadjustedfortheswap
premium)narrowedfrom0.83%to0.50%
duringthisperiod,suggestingamodest
declinein marketassessments ofother
kindsofriskrelatingtoIndonesia.
Stock Market. The rebound on the
Jakarta StockExchangesincelate2001
peaked in April 2002 (figure 2). Al
-thoughthispartlyreflectedthegeneral
upward trend as global and regional
sharepricesrecoveredaftertheterror
-istattacksontheUSon11September,
thesurgeinIndonesiansharepriceswas especiallystrong,withagainof33%in
localcurrencytermsand60%indollar
values(ADB2002).Presumablythiswas
partlyattributabletorenewed investor interest inIndonesian sharesaspoliti
-caluncertainties receded.Share prices
began to slideback in May,however,
and by September mostof the rupiah
gains since the end of 2001 had been
wiped out;nonetheless, given rupiah
strengthening duringthis period,dol
-larvalueswerestill23%abovetheirend 2001levels.Partoftheexplanation for
thedecline inrupiahshare pricesmay
beoverallweaknessinindustrialcoun
-tryandregionalstockmarkets,butthe declineinmoneygrowthrelativetothe earlierperiodisalsolikelytohavecon
-tributed.
BaseMoney. Basemoneyincreasedby
21%intheyeartoNovember2001,4and
stoodat Rp 127.8trillion at year end, wellabovethecurrentLOI(letterofin
-tenttotheIMF)indicativetargetofRp 120.6trillion.BankIndonesia(BI)finally
responded at around thistime to the
persistent increase in inflation since
about March 2000by tightening mon
-etary policy (figure 3). Whereas base
moneygrowthofaround20%p.a.had
been the norm since mid 2000, the
growthratewasfarslowerin2002,and was running at 7.5% year-on-year by
September—havingfallentoaslowas
4.9% in August.Incontrast withmost
ofthepost-crisisperiod(Deuster2002:
25),thevolumeofbasemoneywaswell
belowLOIindicativetargetsafterApril 2002, amountingtoRp123.9 trillionat
the endofSeptember, whereas thein
-dicativetargetwasRp128.2trillion.
Inflation. Inflationary pressure re
-ceded significantly afterFebruary(fig
-ure3),withtheyear-on-yearratefalling
from 15.1% to 10.5% in September;
prices were virtually constant during
March and April, and subsequent
monthlyincreaseshavebeenrelatively
small.Whilemanycommentatorsseek
-ingtoexplainchangesininflationlook toseasonalfactors,wageandsalaryin
-creases,exchangeratechanges andin
-creases in administered prices for
commodities suchasfuel,it ishardto
ignorethefactthatbasemoneygrowth
wasfarlowerin2002thanin2001.
Interest Rates. Thesecondquarterof
2002 sawacontinuation ofthedecline
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FIGURE3 BaseMoneyGrowth,InflationandInterestRates (%p.a.)
Source:CEICAsiaDatabase.
innominalinterestratesthathadbeen
apparent sinceJanuary (figure3). The
nominal 3-monthSBI (Bank Indonesia
Certificate) rate(not shown)fellby 3.3
percentage points during the period
January–September.5Banklendingrates
droppedrelativelylittleduringthispe
-riod,butaveragedepositratesfellsome
-whatmore,resultinginamuchneeded
increaseinthebanks’netlendingmar
-gins. Thedeclining interest rate trend
reflects the impact on expectations of
fallinginflationandrupiahappreciation overthisperiod:thatis,nominal rates
adjusteddownwardsasexpectationsof
inflationanddepreciationwererevised tolowerlevels.Itisinterestingtonote thattherealinterestrate—represented
infigure3bythe1-monthinterbankcall
rate adjusted forcontemporaneous in
-flation—appearstobelargelyunrespon
-sivetotheconductofmonetarypolicy,
having remained fairly consistent at
around 4–5%p.a. sincelate 2000.6 Ar
-guably it is real rather than nominal
ratesthatareofmostfundamentalcon
-cerntoeconomicactors.7 BalanceofPayments
Althoughtotalexportsstabilised inQ1 2002, non-oilandgas exportsandtotal
importsbothdeclinedslightly,continu
-ing the slide that began in Q3 2000
(table 2). The trade balance increased
marginallyoverthepreviousquarter,as didthecurrentaccountsurplus.Thecapi
-talaccountwasstillindeficitinQ12002, reflectingacontinuedandsignificantnet outflowof private capital; net official
capitalinflow also remained negative.
-5
0 5 10 15 20 25
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02
Basemoneygrowth Inflation Interbank1-month Interbankreal
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Thenetoutflowofprivatecapitalinthe
formofdirectinvestment wasashigh
in Q12002 as inanyquarter sincethe
startofthecrisis,providingastrongin
-dication that investor confidence in
Indonesia’sprospects,farfromimprov
-ing,hascontinuedtoweaken.
Therewas,however,asignificantin
-creaseinotherprivatecapitalflow(i.e.
portfolioinvestment), whichhadbeen
positivesinceQ42001.Thefactorsun
-derlying thissurgeinportfolio invest
-mentaredifficulttoascertain,butmay include the returnof Indonesian citi
-zens’savingsfromoffshoreaccountsas politicalconditionsstabilised,renewed
investorinterestintheJakartaStockEx
-change,andIBRA(IndonesianBankRe
-structuring Agency) assetsales (CSIS
2002).Note,however,thatthesebalance
ofpaymentsdataarebynowquiteold;
the recent figures from the stock ex
-changediscussedabovesuggestthatthe desiretoinvestinIndonesianstockshas declinedsignificantlyinrecentmonths.
THEFISCALSITUATION The2002Budget
At thetime ofwriting, thebudget for
2002appeared tobereasonablywellon track.TaxrevenueforJanuary–August
was58.4% ofthebudgetedamountfor
TABLE2 BalanceofPayments ($billion)
2000 2001 2002
Total Q1 Q2 Q3 Q4 Total Q1
Exports 65.41 15.40 15.00 14.23 12.73 57.36 12.74 Non-oil&gas 50.34 11.62 11.67 11.31 10.20 44.81 10.12
Oil&gas 15.07 3.78 3.33 2.92 2.53 12.56 2.62 Oil 7.95 2.08 1.95 1.55 1.35 6.92 1.42 LNG&LPG 7.11 1.71 1.38 1.37 1.18 5.64 1.20 Imports –40.37 –9.22 –9.51 –8.59 –7.35 –34.67 –7.20
Merchandisetrade
balance 25.04 6.18 5.49 5.64 5.38 22.69 5.54 Services –17.05 –4.12 –4.15 –3.28 –4.24 –15.80 –4.26
Currentaccount 7.99 2.06 1.34 2.36 1.14 6.90 1.28
Officialcapital 3.22 –0.14 –0.24 –0.20 –0.17 –0.74 –0.35
Inflows 7.49 1.40 1.16 1.40 1.79 5.74 1.36 CGI 2.42 0.53 0.41 0.38 0.65 1.96 0.35 Non-CGI 5.07 0.87 0.75 1.02 1.14 3.78 1.01
Debtrepayments –4.27 –1.53 –1.40 –1.59 –1.95 –6.48 –1.71
Privatecapital –9.99 –3.11 –2.47 –2.50 –0.18 –8.25 –1.08
Directinvestment –4.55 –2.24 –1.90 –1.11 –0.62 –5.88 –2.24
Other –5.44 –0.87 –0.57 –1.39 0.45 –2.38 1.16
Capitalaccount –6.77 –3.25 –2.71 –2.70 –0.34 –8.99 –1.42
Overallbalance 5.04 –0.72 –0.04 0.32 –0.94 –1.38 –0.01
Capital¤t
account,net 1.22 –1.19 –1.37 –0.34 0.80 –2.09 –0.14
Errors&omissions 3.82 0.46 1.33 0.66 –1.74 0.71 0.13
Source:BankIndonesia,http://www.bi.go.id.
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theyear,suggestingthattheoveralltar
-get is within reach—even though re
-visedGDPgrowthestimatesof3.2–3.8%
for2002arealittlelowerthanthebud
-getassumptionof4%(table3).The9%
inflationrateassumedinthebudgetwas wellwithinreachatitsSeptemberlevel
of10.5%. Rupiahappreciation had not
beensufficientatthetimeofwritingto
achieve the average exchange rate of
Rp9,000/$assumedinthebudget,but
the actual outcomeshould not be far
awayfromthis.8ThedeclineinSBIin
-terestratesreduced interest payments
onthegovernment’sdomesticdebt,but
it was not until September that the
3-monthSBIratefellto14%—theaver
-agerateassumedinthebudget.Thusin
theabsence ofdebtrescheduling, debt
interest outlayscanbe expected toex
-ceedbudgetedlevels.Ontheotherhand,
theassumed averageoil priceof $22/
barrelwillbeexceeded,asoilhasrisen dramaticallyinpricesinceMarch:itwas
$28/barrel in August, and with the
threatofwarinIraqtherewasthepros
-pectofevenfurtherincreasesinthenear
future. Oil productionis expected to
average1.2millionbarrels/day, some
-what lessthan the budgetassumption
of1.3 millionbarrels/day, buttheim
-pactofthisonoilrevenuewillbemore thanoffsetbythehigherprice.
Theplannedbudgetdeficitof2.5%of
GDP is believed to be within reach,
thankstotheincreaseinoilpricesand tothereschedulingofsomeinterestpay
-mentsfallingdue in2002asagreedin
theParisClubnegotiations inApril.Fi
-nancingofthe deficitrelies heavilyon privatisation andIBRAassetsales.Pri
-vatisationproceedsandIBRAassetsales forthefirsthalfof2002wereRp2.1tril
-lion and Rp 23.1 trillion respectively, alreadywellinexcessoftheaggregate
Rp 23.5 trillion required from these
sourcestofinancethedeficit.Thegov
-ernmentactuallyhopestoobtaingreater
amountsfromprivatisation(Rp6.5tril
-lion) and asset sales (Rp 35.3 trillion) thansuggestedbytable3.Assumingthe
deficit comes in on target,this would
permitsomenetredemptionofgovern
-mentbondsoutstanding.
TheDraft2003Budget
The 2003 draft budget presented by
President Megawati to parliament in
August 2002—surprisingly far in ad
-vance of thestart of the fiscal year in January2003,andthusrunningtherisk
ofbeingovertakenwithinthenextfew
monthsbyunforeseeneventssuchasthe
Balibombattacks—wasbasedonthree
broadobjectives:consolidatingthebud
-get, stimulating the economy, and
achievingfiscalsustainability.Thebud
-getdeficitwastargetedat1.3%ofGDP, significantlylowerthanfor2002.Itskey
economic assumptions (table 3) were
that:
GDPgrowthwouldincreaseto5%
(bycomparisonwiththe3.2–3.8%now
expectedin2002);
inflation wouldfallto8%from its
August2002 levelof10%(asurpris
-ingly unambitious target,given the
easewithwhichtheratehadalready
beenreducedfromover15%inFeb
-ruary);
the3-monthSBIinterestratewould
fallto 13% from its August level of 14.9%;
theaverageexchangeratewouldbe
Rp8,700/$, roughly the sameas its
Augustlevel;
oil production would remain
around its average2002 level of1.2
millionbarrels/day; and
theoilpricewouldfallto$20.50/bar
-relfromthe$28/barrelfigurerecorded inAugust(seemingly highlyconser
-vative,butthedifficultyofpredicting worldoilpricesprobablyjustifiessuch anapproach—evenifthelevelofpre
-cisionhereisspurious).
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TABLE3 Budgetsfor2002and2003 (Rptrillion)
2002 2003 Real Change Revised %of %of Approved %of %of (%)a
Total GDP Total GDP
TOTALREVENUE 301.9 100.0 17.6 327.8 100.0 16.8 0.5
Taxrevenue 219.6 72.7 12.8 260.8 79.5 13.3 10.0
Domestictaxes 207.0 68.6 12.1 246.5 75.2 12.6 10.3
Incometax 104.5 34.6 6.1 124.7 38.0 6.4 10.5 (ofwhichnon-oil&gas) (88.8) (29.4) (5.2) (112.2) (34.2) (5.7) (16.9)
Valueaddedtax 70.1 23.2 4.1 82.1 25.1 0.5 8.5 Land&buildingtaxes 8.1 2.7 0.5 9.9 3.0 1.5 18.6 Excise&other 24.4 8.1 1.4 29.8 9.1 6.2 13.2
Internationaltradetaxes 12.6 4.2 0.7 14.3 4.3 0.7 4.8
Non-taxrevenue 82.3 27.3 4.8 67.0 20.5 3.4 –24.6
Naturalresources 63.2 20.9 3.7 49.6 15.1 2.5 –27.4
ProfittransfersfromSOEs 10.4 3.4 0.6 8.5 2.6 0.4 –24.2
Othernon-taxrevenues 8.7 2.9 0.5 9.0 2.7 0.5 –4.5
TOTALEXPENDITURE 344.0 100.0 20.1 354.2 100.0 18.1 –4.7
Centralgovernmentexpenditure 246.1 71.5 14.3 241.0 68.0 12.3 –9.3
Routineexpenditure 193.8 56.3 11.3 186.5 52.6 9.5 –10.9
Personnel 41.3 12.0 2.4 51.9 14.7 2.7 16.4 Goods&services 12.9 3.8 0.8 15.4 4.3 0.8 10.4 Interestpayments 88.5 25.7 5.2 80.9 22.8 4.1 –15.4
Domesticdebt 59.5 17.3 3.5 55.1 15.6 2.8 –14.3
Foreigndebt 29.0 8.4 1.7 25.8 7.3 1.3 –17.6
Subsidies 41.6 12.1 2.4 25.4 7.2 1.3 –43.5
Fuel 30.4 8.8 1.8 13.6 3.8 0.7 –58.6
Non-fuel 11.2 3.3 0.7 11.8 3.3 0.6 –2.4
Other 9.5 2.8 0.6 12.8 3.6 0.7 25.2
Developmentexpenditure 52.3 15.2 3.0 54.5 15.4 2.8 –3.5
Rupiahfinancing 26.5 7.7 1.5 36.2 10.2 1.9 26.6 Projectfinancing 25.8 7.5 1.5 18.3 5.2 0.9 –34.4
Fundingofregionalgovernments 97.9 28.5 5.7 113.2 32.0 5.8 7.1
Equalisationfunds 94.5 27.5 5.5 103.6 29.2 5.3 1.5
Revenuesharing 24.6 7.2 1.4 25.9 7.3 1.3 –2.7
Generalallocationfund(DAU) 69.1 20.1 4.0 75.4 21.3 3.9 1.1 Specificallocationfund(DAK) 0.8 0.2 0.0 2.3 0.7 0.1 169.0
Specialautonomyfunds 3.4 1.0 0.2 9.6 2.7 0.5 162.1
OVERALLBALANCE –42.1 –12.2 –2.5 –26.3 –7.4 –1.3 –42.1
(12)
TABLE3 (continued) Budgetsfor2002and2003 (Rptrillion)
2002 2003 Real Change Revised %of %of Approved %of %of (%)a
Total GDP Total GDP
FINANCING 42.1 100.0 2.5 26.3 100.0 1.3 –42.1
Domesticfinancing 23.5 55.9 1.4 16.9 64.3 0.9 –33.4
Useofbankdeposits 0.0 0.0 0.0 8.5 32.3 0.4 Other 23.5 55.9 1.4 8.4 31.9 0.4 –66.9
Privatisation 4.0 9.5 0.2 8.0 30.4 0.4 85.2 Assetsales 19.5 46.4 1.1 12.0 45.6 0.6 –43.0
Governmentbonds(net) 0.0 0.0 0.0 –11.6 –44.1 –0.6
Foreignfinancing(net) 18.6 44.1 1.1 9.4 35.7 0.5 –53.1
Foreignfinancing(gross) 35.4 84.1 2.1 26.1 99.2 1.3 –31.7
Programloansb 9.5 22.7 0.6 7.8 29.7 0.4 –24.2
Projectloans 25.8 61.4 1.5 18.3 69.6 0.9 –34.4
Debtpayment –16.8 –39.9 –1.0 –16.7 –63.5 –0.9 –8.0
Maturity –44.0 –104.6 –2.6 –42.8 –162.7 –2.2 –9.9
Rescheduling 27.2 64.7 1.6 26.1 99.2 1.3 –11.2
Principal 20.1 47.8 1.2 19.8 75.3 1.0 –8.8
Interest 7.1 16.9 0.4 6.3 24.0 0.3 –17.8 ASSUMPTIONS
GDPgrowth(%) 4.0 5.0 Inflationrate(%) 9.0 8.0 Interestrate(3-monthSBI,%) 14.0 13.0
Exchangerate(Rp/$) 9,000 8,700 Oilproduction(mbcd)c 1.3 1.2
Oilprice($/barrel) 22.0 20.5
aChangein2003relativeto2002,%inrealterms.
bIntherevised2002budget,programloansweremergedwithParisClubIIIrescheduling
ofRp36.8 trillion, becauseat the time the budgetwas formulated the amount ofdebt rescheduledwasnotyetclear.
cMillionbarrelsofcrudeoilperday.
Source:RepublicofIndonesia,NotaKeuangandanRancanganAnggaranPendapatandanBelanja Negara2003[FinancialNotesandDraftStateBudget2003].
(13)
The assumptionof 5% GDPgrowth wasperceivedtobereasonable,ifsome
-what optimistic. Itrelied,forexample,
onassumptions ofinvestmentand ex
-portgrowthinexcessof6%and5%re
-spectively, which would represent a
considerableimprovementon2002.9The
blowtoinvestorconfidenceandtotour
-ism exports resulting from the Bali
bombingsmakesithighlyunlikelythat
thesegrowthrateswillbeachieved.The targeteddeficitof1.3%ofGDPhasbeen criticisedbysomeasfailingtoprovide
an adequate stimulus to economicre
-covery,butthisviewassumesthatthe
continuedexistenceofunusedproduc
-tioncapacityresultssimplyfromalack
ofaggregate demand—ignoring such
crucialmattersas theenormousprob
-lem ofwidespread corporatedefaults,
thecontinuedillhealthofthebanking system,thelackofstrongleadershipand consistentpolicymakingonthepartof
thegovernment,andtheevermoreob
-viousinadequaciesofthelegalsystem. Theplannedreductionofthedeficitat leastsignalsthegovernment’sintention to consolidate itsposition and putthe
budgetonamoresustainable path.
Revenue is expectedto increase by
8.5%fromthebudgetedamountin2002,
which would amount to a negligible
changeinrealterms:hencetheprojected
slight decline in revenue relative to
GDP.Mostoftheincreaseistobegen
-erated fromindividual and corporate
incometax,valueaddedtaxandtheex
-ciseoncigarettesales. Incometaxrev
-enue increases are to be achieved by
extendingcoverageofpersonsandfirms thathavethusfarevaded theirobliga
-tionsastaxpayers.
Central government expenditure is
projectedtodeclinesignificantlybyvir
-tueof a large cutin routine expendi
-ture—despiteplanstoincreasesalaries
ofcivilservants,policeandmilitaryper
-sonnelby10%andteachers’allowances
by50%.Thisreductionismadepossible
byafurther majorcut(39%,or44% in
realterms)insubsidies—mostnotably
onfuelprices—andbyreduceddebtser
-vicing costs.Fuel subsidies are tobe
slashed toRp13.6 trillion,downfrom
Rp30.4trillionin2002,whileelectricity tariffswillberaisedonaverageby6% each quarter. Some non-fuel subsidies
willberetained,however,includingthe
fertiliser subsidy, food subsidies for
povertyalleviation, andinterestsubsi
-dies in certain lendingprograms; the
totalamountinvolvedisRp11.8trillion. Thecostofforeigndebtservicingisex
-pectedtodeclineasaresultofboththe ParisClubreschedulingandrupiahap
-preciation.Atthesametime,thedomes
-ticdebtservicingcostisprojectedtofall withdeclinesintheSBIinterestrate,and
asa resultofsomeredemptions ofthe
government’s bank recapitalisation
bonds.
Developmentexpenditureisalsoex
-pectedtodeclineinrealtermsandasa percentageofGDP.Thereisaprojected
shift indevelopment spendingtoward
greaterrelianceonrupiahfinancingand correspondingly lessonproject(aid)fi
-nancing. The decline in development
spendingmustbeinterpretedcarefully, inlightofstructuralchangestothebud
-get resultingfrom thedecentralisation
of public services to localgovernment
level:totalfundingoflocalgovernment
accounts for about 30% of the central
government budget. Nevertheless,
funding of local government through
the equalisation processis to increase onlybyabout1.5%inrealterms.
Roughly two-thirds(Rp16.9 trillion)
ofthedeficitfinancingrequirementisto
be met from domesticsources,the re
-mainder fromnet newforeignborrow
-ing.Thetargetforprivatisationproceeds
is Rp 8 trillion—twice the budgeted
amountin2002—whichseemsveryop
-timisticconsideringtheslowprogressso
(14)
faronthisfront.IBRAassetsalesareex
-pectedtobringinanotherRp12trillion.
WhetherIBRA can meet thistarget re
-mainstobeseen,sinceithaslimitedas
-setsfordisposalafterrecentlargesales. Ifthesefigures(andalltheotherbudget items) were toberealised, thegovern
-ment would be able to redeem some
Rp11.6 trillionofexistingbank recapi
-talisationbonds.Providedanyshortfall inprivatisationandassetsalesdoesnot exceedthisamountinaggregate,thebud
-getdeficitfor2003canstillbefinanced,
butcorrespondinglysmalleramountsof
bondswillbeabletoberedeemed.
TheBurdenofGovernmentDebt
AsofSeptember2002,totalgovernment
domesticdebtoutstanding wasRp656
trillion.The bulkofit(Rp427 trillion) comprisedbondsissuedtorecapitalise
banksthatbecameinsolventduringthe
bankingsectorcrisisof1997/98,while
additionalbondsworthRp218trillion
wereissuedtoBankIndonesiainsettle
-ment ofliquidity support provided to
troubledbanksduringthecourseofthe
crisis.10 Interest payments on these
bondsarenow imposingaheavybur
-denonthebudget:in2002,forexample, about Rp 59.5 trillion, or 20% of total
revenue, is accounted for by interest
paymentsondomesticdebt.Ontheba
-sis of the maturity structureof these
bondsasoriginallyissued,principalre
-paymentsbegintobecomesignificantin
2003, butjump toa much higherlevel
in2004andcontinuetoincreaseineach ofthenextthreeyears(Deuster2002:31).
Thiswouldimplymuchgreaterannual
debt service burdens than in 2002; in
2004, forexample, principal and inter
-est payments together would exceed
Rp100trillion.
Oneresponsetothiscashflowprob
-lem is to roll over the bonds as they
mature(i.e.toissuereplacementbonds) asinthebudgetfor2002,11butrecently
thegovernmenthasbeenconcentrating
onlengthening the maturitystructure
of someoftheexistingbondssoasto
pushprincipalrepaymentsfurtherinto
thefuture.Agreementhasbeenreached
withthefourstate-ownedbanks(Bank
Mandiri,BankBNI,BankRakyatIndo
-nesia and Bank Tabungan Negara) to
‘re-profile’someRp175trillionoftheir
holdingsofgovernmentbonds(table4). Thematuritydatesoffixedratebonds,
originallybetween2004 and 2009,are
now to be extended to between 2010
and 2013 (Kompas, 21/9/02), while
those of variable ratebonds areto be
extendedfrombetween2004and2009
to between 2014 and 2020. Despite a
perception tothecontraryonthepart
of someobservers, the debtre-profil
-ing exercise has not involved any
switchingofbondsfromfixedtovari
-able interest rates. Since the interest
ratesonthesebondsarebelowmarket
levels (McLeod 2000: 27–9) the banks
thatholdthemareeffectively subsidis
-ingthegovernment, andthesizeofthe subsidyincreaseswithanyextensionof
thematuritystructure.Presumablyfor
thisreason,theagreementprovidesfor additionalinterestpaymentstothefour
banks amounting toa totalof Rp824
billioneachyearuntil2010inreturnfor
delaying the repayment of principal
(Kompas,21/9/02).
Besides domestic debt, the total
amount of government external debt
outstandingwas$73.5billion(asofJuly 2002),andthecashoutflowsassociated withthisalsoconstituteaheavydrain
on budgetary resources. In the 2002
budget, total principal and interest
originally due on this debt was
Rp43.9trillion,butthegovernmenthas
reduced theactual amount toRp16.7
trillionbynegotiatingthroughtheParis
Clubtherescheduling ofsomeRp20.2
trillion ofprincipaland Rp7.1trillion ofinterestfallingduethisyear.
(15)
Ofcoursereschedulingforeigndebt andlengtheningthematurityprofileof
bondsissueddomesticallydoesnothing
morethan easethe government’scur
-rent cash flow difficulties—in effect,
shiftingtheburdenofdealingwiththe amortisationoftheseborrowingstofu
-turegovernments.Thusanevengreater
problem willarise withthe 2004 bud
-get,forexample.
Theredoesnotappeartobeaneasy
solution to the budget debt servicing
problem. In the absence of any other
newsourceoffinancing,andgivenlim
-itsontheextenttowhichspendingcan
bereduced further, external financing
andreschedulingofexistingdebtisstill apossibility inthe nearfuture.12Inthe
mediumterm,however,theimportant
questioniswhetherthegovernmentwill continuetobe abletopersuade itsex
-ternalcreditorstodelaytherepayment ofitsborrowings.
Variousmeasuresareavailableforre
-ducing the totalamount of bondsout
-standing,suchassellingassetstofinance
the redemptionofbonds,andallowing
recapitalised banks to swap bonds for
assets(suchasbankloans)nowheldby IBRA.13Littleisgainedbysuchmeasures,
astheyallinvolvethelossofrevenues generatedbytheassetsinquestion,leav
-ingthebudgetdeficitlargelyunchanged.
An alternative approach involvingthe
use of accumulated budget surpluses
(sisaanggaran lebih)heldas depositsat
BItoredeembondswouldhavetheef
-fect of expanding basemoney, and it
wouldbenecessaryforBItosterilisethe inflationaryimpactbyissuingnewSBIs; giventhatBIispartofthepublicsector, totalpublicsectordebtwouldtherefore beunchanged.Thislatterobservationis alsorelevanttoarecentagreementonthe sharingofbankingcrisiscostsbythegov
-ernmentandBI(box1).14
TABLE4 DomesticGovernmentDebtReprofiling (Rptrillion)
Bank Rate Total Reprofiled Unchanged
Mandiri Fixed 47.0 34.8 12.3 Variable 89.9 69.6 20.3 Total 137.0 104.4 32.6
BNI Fixed 33.1 24.7 8.5
Variable 19.3 16.2 3.1 Total 52.4 40.8 11.6
BRI Fixed 22.0 16.8 5.2
Variable 6.5 3.6 2.9 Total 28.5 20.4 8.1
BTN Fixed 1.2 0.0 1.2
Variable 12.6 9.0 3.6 Total 13.7 9.0 4.7 Totalfixed 103.3 76.2 27.1 Totalvariable 128.4 98.4 30.0
Grandtotal 231.6 174.6 57.0
Source:MinistryofFinance,citedinKompas,21/9/02.
(16)
BOX1 SMOKE ANDMIRRORS:SHARING THECOST OF THEBANKINGCRISIS?
Muchwasmaderecentlyofanewagreement(stilltoberatifiedbytheDPR
atthetimeofwriting)regardingsomeRp218trillioninbondsissuedbythe governmenttoBItocompensatethelatterforlast-resortloansitextendedto
troubledbanksattheheightofthefinancialcrisis(BantuanLikuiditasBank Indonesia,BLBI),mostofwhichhavenotbeenrepaid(Kenward2002:22–3).
Thepurposeofthisagreementwastocreatetheimpressionthatthecostof
thesedefaultswasnowtobesharedbetweenthegovernmentandBI,rather
thanbeingcarriedbythegovernmentalone(inimplicitrecognition ofBI’s failuretoexercisesufficientcareinprovidingtheseloansinthefirstplace). Thiswastobeeffectedbytransforming someRp159trillionofthesebonds
into ‘CapitalMaintenance Notes’(CMNs)thathavenomaturitydateand
pay nointerest(i.e.intozerointerestconsols).a
Clearly thesenew instruments areworthless, sincetheir presentvalue
(calculated by discounting theirnominalamountsover an infinitely long
periodoftimeatanypositiveinterestrate)iszero.Thatbeingthecase,the effectisto‘charge’BIanamountofRp159trillionforitspresumedincom
-petenceaslenderoflastresort;apparentlythisissufficienttosatisfythose
onthegovernmentsidewhowishtoseeBIcarrysomeofthecostofwhat
theyseeasitspastmistakes.BycarryingtheCMNsattheirfacevaluerather thantheirtruevalue,however,BIwillbesparedtheembarrassment ofrec
-ognisingthislossandwritingdownthevalueofitsequitycommensurately
initsfinancialstatements.
Theagreementalsorequires,however,thattheseCMNsberedeemedby
thegovernmentovertimebymeansofforgoingdividendsthatwouldoth
-erwise accruetoit fromBI’soperatingprofits.ThusifBIwere tomake a
profitofRp159trillionthisyearitcouldnotionallypaythisamounttothe
government as a dividend, whereupon the government could notionally
use this revenue to redeem all the outstanding CMNs. BI would still be
saved from the need to recognise a loss of Rp 159 trillion on its lending
activities, bybeingabletoportraythistransaction asadividendpayment. Attheotherextreme,ifitfailedevertoearnanyprofitinthefuture,itwould simplycontinuetocarryRp159trillionofCMNsinitsbalancesheetindefi
-nitely,againavoidingtheneedforanyembarrassing financialdisclosures. Allofthisfinancial‘smoke-and-mirrors’isoflittleornoconsequence to
thegovernment’sfinancial positionortoeconomicrecovery.BothBIand
thegovernmentarepartofthepublicsector,andchangingthetermsofthe financialtransactions betweenthemhasnoimpactonthefinancialposition ofthepublicsectoroverall:anygaintoonesideismatchedbyanequalloss totheother.Thereisanintangiblecost,however,intheformofyetanother setbacktotheidealofencouraging transparency inthepublicsector.
aThisformaliseswhathasbeenactualpractice:todatethegovernmenthasnotpaid
anyinterestonitsdebttoBI.
(17)
THEREALSECTOR:
TRADEANDINVESTMENT
Althoughgrowthhadbeenexpectedto
remainstrongfortherestof2002,inter
-national developments and thefallout
fromtheBalitragedynowcastdoubton
this prognosis, and even more so for
growthtargetsandmacroeconomicsta
-bilityin 2003. Domestic consumption
wasnotasrobustinthefirsthalfof2002
as 12 months ago. Key indicators ce
-ment,motorcarandmotorcyclesales
increasedin this period,butwerestill barelyabovefiguresrecordedinthefirst halfoflastyear,followingadeeptrough
around puasa and lebaran (the fasting
monthandtheholidayfollowingit)in
late2001(figure4).
Investmentsignalsweremixed.For
-eign investment approvals remained
low in the first halfof 2002. Boththe
numberofprojects(506)andthe value
ofinvestmentapprovals(justover$2.5
billion)were significantly downcom
-pared with the same period in 2001.
Nevertheless, eventhoughthevalueof
domesticapprovalsplunged70%over
thesameperiod,thedownwardtrends
in total gross fixed capital formation
and import of capital goods seem to
have bottomed out in the December
quarter.Growthinthe domesticcom
-ponent offixed capitalformationalso
remainedpositiveineachquartersince mid2001.Additionally, reportsfromBI ofanincreaseincreditfromthebank
-ingsectorand ofsome51%ofallnew
creditgoing tosmallandmedium en
-terprises(SMEs)through toMay2002
(Kompas,18/7/02) offer further hope
for continued recovery in 2002, al
-though the potential disincentive for
the banks to lend to SMEs following
official approvalforahaircutonpast loansisnotencouraging.15
Exportsrecoveredsomewhatin2002
afterabumpylasttwoquartersin2001.
Although theywere some 7% lower
overall (and3% inthe caseofnon-oil
andgasexports)inthefirsthalfof2002
FIGURE4 MotorCar,MotorCycleandCementSales (January2002=100)
Source: PEG–Bappenas,RealSectorIndicators(unpublished data). 0
25 50 75 100 125 150
Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02
Motorcars Motorcycles Cement
(18)
than in thesame periodin 2001, they
had bouncedbackfollowingthesteep
declineinthesecondhalfof2001,when ordersfelloffsharplyinresponsetothe
11 September attacks and associated
political unrest in Indonesia. Overall, non-oilandgasexportsroseby3.6%in
thefirsthalfof2002comparedwiththe
secondhalfoftheprevious year,with
machinery and appliances registering
particularly robust growth (figure 5
andtable5).16
Nevertheless, the trend in several
labour-intensive exports that had
played a key role in job expansion
beforethecrisiswasparticularly wor
-rying.Garmentshadnotrecoveredfol
-lowing the sharp (15% ) decline in
exportsinthesecondhalfof2001.Com
-petitionfromChinawasalreadybegin
-ning to hurt the textile and garment
industries, withlowerunitlabourcosts resultingfromhigherproductivityrela
-tivetowageratesinChineseindustry
(James,RayandMinor 2002).Thefoot
-wearindustrywasfacingmajorprob
-lemsasNikeandReebokclosedfacto
-riesinIndonesiainthefirsthalfof2002 (FEER, 12/9/02: 47–9). Furniture and
timber sales also declined in this pe
-riod, and were some10% below the
previousquarter.
Theappreciationoftheexchangerate inthe firsttwoquartersof 2002 prob
-ablyplayedsomeroleintheslowdown
intheseexports,althoughregulatedin
-creasesinlabourcostswerenowsqueez
-ingkeylabour-intensiveindustries(see
below).Further,firmsurveysfoundthat non-labour costsof special concern to
exportersincludedthehighluxurytax
onimportedgoods,especiallyelectron
-ics,thehighcostandinefficiencyofport
services,the ban imposed on bonded
warehousesforthepurchase oflocally
madematerials, and delays in rebates
to exporters through Bintek (Badan
InformasidanTeknologiKeuangan,the
Financial Information andTechnology
Agency).17
FIGURE5 ValueofOilandNon-oilExports ($billion)
0 1 2 3 4 5 6
Jan-01 Jul-01 Jan-02 Jul-02
Total Non-oil
Oil
Source: BPS(CentralStatisticsAgency),IndikatorEkonomi,variousissues.
(19)
SmugglingandTradeRestrictions
Reportsofwidespreadsmugglingcon
-tinuedtodominatepublicdiscussionof tradepolicyinthefirsthalfof2002.Fol
-lowingthefuroreoverasmuggledcon
-signment of luxury cars earlierin the
year, extensive smuggling ofelectron
-icsproductsand usedclothingcontin
-ued to receive media attention (JP,
18/7/02). Thisrevived onceagain the
debateoverwhetherIndonesiashould
reintroduce aPre-ShipmentInspection
Authority(PSI).18Bothtradeandindus
-tryministerRiniSuwandiandIMFrep
-resentatives have spoken in favour of
reintroduction of PSI and they have
receivedstrongsupportfromsomepro
-ducergroups.Finance ministerBoedi
-ono has been more cautious, arguing
thatthereintroductionofPSIwillonly delaylongoverduereformstothecus
-tomsservice.
Atthesametime,araftofregulations
havebeenintroducedinanattemptto
limit smuggling and overcome prob
-lems of under-invoicing of imports.
Over3,800 importers ineight key sec
-torshavebeenregisteredwiththetrade andindustryministry,whichthreatened towithdrawlicencesfornon-reporting.
Thecustomsserviceannounced inOc
-toberthat10large,reputableimporters
would receive favourable treatment
fromtheservice(Kompas,2/10/01).
Many of thereformsto agricultural
trade outlined in the initial MOU
(memorandumofunderstanding) with
theIMF in1998 are being dismantled.
Importofsomecommoditiesfordomes
-ticprocessing, notablycloves andraw
sugar,hasbeenrestrictedtoregistered
domestic producers. The Ministryof
Tradeand Industry appointed three
stateplantations as registered sugar
TABLE5 PrincipalNon-oilExports,2001and2002 ($million)
Productand 2001 2002 2002S1
SITCCode Comparedwith:
S1 S2 S1 2001S1 2001S2 (%) (%)
Machine/electricityequipment(85) 3,198 2,716 2,976 –6.9 9.6
Timber,timberproducts(44) 1,649 1,705 1,531 –7.2 –10.2
Machinery/mechanical machinery(84) 1,422 1,303 1,496 5.2 14.8 Garments(excl.knittedware)(62) 1,511 1,272 1,297 –14.2 2.0
Appliances/householdlighting(94) 775 676 849 9.5 25.6 Syntheticfilaments(54) 585 571 533 –8.9 –6.7
Organicchemicals(29) 488 538 528 8.2 –1.9
Man-madestaplefibres(55) 468 414 456 –2.6 10.1
Cotton(52) 390 354 340 –12.8 –4.0
Copper(74) 199 221 210 5.5 –5.0
Subtotal 10,685 9,770 10,216 –4.4 4.6
Other 11,670 11,229 11,529 –1.2 2.7
Total 22,355 20,999 21,745 –2.7 3.6
Source:BPS(adaptedfromCSIS2002).
(20)
importers, setting a minimum price
(Rp 3,100) well above the current fob
priceat whichtheycan bringinsugar
(JP,24/9/02).19Somekeyitemssuchas
riceandwheatflourhavebeenmoved
from the‘green’to themoreintrusive
‘red’customslaneforspecialattention on thepart of officials, causing major
delaysandsomecancellationofimport
consignments.
Asreported intheprevious survey
(Athukorala 2000: 157–8), callsfor in
-creased agricultural protection have
been associated with complaints that
localproducerscannolongercompete
with lowerthan normalinternational
pricesofsomecommodities (sugarand
cloves inparticular).20Low (5%) anti
-dumpingdutieswereproposedbythe
Ministry of Industry and Trade on
wheatflourinJuly,despiteearlieras
-surances fromthe minister that there
wasnocaseagainstdumpinginthisin
-dustry.Amuchstrongerpushfornew
tariffsonkeyagriculturalcommodities
(rice, sugar, corn and soy bean) was
made by the agriculture minister,
Bungaran Saragih (Kompas, 11/6/02).
Heformedateamtoinvestigate tariffs
on thesecommodities in late June. In
September, heannounced aproposed
increaseinthetariffonricefromRp430
toRp753/kgtoaccompanyanincrease
in the farmers’ floorprice of around
15%,fromRp1,519toRp1,745/kg of
unhuskedrice(gabah).21
TheMinistryofAgriculture hasalso
recommended a fertiliser subsidy of
Rp 1.2–1.5 trillion, which is projected
toreduceureaandotherfertiliserprices
by some15–20%, and the Ministry of
Trade and Industry has banned a re
-ported smallincrease in price by the
state-owned producer, PN Pusri
(Kompas, 9/10/02). Other regulations
proposed by the trade and industry
ministryarealsopotentiallydamaging
to farmer interests, most notably a
5–20% export tax on cocoa, a move
stronglycriticisedbytheExecutiveDi
-rectoroftheIndonesianCocoaAssocia
-tion(Askindo)(JP,12/10/02).
TariffsonRice. Therehas beencon
-siderablecontroversyovertheeffectsof projectedincreasesinthericetariff.The
supporters ofgreaterprotection argue
that Indonesiais merely adapting to
what isaveryunevenplaying fieldin
agricultural trade. Ontheother hand,
critics of a more interventionist ap
-proachhavepointedoutthatIndonesian ricepricesarenowalreadysignificantly aboveworldprices,thusartificiallydis
-torting incentives in favour of rice
against potentially more profitable
crops, farm and non-farm activities
(Bappenas et al. 2002; Timmer 2002).
They alsoarguethathigher riceprices tendtohurtratherthanhelp thepoor, mostofwhomarenetconsumersofrice. Thespecialricesubsidy(OPK),recently
increasedinvaluetoasmallernumber
ofhouseholds,tendstocushiontheim
-pact of higher prices on the poor, al
-thoughithasbeenestimatedthatonly
around halfreceive relatively meagre
support.However,afurtherincreasein thetariffwillreduce benefitsfromthe subsidy.
Critics of the push towards more
protectioninricealsodrawtwoimpor
-tant contrasts with the early period
whenBulogheldamonopolyoverthe
import of rice. Inthe periodofheavy
Bulog intervention in the 1980s and
1990s,domesticpricestrackedinterna
-tionalpricesquitecloselyina volatile worldricemarket. Currently,all indi
-cations are that world prices will re
-main low for sometime, with higher
levelsofpercapitaproductioninmany
countries. Major exporters (Vietnam
andThailand)holdlargestocksofrice, andcountrieslikeIndiaalsoplayarole
(21)
intheinternational tradefromtimeto time.Secondly,insofarasriceproduc
-ers were protected in earlier periods,
the trade-offwas substantial gains in
productionthrough the rice intensifi
-cation and extensification programs,
whichareunlikelytoberepeated.
While few would deny that in
-creased protection of rice farmers is
likelytoslowthelonger-termtransfer
of farmers into higher value added
crops,theimpact ofincreased protec
-tion on the poor appears to be less
clearcut.ACGE(Computable General
Equilibrium) modeltosimulatetheef
-fectsonthepoorofanincreaseinthe
tariff from 25% to 45% found that
highertariffsdoincreasetheincidence
ofpoverty(Warr 2002).Buttheimpact
wasquitesmall.Theresultsimplythat
the effects on the poor alone are not
enough to dropproposals for greater
protection. The analysis predicts that
themainbeneficiaries ofthepolicyare likelytobefarmlabouringhouseholds,
throughmoreemploymentandhigher
wagesfromincreasedproduction. The
netpositiveimpactonpovertyoccurs
mainlybecausethesehouseholdshave
thehighestincidenceofpovertyamong
socio-economicgroupsidentifiedinthe
model.
Theseresultsareawelcomereminder that the distributional impact and ad
-justmentcostsofmarket-orientedpoli
-cies are not always clearcut, despite
potentiallonger-termeconomicbenefits.
Theproponentsofreformmustdomore
thanmerelyassertthatpovertyallevia
-tionisservedbylessprotectionifthey aretoconvincea sceptical public,and gulliblepoliticians,thattheinterestsof wellorganisedproducergroupsarenec
-essarilyagainstthoseofthepoorinpub
-licpolicy.22
Thelonger-termcostsofmoreprotec
-tionwouldseemmuchhigherinthecase ofsugar.Themainissuestillappearsto
be theconflictbetweentheentrenched
interests of the sugar mill lobby and
thoseofbothconsumersandpotential
producersofagro-processedcommodi
-ties,whousesugarasaninput.Asagri
-culturalresearchers have longpointed
out, increasedprotection ofsugar and
sugarfactoriesislikelytobeattheex
-penseofmanyricesectorfarmers(and
workers) on Java, who thrive under
similaragronomicconditions.
Nevertheless, on the positiveside,
priorto this year thegovernmenthad
moved cautiouslyonagricultural pro
-tection, despitequite intense lobbying
fromfarmergroupsandfromsomere
-gions.TheMinistryofTradeandIndus
-try strongly rejected the East Java
attempttoimposeanimportbanforthat
province inearly July, and it appears
thatafteramonthofexperimentingwith
suchabantheEastJavagovernorwas
havingsecondthoughtsonwhetherthis
wasaneffectivepolicytoraisefarmgate riceprices(BisnisIndonesia,9/7/02and 8/8/02).TheMinisterofFinanceissaid to have rejected proposals forananti
-dumping tariffon wheat flour. There
have notbeenstrongsignsofagrow
-ing protectionist mood spread ing
from agriculture to other areas of the
economy(despitepressuresfrompro
-ducers and sectionsof the DPR), al
-thougharecentproposalforatariffon
garmentsisaworryingdevelopment.
FailingInfrastructure?
TheCaseofElectricitySupply23
Onemajorobstacle tonewinvestment
andincreasedproductionhasbeenthe
slowdowninconstructionofnewinfra
-structureandthemaintenanceofexist
-ingroad,port,telecommunicationsand
electricity networks. Fortunately, the
countryhadinvestedheavilyinphysi
-cal infrastructure duringthe Soeharto
era, andhenceexistingnetworkswere
better placed than in many countries
(22)
suffering economiccrises(e.g. Eastern Europe orthePhilippines inthe1980s and1990s).
Fiveyearsonthecracksarebeginning toappear,owingtoalackofpublicand
private investment. This was vividly
brought home to national capital resi
-dentsandbusinesseswhenJakartaand
surrounding areassufferedafive-hour
totalblackoutonThursday,12Septem
-ber(McBeth 2002).Theimmediatecause
of theblackout wasa break innearby
transmission lines. Buttheunderlying
problemrelatestofundingcutbacks and financialdifficultiessufferedbytheState
ElectricityCompany,PLN,inthewake
ofthecrisis.
The main challenge appears to be
medium term rather than immediate.
Forthepresent,thepowerneedsofthe countryarebeingmetbyacombination of public andprivate (captive)suppli
-ers,withsometwo-thirdsoftotalcapa
-city(33,000megawatts)beingsupplied
bythepublicsector.Moreover,thegov
-ernmenthas movedtoraise electricity
pricesfromthehighlysubsidisedlevels
ofthepast,andrecentlypassed anew
lawpavingthewayforprivatisationof PLNby2007, allowinggreaterflexibil
-ityinpricingandinvestment.(Ashort
-termeffect wastherelease ofurgently neededaidforpower.)Currentcapacity stillseemscapable ofcopingwithcur
-rentdemand—althoughtherearesome
tricky transmission issues to be dealt
with—and there remains a breathing
spacetoincreasegeneration,transmis
-sionanddistributionifinvestments(and decisions)areforthcomingintheimme
-diatefuture.
Nevertheless, thecountrywillneed
around2,000megawattsofnewgener
-atingcapacityperannumifinvestment
picksupandthecountrybeginstomeet
economicgrowthtargetsof5%ormore.
Newinvestment needs wouldthen be
around$2billionperannuminallstages
of the electricityproduction process,
muchofwhichwouldalmostcertainly
have to come from overseas private
sources.Becauseofuncertainty,largein
-vestors willprobably require a sover
-eign,notaPLN,guarantee(afterhaving
had their fingers burnt from unpaid
debts arising out of therupiah depre
-ciation of 1998–99); the governmentis
loath to offer such guarantees, given
the precedent it would set for other
public–privatesectordeals.Gasmaybe
anoptioninthemediumterm.Buteven
here,thecountrywillneedlargeinvest
-ments,andacapacitytodealwithasso
-ciatedlegalandsecurityissues.
LABOURPOLICY:
REGULATIONOUTOFCONTROL
Labour policy issues remained in the
spotlight in the latter half of 2002, in
the context of layoffs in key labour
-intensiveindustries, discussed above,
and associated fears of mounting
unemployment.24 Three interrelated
policyissuesdominatedpublicdiscus
-sion:(i)theemploymentimpactoflarge
increases in minimumwages inJanu
-ary;(ii)oppositionfromemployersand
unions to the drafts oftwo new acts
(undang-undang)regulatinglabourpro
-tectionandthesettlementofindustrial disputes;and (iii)labourunrest,espe
-cially associated with layoffs in the
modernsector.Thereremainsafunda
-mental disconnect between the advo
-cacy of labourrightscampaigners, on
the one hand, and thecomplaints of
business groups about labour regula
-tionandunrestontheother.Theformer failtoaddresstheargumentthatlabour
regulation jeopardises employment,
whiletheemployers’caseisnothelped
byoftenexaggerated claimsaboutthe
impact of someregulations, such as
multiple unionism at the plant level,
and the disruption caused by a more
militantunionmovement.
(23)
The flight of capital from labour
-intensive industries has been high
-lightedby theexit offoreigninvestors (especiallyKoreans)anddomesticfirms
fromthegarmentsandfootwearindus
-tries.DuringtheJunevisitofhisforeign minister,Badawi,theMalaysianambas
-sador also announced that Indonesia
waspricingitselfoutofexport-oriented
labour-intensiveindustries.TheKorean
ChamberofCommercereportedthat36
companies in garments, footwearand
toymakinghadcloseddowninthepre
-vious 12 months(JP, 23/8/02). Even
thoughthenumberofworkersaffected
isstillasmallproportionofthe500,000
reported to be employed in Korean
companies,theclosureofseveralhigh
profileNikeandReebokcontractorsre
-sultedinlabourprotests.
Once the largest exporter of Nike
footwearintheworld,with38%ofthe
market in 1996, Indonesia has now
slippedbehindChina,andmanyinves
-torshavesetupinVietnam,whoseshare
of exportsofNike productsrose from
2% in1996to16%in 2001–02 (Dhume
andTkacik 2002).NikeandReebokhave
beenatpainstostressthattheyarecom
-mitted to Indonesia, yet their actions
clearlysuggestotherwise(JP,31/8/02). Althoughprobablyoverstatingthecase, thefootwearmanufacturerandassocia
-tion head, Anton Supit, reports that
some200,000workerslostjobsinthein
-dustryoverthepasttwoyears(AWSJ, 13/8/02). It is a similar story in gar
-ments.GreatRiver,oneofthecountry’s largestexporters,reportedlyshedsome 5,000 of its 15,000 workers in thepast twoyears.
Inthefiveyears1996–2001,atatime
ofincreasingstrainsinthelabourmar
-ket, small and cottage firms absorbed
almost80% of employment growthin
manufacturing.Incontrast,thenumber
ofjobsinlargeandmediumfirmsgrew
hardlyatall,afterincreasingatslightly
lessthan10%perannum andaccount
-ing for more than half the new jobs
created in the sector in the decade
1986–96.25
MinimumWages:Employment Considerations ontheBackBurner
TheKoreanChamberofCommercere
-portedfourlabour-relatedproblemsin
Indonesia (JP, 23/8/02): ‘irrational’
wagepolicies(minimumwagesandex
-cessiveovertimepremiums);lowlabour
FIGURE6a RealMinimumWagesinMajor IndustrialCentres,1992–2002
(Rp,1996prices)
0 50 100 150 200 250
1992 1994 1996 1998 2000 2002 Jakarta Bandung Surabaya
FIGURE6b MinimumWagesinMajor IndustrialCentresinDollarTerms,1992–2002
($,currentprices)
0 10 20 30 40 50 60 70
1992 1995 1998 2001 Jakarta
Bandung Surabaya
Sources: Unpublished data, Ministry ofManpower and Transmigration; BPS, Indikator KesejahteraanBuruh[LabourWelfareIndicators],variousissues.
(24)
TABLE6 NominalValuesandEstimatesoftheRealValueofMinimumWages,1996–2002
Nominal Valueof Minimum Index RealMinimum Minimum KHM Wageas% (1998=100) Wage
Wage ofKHM (1998Prices) (Rp‘000) (Rp‘000 KHMa CPIb Deflatedby
permonth)a KHM CPI
Apr-96 122 132 0.92 0.52 0.48 234 257
Jan-99 180 253 0.71 1.00 1.00 180 180
Jan-00 225 266 0.85 1.05 1.02 214 220
Jan-01 307 343 0.90 1.36 1.12 226 275
Jan-02 363 422 0.86 1.67 1.26 218 289
aTheminimumwageeachyeartakesintoaccountestimatesoftheKHM(minimumphysical
needs)index inOctober–December ofthe precedingyear,andestimatedchangesinthe
KHMinthe preceding12months. The estimatesofthenationalKHMare unweighted averagesoftheprovincialKHMestimates.
bIndexoftheCPIforDecemberintheprecedingyear.
Source:MinistryofManpowerandTransmigration,unpublished data,andBPS,Indikator HidupPekerja,variousissues.
productivity; strikes;andpoorlawen
-forcement.Theterm‘irrational’presum
-ably refers to regulated wageshaving
risenbynearly40%(25%inrealterms) intheGreaterRegionofJakartaandin
Surabaya in the past two years. Al
-though they had fallen precipitously
during the crisis along with average
wages,real minimum wages (MW)in
major industrialareas hadreturnedto
10–30% above pre-crisis levels in real
rupiahterms,andin2002werecloseto pre-crisis levels in dollar terms at an
exchangerateofRp9000/$(figures6a
and6b).Indonesia’scompetitiveadvan
-tage from thecrisis-induced deprecia
-tionhadlargelybeeneroded.
Theterm‘irrational’mightalsohave beenusedtodescribeadjustmentsbased onameasureofbasicneeds,themini
-mum physical needs index or KHM
(Kebutuhan HidupMinimum).Onav
-erage,theneedsindexhas,implausibly,
been estimated by provincial wage
councils,oftenthroughaprocessofne
-gotiation,tohaveincreasednationwide byaroundtwicetheCPI(consumerprice index)overthepasttwoyears(table6).26
Despitethereportsofbusinessstress,
there was every indication that some
provinceswereplanningtoraisemini
-mumwagesbysimilaramountsin2003.
The Jakarta (Special Capital Region,
DKI) governmenthadalreadydecided
toexpandthebasicneedsindexfrom43 to55items,includingthepurchaseofa
range of consumer durables, seen as
needs ‘fitting’(layak)fortheconsump
-tionstandardsofJakartaworkers.27The
DKIWagesCouncilcameupwithafig
-ure of Rp 700,000 as the value of the
KHM inOctober2002, tobe usedasa
standardforminimumwageincreases,
implying, potentially, a rise of 18% in
January 2003 (Kompas,11/10/02). The
association of employers, Apindo,has
argued for no increase in the present
difficulteconomiccircumstances,asug
-gestionmetbyanotsogentlereminder
from the Minister of Manpower, and
(1)
headofthelargestunion,thatafreeze
onnominalwages ‘could’resultin in
-dustrialaction.
CompliancewithMWhadincreased
considerably by 2000inlarge andme
-diumfirms,establishing theminimum
as thestandard entry-level wage for
new,lessskilledworkers(SMERU 2001).
However,MWalsofeedintoovertime
rates,alreadygenerousbyinternational
standards,andthecostofseverancepay,
which had been increased and broad
-enedtocoverawiderrangeofworkers
through the controversial Ministerial
Decree150 passed in 2000(Dick 2001:
29).Risingwagecostshavecontributed
notonlytosignificant joblossesinthe
modern sectorbut also to a widening
wage gap between the protected and
unprotectedwagesectors,andtocrowd
-ingandlowerearningsintheinformal
sector(SMERU2001;BirdandManning
2002).
LabourLegislation:
StillanUnfinishedAgenda
The Korean Chamber of Commerce
complaintsaboutlegaluncertainty (JP,
23/8/02) relateprimarilytothe unre
-conciled tug-of-war between workers
andemployersovernewlabourlegisla
-tion.Asaresultofthisconflict,thepass
-ing of two proposed labour acts (a
combinedversionofwhichwasshelved
in 1998) has been repeatedly delayed.
Seeminglyclosetoafinalreadinginthe
DPR,thepassingofbothactswaspost
-poned yetagainattheendofSeptem
-ber(JP,28/9/02).
Theextraordinarily detailedLabour
ProtectionAct,draftedbytheMinistry
ofManpowerandTransmigration,cov
-ers severance pay, minimum wage
regulation,training,collectivebargain
-ing and a raft of labour conditions.
Unionoppositionrelatestoarticleson
employmentofcontractworkers,insuf
-ficient protection against dismissal
(withunionsarguingthatthenewdraft
law offerslessprotectionthantheold
1964 law), changes to the wording of
severancepayconditions,28andcondi
-tionsgoverningtherighttostrike.29Op
-position to the sister Settlement of
Labour Disputes Act arises mainly
fromtheproposedreplacement ofthe
present labour disputescouncils with
a labour court (to be staffed by one
regular and twoad hocjudgesat dis
-trictlevel)whichunions arguewould
putthematadisadvantage indisputes
vis-à-viswealthieremployers.
Employers, fortheirpart, weremost
opposedtoproposedclausesthatallow
paymentsforstrikingworkers(breaking
with theinternationallyaccepted prin
-cipleof‘nowork,nopay’);prescribethree
monthslong-serviceleave;andprohibit
nightworkforpregnantwomen.
Inpart,over-regulationand,implic
-itly, rentseeking bythe ministrycon
-tributetoconflictsbetweentheunions
and employers. Further, most ofthe
60-plusnewunionshaveaninterestin
opposing acts proposed by a man
-powerministerwhoisstillheadofthe
largest union, SPSI (Serikat Pekerja
Seluruh Indonesia), their major com
-petitor,and theonlyregisteredunion
forprivate sectorworkersfor mostof
the New Order period. More funda
-mentally, there is widespread belief
amongunionsandcivilsocietygroups
that it is nowlabour’s turn to gain a
fairer shareofthepie.
Few commentators have been pre
-paredtofaceuptothegenuinedilemma
ofhowtoextendlabourprotectionwhile
at thesame timeencouraging employ
-ment.Simplisticinterventionsbysome
influential commentators have not
helped toclarify thepotential costsof
labour regulation.30 The Minister of
TradeandIndustry,RiniSuwandi,has
publicly drawnattentiontothepoten
-tialcostsoflabourunrestoverthenew
(2)
labour acts and minimum wages (JP,
7/7/02; 24/8/02). But,while the gov
-ernmenthasstressedtheimportanceof
employmentforwelfareandsocialsta
-bility, therehas beenlittleevidenceof
efforts to reconcile the pursuit of this
objectivewiththecoststoemployersof
increasinglabourregulation.
MigrantLabour
The management of migrant workers
emergedasamajornationalissuewith
the forcedrepatriation fromMalaysia
of some 400,000 illegal Indonesian
workers beginning early in 2002, cul
-minatinginaminorcrisisasmigrants
flooded exit points to Indonesia in
July–September.31Illegallabourmigra
-tion has been spurred by large wage
differentials betweenthetwocountries
(whichwidenedwiththelargerupiah
depreciation duringthe economiccri
-sis), combined with the Malaysian
policyoflongturningablindeyetoil
-legal immigration as it sought cheap
labour in declining industries, con
-structionand services.32
Why did the migrantworker crisis
occur?Followingaseriesofhalf-hearted
crackdownsinthe1990s,theMalaysian
government announced a ban on the
hire ofany new Indonesian workers,
andtheplannedreductionofthenum
-beroflegallyapprovedworkersby50%
inearly2002.33InMarch,itannounced
anamnestytofacilitatetherepatriation
ofillegalworkersbya31Julydeadline.
Anewlawprovidedforuptosix-month
gaoltermsforillegalworkersandtheir
employers,including thepossibility of
caning(cambuk)anda potentialfineof
uptoRM10,000.
Bythedeadline,onlyaround250,000
illegalmigrants werereported tohave
returnedtoIndonesia(Kompas31/7/02;
7/8/02; 10/9/02) , and a migrant–
refugeecrisisemergedontheislandof
NunukaninEastKalimantan,thepoint
ofdepartureandreturnformigrantsin
East Malaysia, where the number of
strandedreturningmigrantsisreported
tohave swelledto30,000 inearlySep
-tember.34
Becauseofthiscrisis,theMalaysian
governmentextendedtheamnesty,and
in midAugust it repealed the ban on
hiring newIndonesian workersowing
tolabourshortagesonmanyconstruc
-tion projects in thevicinity ofKuala
Lumpur, including workon the new
national capital at Putrajaya (FEER,
12/9/02).
ThecrisisonNunukan,andespecially
theclauseinthenewMalaysianlawre
-lated to caning of offenders, brought
strongreactionsfromIndonesianlead
-ers (JP,30/8/02). Inlate August anti
-Malaysian demonstrations erupted in
Jakarta, Malaysian visitors were de
-tainedinNorthSumatraandtheMalay
-siangovernmentadviseditscitizensnot
totraveltoIndonesia.
The labour market effect of return
migrationhasnotbeenaslargeasisof
-ten claimed,because thetotalnumber
ofsome400,000returnmigrants(bylate
September), many with considerable
savings, is still equivalent to only
around 5% of all unemployed. How
-ever,itislikelytobesignificant inma
-jorsendingareasinEasternIndonesia,
where the loss of incomefrom remit
-tances willprobablyhavealargeindi
-recteffectonincomes.
Unfortunately,itseemsunlikelythat
improvements willoccurintheadmin
-istrativeframework,giventhespeedof
theMalaysiangovernment’sreversalof
itsoriginalban,andtheseeminginabil
-ityoftheIndonesiangovernmenttode
-velop a clear policy response. Many
private organisations, including now
over400officiallyapproved recruiting
agents,and numerous governmentof
-ficialsintheMinistryofManpowerand
theimmigrationservice,havelongstood
(3)
togainfromrentsearnedfromtheplace
-ment of workers abroad.35 A former
headoftheLabourRecruitingAgency
Association(Apjati)arguedthatifIndo
-nesiawantedtocleanupthelabourmi
-grationprocessthegovernmentwould
need to ‘replace theentire Ministryof
ManpowerandTransmigrationadmin
-istrationinvolvedwithoverseaswork
-ers’(Kompas,23/9/02).
Notingwidespreadreportsofcollu
-sion between officials and labour re
-cruitingagencies toprofitfromlabour
migration,humanrightsobservershave
recommended thatIndonesia establish
anindependent bodytoadministerall
aspectsoftheprocess,asinthePhilip
-pines. At the sametime,however, the
currenthighdegreeofregulationofre
-cruiting,departureandplacementwill
need significant reassessment if mi
-grantsaretobeprotectedfromrentseek
-ersonbothsidesoftheborder.
PROGNOSIS
AsIndonesiamovesclosertothegen
-eral electionin 2004, the government
faces a major challenge to stall back
-trackingonkeyreformsandtosustain
newlygainedmacroeconomicbalance
in thewakeofthe Balibombingsand
predictedpoliticalunrestoverthefall
-outfromBali.WillIndonesianowsettle
intoa‘Philippines’pattern,withanex
-tended period of slow and unsteady
economic growthand smallimprove
-mentin living standards?Or, despite
sometimes messy and unpredictable
politicaloutcomes,canitreturntothe
‘EastAsian’modelofrapid economic,
employmentandproductivity growth,
andsustainedimprovements inliving
standards?
Sceptics, probably in the majority,
pointto the absence of strongleader
-ship inprovidingbacking for reform,
privatisation, bank restructuring and
disposalofIBRA-controlledassets.The
retiringHead oftheWorld BankMis
-sion, Mark Baird, in notingthat cor
-ruption was now more harmful to
development than in the past, listed
fivedauntingmedium-termchallenges:
to improvetax and customsadminis
-tration; to achieve a better balance in
labourpolicies;tocontaintheprolifera
-tion of regulations in the regions; to
speedupassetsalesandprivatisation;
and to improve theregulatoryframe
-work forinvestment, especially in in
-frastructure (JP,5/9/02).
In challenging the sceptics,a more
optimisticviewwouldgivethepresent
administration credit for providing
greater political stability, essential for
renewed and sustained investment. It
wouldnotethatPresidentMegawatihas
backedherfinanceministerinpursuing
reformstogetthebudgetbackontrack
and restoremacroeconomic stability,
and in rejecting anearly exitfromthe
IMF specialsupport program.Despite
accusationsofbeingacentralistatheart
andtooclosetothemilitary,shehasre
-affirmed hersupport forthemajor re
-forms of the previous post-Soeharto
governments, especially decentralisa
-tionandthespecialautonomylawsfor
PapuaandAceh,andhasoverseenthe
importantconstitutionalamendmentsat
theAugustMPRmeeting.
InthelightoftheBalitragedy,thefirst
hurdle is surely to maintain macro
-economicstabilityandresistmounting
pressuresforspecialprivilegesandpro
-tection,withaneyetorealisingacred
-ibleeconomicgrowthratefor2003.The
patternofgrowthalsomatters:itshould
supportmanymore‘better’jobs,tocon
-tribute to rising living standards,and
greater resolve is surely needed in
microeconomic areassuchastradeand
labour policy to achieve such an out
-come.
(4)
NOTES
* ChrisManningwasemployedwiththe PartnershipforEconomicGrowth(PEG) –Bappenas(USAID)atthetimeof writ-ing.Hewishes tothank colleagues at PEGforsupportinpreparingtheSurvey. 1 SeeTheVanZorgeReport,2–9September 2002(including along interviewwith JacobTobing,the Head oftheAdHoc DraftingCommittee).
2 TheroleoftheDPD,essentially,willbe toreviewthebasiclegislativeframework ofregional government and consider budgetissuesfortheregions.
3 An unsuccessful PDI-P (Indonesian DemocraticPartyofStruggle)candidate reportedtothepressonthedayafterthe electionthathehadpaidRp200million ($22,200)eachto40councillors. 4 The December figuresare heavily
dis-tortedbyseasonalfactors.
5 The interbank rate shown in figure 3 closelytracksthepolicydeterminedSBI rate.
6 Thetemporarydipinthefirsthalfof2002 wouldappeartoreflectthedelayin ad-justmentofinflationary expectations to the tightening ofmonetary policy that occurredaroundthebeginningof2002. 7 Itisclearfromfigure3thatBIputsmost
emphasisoncontrollingnominal inter-estratesratherthanmoneygrowth,even thoughall theLOIstothe IMFcontain moneygrowth targets butnot interest ratetargets.
8 Atthetimeofwritingitwastoosoonto tellwhetherthebombingoutrageinBali wouldsignificantly affecttheaverage exchangerateforcalendaryear2002. 9 A Ministry ofFinance analysis breaks
downthe5%targetgrowthfor2003into thefollowingcomponents: private con-sumption,6.38%;government consump-tion,7.07%;investment,6.24%;exports, 5.38%;andimports10.86%.
10 SeeDeuster(2002)fordetailsoftotal ex-ternalanddomesticdebtandthe matu-rityprofileofdomesticdebtoutstanding. 11 The2002 budget allowed forbond re-demptionsamountingtoRp3.9trillion tobefinancedbynewissuesinthesame amount.
12 Anotheroptionthathascaptured atten-tionrecentlyistheproposaltoissue Trea-surybills(‘T-bills’)withshortmaturities. This wouldachieve nothing, however, otherthantoputanewlabelona por-tionofthe government’sdebt. Debtis debt,regardless ofwhether it iscalled bonds,borrowingsorT-bills.
13 Inthecaseofassetforbondswaps,itis unclearwhythismethodwouldbe pre-ferredtoopenauctionsofIBRA’sloan portfolio. The danger of nego tiated swaps isthatthe implicitprices ofthe bondsandassetsinquestionwillbe dis-tortedawayfromtruemarketvaluesin amannerthatisnottransparent tothe generalpublic.
14 Thegovernmentalsoholdsdepositswith commercialbanks,theaverage amount ofwhichroughlydoubledbetween1999 and2001toaroundRp40trillion.These couldberundownsignificantlywithout increasingbasemoney,butthescopefor thisissmallincomparisonwiththe vol-umeofbondsoutstanding.
15 Thedetailsofalimitedhaircutapproved inapresidentialdecreeinlateJulyareto beworkedoutjointlybytheMinisterof FinanceandtheMinisterofState Enter-prisesforSMEs.
16 GrowthinexportstaperedoffinJulyand August2002, however, fallingby 3.5% fromtheirJunelevel,largelyasaresult of slower growth in non-oil and gas exports.
17 Based ona reporton visits by PEG– Bappenas consultantsto large export companiesinthefirsthalfof2002.One majorelectronicsmanufacturerreported thatcloseto100%ofallmoreadvanced technology goods destined forthe do-mestic market (eg. DVDs, VCDs, cell phones and higher quality consumer durables)werebeingsmuggledintothe country,oftenbymajorexporters. 18 SeeAthukorala(2002:146)ontheearlier
PSIsystem.
19 TheMinisterofAgriculturefavours sub-sidiesratherthanhighertariffs,arguing thattheywillprovidegreaterassistance tofarmers.
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20 Thanks are duetovaluable comments fromSteveMarksandPeter Rosneron thisissue.
21 Oneproposal supportedbyBulog isa quota–tariff scheme (Tabor,Sawitand Dillon2002).
22 DespitetheCGEstudy’svaluein exam-ininggeneralequilibriumeffects,the va-lidityofassumptionsontheimportance of riceconsumption inbudgetsofthe poorisunclear,andonemightquestion thelowrateofsubstitutability between imported and domestically consumed riceimpliedinthemodel.
23 Theauthorsareespeciallygratefulto Pe-terMcCawley formaterial onthe elec-tricityindustry.
24 SeeespeciallyTheVanZorgeReport,14–21 August2002:4–16.
25 Basedondata fromthe BPS industrial surveys.
26 According to official guidelines, the KHMisonlyoneofsixfactorstobetaken into account in adju sting minimum wages,yettheotherfivearelargely ne-glectedinthecalculation.
27 Infact,owing todisagreementsamong thepartiesonpriceincreases,theJakarta government side-steppedthe issueof determiningtheKHMin2001forwage adjustmentsin2002,andinsteadusedan estimateofpercapitaincometoset mini-mumwagesinJanuary2002.
28 Thenewseverancepayregulations (re-flectedinarticles145–166intheact)not onlyincreasedthelevelofpaymentsto someworkersbutalsoexplicitlysetthese paymentsasa‘minimum’,contributing toclaimsforhigherseverancepay. 29 SeeespeciallyreportsinJP,7/7/02;and
Kompas8/8/02;9/9/02.
30 Chatib Basri and Moh. Ikhsa n (JP, 15/8/02;Kompas,8/8/02)havebeen al-mostlonevoicesdrawingattentiontothe
costsofhigh minimum wages.For ex-ample, the ILO director in Jakarta re-ceived front-pagebilling intheJakarta Post (24/8/02),for gratuitously point-ingoutthatlabourproblemswerenotthe ‘major’problemforforeigninvestors. 31 Thetotalnumberofmigrantworkersin
Malaysia wasestimatedat aroundtwo million in early 2002, around 70% of whom were Indonesians and 60% of theseillegal.Abouttwo-thirdsof Indo-nesiansworkedinWestMalaysiaanda furtherone-thirdinEastMalaysia,most ofthelattergroupbeingfromEastern In-donesia.
32 LegalworkersgenerallyearnedRM500– 1,000 (Rp 1.1–2.3 million) amonth in early2002,3–5timeswhatmanycould earn inmostly uncertain jobsin Indo-nesia, and illegal unskilled workers earnedaroundRM300–600.
33 Theintroductionofthenewpolicywas followedbymigrantworkerriotsaftera raidonafactoryandthearrestof16 In-donesian workers inJanuary–February 2002.
34 Over3,000people werereported tobe sufferinghealthproblemsand64deaths hadbeenreportedtotheendofAugust, aroundone-thirdasmanyasdiedinthe Balibombings.
35 Migrationishighlyregulated,permitting rentstobeextractedfromthecompanies andtheauthoritiesatvariousstages: re-cruiting companies hav e to obtain employmentordersfromoverseas com-panies,andthenrecruitpotential work-ers,prepareandequipthem,andarrange fortheirtraveltooverseasdestinations. Inmostcases, thecompaniesmakean advancetotheworkers(ofRp3–6million orRM1,500–2,500),tobedeductedlater fromtheir wages.All contracts are re-newableaftertwoyears.
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