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Bulletin of Indonesian Economic Studies
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Survey of recent developments
Arianto A. Patunru a;Christian von Luebke b a University of Indonesia, Jakarta b Stanford University, Online publication date: 17 March 2010
To cite this Article Patunru, Arianto A. andvon Luebke, Christian(2010) 'Survey of recent developments', Bulletin of
Indonesian Economic Studies, 46: 1, 7 — 31 To link to this Article: DOI: 10.1080/00074911003642229 URL: http://dx.doi.org/10.1080/00074911003642229
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Bulletin of Indonesian Economic Studies, Vol. 46, No. 1, 2010: 7–31
SURVEY OF RECENT DEVELOPMENTS
Arianto A. Patunru* University of Indonesia, Jakarta Christian von Luebke* Stanford University
Recent political developments are slowing reforms. The Corruption Eradication Commission (KPK) and the ﬁnance ministry ﬁnd themselves entrapped in legal inquiries and political wrangling that seem intended to weaken their reforming zeal. KPK’s effectiveness has been undermined by legislative changes and the arrests of three of its commissioners. Meanwhile, the costly bail-out of a small bank has provided an opportunity for attacks on leading reformers – Vice President Boediono and the Minister of Finance, Sri Mulyani Indrawati. The president’s difﬁdent stance in both instances has played into the hands of the opposition and, although key reformers are likely to remain in ofﬁce, the political imbroglio has nonetheless eroded conﬁdence in the government. Year-on-year GDP growth recovered strongly to 5.4% in the fourth quarter of 2009. Government spending has been the key driver, while household spending slowed and investment remained low. Both exports and imports have returned to modest growth. Although 2009 ended with low inﬂation, Bank Indonesia (BI) has set its target inﬂation rate for 2010 at double the rate it achieved in November. BI is likely to bow to populist demands to lower nominal interest rates rather than raising them somewhat to prevent inﬂation accelerating, even though its real policy rate has been consistent with signiﬁcant acceleration of GDP growth. The 2009 budget outcomes conﬁrm that the ﬁscal stimulus in response to the global ﬁnancial crisis has been less than hoped for. As for 2010, high world oil prices will imply huge subsidies, given that the government is unwilling to increase domestic fuel and electricity prices commensurately. The president announced that virtually all the government’s ‘ﬁrst 100 days’ program targets have been met. However, half of the ‘action plans’ amounted to nothing more than issuing or announcing new regulations, plans, blueprints, guidelines, recommendations or policies, or simply preparing drafts of these. No real progress has been made in relation to the most urgent reforms, particularly on energy subsidies and labour market regulation. Realising that the whole population would beneﬁt in net terms, the previous government signed the ASEAN–China Free Trade Agreement (ACFTA) in November 2004. But just when the agreement was to take effect, strong resistance from business and parliamentarians emerged, leading to the government’s decision to re-negotiate many tariffs with China. This is disappointing: failing to uphold its commitments under this long-standing agreement makes Indonesia appear unreliable as an economic partner.
The authors thank Erna Zetha and Susi Haryani for data and logistics assistance. Christian von Luebke gratefully acknowledges the ﬁnancial support of the German Research Foundation (DFG).
ISSN 0007-4918 print/ISSN 1472-7234 online/10/010007-25 DOI: 10.1080/00074911003642229 © 2010 Indonesia Project ANU
deputy commissioners Chandra Hamzah and Bibit Rianto were arrested on corruption charges. less corruption. Patunru and Christian von Luebke RECENT POLITICAL DEVELOPMENTS Nation-wide demonstrations on 9 December 2009 – World Anti-Corruption Day – served as a reminder that Indonesia’s reform challenges have reached new levels of complexity. During its sixyear existence the agency has achieved an impressive track record. in response to public outrage following the release of taped conversations that appeared to reveal police involvement in a conspiracy against them. There were three controversial arrests of KPK commissioners in 2009. at least. particularly those of Chandra and Bibit. Public dismay had been fuelled by the arrests of three commissioners of the Anti-Corruption Commission (Komisi Pemberantasan Korupsi. then chief commissioner.7 trillion bail-out of the troubled Bank Century. KPK seems to have fallen victim to its own success. box 1) to support the KPK publicly. are themselves likely to be (or. to have been) involved in malfeasance. Antasari Azhar. In May. especially.8 Arianto A. Then in October. reﬂected elite resistance to the anti-corruption drive. Many observers (for example.. mechanisms that seek to monitor and penalise ofﬁcials’ misbehaviour may be of little use . KPK). The resulting political quagmire has been a severe distraction from the government’s ‘ﬁrst 100 days’ program. KPK in the cross-hairs McLeod (2005a: 383) argued that when corruption and malpractice are endemic. Antasari was sentenced to 18 years in prison. the attorney general’s ofﬁce and the parliament (DPR) – have been involved in attacks of some kind against the commission. Equipped with 1 One witness in the Antasari trial asserted that top-level police ofﬁcials gave orders ‘to spin the [statement] of … Antasari … from the original “bribes paid to certain KPK employees” into “bribes paid to KPK leaders”‘ (Jakarta Post [hereafter ‘JP’]. [since] other individuals within the same system need to take ﬁrm action against those found to be corrupt.. and the Minister of Finance. The arrests sparked nation-wide protests and prompted national leaders such as former President Abdurrahman Wahid (who died on 30 December 2009. Bibit and Chandra were released from police custody in early November. believe that the arrests.. has emboldened political opponents to attack two of the country’s most steadfast reformers: the vice president. Thousands of citizens voiced demands for better governance and. Discontent was further fanned by media reports of a Rp 6. was charged with master-minding the murder of a businessman under investigation by the KPK. which many saw as part of a campaign to stiﬂe this new and hitherto highly successful institution.1 In general. but .. and casts considerable doubt on whether much-needed public sector reforms can be realised. . Sri Mulyani Indrawati. Thus it comes as no surprise that key state institutions whose members the KPK has exposed as corrupt – the police. 13/11/2009). Boediono. The difﬁdent response of the president. Sukma 2009: 332). including unsubstantiated allegations that the bail-out involved some kind of subterfuge to channel government funds to the 2009 election campaign of President Susilo Bambang Yudhoyono (SBY). especially in the Bank Century case. however. as they are in Indonesia.
It has revealed transgressions by senior parliamentarians. As head of Indonesia’s largest Islamic organisation. Christians. His natural. and his attempts to normalise relations with Israel – helped to reduce inter-faith friction and paved the way for a peaceful democratic transition. Nahdlatul Ulama. his overturning of repression of Chinese language and traditions. after a failed attempt by Gus Dur to dissolve parliament. the DPR voted to impeach the president and replace him with Megawati Soekarnoputri. One thousand candles were lit to commemorate the accomplishments of the late religious leader. Abdurrahman Wahid – widely known as ‘Gus Dur’ – passed away in a hospital in Jakarta. As Indonesia’s fourth president. raising hope that future leaders will follow in his footsteps and uphold the traditions of pluralism and tolerance he held so dear. he was an unwavering advocate of peace and reconciliation. police ofﬁcials and business people. a visionary Muslim cleric who promoted a greater openness in mainstream Islam towards other religious traditions. it highlighted his humility and compassion in social dialogue. But shortcomings during his presidency do not diminish Gus Dur’s vast contributions to the Indonesian nation. freeze bank accounts. In September 2009. His alleged involvement in the 2000 Bulog (national logistics agency) ﬁnancial scandal and his accommodating stance on Papuan and Acehnese separatism only served to fuel tensions further. bureaucrats. Reconciliatory gestures during his term in ofﬁce – including his apology for anti-communist violence in 1965. Gus Dur’s legacy will remain in the minds and hearts of many. Even the president seemed to support the emerging criticism. In July 2001. While Wahid’s frailty may have been a disadvantage in politics. The ‘father of pluralism’. 25/6/2009). The reputation of Gus Dur will live on far beyond his death. Gus Dur attained little acclaim. His short presidency during Indonesia’s early democratic transition (1999–2001) was beset by political friction. will be remembered for his vision of an Indonesian nation in which tolerance and solidarity transcend religious and ethnic divides. DPR legislators drafted a new . unpretentious demeanour attracted people from all walks of life.Survey of recent developments 9 BOX 1 ABDURRAHMAN WAHID: FATHER OF PLURALISM Indonesia has lost one of its foremost champions of integration and multiculturalism. On 2 January. On 30 December 2009. as President Yudhoyono describes him. noting that ‘KPK has developed into a super-body … that is accountable only to Allah’ (Kompas. KPK has also faced considerable opposition in parliament. but its efforts to target the higher echelons of power are being met by increasing resistance. Apart from its conﬂicts with the police force. Gus Dur never succeeded in aligning political interests and coalition partners. enforce travel bans and prosecute corruption suspects – the commission has a conviction rate of 100%. Buddhists and Hindus alike – gathered around Jakarta’s Proclamation Monument to pay their last respects. Facing a fragmented parliament with 21 political parties. hundreds of Indonesians – Muslims. far-reaching powers – including the authority to wire-tap conversations.
Interestingly.76 trillion by July 2009 (ﬁgure 1).63 trillion. and BI brought the Bank Century case to the Financial System Stability Committee (Komite Stabilitas Sistem Keuangan.4 to –3. Despite these liquidity injections the bank continued to falter. its problems reached new levels of urgency. Although public protests and last-minute intervention by the president safeguarded KPK’s core investigative functions. it called for the replacement of the national anti-corruption court by 33 provincial corruption courts. whose judicial panels would be appointed by existing district courts. The initial draft of the bill aimed to abolish KPK’s authority to wiretap conversations and prosecute corruption suspects. The bill provoked considerable criticism because it subordinated KPK operations to traditional law enforcement structures. It therefore approved the bail-out on 21 November. During the global ﬁnancial crisis (GFC). The newly appointed BPK chairman. were accompanied by calls for the resignations of Boediono (who was BI governor at the time of the bail-out) and Sri Mulyani. While BI’s initial estimate of its likely cost was just Rp 0. KSSK). was seriously concerned that the failure of even a small bank could have a deep psychological impact throughout the banking system. far below the prescribed minimum of 8%. turning the institution into a ‘toothless tiger’. and eventually to Rp 6. its CAR was estimated to have plummeted to –35. According to the Supreme Audit Agency (Badan Pemeriksa Keuangan. the bank’s track record included several banking law violations between 2004 and 2008 that were not adequately dealt with by the central bank. coloured by speculation that the bail-out funds had beneﬁted SBY’s election campaign. LPS) had ballooned to Rp 5 trillion by the end of 2008. It was not until August that newly elected DPR members began to criticise the decision. on 14. In light of the simultaneous attacks on its commissioners by other law enforcement agencies. The Bank Century bail-out Another episode that has captured public attention is the bail-out of Bank Century. These political attacks were further invigorated by a report on the bail-out by BPK in mid-November. chaired by ﬁnance minister Sri Mulyani. Bank Indonesia (BI) (BPK 2009). Bank Century – the result of a merger of three ailing banks in December 2004 – has provided much cause for concern. the actual disbursements required by the Deposit Insurance Corporation (Lembaga Penjamin Simpanan. the bill will nonetheless reduce the efﬁciency and independence of corruption prosecutions. Hadi Purnomo – a former tax chief dismissed by Sri Mulyani in 2006 in a bold move to root out graft in the . BPK). Patunru and Christian von Luebke anti-corruption bill that overtly sought to diminish the commission’s investigative powers. BI responded by providing three ‘short-term funding facilities’. 17 and 18 November. by dispersing corruption courts across provinces and reducing transparency in the appointment of judicial panels. although LPS disbursements to the bank had by February 2009 increased nine-fold from the initial estimate.9%. In addition. The committee. Ever since its establishment. given existing turbulence in ﬁnancial markets as a consequence of the GFC. such that between September and October 2008 its capital adequacy ratio (CAR) fell from 2.5%. the bail-out was virtually ignored before the parliamentary and presidential elections in April and July 2009.10 Arianto A. totalling Rp 689 billion (about $73 million). Media reports. the overt resistance in parliament to KPK’s continued effectiveness suggests that its leaders should brace themselves for an uphill battle. By 20 November 2008.
Pansus member Bambang Soesatyo (of the Golkar party). 16/1/2010). even minutes [to sustain] ﬁnancial markets’ (Kompas. Some of the most outspoken critics were guilty of inconsistency. the bail-out was necessary to sustain ﬁnancial sector conﬁdence and stability. however. but in a matter of hours.2 had argued in April 2008 that the government needed to act ‘not in a matter of days. 24-Jan-2009 24-Mar-2009 24-May-2009 24-Jul-2009 ﬁnance ministry (McLeod 2008) – declared that Rp 2. By preventing contagious bank runs. the government contributed to Indonesia’s success in weathering the GFC better than most Asian countries (JP. politicians eager to attack the government – including those from parties supposedly in coalition with SBY’s Democratic Party (Partai Demokrat. . Soesatyo refused to apologise (Kompas. 28/4/2008). or Pansus) to probe more deeply into the Bank Century affair. According to the ﬁnance minister and the former BI governor. 13/12/2009). Boediono and other KSSK members left the strong impression that scoring political points and discrediting senior ofﬁcials was more important than adding substance and clarity to the case. PDI-P). Televised cross-examinations of Sri Mulyani. 23/11/2009). having themselves pressed for rapid and far-reaching government intervention as the GFC peaked.Survey of recent developments 11 FIGURE 1 Bank Century: Cumulative Deposit Insurance Corporation Disbursements (Rp trillion) 7 6 5 4 3 2 1 0 24-Nov-2008 Source: BPK (2009). His colleague Maruarar Sirait (of the Indonesian Democratic Party of Struggle. Technical arguments about systemic risk and the relative cost of bailing out or liquidating the bank failed to resonate with the parliamentary inquiry committee. PD) – voted to set up a special parliamentary committee of inquiry (Panitia Khusus. who was one of the 2 Soesatyo accused Mulyani through the press of having met secretly with Bank Century president director Robert Tantular before the KSSK approved the bail-out.9 trillion of the LPS disbursements were illegal and required further investigation (JP. Although this allegation was quickly disproved. who levelled a series of media attacks against Sri Mulyani. On the basis of the BPK report.
the United Development Party). who had become persona non grata for the party’s chair. it provided a possible means to unseat Mulyani. his public approval rating declined signiﬁcantly. Gunawan and Siregar 2009: 22–3). In short. Tensions increased further when the minister issued travel bans on executives from certain Bakrie companies accused of tax evasion. Conﬂict between Mulyani and Bakrie – one of the country’s wealthiest citizens – appears to be at the heart of the current political turmoil. which remained a somewhat reluctant coalition partner at best. His relationship with Golkar is particularly challenging – not only 3 PKS (Partai Keadilan Sejahtera. Although the president’s behaviour may reﬂect a desire to maintain a clean. and PKB (Partai Kebangkitan Bangsa. Mulyani publicly refused Bakrie’s request to close the stock exchange after Bakrie-controlled companies rapidly lost 30% in value (Wall Street Journal. For the opposition parties (PDI-P. In the KPK drama it was the force of public opinion – not the intervention of the president – that secured the release of KPK deputy directors Bibit and Chandra. In October 2008. . And for Golkar. the National Awakening Party). which has tied Mulyani up in long-winded hearings and the need to defend herself against media attacks. PAN. 13/10/2008). Because he persevered with the strategy of forming a ‘rainbow coalition’ cabinet. 10/12/2009. Patunru and Christian von Luebke most vocal critics of the bail-out. the case provided a useful platform from which to press for his replacement. President Yudhoyono has remained a somewhat disengaged observer of these important political developments. PPP (Partai Persatuan Pembangunan. it appears that political parties – from within and without the current coalition – have exploited the investigative powers of the Pansus primarily to advance their political agendas. the parliamentary inquiry offered an opportunity to undermine the government’s anti-corruption image. A reconciliation meeting initiated by the president in early November 2009 seemed only to worsen the conﬂict.3 who were unhappy with SBY’s choice of the technocrat Boediono as his vice-presidential running mate. It has grown out of a series of issues. 16/12/2009). 17/1/2010). PPP and PKB). the president is likely to face a continuing tug-of-war among diverse party interests. For the Islamic parties (PKS. and opposed his plans to buy into one of the country’s largest gold mines. Aburizal Bakrie. Presidential leadership Despite his sweeping electoral victory in 2009. from 85% in July 2009 to 70% in January 2010 (JP. the Prosperous Justice Party). 28/1/2010). reformist image.12 Arianto A. She has also reportedly urged Bakrie to take responsibility for the Lapindo mudﬂow disaster (McMichael 2009). and shortly afterwards the Golkar chair gave his blessing to the parliamentary committee inquiry (JP. the National Mandate Party). Hanura and Gerindra). while SBY’s reluctance to defend Boediono and Mulyani with any vigour merely encouraged political opponents to step up their attacks on the government and its reform agenda (JP. making it very difﬁcult to advance any reform agenda (Diamond 2009: 338). had urged the ﬁnance ministry in October 2008 to ‘take immediate action to prevent the crisis from hitting capital markets and spreading to the banking sector’ (Suara Pembaharuan. PAN (Partai Amanat Nasional.
At the same time. who have become increasingly risk-averse and disconsolate owing to the political attacks surrounding Bank Century and the lack of strong support from above. rendering the government unwilling to take the risk of reducing hugely wasteful and regressive fuel and electricity subsidies in the face of world oil prices far above the original budget estimate. while the vice president has four special staff and one secretary. for example. which broadcast all the Bank Century inquiry sessions. . political disruption has already exacted a toll. the president will ﬁnd it difﬁcult to rebuild trust with his technocrat ministers. Indeed. military chief. Suharmoko and Witular 2008). but also because its chair. UKP4 is tasked to serve as a delivery or ‘de-bottlenecking’ unit. Executive proliferation A related cause for concern is that the executive has grown very large in terms of key high-level ofﬁcial posts. Its size creates difﬁculties for effective coordination and efﬁciency in policy making. given that some were reportedly not consulted in advance 4 Golkar chair Bakrie controls ‘TV One’. Surya Paloh. and the effect of this can be expected to cascade down to lower levels of government. given the overlap in responsibilities. A curious aspect of the expansion of the executive under SBY is the unexpected appointment by the president in December 2009 of deputy ministers in 10 of the ministries. The head of Golkar’s advisory council. legal and security affairs. police chief. but it is not clear how its head will undertake coordination alongside the three coordinating ministers (for political. 5 In addition. the economy. It is to be hoped that the ministers will be helped rather than hindered by these appointments. For example. Uncertainty about the future role of this group of ministers will reduce private sector willingness to commit to new investments. making it virtually impossible to achieve the targeted growth rate of 7% by 2014. the president has 10 special staff. rivalry between Paloh and Bakrie appears to have led more recently to coverage by Media Indonesia and Metro TV that is more sympathetic to the ﬁnance minister. the president cannot afford to lose private sector trust: any short-term political gain from ousting technocratic reformers would be far outweighed by longer-term economic costs. And although the president claims to have achieved most of the ‘ﬁrst 100 days’ objectives. trade and growth. However. with the perverse result that nothing at all gets done. Bakrie. one secretary and an advisory board with nine members. owns the newspaper Media Indonesia and the news channel ‘Metro TV’. UKP4]).5 Not since the Soekarno era has Indonesia had such a large cabinet. is widely believed to have provided substantial ﬁnancial support to Yudhoyono’s presidential campaign (see. and people’s welfare) without creating tensions. In his quest to re-invigorate investment. and head of the Presidential Unit for Development Supervision and Control [Unit Kerja Presiden untuk Pengawasan dan Pengendalian Pembangunan. Another danger is that each side may rely on the other to manage coordination.Survey of recent developments 13 because Golkar controls important media networks4 and a well-institutionalised machinery. since the need for ‘de-bottlenecking’ would seem to imply a failure of the coordinating ministers to do their job properly. The cabinet now consists of 34 ministers (including three coordinating ministers) and four ofﬁcials with rank equivalent to ministers (attorney general. progress in key policy areas has in fact been slow.
But since many exports have a high import content. but its reluctance to engage with the world economy has helped to condemn its people to very low standards of living. By contrast.2% to 5. has certainly suffered from the crisis but. Growth After falling steadily from 6. There is the possibility of disruptive conﬂict between deputy ministers and secretaries-general in the respective ministries. This is in sharp contrast with the three countries’ relative performance during the 1997–98 ﬁnancial crisis. respectively (Hill 2010). their appointment to these positions may be a misallocation of human resources. Nevertheless. tending to offset the impact on the level of output. such that GDP for the whole year increased by 4. Thailand and Singapore were around 80%. MACROECONOMIC DEVELOPMENTS Indonesia’s economy has remained surprisingly resilient to the GFC. so as to protect itself from external shocks like the GFC. but if they have no clear authority to exercise their vision. Growth has been well supported by government consumption expenditure.4% in Q4 2009 (table 1a).5% over that in 2008. so it is hard to envisage how the deputy ministers could be effective. which is extremely open to trade. Indonesia’s ratio of exports to GDP before the GFC was only around 30%. On the other hand. there have been similar declines in imports. and a severe decline in Indonesia’s exports (table 1a).2% in the third quarter (Q3) of 2008 to a little over 4% in Q2 and Q3 2009. Moreover. resulting by now in very high per capita incomes.14 Arianto A. . we share the view of most observers (for example. private consumption switched from leading growth to holding it back in Q4 2009. which has continued to record double-digit growth. neighbouring Malaysia and Thailand are estimated to have contracted in 2009 by around 3% and 4%. while the respective measures for Malaysia. Only the latter have an ofﬁcial hierarchical line of authority. Patunru and Christian von Luebke about them. By contrast. A country such as Singapore. Many of the new deputies are among the most capable people in the bureaucracy. 60% and 160%.0% was perhaps due partly to dissipation of the boost that had been provided by election campaign spending (Resosudarmo and Yusuf 2009: 291). there are only weak links between Indonesia’s ﬁnancial sector and those that have been crumbling in the US and Europe.4% year on year (table 1a). In the fourth quarter of 2009 the GDP growth rate rebounded from 4. Thailand’s by 11% and Malaysia’s by 7%. when Indonesia’s GDP fell by 13%. it is precisely its openness to trade that has allowed its economy to grow rapidly over several decades. Hill 2010) that Indonesia’s resilience is in large part due to its relatively low exposure to international trade and ﬁnancial ﬂows. a country such as Burma may not have been greatly affected by the GFC. The impact of the GFC has therefore been limited mainly to foreign trade. year-on-year growth of quarterly GDP jumped to a rather surprising 5. We note in passing that there is no basis for the argument that Indonesia would be better off if it reduced the extent of its trade with the rest of the world in the future. Expansionary ﬁscal policy and sound monetary policy have contributed to this resilience by helping to stabilise domestic conditions (Resosudarmo and Yusuf 2009). on the other hand. its decline to 4.
3 4.1 4.9 6.2 6.9 4.6 –1.2 1.0 –3.1 3.6 7.2 8.7 4.8 –14.6 9.5 –1. The non-tradables sector continued to record signiﬁcantly higher growth rates than tradables throughout the period under consideration.3 6.6 11.2 4.7 5.0 4.0 4. however.0 8.7 a Some data from earlier periods have been revised in the latest estimates.2 7.7 4.7 3.9 6. forestry & ﬁsheries Mining & quarrying Manufacturing Excluding petroleum & gas Non-tradables Electricity.9 15. gas & water supply Construction Trade. A more optimistic picture emerges from exports and imports.9 8.8 2.9 10.8 7.9 5.8 17.5 1.4 1. the growth of tradables increased noticeably in Q4 2009.6 5.3 1. % year on year) Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Gross domestic product (GDP) GDP excluding petroleum & gas By expenditure Private consumption Government consumption Investment Construction Machinery & equipment Transport Other Exports Imports By sector Tradables Agriculture.7 2.2 –18.3 14.3 3.6 9.0 3.3 4.8 4.5 4.6 5.8 16.5 4.1 2.8 5.4 9. hotels & restaurants Transport Communications Financial. both of which have returned to modest positive growth rates after several quarters of severe decline. Source: CEIC Asia Database.7 –0.7 3.6 9. livestock. investment in machinery and equipment and in transport has declined signiﬁcantly.3 7.2 3.1 0.2 6.6 –15.0 2.5 7.5 –0.6 14. but remained disappointingly low at 4.2 4. The year-on-year growth of investment accelerated somewhat during the last two quarters of 2009.5 10.2 2.9 3.5 6.7 16.2 2.9 –14.4 5.0 33.3 6.1 7.5 –21.8 24.5 8.3 3.3 5.7 2.2 0.7 –2.6 –2.1 1.0 5.4 6.9 15.2 4.9 2.2 6.1 11.5 1.5 7.3 6.9 6.5 4.5 4.7 26.0 33. Of particular interest is the large and unexpected acceleration of manufacturing output growth .4 1.0 5.7 1.2 7.9 38.6 –4.6 4.0 17.4 2. Even though construction spending has remained healthy.5 40.0 19.2 4.3 7.6 3.0 2.7 –12.1 –11.4 5.6 1.8 5.7 –24.8 5.3 6.2 2. rental & business services Services 6.4 7.4 23.9 6.6 2.7 10.3 6.2 –8.9 5.0 30. far below the corresponding ﬁgures a year earlier.Survey of recent developments 15 TABLE 1a Components of GDP Growth a (2000 prices. Nevertheless.8 –7.0 –3.7 4.3 14.2% in Q4.4 5.3 5.1 12.0 5.5 5.
gas & water supply Construction Trade.2 1. rental & business services Services 1.2 1.8 –0.8 3.1 1.2 0.9 1.3 3.2 2.9 –4.1 1.0 1. Source: CEIC Asia Database.3 0.7 0.3 1. hotels & restaurants Transport Communications Financial.2 –14.7 0.4 7.3 –0.9 1.8 7.1 0.3 1.0 1.0 –0.5 1.1 3.7 2.8 25.5 –1.4 0.5 1.1 8.0 0.5 4.1 1.7 –1.8 1.3 –2.4 –4.8 1.2 1.16 Arianto A.4 2.6 5.3 9.2 1.0 0.6 3.4 1.8 1.0 1.1 –28.0 1.8 1.5 –0.5 1.8 2.9 1.8 1.8 1.2 1.4 3. The performance of the trade.8 1. forestry & ﬁsheries Mining & quarrying Manufacturing Excluding petroleum & gas Non-tradables Electricity.4 1.6 –11.4 5.4 1. after three quarters of negligible growth.3 5.3 0.0 1.6 0.0 1.1 1.3 –1. as is the noticeable decline in .6 1.2 1.5 1. The sudden jump in GDP growth in Q4 2009 is conﬁrmed.9 0.3 –1.2 3.3 1.9 4.2 8.6 1.9 2.2 1.6 1.3 2.3 1.6 2.8 –1.0 0.9 1.9 3.9 0. returning to growth rates not seen since early 2007.1 0.9 –15.0 0. livestock.6 –3.4 2.3 1.2 7.7 –1.3 1.9 3.6 1.9 1.3 a Some data from earlier periods have been revised in the latest estimates. In conditions of signiﬁcant economic disruption it is important to shorten the time horizon of analysis. Utilities and communications continued as important contributors to non-tradables growth throughout the period in question. Mining and quarrying also grew impressively in the second half of 2009.6 1.2 0.4 2. hotels and restaurants sector improved considerably in Q4 2009.1 1.9 4. Table 1b therefore presents the seasonally adjusted quarter-on-quarter growth rates of key demand categories and sectors.5 5.4 –8.9 1.4 8. % quarter on quarter) Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Gross domestic product (GDP) GDP excluding petroleum & gas By expenditure Private consumption Government consumption Not seasonally adjusted Investment Construction Machinery & equipment Transport Other Exports Imports By sector Tradables Agriculture.6 0.1 –13.2 3.4 2.1 4.0 0.2 2.7 1.7 –7.7 0.6 1.6 3.1 2.8 1.9 1.5 –2.2 4. in that quarter.6 1.4 1.2 1.5 2.5 1.8 3.4 0.4 0.2 0.8 –1.2 7. seasonally adjusted.0 4. Patunru and Christian von Luebke TABLE 1b Components of GDP Growth a (2000 prices.7 23.8 33.6 7.4 1.
6%. Non-oil and gas imports totalled $77.0% from their level of $137.Survey of recent developments 17 FIGURE 2a Exports ($ values. growth of private consumption. respectively (BPS 2010). In terms of sectors. The low point was reached in Q2 2009. some 25. for which they are an important input. There appears to have been a slight setback towards the end of 2009. The large decline in raw materials inputs reﬂects similarly large declines in manufactured exports. Growth of investment spending has been rather volatile. inedible Animal & vegetable oils & fats Food. exports of manufactured products fell 16. but in the second half of 2009 it was more rapid than growth of the economy as a whole.0 billion in 2008. As the world economy began to recover from the GFC. while those of raw materials and capital goods fell by 30.9 billion. and this is mirrored in the performance of imports. while mining and quarrying output in Q4 2009 can be seen actually to have fallen. Healthy growth of exports in the last three quarters contrasts strongly with that of the previous three.1% from 2008.9 billion. Indonesia’s total merchandise exports in 2009 contracted by 15. respectively (BPS 2010). after reaching their low point in about March 2009 (ﬁgure 2a).7% from $107.9 billion in 2009. July 2008 = 100) 120 100 80 60 40 20 0 Nov-2008 Crude materials. Imports of consumer goods declined by 18.0% and 4. tobacco & live animals Manufactures Chemicals Feb-2009 May-2009 Aug-2009 Nov-2009 Source: CEIC Asia Database.9%. Figure 2b shows a severe decline in major import categories as the GFC began to affect Indonesia.5%. 3-month rolling sum. Total merchandise imports amounted to $96. Government consumption appears remarkably stable.0% lower than in 2008.8% and 31. The signiﬁcant recovery in year-on-year manufacturing growth in Q4 is conﬁrmed in the quarterly data. beverages. but it is too early to tell whether this renewed softening of exports will be sustained. while those of the agriculture and mining sectors declined by 4. but this is due to seasonal adjustment of the data: the unadjusted growth rates continue to demonstrate very high volatility. while non-oil and gas exports fell by 9. exports started to pick up noticeably. down by 21. and the subsequent recovery toward the end of the .9%.
this represented a huge proportionate increase from just 10.5% (see table 2. Fiscal developments Table 2 presents key features of the 2009 and 2010 budgets. In the revised budget the deﬁcit was increased to 2. Patunru and Christian von Luebke FIGURE 2b Imports ($ values. The shortfall was mainly the consequence of disappointingly slow growth in non-oil and gas tax collections which. the overall revenue shortfall was only 0. year shows evidence of an even more noticeable stagnation of imports than of exports.6%.3% less than the amount speciﬁed in the revised budget. Expenditure by the central government was 7.18 Arianto A. so it would seem that the downturn in the economy must have had a signiﬁcant negative impact on tax collections. The original 2009 budget had called for a deﬁcit equivalent to 1. and although tax revenue was also below its target.7%. Accelerating economic growth . The preliminary outcome data for 2009 conﬁrm that the government was rather less successful than had been hoped in providing a ﬁscal stimulus to counter the expected contractionary impact of the GFC. press release. Although the number of registered taxpayers remained low in 2009. In 2010 the target increase in tax collections is 13.7 million in the previous year (Kompas. 4/1/2010). 5/1/2010). although the revenues collected contributed slightly to the hoped-for ﬁscal stimulus.4%. One consequence of this is that there were unspent funds amounting to Rp 38 trillion to be carried over to 2010. Accordingly. The stimulatory impact of collecting less revenue than intended would have been much too small to offset the shortfall in spending. but this estimate was revised in view of the need to provide a stronger ﬁscal stimulus. at 15. compares poorly with the average annual growth rate of 18% during 2005–08 (Directorate General of Taxation.9 million. inedible Manufactures Chemicals 25 Food & live animals Machinery & transport equipment 0 Nov-2008 Feb-2009 May-2009 Aug-2009 Nov-2009 Source: CEIC Asia Database. the actual deﬁcit was far lower than expected.7%. July 2008 = 100) 125 100 75 50 Crude materials. note a). The shortfall in tax revenue in 2009 gives some cause for concern. but the realised deﬁcit was only 1. 3-month rolling sum. at 4.1% of GDP.
.7 87.7 11.1 133.8 57.1 308.0 –0.8 53.6 87.2 1.1 219.0 1.6 15.5 1.0 10.5 699. average (%)b Oil price ($/barrel) Oil production (‘000 barrels/day) 872.4 69.0 645.5 47. Source: MOF (2009a.0 12.2 1.7 –0.0 0.6 133.1 3.1 0.6 652.4 1.6 –58.1 15.2 142.0 144. b SBI = Sertiﬁkat Bank Indonesia (Bank Indonesia Certiﬁcate).6 125.2 180.9 115.0 –1.7 161.0 5. 2009b).3 309.1 1.0 6.4 –5. MOF (2009b) reported a revised deﬁcit of 2.3 –34.9 –5.5 –13.7 100.7 38.2 76.6 871.5 5.3 10.0 74.6 98.3 110.9 2.009.005.8 –0.7 1.8 –8.3 1.7 –1.6 2.1 160.6 1.7 641.0 16.8 865.8 309.050 5.5 60 965 a The revised budget deﬁcit is based on MOF (2009a).1 729.5 1.7 696.9 –1.6 –17.0 2.1 107.4 –0.8 70.) Exchange rate (Rp/$) 3-month SBI rate.3 911.4 –0.7 –69.a.7 1.000 6.1 –7.8 98.6 144.8 –11.0 1.4%.6 1.0 77.4 1.9 –9.1 31.2 224.0 2010 % GDP Actual Difference Budget (%) 866.1 954.Survey of recent developments 19 TABLE 2 Budgets for 2009 and 2010 (Rp trillion) 2009 Revised Budget REVENUE AND GRANTS Revenue Tax Non-tax Grants EXPENDITURES Central government Personnel Goods & services Capital expenditures Interest payments Subsidies Social assistance Other expenditure Transfers to regional governments DEFICIT % of GDP FINANCING Domestic ﬁnancing (net) Foreign ﬁnancing (net) Foreign gross drawings Amortisation Loan rescheduling UNSPENT FUNDS ASSUMPTIONS FOR 2010 BUDGET GDP Growth (%) Nominal value (Rp trillion) Inﬂation (% p.7 2.5 a 133.5 910.9 1.
The requirement for immediate results makes items 4. the context is one in which only a very small proportion of them pay income tax. Assessing the ﬁscal stimulus package It is difﬁcult to evaluate the success of the government’s early 2009 ﬁscal stimulus package. and be able to be completed during 2009. Moreover. for example. almost certainly meant that this aspect of the stimulus package would have had virtually no impact. ﬁsheries and manufacturing sectors (Ministry of Finance Regulation 43/2009). First. This fact. Nevertheless. opportunities for corrupt behaviour and an unnecessary obstacle to the desired ﬁscal stimulus. 5 and 6 redundant. given the urgent need for infrastructure spending even if there were no necessity for a stimulus. 7 meet the targets of Presidential Instruction 5/2008 concerning the focus of the economic program for 2008–09. income tax was waived for certain workers – those with a maximum gross income of Rp 5 million per month (around $20 per day) and employed in the agriculture. and it is not clear why it should matter whether they complement existing infrastructure (provided they have positive net social beneﬁts). for the remainder. Patunru and Christian von Luebke will be of some assistance in meeting this target. Projects were required to satisfy no fewer than eight conditions. . Failure to execute budget allocations for infrastructure has made the stimulus program less successful than it might otherwise have been. They had to: 1 create a signiﬁcant number of job opportunities. and 8 be part of the government’s strategic plan. 6 not be affected by land acquisition difﬁculties. there is no direct way to determine the extent to which the limited nature of the decline is a consequence of the ﬁscal stimulus program. Second. the tax cut is irrelevant. All infrastructure projects create employment. and it is hard to imagine any that would be inconsistent with the government’s programs. Little of this makes sense.20 Arianto A. It is difﬁcult to see the rationale for discriminating against workers who happen to be employed in retail trade or the construction industry. 5 be able to be ‘absorbed’ during 2009. Even though the macroeconomic indicators show that Indonesia has suffered nothing more than a short-lived and small decline in its growth rate in the face of the GFC. there are important lessons from Indonesia’s experience with ﬁscal stimulation in 2009 (Patunru and Zetha 2010). a ﬁscal stimulus relying on extra spending on infrastructure depends heavily on the effectiveness of the ministries involved. 3 produce immediate results. Thus far. there is no obvious reason why they would need to be completed in 2009. effectiveness has left much to be desired. Provided that projects could be initiated quickly. 4 be already designed or be able to be quickly designed. Such an array of requirements seems to do little other than create red tape. Similarly restrictive eligibility criteria were applied to the provision of favourable tax treatment to infrastructure projects (Minister of Finance Circular 883/2009). although the cut-off was high enough to include the vast majority of Indonesian employees. 2 complement existing infrastructure networks in order to make them more efﬁcient. but the government will also need to improve its strategies for tax collection. to stimulate household spending. plus the sectoral restrictions.
4% in November 2009 (ﬁgure 3). it has set its target inﬂation rate for 2010 twice as high. given that it foresees inﬂation roughly doubling from its late 2009 level. Current indications suggest that the projected GDP growth rate is realistic. with the rupiah weakening from current levels of around Rp 9. The government seems to be expecting the central bank to soften monetary policy somewhat. although some are perplexing. the oil price was close to $84/barrel. although volatile. such that FIGURE 3 Monetary Policy and Inﬂation (% p. the ﬁnance minister has already signalled the government’s intention to revise its initial. Or perhaps it does.a. at 4–6%. inﬂation.) CPI inflation 16 Currency in circulation SBI rate 30 days 12 Real SBI rate 20 8 4 0 Jan-2009 Mar-2009 May-2009 Jul-2009 Sep-2009 Nov-2009 Jan-2010 Source: CEIC Asia Database. especially in the second half of 2010. The rate of growth of currency in circulation over the three months to January 2010. and it is likely to increase quite signiﬁcantly. ﬁnancial markets and government debt Monetary policy and inﬂation BI seems scarcely to have noticed the recent success of its monetary policy in bringing inﬂation as low as 2.400/$. As in previous years.Survey of recent developments 21 The 2010 budget assumptions Most of the assumptions underlying the 2010 budget seem plausible. this will imply a huge rise in subsidies beyond the already high level of about $15 billion in the 2010 budget. In the absence of changes to domestic fuel and electricity prices. as the recovery of major world economies strengthens. with a ‘declining trend’ toward its medium-term target of 3% (Nasution 2010) – even though that target was achieved as long ago as August 2009. political attacks on the minister and the vice president seem already to have caused the government to back away from its promised reconsideration of subsidies (and the implied shift to aligning domestic energy prices more closely with world levels). which is almost certainly too low. Inexplicably. By early February 2010. this time to $80/barrel. Monetary policy. unrealistic oil price assumption. Unfortunately. The key item of concern is the assumed oil price of $60/barrel. . This curious disconnect between future targets and what has already been achieved seems to suggest that BI still fails to appreciate the impact of growth of its monetary liabilities on inﬂation. displayed a somewhat rising trend.
rather than raising it somewhat in order to slow money growth. The solid performance of the capital market is also reﬂected in the exchange rate. but it is consistent with the soft target now set for 2010. suggest that BI is likely to bow to populist demands to lower the nominal SBI rate (Kompas. A real SBI rate of about 4% has been consistent with the signiﬁcant acceleration of GDP growth already noted. In turn.500 2.000 1. Investors’ optimism is shared by Fitch Ratings. 7/1/2010). 25/1/2010). the decline in share prices from mid-January may be a reﬂection of concern about the continued attacks on the ﬁnance minister and the vice president.000 3. This is Indonesia’s highest rating since the Asian ﬁnancial crisis in the late 1990s. Singapore/London. which has been relatively stable at Rp 9.000 9.000 12.000 31-Dec-2008 19-Mar-2009 5-Jun-2009 21-Aug-2009 6-Nov-2009 26-Jan-2010 0 Source: Indonesia Stock Exchange.000 500 0 CSPI Exchange rate Rp/$ 15. . The currency would have strengthened further had it not been for heavy intervention by BI in the foreign exchange market. Nevertheless. demonstrating that monetary policy through October 2009 was entirely appropriate to the circumstances.22 Arianto A. and the likely consequences for economic management.200–9. Capital and foreign exchange markets Reﬂecting the strengthening of GDP growth. share prices resumed their upward trend following a short-lived decline in October 2009 (ﬁgure 4). That said.500 6. with an outlook of ‘stable’ for both (Fitch Ratings. As has been the case on several occasions in the past – notably in 2000–01. the most recent data. Patunru and Christian von Luebke inﬂation increased quite markedly from its previous low point to 3. FIGURE 4 Composite Stock Price Index (CSPI) and Exchange Rate CSPI 3. the real rate of interest on BI Certiﬁcates (SBIs) has declined – even though the nominal rate has been held steady since September 2009. press release.000 2. which upgraded Indonesia’s long-term foreign and local currency debt from BB to BB+ on 25 January.000 1. 2004–05 and 2008 – gains on the inﬂation front are unlikely to be sustained.7% (although it is possible that this is a short-term aberration).400/$ since October. This unannounced moderate easing of monetary policy is not consistent with keeping inﬂation at the low level already achieved. Paciﬁc Exchange Rate Service. combined with the newly announced inﬂation target.
1 36.7 0.0 104.0 9.0 133. During this same period.5 67.6 14.4 9. The foreign-owned share of rupiah-denominated SBNs averaged 17% during 2009.2 0.1 1.9 9.5 2.4 129.6 29. rising to almost 20% by 21 January 2010 (MOF 2010). The interest cost of these SBIs is considerably higher than the yields BI obtains on the reserves.2 18.5 0.2 15.2 0. while securities issued at market rates have increased from 53% to 62%.2 21.3 0. but this term leads to confusion.2 31.6 100.1 42. the role of borrowing (entirely from foreign sources and predominantly in the form of relatively low-cost development assistance loans) has been declining relative to that of issuing securities (Surat Berharga Negara.8 0.2 89. Although rising reserves are usually portrayed as a sign of successful macroeconomic policies.3 12.2 68.830 47.0 Source: MOF (2010).1 0.5 3.1 574.6 3.7 1.0 169.2 28.4 0.1 52.7 46.9 2.0 0.535 47.1 52. the government has succeeded in reducing its dependence on debt from 89% of GDP in 2000 to 29% as of October 2009 (table 3). since a signiﬁcant portion of it is actually owned by foreigners. so it is hard to see what Indonesia gains from this investment.4 24.1 0.8 100.6 50. . in fact they simply demonstrate the central bank’s willingness to spend heavily in the foreign exchange market.5 billion equivalent in the 10 months through October 2009 alone.8 0.2 15.9 41.Survey of recent developments 23 this increased its international reserves by about $18 billion from the end of 2008 through January 2010.4 0.5 20.2 100. SBN) denominated in both domestic and foreign currency.6 88.6 290.1 0.0 52.400 38. BI had to ﬁnance a large part of these purchases by issuing SBIs – some $8.0 61.8 2.5 145.4 0. 61.2 70.6 Borrowing has declined from 47% of total debt in 2000 and 2005 to 38% in October 2009.0 52. Government debt Not least because it has managed to keep its budget deﬁcits small. SBNs TABLE 3 Central Government Debt Outstanding 2000 2005 2009 a ($ billion) % of total ($ billion) % of total ($ billion) % of total Borrowings Bilateral Multilateral Commercial Suppliers Other Securities Foreign denominated Rupiah denominated Total outstanding debt GDP Debt/GDP (%) Memo item Exchange rate (Rp/$) a The 2009 data are for October.8 1. 6 The SBN component of the government’s overall debt is often referred to as ‘government domestic debt’.0 68.0 64.6 9. This is low by international standards (Ashcroft and Cavanough 2008: 360).0 63.
there has been no need to draw on the $5. Instead. therefore.5 billion in stand-by loans committed by Indonesia’s development partners. There were 45 programs and 130 action items. The bulk of securities outstanding in October 2009 were denominated in rupiah. nine of which are in the ﬁeld of economic policy. From 2004. they were denominated almost entirely in rupiah. with priority given to 15 programs. that SBY decided to take control of the process by pre-empting the media in its choice of matters for emphasis. By generating .2 trillion. this can be a somewhat daunting prospect. In retrospect this interpretation of the 100-day program may have been too generous.24 Arianto A. Patunru and Christian von Luebke were ﬁrst introduced in 1998.. small reform projects is likely to create a snowball effect. and the rest were treasury bills. the government hopes to create a perception that it has the will and the capacity to tackle reform more generally. Given the relatively minor impact of the GFC on Indonesia. Resosudarmo and Yusuf (2009: 304–7) discuss the strategy for the ﬁrst 100 days of the second SBY administration.3 trillion – almost 39% lower than the realised amount in 2008 (MOF 2009a). THE FIRST 100 DAYS PROGRAM The newly assembled government established its ‘100 Days Program’ under the coordination of the vice president and the UKP4 Team. media commentators seem . To a government leader in an age in which opinion polls have become very common. improving deﬁcient infrastructure. preventing electricity black-outs. it had become predictable that the media would use completion of the ﬁrst 100 days as the basis for generating what they hope will be a collection of reports on the government’s performance that will be considered newsworthy by the general public. bonds deemed acceptable for Islamic investors) remains very small for the present. ensuring compensation for victims of the Lapindo mudﬂow disaster (McMichael 2009) and so on. a large proportion of these were in the form of bonds (with ﬁxed and variable interest rates). As the authors noted. the World Bank. However. It does not seem implausible to argue.... The government’s initial target for debt ﬁnancing in 2009 was Rp 51. the government also began to issue foreign currency-denominated securities. quick success stories. with the sudden need for ﬁscal stimulus in 2009 it was instead increased to Rp 133 trillion (table 2) – 58% more than in 2008. This was more than covered by domestic ﬁnancing of Rp 142. making it easier to implement much larger and more sensitive reform projects subsequently. the positive impact resulting from .6 trillion. allowing foreign ﬁnancing to be run down by Rp 17. As it turned out the realised amount was Rp 125.4 trillion. the media might have focused on the government’s success – or lack of it – in tackling corruption and crime. and were used to recapitalise insolvent banks taken over by the government. arguing that the intention was to demonstrate that the new government is serious about conducting reform. … It believes that . with input from all ministries and other government agencies. The role of government syariah securities (that is. the Asian Development Bank and the governments of Japan and Australia. however... Left to itself. raised mainly through the issue of government bonds (Rp 102 trillion).
for example. a few list achievement in excess of 100%. policy or set of guidelines. but none less than that. its power to resume land needed for important public purposes such as building a new road (McLeod 2005b: 146–7). If we focus on the concrete. the achievement amounts to issuing or announcing a new regulation. The general public. The inputs in question encompass all the ministerial and bureaucratic activity that lies behind the delivery of services by the government to the public. doing these things does not guarantee it.ekon. By way of illustration. For at least half of the individual action items. The outputs are those services themselves. 7 Recall that one of the eligibility criteria listed above for infrastructure projects to be given favourable tax treatment as part of the ﬁscal stimulus package was that the project had to be free of any land acquisition constraint. and ‘social infrastructure’ (social protection for the poor).7 Thus. 1/2/2010). Taken at face value. the state-owned toll road operator. While it is true that not enacting laws and issuing regulations often holds back progress. plan. blueprint. electricity and housing). ‘soft infrastructure’ (ease of doing business. Government websites have provided different versions. We focus here only on its economic section. ports. and in several cases nothing more than preparing a draft thereof. Initially. from whom further action is awaited. a letter or other document has been sent to the president or one of the ministers. In about seven cases. The important distinction to be made here is between inputs and outputs. The summary of these ‘achievements’ can be found at <http://www. information provided on the nature of these achievements. a document running to some 50 pages. In any event. legal certainty and regulatory reform).go. . In about one-ﬁfth of cases the achievement has been to hold one or more meetings. albeit brief. recommendation. yet government ofﬁcials continue to complain that slow progress in building new infrastructure results from inability to take over the land that is needed. a different picture emerges. however. see Basri and Patunru 2006).id/ images/capaian100hari. Not least of the difﬁculties faced has been even to gain access to a reliable ofﬁcial list.Survey of recent developments 25 for the most part to have been overwhelmed by the administration’s extraordinarily long and often vaguely speciﬁed list of things to be achieved in the ﬁrst 100 days. seminars or site visits. the most common classiﬁcation of tasks was similar to that underlying the government’s ﬁveyear program: physical/geographical infrastructure (roads. To our knowledge this decree has never been used. What it wants to see is outputs such as improved infrastructure. and ofﬁcials have often gone public with yet different lists. at the end of the ﬁrst 100 days the president announced that virtually all activities included in the program had been completed on target. for each of which the level of achievement is recorded. the document seems to suggest that the incoming government has been performing extremely well. is not interested in the fact that ministers and bureaucrats have held meetings or written new regulations. took more than two years to procure just six hectares of land in one case (Kompas. logistics. For almost every item the level of achievement is given as 100%.pdf>. presumably. This kind of approach – ambitious programs with a long list of action items – has been observed before (for a discussion of the problems it entails. which lists roughly 60 ‘action plans’. better law enforcement and so on. several years ago a presidential decree was issued that was intended to clarify the government’s power of eminent domain – that is. PT Jasa Marga.
26 Arianto A. The government claims to have met completely the targets of the relevant action plans. in a few more. ‘completion’ means that a draft regulation has been delivered to the Minister of Labour and Transmigration. while wage regulation creates an insurmountable barrier for millions of low-productivity workers who might otherwise join the formal sector workforce.000 villages). minerals and coal. and now gives every sign of having been reversed. the environment. it has yet to be approved and issued and. so the continuation of progress at this rate would see every village in the country with telephone access in less than nine months! . and to whether particular items have any place there. and tax. In respect of minimum wages. Two items that are clearly extremely important to Indonesia’s economic progress are policies relating to the subsidisation of fuels.8 Aside from the question of what has actually been achieved. Several of the action plans under the broad heading ‘revitalisation of fertiliser and sugar manufacturing’ actually involve expansion of existing. under-performing state-owned ﬁrms. At the same time. they even envisage extension of one such ﬁrm’s activities overseas through the establishment of a joint-venture urea factory in Iran. causing billions of dollars worth of mining investments to be placed on hold. and to the regulation of minimum wages. the information provided actually makes it clear that the target has not been achieved. Another important omission from the program is privatisation. ‘completion’ means ‘preparation of a roadmap for reducing fuel subsidies’ (which seems not to have been made public). and there is at least one case where the claimed achievement seems quite implausible (item P13A7. electricity and fertiliser. One of the important policy issues that has been ignored in the 100-day program is the long-awaited synchronisation of regulations in the mining sector. The subsidies consume tens of billions of dollars of the government’s ﬁnancial resources. but no concrete evidence of this is provided. increasing the capacity of 695 kilometres of roads in Sumatra and Sulawesi). forestry. spatial planning. In the ﬁrst case. In reality. This reﬂects the belief that it 8 Indonesia has about 70.000 villages. Indeed. This has never been implemented with any enthusiasm. Several cases of overlap and contradiction between these laws have created uncertainty for investors. new state enterprises have been set up to handle various aspects of infrastructure ﬁnancing. in a few cases 100% completion is claimed. 14/1/2010). An example of the latter relates to item P15A2: the plan to establish a food estate in Merauke. The related regulatory framework involves laws on oil and gas. little attention seems to have been given to the content of the 100-day program – to its lack of any sense of what is crucial and what is of minor importance. item P13A3. subsidies to electricity and fertiliser are not even mentioned. providing telephone access to 25. Patunru and Christian von Luebke Returning to the ‘achievements’ of the 100-day program. The information provided here states explicitly that this has ‘not yet been able to be implemented because certain technical conditions have still to be determined’. no information has been provided as to whether it will free up the labour market or constrain it further. to items that have been left off the list. in any case. the Coordinating Minister for Economics has already announced that domestic fuel prices and electricity tariffs will not be changed in 2010 (Kompas. Several achievements seem to amount to nothing more than that the relevant department has continued to do its regular day-to-day operations (for example.
Bilateral or limited multilateral trade agreements are not the best approach to trade policy. proﬁtability would not be at issue. Surabaya and Makassar). mining and maritime sectors. whereas in fact the greatest obstacle is the unwillingness of the government to recognise the importance of pricing policy relating to infrastructure use. and the head of the investment coordinating board) abolishing 70 business permits. If there were reasonable certainty that prices to users could be set on a rational basis rather than determined by political considerations. A few of the items in the 100-day program deal with some of the sacred cows of policy making in Indonesia. and with the government’s failure to distinguish meaningful achievement from mere bureaucratic bustling. with some of them going on to become large. corn. Lingga 2010). along the lines that ‘the news media had unfairly focused on the [KPK and Bank Century] scandals and ignored the government’s progress in infrastructure projects and other areas’ (Onishi 2010). it is not sensible for a country with limited land resources to pursue self-sufﬁciency in beef. then from a wide range of other sources). the media can hardly be blamed for its failure to focus on the genuine successes. justice and human rights. The substantial decline in the president’s opinion poll ratings has drawn a predictable response from a presidential spokesman. sugar and beef.682 items spread over 17 sectors. There are indeed a few important areas where the government has made some progress but. which in turn largely determines their access to outside ﬁnance (if not from banks. Likewise. directly or indirectly. There are few if any credible arguments in their favour: countless small and medium ﬁrms survive and prosper in the absence of assistance. and transmigration and manpower. and the desirability of self-sufﬁciency in various foods. given that these have been lost in a forest of ‘achieved targets’ that are essentially vacuous. Trade diversion refers . SBY’s decline in popularity may indeed have much to do with the scandals. The key determinant of small ﬁrms’ success is the capability of their owners. the launching of the national single window (a one-stop electronic service for import and export clearance). not least because they can result in ‘trade diversion’ as well as trade creation. ASEAN–CHINA FREE TRADE AGREEMENT The ASEAN–China Free Trade Agreement (ACFTA) signed in November 2004 took effect on 1 January 2010. in particular. advocacy of food self-sufﬁciency has very little basis in economic rationality. The agreement requires Indonesia to remove tariffs on some 6. seven-days-a-week operation at Indonesia’s four major ports (in the cities of Jakarta. including soy beans. and ﬁnancing would not be a problem. and the issue of a joint decree (by the ministers of trade. 12 in manufacturing and ﬁve in the agriculture. Governments at least as far back as the Soeharto era have paid lip service to the need for policies to support small and medium business. Medan.Survey of recent developments 27 is lack of ﬁnancing that is holding up the development of infrastructure. but it may also reﬂect public disappointment with the president’s attempt to ‘hijack’ the 100-day assessment exercise. Among the more genuine achievements in the ﬁrst 100 days are the commencement of 24-hours-a-day. with a view to reducing from 60 days to 17 days the time required to complete licensing procedures for the establishment of new businesses (Basri 2010. including the supposed need for government support for the development of small and medium enterprises (and the related policy of subsidising. the ﬂow of outside ﬁnancing to such ﬁrms). home affairs.
FTAs require highly complex ‘rules of origin’ to prevent efﬁcient. And as such. machinery. although the veracity of this report is open to doubt. low-cost producers in the rest of the world exporting to member countries. including bigger bureaucratic hurdles. there is the potential for a ‘spaghettibowl effect’ (Bhagwati 2008: 61–71). The analytical basis for this long list is not readily apparent. logistics and the investment climate. The ACFTA risks adding to the rather worrying global trend towards trade dis-integration and trade diversion. Responding to these pressures. because of its reliance on preferential rather than non-discriminatory tariff reductions – not to mention the far superior options of moving toward freer trade through global trade agreements or unilateral action. indirectly. (Cordenillo 2005) Although Indonesian ﬁrms had had ﬁve years to prepare for this new environment. electronics. while also improving infrastructure. petrochemicals. steel. agricultural machinery and equipment. via members with the lowest tariffs against non-members. This could be avoided if countries within the FTA applied the same tariff levels to the rest of the world as to their partner countries. continued to urge the government to do more to protect domestic producers. rubber products. As a consequence. The government’s position was later clariﬁed by the Coordinating Minister for Economic Affairs (AntaraNews. Shortly after the agreement was signed. cables and electrical equipment. synthetic ﬁbre. As the number of agreements joined by a country increases. the Minister of Trade reportedly wrote to the ASEAN Secretariat requesting re-negotiation of some tariff posts (JP. meanwhile. but that approach is rarely followed. Patunru and Christian von Luebke to the shift of imports from more efﬁcient producer countries in the rest of the world to less efﬁcient producers within the free trade area (FTA). there would be the need for adjustments amongst workers and enterprises. This leads to confusion and increased transactions costs. and the same commodity may be subjected to several different tariff rates and rules of origin. and engineering. the ASEAN Secretariat warned that the ensuing intensiﬁed competition in each region’s domestic market given the similarity in industrial structures of ASEAN and China may entail short-run costs in the form of displacement of workers and rationalisation of some industries and ﬁrms. furniture. there were many media reports in late 2009 and early 2010 of manufacturers’ concern about the new competitive pressures they now faced. The ASEAN Secretary General denied that the government had explicitly requested any re-negotiation. The parliament. . but acknowledged receiving a letter voicing concern about the impact on local industries. procurement and construction services (Suharmoko and Afrida 2010). in which the trade agreements criss-cross and overlap. the sheer size of the ACFTA should mean that losses from trade diversion will be small relative to gains from trade creation. automotive components. 19/1/2010): Indonesia would re-negotiate directly with China on 228 items. but it would seem to suggest that the parliamentarians have little understanding of the reasons why nations trade or why protection diminishes the potential gains from trade. Simply put.28 Arianto A. nations trade in order to increase their access to goods and services. Nevertheless. footwear. 6/1/2010). food and beverages. cosmetics and traditional herbal medicines. Members argued that no less than 15 of the 17 sectors ‘needed’ protection: textiles and textile products.
‘[the] local steel industry needs to be protected’ (Jati 2009). whereas sectors that will experience pressures for contraction include leather products. 15/1/2010). Machinery. Sadewa’s analysis showed that Indonesia would beneﬁt more if it were a member of both ACFTA and the ASEAN Free Trade Agreement than if it belonged only to the latter (assuming that the other ASEAN countries were members of both). economic integration of Indonesia with China had been increasing rapidly even before the advent of the ACFTA.Survey of recent developments 29 given their own endowments of productive resources. with the relatively weak management capability that this usually implies. that the expected net welfare impact for Indonesia from joining the ACFTA (as measured by the utility received by Indonesian households) is positive. cold roll (CR) and wire rope (WR). The company’s plan to make an initial public offering in the second half of 2010 should increase its capital resources. As for WR and CR. This optimism would appear to rest. BSN). In any case. however. Arguably the company’s optimism is misplaced. rather than on the ﬁrm’s inherent ability to compete with other producers within the FTA. While the World Trade Organization’s Doha development agenda is currently in limbo. annual average 9 The Ministry of Industry is quite open about the protective intent of the regulation just mentioned. because WR falls under Normal Track 2 of the agreement and CR under its Sensitive List (JP. mineral products. using a Global Trade Analysis Project (GTAP) simulation. products whose tariffs had to be scrapped in 2010). and the country as a whole will be better off if its productive resources are allocated elsewhere. because imported HRC is required under Ministry of Industry Regulation 1/M-IND/PER/2009 to have the same certiﬁcate. garments and metal products. An industry that needs continuous protection is inefﬁcient. respectively. His impact exercise found that easier market access to China will signiﬁcantly improve Indonesia’s export performance. According to its Director General for the Metal. . Sectors that will gain include rubber products. HRC falls under Normal Track 1 of the agreement (that is. Textiles and Multifarious Industries. it is expected that the use of SNI certiﬁcates for protection will not be allowed in the future. At least one large manufacturer. for this product. but it cannot be assumed that this will improve its performance sufﬁciently to enable it to compete without protection – especially since it will remain a state-owned enterprise. issued by the National Standardisation Agency (Badan Standardisasi Nasional. Sadewa (2010) argues. but Krakatau Steel has obtained an SNI (Indonesian National Standard) certiﬁcate. Between 2004 and 2008. on the expected continuation of protection.9 Furthermore. the state-owned PT Krakatau Steel (Indonesia’s largest steel producer) remains optimistic in the face of the ACFTA. and machinery and equipment. The SNI serves as a technical barrier to minimise impact from international competition. Industries that compete with imports are forced to become efﬁcient and thus enable the country to reap the gains from trade. Despite the concerns of individual ﬁrms and industries. the deadlines for removal of their protective tariffs are not until 2012 and 2018. without signiﬁcant improvement in efﬁciency it will not be surprising if Krakatau Steel requests further protection as the 2012 and 2018 deadlines for WR and CR tariff removal approach. notwithstanding the cost to downstream users. The company’s key products – directed mainly to the domestic market – are hot-rolled coil (HRC).
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