Indonesia: ECONOMY

ECONOMY



Character and Structure: Although the New Order brought spectacular development to Indonesia during the 1970s and 1980s, lifting the nation out of the dire economic conditions of the previous two decades, this success did not solve major structural problems and, indeed, may have created new kinds of difficulties. Increasingly in the 1990s, the economic outlook was weakened by charges dubbed “Corruption, Collusion, and Nepotism” (Korupsi, Kolusi, dan Nepotisme—KKN), which after 1996 were leveled particularly at Suharto and his family. Despite liberalization and surveillance policies enacted in the late 1980s, these factors grew in importance and left the economy particularly vulnerable to, and ill-prepared to address, the financial crisis of 1997-98, which saw the gross domestic product (GDP) drop an officially estimated 13 percent and inflation rise to nearly 60 percent in 1998 alone. In mid-1999, nearly 25 percent of the population was thought to be living in absolute poverty, compared with about 10 percent five years earlier. Since then, Indonesia’s economic growth has been slow and somewhat erratic. Major factors are slow progress on legal, banking, and corporate reforms; continued military action in resource-rich Aceh; and terrorism targeting international capital and tourism.



During the New Order, the economy was transformed from one having virtually no industry in 1965 to production of steel, aluminum, and cement by the late 1970s. At present, Indonesia is the world’s number-one exporter of liquefied natural gas (LNG) and the seventeenth largest oil producer in the world, responsible for about 1.8 percent of world production and 5.2 percent of total Organization of Petroleum Exporting Countries (OPEC) production in 2004. The emphasis in the early 2000s was on less government interference in private business and greater technology inputs. Agriculture predominates and benefits from an infusion of modern technology by the government. Indonesia is a major aid recipient.



Indonesia’s major trade partners are Japan, the European Union, the United States, Singapore, and the Republic of Korea (South Korea); trade with Association of Southeast Asian Nations (ASEAN) members is increasing. In spite of government liberalization of previously restrictive investment rules, foreign investors continue to experience numerous difficulties in conducting business. Since the late 1990s, companies have remained wary of investing in Indonesia, and an increasing number of manufacturers have relocated outside the country because of security issues, deteriorating infrastructure, substantial corruption, high interest rates, and increasing labor costs. The 1997–98 economic downturn hurt Indonesia more deeply and for a longer time than other Southeast Asian nations. In 2003 the government terminated its loan program with the International Monetary Fund (IMF) because of its reluctance to continue implementing unpopular economic restrictions. However, there are positive economic signs in steady domestic consumption, a strengthened currency, and successful small and medium business enterprises.



Gross Domestic Product (GDP)/Purchasing Parity Power (PPP): In 2002 GDP was Rp1,609.8 trillion (US$172.9 billion; for value of the rupiah—Rp—see below). However, average annual growth of both GDP and GDP per capita have slowed substantially since the 1980s. The average annual growth of GDP in 1982–92 was 6.9 percent; in the 1992–2002 period, it was 2.5 percent. The average annual growth in GDP per capita for 1982–92 was 5.0 percent, and in 1992–2002 it was 1.1 percent. In 2002 PPP was Rp6,052.2 trillion (US$650 billion), and PPP per capita was Rp28.6 million (US$3,070), which ranks as 141 out of 208 countries listed by the World Bank. Estimated PPP was Rp7058.7 trillion (US$758.1 billion) in 2003. The estimated average PPP per capita for 2003 was Rp29.8 million (US$3,200).



GOVERNMENT Budget: For 2003 Indonesia’s government budget was Rp 334.5 trillion (US$39 billion) in revenues and Rp 368.8 (US$43 billion) in expenditures, including capital expenditures. The budget is formulated by the Ministry of Finance and approved by the legislature. Budgets are developed as part of five-year economic development plans (Repelita—Rencana Pembangunan Lima Tahun).



Inflation: The estimated inflation rate in Indonesia for 2003 was 6.6 percent. This level ranked Indonesia 163d in the world. Among Southeast Asian nations, only East Timor, Laos, and Papua New Guinea had higher inflation rates.



Agriculture, Forestry, and Fishing: In 2004 agriculture represented a declining share (17.5 percent or lower; down from 20.6 percent in 1993) of gross domestic product (GDP) but employed a majority of workers (an estimated 45 percent of the total labor force) in 2004. Only about 11.3 percent of the total land is arable. Farming is by smallholders and on large private and government-owned commercial plantations. Rice dominates food production, but cassava, corn, fruits, sweet potatoes, and vegetables also are important subsistence crops. Green Revolution technological advances and increased use of fertilizers, pesticides, and irrigation improved rice production in the 1970s and 1980s. Cash crops include cocoa, coffee, copra, palm oil, peanuts, rubber, soybeans, sugar, tea, and tobacco. Animal husbandry (dairy and beef cattle, poultry and eggs, and pigs) and fishing are small but valuable parts of the agricultural sector. Attempts to ameliorate rural poverty by means of a transmigration program moving families from crowded agricultural regions such as Central Java to less crowded areas in, for example, Sumatra and Kalimantan, have failed. Greatly expanding a program begun by the Dutch early in the twentieth century, at the program’s height in the 1979–84 period the Suharto government moved 500,000 people. Poor funding and preparation, local hostility, suspicions about ulterior motives, and (somewhat ironically) economic growth on Java, brought about a precipitous decline; in 2000 the transmigration program was ended.



Mining and Minerals: Mining and mineral production represented about 11.9 percent of gross domestic product (GDP) and employed about 0.5 percent of the labor force in 2004. Crude petroleum and natural gas are predominant. About 1.2 million barrels of petroleum are produced per day, a decline from peak levels of production enjoyed in 1995, when production was at 1.6 million barrels per day. Most proven reserves (estimated at 7.1 billion barrels) are offshore. Central Sumatra is the largest oil-producing region and also has about 60 percent of the reserves of coal, of which a total of 114 million tons were produced nationwide in 2003. Indonesia is the world’s largest exporter of liquefied natural gas. An estimated 69 billion cubic meters were produced in 2001, and Indonesia had an estimated proven reserve of 5.5 trillion cubic meters in 2002. Other minerals of significance are bauxite, copper, gold, iron sands, nickel, silver, and tin; most of these minerals are highly localized and often difficult and costly to extract.



Industry and Manufacturing: The industrial sector accounts for an increasing share of gross domestic product (GDP)—42 percent in 2002, up from 27 percent in the late 1980s—and employed about 19 percent of the work force in 2001. Basic industries are automotive and transportation manufactures, food processing, forest products processing, metal manufactures, oil and natural gas processing, and textiles, as well as such other industries as electronic goods, footwear, furniture, garments, and paper goods. Most production is on Java and Sumatra.



Energy: Efforts are underway to decrease dependence on petroleum and to increase the use of alternative energy sources, especially natural gas and coal to generate electric power. Modernized electric power generation produced 95.78 billion kilowatts in 2001, using fossil fuels (86.9 percent), hydropower (10.5 percent), and other sources (2.6 percent). Indonesia has no nuclear power generation. Rural electrification projects have brought power to more than 14 million village homes since the early 1990s.



Services: Services are estimated to produce between 38 and 42 percent of gross domestic product (GDP) and employed about 37 percent of the work force in 2001. Government service is one of the fastest growing sources of employment and attracts a majority of the best-educated personnel. The sector is characterized by a mix of modern government-operated utilities, stable private services, and numerous self-employed operators in the informal, personal services sector.



Banking and Finance: Much like Indonesia’s general economic performance, the country’s banking and finance have exhibited both positive and negative signs. Relations with the International Monetary Fund (IMF)—a benchmark for foreign investors’ attitudes toward the country—have been tense, and the government formally terminated its loan program with the IMF in December 2003. In the future, Indonesia will likely have to rely on bilateral arrangements, and Japan has indicated that it will pick up some of the slack. Furthermore, the rapid growth in capital markets during the early 1990s has slowed considerably, and share indices have not yet regained their pre-1997 levels.



During the financial crisis of 1997–98, a great many domestic banks collapsed. In 1998 the government allowed foreign ownership of banks and removed restrictions on foreign bank branches outside Jakarta. However, slow progress in bank restructuring has also made foreign investors cautious. The Indonesian Bank Restructuring Agency (IBRA) was established in 1998 to rebuild the private-sector banking industry and dismantle crony conglomerates, which involved selling the banks around which the conglomerates were structured and establishing holding companies to liquidate conglomerates’ assets. The Salim banking group’s assets were successfully dispersed in this fashion; IBRA also sold majority stakes in Bank Niaga to foreign concerns in November 2002 and in Bank Kanamon Indonesia in July 2003. In addition, IBRA merged five smaller banks into the new Bank Permata. Nevertheless, investors have been cautious because of price manipulations in sales of bank shares, such as the case in which the Riady group was able to resume its previous control over the Lippo Bank, and public opinion has shown anxiety about losing the country’s assets to foreign investors.



Indonesia’s continued efforts to deal with both domestic and international debts have hindered its attempts to attract foreign investment as well as its efforts to help business and banking recover. Limited corporate restructuring and continuing uncertainties about capital inflows have hindered banks’ efforts to increase private-sector lending. Although bank loans started to rebound in 2001–02, foreign subsidiaries generally rely on foreign financial markets to raise capital, and for local services they tend to use foreign bank branches. Small businesses and consumers are increasingly obtaining credit from pawn shops.



Tourism: The 1990s, dubbed by the government a “Visit Indonesia Decade,” saw concerted efforts to increase foreign tourism. Travel agencies increased more than 600 percent to nearly 2,500, and rapid construction of facilities took place. Tourist arrivals quintupled, reaching about 5 million in 1996 and earning in excess of US$6 billion. The upheaval and violence associated with the end of the New Order brought declines, however; 2001 saw about 4.2 million arrivals and, as a result of deflation of the rupiah, estimated receipts of under US$4 billion.



Labor: The New Order period saw the rapid growth of an industrial work force and increasing labor unrest. There were about 350 strikes in 1996, nearly twenty times the number only seven years earlier. Government policy attempted to repress labor activism, but at the same time adopted a policy of raising the minimum wage annually; by 1997 it was three times what it had been six years earlier. The fall of Suharto lifted many pressures on unions and raised minimum wages even more quickly, Jakarta’s rising nearly 40 percent in 2001 alone and steadily after that, to about US$80 a month in 2004. In 2002 Indonesia’s the labor force numbered 100.5 million, of which an estimated 10.5 million were unemployed. Another 32 million individuals fell into the category of “disguised unemployment.”



Foreign Economic Relations: The principal export trade is with, in descending order of importance, Japan, the European Union, the United States, Singapore, South Korea, China, and Taiwan. The most important export commodities are crude petroleum and petroleum products; electrical and telecommunications equipment, natural gas (mostly to Japan), natural rubber, plywood, and textiles also are important. Key import partners are Japan, the European Union, the United States, Singapore, South Korea, China, Australia, and Taiwan. The principal imports are machinery and equipment, chemicals, fuels, and foodstuffs.



Trade Balance: Indonesia registered a positive trade balance throughout the 1980s and 1990s despite the sharp decline in oil prices in the mid 1980s. In 2003 exports were estimated at US$63.2 billion versus US$38 billion in imports.



Balance of Payments: Since 1999, Indonesia’s balance of payments has fluctuated from +US$1.2 billion in 1999 and 2000, to –US$717 million in 2001, to +US$6.4 billion in 2002. Indonesia’s current account balance in 2003 was US$US7.6 billion, ranking it 25th in the world and 4th among Association of Southeast Asian Nations (ASEAN) members (behind Singapore, Malaysia, and Thailand).



External Debt: At the end of 2002, Indonesia’s external debt was US$131.3 billion. This figure represented a slight decline from the immediately preceding years. About 56 percent of this indebtedness was in the governmental sector and the rest in private-sector enterprises and domestic securities owned by nonresidents. A total debt of US$132.9 billion was estimated for 2003, compared with US$2.4 billion about fifteen years earlier.



Foreign Investment: Foreign investment in Indonesia has been on the decline since the Asian banking crisis. In 1997 Indonesia received a total of US$33.1 billion in approved foreign direct investment, most of it in the manufacturing sector (and most of that in chemicals and pharmaceuticals). By 2000 the total had plummeted to US$15.2 billion, with manufacturing and chemicals and pharmaceuticals receiving the greatest share. Further decreases were experienced in the succeeding years. In 2003 Indonesia received a total of US$9.3 billion with the same relative distribution.

Foreign Aid: Indonesia received US$43 billion in International Monetary Fund (IMF) aid in 2003, and this assistance has traditionally been an important part of the central government’s budget. From 1967 to 1991, most aid was coordinated through the Inter-Governmental Group on Indonesia (IGGI) founded and chaired by the Netherlands; since 1992, without the Netherlands, the organization has been known as the Consultative Group on Indonesia (CGI). Although Indonesia terminated its IMF aid program in December 2003, it still receives bilateral aid through the CGI, which pledged US$2.8 billion in grants and loans for 2004. Japan and the Asian Development Bank also have been key donors.



Currency and Exchange Rate: Indonesia’s currency is the rupiah (Rp, also sometimes Indonesian rupiah—IDR). The exchange rate in December 2004 was US$1=Rp9,176.



Fiscal Year: Calendar year. Prior to 2001, the fiscal year ran from April 1 to March 31.