Report No. 15383-IND Indonesia Dimensions of Growth May 7, 1996 Country Department III East Asia and Pacific Region ""EU. CURRENCY EQUIVALENTS a Before November 15, 1978, $1.00 = Rp415 Annual Average 1979-1995 1979 $1.00 = Rp623 1980 $1.00 = Rp627 1981 $1.00 = Rp632 1982 $1.00 = Rp661 1983 $1.00 = Rp9O9 b 1984 $1.00 = Rpl,026 1985 $1.00 = Rpl,111 1986 $1.00 = Rpl,283 C 1987 $1.00 = Rpl,644 1988 $1.00 = Rpl,686 1989 $1.00 = Rpl,770 1990 $1.00 = Rpl,843 1991 $1.00 = Rpl,950 1992 $1.00 = Rp2,030 1993 $1.00 = Rp2,087 1994 $1.00 = Rp2,161 1995 $1.00 = Rp2,249 FISCAL YEAR Government April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks - January 1 to December 31 a $ denotes US dollars. b On March 30, 1983 the Rupiah was devalued from $1.00 = Rp703 to $1.00 = Rp970. C On September 12, 1986 the Rupiah was devalued from $1.00 = Rpl,134 to $1.00 = Rpl,644. ABBREVIATIONS, ACRONYMS AND DEFINITIONS AMDAL Environmental Impact Assessment ASEAN Association of Southeast Asian Nations BAPEDAL National Pollution Control Agency BAPPEDA Regional Development Planning Board BAPPENAS National Development Planning Board BKPM Investment Coordinating Board BOT Build, Operate and Transfer BPD Regional Development Bank BPN National Land Agency BPS Central Bureau of Statistics (Biro Pusat Statistik) CGI Consultative Group for Indonesia COLT Commercial Offshore Loan Team CPI Consumer Price Index DATI I Provincial Level Govermnent DATI II Local Level Government DIP List of Project Contents DOD Debt Outstanding and Disbursed FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GNP Gross National Product HC Carcinogenic Hydrocarbons ICOR Incremental Capital-Output Ratio IDT Block grant program for left-behind villages IHH Forest Concession Fee IMF International Monetary Fund INPRES Instruction of the President JABOTABEK Jakarta, Bogor, Tangerang, Bekasi Area JAMSOSTEK Social Security System KABUPATEN Regency KEPPRES Decision of the President KFM Minimum Physical Need KOTAMADYA Urban Municipalities KSO Joint Operating Scheme KUD Local Cooperative LNG Liquid Natural Gas LPG Liquid Petroleum Gas MLT Medium- and Long-Term MOEC Ministry of Education and Culture NGO Non-Governmental Organization PAM Water Supply Company (Local) PJP1 The First Twenty Five Year Long-term Development Plan PTP Publicly-Owned Plantation PTT Non-Permanent Employees REPELITA Five-Year Development Plan RETRIBUSI User charge SAKERNAS Labor Force Survey SBI Bank Indonesia Certificate (Central Bank liability) SBPU Money market instrument (Central Bank asset) SIUP Ordinary Business License SPM Suspended Particulate Matter VAT Value Added Tax WTO World Trade Organizfition INDONESIA: DIMENSIONS OF GROWVTH CONTENTS Ringkasan Eksekutif (Executive Summary in Bahasa Indonesia) ................. vii Executive Summary ............................................ xxii 1 A Macroeconomic Framework for Redicing Risk ..................... 1 A. Overview .1 B. Supply and Demand: Domestic Demand-Led Overheating. 3 Inflation: 9-10% .................................... 3 The Balance of Payments: Strong Domestic Demand Spilled-Over Into Imports ............ .................. 4 Merchandise Trade ................................... 5 The Capital Account: Buoyed by Foreign Investmnent, Fluctuating in Line with External Shocks ........... .................. 8 Interest Spreads Have Fallen Since the Early 1990s, But Risen Since the Mexico Crisis . ............................... 9 External Debt: Prepayment of Public Debt and Reduced Reliance on Public Borrowing ................................... 10 Management of External Borrowing ........ ................. 10 Official Reserves Rose $2.7 Bilion ........ ................. 11 Increased Foreign Investment Approvals Foreshadow a New Source of Growth ................................ 12 C. Macroeconomic Policies ................. .................. 14 1. Fiscal Policy: Tightening in 1995/96 ....................... 14 2. Exchange Rate Developments: Toward a More Market-Determined Exchange Rate .................................... 16 3. Monetary Policy Tightened in 1995 ......................... 17 D. Update on the Banking Sector ......... ...................... 20 E. Macroeconomic Policies to Reduce Risks ........................ 22 F. Projections and Foreign Assistance ............................ 23 Technical Annex to Chapter 1: Revision of GDP Growth for 1988-93 .... ...... 28 This report was prepared by a core team led by Timothy Condon and including Nisha Agrawal, Jorge Garcia-Garcia, and Lloyd Kenward. James Hanson made major contributions. Edison Hulu prepared the graphics and provided research support. The report draws on background inputs prepared by Jacqueline Baptist, Chris Bennett, Alejandra Cox-Edwards, Dipak Dasgupta, Stephen Dice, Frida Johansen, Ari Kuncoro, Donald Larson, Chad Leechor, Samuel Lieberman, Andrew Mason, Akihiko Nishio, Martin Rama and Lana Soelisfianingsih. Yasmine Hamid prepared the Statistical Annex. Jessica Ardinoto, Inneke Herawati, Datty Sembodo, Ester Tjahyadi and Phyllis Williams were responsible for document processing. ii Contents 2. Increasing Transparency and Competition ......... ................. 31 A. Transparency in Land, Forestry and Water Management . .31 1. Land ............................................ 31 2. Forestry .33 3. Water .34 B. Air, Water and Industrial Pollution ........................... 35 1. Improving Air Quality ................................. 36 2. Improving Water Quality ............................... 37 3. Reducing Industrial Pollution ............................. 38 C. Unfinished Deregulation Agenda .. 41 1. Reducing the Anti-Trade Bias of the Trade Regime ............... 43 2. Increasing Domestic Competition .......................... 45 D. A Healthy Financial System ................ ................. 47 1. Bad Debt in the Commercial Banks ......................... 47 2. Transparency and Access to Credit ......................... 50 E. Privatization in Indonesia ...... .......... .................. 52 1. Where is Indonesia in Privatization? ........................ 52 2. The Potential Benefits of Privatization and Private Provision of Infrastructure ............................. 54 3. Maximizing the Benefits of Privatization ...................... 57 3 Growth Benefitted Workers ................................... 62 A. Structural Change Increased Jobs in Manufacturing and Services .... ...... 62 The Move into High-Productivity Jobs ....................... 63 B. Labor Market Developments ............................. ... 64 1. Labor Supply ...................................... 64 2. "Formalization" Accelerates in the 1990s ..................... 65 3. Workers at All Levels Benefitted .......................... 67 4. Unemployment .67 5. Mainly Rural Underemployment, Mainly Urban "Overemployment . 68 6. Wages and Earnings Growth ............................. 70 C. Education Improvements and Earnings .......................... 72 D. Minimum Wage Policy ....... ........ .. ................... 74 1. Minimum wages are rising fast ............................. 74 2. ... and beginning to bind ................................ 76 3. Impact of Minimum Wages on Average Wages and Employment ....... 77 4. Minimum Wages: Not a Tool for Reducing Poverty .............. 78 5. Minimum Wage Increases May Not Improve Industrial Relations ....... 80 6. Summary and Conclusion on Minimum Wages .................. 81 Contents iii E. Emerging Issues of Labor Standards ........ . . ......... . . . . . . . 81 1. Child Labor ............. ... .. .. .. ... .. .. .. ... .. . . 82 2. The Working Conditions of Women ........................ 84 3. The Right to Organize ................................. 86 Annexes to Chapter 3 ........................................ 88 4 Growth Beneritted AR Regions .................................. 92 A. Overview ............................................ 92 B. Regional Disparities Decline ............... ................. 93 1. Background ....................................... 93 2. Regional GDP ...................................... 93 3. Rapid Growth in per Capita GDP and Private Consumption .... ...... 96 4. Provincial GDP and Consumption per Capita are Converging Slowly .................................. 97 5. Equality within Provinces: Generally Improving .................. 99 C. Regional Fiscal Issues .................................... 100 1. Overview ......................................... 100 2. Fiscal Redistribution .................................. 101 D. A Pro-Poor Approach to Regional Development ......... ... ........ 103 1. Deregulation to Eliminate Anti-trade Bias ..................... 103 2. Targeted Agricultural and Infrastructure Development Program ... ..... 106 3. Pro-Poor Health and Education Spending ..................... 109 4. Decentralization ..................................... 117 Bibliography ................................................. 122 Statistical Annex .............................................. 128 TABLES IN TEXT 1.1 Real Growth in National Output and Expenditure. 3 1.2 Balance of Payments. 6 1.3 Growth and Composition of Nonoil Exports. 7 1.4 Growth and Composition of Nonoil Imports. 8 1.5 Ceilings on Foreign Commercial Borrowing .11 1.6 Central Governent Fiscal Operations .15 1.7 Sources of Reserve Money Expansion .18 1.8 Monetary Survey ........................................ 18 1.9 Commercial Banks' Classified Credits .20 1.10 Summary of the Medium-Term Outlook .24 1.11 Medium- and Long-Term (MLT) Debt Indicators .25 iv Contents 1.12 Saving-Investment Balances, 1994-1997 .......... .. . .. . .. . .. . .. . 26 1.13 Sources and Uses of External Financing ........... . .. . .. . .. .. . . . 27 2.1 Public enterprises at a glance .................... .... ... .... . 52 3.1 Output Trends are Reflected in the Labor Market . . ....... . . . . . . . .. . 63 3.2 "Economically Active' People Work ............ .. .. .. .. .. .. .. . 65 3.3 Population and Employment Growth ............ .. .. .. .. .. .. .. . 66 3.4 The East Asian Workforce ....................... .... ..... . 67 3.5 Growth benefitted workers at all levels. ........... . .. . .. .. . .. . . . 67 3.6 Unemployment in Indonesia, 1994. ......... ................... 67 3.7 Educated entrants wait for jobs. ........... ................... 68 3.8 Rural Underemployment, Urban Overemployment ................... 69 3.9 When you leave agriculture, you work longer hours. ................. 70 3.10 Indonesia's growth translated into higher wages ..................... 70 3.11 Real Gains in Monthly Earnings of Wage Employees ................. 71 3.12 Hours worked, not wages, rise when workers leave agriculture. .... ...... 71 3.13 Schooling Pays ........................................ 72 3.14 Men are better educated and paid, but women are catching up ..... ....... 73 3.15 Impact of Additional Schooling on Earnings, by Gender, 1986 and 1993 ... ... 74 3.16 Minimum Wages Increased in the l990s ......................... 75 3.17 Minimum wages are beginning to bind. ......................... 76 3.18 Minimum wages are approaching average earnings ................... 77 3.19 Higher minimum wages raise average wages but reduce employment and investment ........................................ 78 3.20 Poverty in Indonesia, 1993 . ................................. 79 3.21 Urban manufacturing workers are not "poor .. ..................... 80 3.22 Strikes are increasing. .................................... 81 3.23 Child labor increasingly is an urban phenomenon .................... 83 3.24 Women are under-represented in the civil service .................... 86 4.1 Current revenues of provincial and local Governments ....... ... ...... 101 4.2 Estimated net impact of Central Government fiscal operations on provinces of Indonesia, 1990/91 ............. ... .......... 102 4.3 Population and doctors per health center, 1985 and 1992 ...... ... ...... 110 4.4 Increasing numbers of teachers reduced the student-teacher ratio .... ...... 113 FIGURES IN TEXT 1.1 Despite policy tightening, strong domestic demand led to a higher current account deficit and continued high inflation ..... ......... . 1 1.2 Consumer Price Index ..................................... 5 1.3 Quarterly Nonoil Trade ......................... 7 1.4 Cumulative MLT Borrowing Since 1989 ....................... . 9 1.5 Country Risk Stabilizing ......................... 9 1.6 Exchange Rate Risk Stabilizing ........................ . 9 Contents v 1.7 Foreign Investment Approvals ........ . . . . . . . . . . . . . . . . . . . . . . . 13 1.8 The Real Exchange Rate ......... . .. . . . .. . . . .. . . . .. . . . .. . . . 17 1.9 Rupiah Interest Rates .......... . .. . .. . . .. . .. . . .. . .. . . .. . . . 17 1.10 Broad Money Multiplier ......... . .. . . . .. . . . .. . . . .. . . . . .. . . 18 1.11 Credit Developments at Deposit Money Banks ...... . . . . . . . . . . . . . . . 20 2.1 Pollution Prevention: Is There A Choice? .............. ......... 35 2.2 Quantifying the Trade-Offs: Costs and Benefits of Pollution Control ... ..... 35 3.1 Value Added Per Worker and Sectoral Distribution of Employment in East Asia ........... .. . .. .. .. . .. .. .. . .. .. .. . .. .. . . 64 3.2 Female Labor Force Participation Rates by Age, 1986-94 ..... . . . . . . . . . 65 3.3 Trends in Population and Employment, 1986-94 ...... . . . . . . . . . . . . . . 66 3.4 Rising Educational Levels of Indonesian Workers, 1976-94 ..... . . . . . . . . 72 3.5 Minimum Wages in Real Terms ........ . . . . . . . . . . . . . . . . . . . . . . 75 3.6 Ratio of Minimum Wage to Labor Productivity ...... . . . . . . . . . . . . . . . 75 3.7 Ratio of Minimum Wages to Average Earnings, by Gender ..... . . . . . . . . 76 4.1 Levels of per capita GDP are similar except for Jakarta, the Oil Producing Province, Nusa Tenggara and East Timor ....................... 94 4.2 Per capita private consumption levels also are similar .95 4.3 Per capita private consumption and GDP grew fast in most places ... ....... 96 4.4 Few changes in per capita GDP rankings between 1983 and 1993 ... ....... 98 4.5 Few changes in per capita consumption rankings .................... 98 4.6 Sustained low inequality .................................... 99 4.7 Where the poor are is not the same as where poverty rates are high ... .... 104 4.8 Despite improvements, infant mortality remains high ................. 111 4.9 Women have fewer children in 1990 than in 1980 ................... 112 4.10 Illiteracy declined everywhere ............................... 114 4.11 Primary school graduation remains low in the eastern provinces ... ....... 116 BOXES IN TEXT 1.1 Rice supply and demand are likely to grow slowly ................... 4 1.2 The links between investment approvals and the balance of payments ..... . . 14 1.3 Making monetary policy in Indonesia ....... . . . . . . . . . . . . . . . . . . . . 19 2.1 Chronology of environmental protection measures ...... . . . . . . . . . . . . . 39 2.2 Reputational incentives as an enforcement mechanism: the PROPER system .... 40 2.3 The high-cost strategic shipbuilding industry ...... . . . . . . . . . . . . . . . . 42 2.4 Export restrictions on crude palm oil are the wrong tool for the job ..... . . . 45 2.5 The case of beer in Bali ......... . .. . . . . .. . . . . .. . . . . .. . . . . . 46 2.6 A success of Rural Finance: BRI's Unit Desa System, Kupedes and Simpedes ......... . . . . .. . . . . . . . .. . . . . . . . . . . 53 2.7 Privatizing Indonesia's Telecommunications ...... . . . . . . . . . . . . . . . . 55 2.8 Quantifying the benefits of privatization ..... . . . . .......... ..... . 56 2.9 Private participation in building Indonesia's gas infrastructure ..... . . . . . . . 59 vi Contents 4.1 Export taxes on raw rattan are wiping out rattan producers and processors ........ . . .. . . . . . . . . . .. . . . . . . . . . 106 4.2 Local copra levies reduce farmgate prices in Central Sulawesi ..... . . . . . 108 4.3 Public-private partnership to deliver infrastructure services in Kalimantan .109 4.4 The implementation gap in decentralizing responsibility for urban land use planning . . . . ..... . . . . . . . . . . . . . . . . . . . . . 119 4.5 Chile uses property taxes to redistribute income between provinces ..... . . 120 Ringkasan Eksekutif vii RINGKASAN EKSEKUTIF INDONESIA: DIMENSI PERTUMBUHAN Indonesia adalah salah satu dari ekonomimakro adalah sualu langkah yang Kelompok Negara Asia dengan Kinerja harus dilakukan dalam memelihara Ekonomi Tinggi. Pertumbuhan PDB per kapita kepercayaan dan mengurangi risiko. selama 30 tahun teraklir berada pada peringkat 10% teratas dari seluruh negara Kebijaksanaan seperti itu dapat berkembang; juga dicatat keberhasilan dalam mencakup peningkatan surplus anggaran- pengentasan kemiskinan. Menurut Bank belanja negara dan pengetatan kebijaksanaan Dunia, pada tahun 1993 status Indonesia moneter. Kebijaksanaan-kebijaksanaan bergeser dari negara berpenghasilan rendah tersebut akan mengurangi tingkatpertumbuhan ke kelompok negara berpenghasilan menengah konsumsi dan mendukung peningkatan bawah. investasi swasta. Beberapa perangkat kebijaksanaan fiskal, seperti peningkatan Laporan ini mengkaji empat dimensi harga Bahan Bakar Minyak (BBM) dan luran kinerja perekonomian Indonesia dan beberapa Hasil Hutan (IHH), serta pengurangan tantangan yang dihadapi dalam memodernisasi pengeluaran negara pada sektor yang ekonomi Indonesia, seperti: pemeliharaan sebagian besar telah mampu dikelola swasta, stabilitas ekonomimakro; peningkatan dan juga dalam meningkatkan efisiensi dan transparansi dan persaingan ekonomi pemerataan. Pengetatan kebiaksanaan (sumberdaya alam, polusi lingkungan, moneter bermaksud menyusun target secara deregulasi, sektor keuangan dan keikutsertaan konservatif terhadap pertumbuhan kredit swasta dalam pengadaan infrastruktur); dalam negeri, menyesuaikan tingkat suku pemeliharan agarpasar tenaga kerja berfungsi bunga terhadap berbagai peralatan dengan baik; kesinambungan pemerataan dan kebijaksanaan moneter Bank Indonesia sejalan pengembangan basis pembangunan daerah. dengan pergerakan suku bunga internasional, ketepatan pelaksanaan berbagai peraturan Kesinambungan modernisasi ekonomi pada sektor keuangan dengan hati-hati. yang terutama dan yang paling hakiki tergantung kepada pemeliharaan stabilitas Kelanjutan ketepatan pengendalian ekonomi. Dalam jangka menengah akan utang pemenintah dan semi-pemenintah oleh terjadipeningkatan besarterhadappermintaan Tim Pinjaman Komersial Luar Negeri (PKLN) investasi swasta. Pada periode berikutnya, dan jaminan yang diberikan baik secara pertumbuhan lebih cepat tetapi juga defisit imnplisit maupun eksplisit terhadap hutang neraca perdagangan nonmigas dan transaksi swasta, menjadi pendukung berbagai berjalan mengalami peningkatan. Defisit kebijaksanaan tersebut di atas. Untuk transaksi berjalan yang semakin besar akan menciptakan peluang agar lebih besar dibiayai, yang paling utarna dari pemasukan pinjaman swasta, pemerintah dapat melakukan modal swasta luar negeri. Keadaan ini program pembayaran hutang luar negeri mudah bergejolak. Ketergantungan yang menggunakan surplus anggaran dan dari semakin besar pada pemasukan modal swasta swastanisasi Badan Usaha Milik Negara luar negeri yang gampang bergejolak itu (BUMN). Kebijaksanaan-kebijaksanaan ini adalah salah satu sumber kerawanan ekonomi. mempunyai dampak sangat positif bagi Kehati-hatian dalam penerapan kebijaksanaan peningkatan kepercayaan pasar. viii Ringkasan Eksekutif Paket deregulasi Mei 1994 dan Mei politik dan jajaran yang tertinggi dalam 1995 meningkatkan transparansi dan menagih utang yang telah jatuh temnpo pada persaingan, dan merupakan salah satu bank-bank pemerintah, akan meningkatkan penyebab menguatnya permintaan investasi kepercayaan kepada sistem keuangan dan dan dalam peningkatan investasi asing yang mengurangi tingkat suku bunga dalam negeri. disetujui. Paket Januari 1996 maju lebih jauh Peningkatan transparansi dan kompetisi dalam lagi dengan penurunan tarif sesuai dengan proses swastanisasi akan menguntungkan jadwal yang sudah diumumnkan pada bulan konsumen dan pembayar pajak, dan, dengan Mei 1995. Petuntasan agenda deregulasi meningkatkan lebih besar penerimaan, yang masih belum dilaksanakan diperlukan mempercepat pembayaran hutang luar negeri, dengan tiga alasan. Pertama, mendorong serta mempertahankan stabilitas produsen untuk lebih efisien dan meningkatkan ekonomimakro. manfaat kepada konsumen. Kedua, menunjukkan tekad pemerintah dalam Pasar tenaga kerja menunjukkan memelihara stabilitas dan diharapkan akan kinerja yang baik. Perluasan basis meningkatkan kepercayaan para investor. pertumbuhan telah mendorong pengalihan Ketiga, deregulasi meningkatkan pemerataan pekerja dari sektor pertanian ke kegiatan melalui pemaksaan kegiatan-kegiatan yang dengan produktivitas dan upah yang lebih dilindungi untuk mulai bersaing dan tinggi. Pemerintah telah memperluasfasilitas meningkatkan permintaan akan tenaga kerja. pendidikan dasar dan pelayanan kesehatan dasar bagi hamnpir seluruh rakyat Indonesia. Masalah yang berpangkal dari Kesenjangan jender dalam pendidikan dan kurangnya transparansi dalam kebijaksanaan penghasilan telah berkurang dengan cepat. pertanahan, air bersih, dan kehutanan, juga akan memperlambat proses modernisasi. Tantangan dalam pasar tenaga kerja Pengurangan masalah tersebut dapat adalah mempertahankan pertumbuhan dilakukan dengan pemercepatan proses kesempatan kerja yang cepat dan sertifikasi hak milik atas tanah, perluasan mengembangkan kelembagaan yang kepercayaan terhadap mekanisme pasar, memungkinkan kinerja pasar tenaga keria seperti penetapam IHH yang lebih tinggi dan dengan baik secara berkesinambungan. penetapan harga air bersih yang lebih baik. Peningkatan upah minimum yang besar Karena kegagalan mekanisme pasar dalam baru-baru ini mulai mengurangi daya saing mengendalikan polusi (misalnya polusi air dan dan memperlambat penciptaan kesempatan udara) sehingga sistim transparansi sulit kerja pada sektor formal. Keberlanjutan diterapkan, diperlukan kombinasi peralatan mempertahankan pertumbuhan permintaan pengendalikan mekanisme pasar, deregulasi tenaga kerja yang tinggi akan tergantung pada yang dipercaya dalam penerapannya, dan kemampuan dalam memelihara peningkatan informasi dari masyarakat yang berkaitan upah minimum sejalan dengan peningkatan dengan kinerja perusahaan-perusahaan dalam produktivitas, stabilitas ekonomimakro, dan mengendalikan polusi. deregulasi yang berkesinambungan. Sebuah sistem keuangan yang sehat Seluruh propinsi di Indonesia telah adalah salah satu syarat dalam sebuah merasakan manfaat dari perluasan basis perekonomian yang modem. Penerapan pertumbuhan ekonomi. Pendapatan per secara tegas peningkatan modal perbankan, kapita, konsumsi per kapita, status pendidikan perbaikan terhadap peraturan yang sudah dan kesehatan menunjukkan perbaikan selama ada, dan sepanjang masih mendapat dukungan kurun waktu 1983-93. Agak kurang Ringkasan Eksekutif ix mengesankan perbaikan dalam pemerataan Deregulasi mengurangi penyimpangan anti- distribusi pengeluaran. Bagaimanapun perdagangan akan mendorong pembangunan perbedaan antardaerah patut nendapat daerah yang seimbang karena harga produk perhatian. Pertumbuhan PDB per kapita untuk akan turun bersaing dengan produk impor, kawasan timur yang berpenghasilan rendah dan menaikkan harga produk ekspor. melebihi 4% dan disertai dengan perbaikan Pembangunan proyek-proyek pertanian dan dalam indikator-indikator kesehatan dan prasarana yang diarahkan pada daerah muskin pendidikan. Di samping itu tingkat kemiskinan akan membantu daerah bersangkutan untuk masih tinggi dan berbagai indikator sosial memanfaatkan dengan lebih baik peluang masih serupa dengan ketUmpok negara dalam perdagangan dan sumberdaya yang berpendapatan rendah. dimiliki makin lebih baik. Langkah selanjutnya menwggeser alokasi belanja negara Upaya pemercepatan pengentasan kepada program-program yang sangat kemiskinan harus terus dilanjutkan mengingat berguna untuk penduduk miskin, seperti masih banyak penduduk miskin di Jawa dan pertanggungjawaban pelayanan pendidikan Sumatera dan masih tinggi tingkat dan kesehatan yang didukung dengan kemiskinan-melihat jumlah penduduk miskin desentralisasi perhitungan anggaran relatif rendah-untuk kawasan timur. pengeluaran dan cara mencari sumber Pembangunan daerah dilanjutkan dengan pembiayaan, akan membantu kelanjutan landasanpemcercepatan lajupertumbuhan dan pemercepatan pengentasan kemiskinan pada perluasan basis pertumbuhan. Sekali lagi, seluruh wilayah nusantara. stabilitas ekonomimakro sebagai fondasi. x Ringkasan Eksekutif A. Kebijaksanaan Ekonomimakro semakin kuat. Pertumbuhan ekspor nonmigas Untuk Mengurangi Risiko diperkirakan akan sedikit meningkat. Defisit transaksi berjalan diperkirakan meningkat 1. Indonesia mempunyai reputasi baik menjadi $8,8 miliar pada periode 1996/97(4% dalam pengelolaan ekonomimakro. Catatan dalamn PDB). Pembiayaan defisit yang keberhasilan termasuk penyesuaian yang cepat meningkat tersebut akan sangat ditentukan oleh dalam menghadapi gejolak harga minyak pada kemampuan mempertahankan sentimen pasar pertengahan tahun 1980-an, memanasnya (market sentiment) yang menguntungkan. perekonomnian Indonesia pada awal tahun 1990-an, dan dampak krisis Meksiko pada 5. Tanpa kebijaksanaan fiskal dan tahun 1995. moneter yang lebih ketat, permintaan konsumsi masih tetap tinggi atau tumbuh lebih 2. Permintaan swasta dalam negeri yang cepat pada periode 1996/97, yang cenderung kuat bertolakbelakang dengan pengetatan memperbesar defisit transaksi berjalan. moneter dan fiskal tetapi defisit transaksi Kemungkinan bila terjadi defisit transaksi berjalan masih tetap tinggi mencapai $6.9 berjalan yang cukup besar akan menyulitkan miliar (3.4% dalam PDB) dan laju inflasi upaya dalam mengendalikan perilaku. Arus berkisar 9-10%. PMA, investasi portofolio dan modal masuk dapat dengan cepat berbalik pinjaman swasta merupakan bagian terbesar menjadi arus modal ke luar, perekonomian dari sumber pembiayaan untuk menutup defisit menjadi terancam. transaksi berjalan, dan meningkatkan cadangan devisa pemerintah sebesar $2,7 miliar. 6. Mengurangi risiko bermaksud berupa kebijaksanaan fiskal dan moneter yang ketat 3. Dominasi pembiayaan yang bersumber untuk membatasi kecenderungan makin dari swasta mencerminkan transformasi besarnya defisit transaksi berjalan. struktural dalarn perekonomian. Investasi Kebijaksanaan ekonomimakro adalah yang swasta dalam beberapa tahun mendatang yang diutamakan dalam mengurangi risiko, seperti diperkirakan meningkat akan mempercepat mendorong agar tingkat tabungan pemerintah pertumbuhan PDB. Tetapi akan mendorong menjadi lebih tinggi untuk mengurangi mengimpor lebih tinggi dan selanjutnya defisit permintaan agregat dan melampangkan tempat transaksi berjalan menjadi meningkat mencapai peningkatan investasi swasta. Kebijaksanaan sekitar 4-4,5% dalam PDB. Modal swasta- fiskal adalah efektif dalam mengendalikan PMA dan utang swasta-akan menjadi sumber permintaan agregat di Indonesia. Dalam terbesar dalam menutupi defisit. mencapai tujuan, pemerintah berupaya untuk Ketergantungan yang besar terhadap arus meningkatkan surplus secara keseluruhan masuk modal swasta merupakan salah sata (menurut meteran IMF/Bank Dunia) yakni sumber kerawanan ekonomi. Oleh karena itu, sekitar 2% dalam PDB. Beberapa langkah kebijakan ekonomi perlu diarahkan untuk yang dapat membantu mencapai tujuan mengurangi risiko dan kerawanan tersebut tersebut secara efisien dan merata yaitu (lihat berikut ini). menaikkan harga BBM, tarif listrik, dan iHH, serta menurunkan pengeluaran pemerintah 4. Kebijaksanaan fiskal dan moneter yang pada sektor yang telah mampu pihak swasta ketat untuk tahun 1996/97 diperkirakan tidak telah berperan besar dalam pengelolaannya. begitu besar turun pertumbuhan impor nonmigas dan komposisi impor akan bergeser 7. Kebijaksanaan moneter yang lebih ke barang modal yang mencerminkan ketat akan mencakup penetapan pertumbuhan perkiraan permnintaan investasi swasta yang kredit dalam negeri Bank Indonesia yang Ringkasan Eksekutif xi konservatif, penyesuaian secara terus-menerus B. Pembiayaan Luar Negeri dan Bantuan tingkat suku bunga sebagai instrumen Luar Negeri kebijaksanaan moneter seirama dengan pergerakan tingkat suku bunga internasional, 10. Proyeksi pembiayaan luar negeri untuk d a n k e a k u r a t a n pelaksanaan Indonesia didasarkan pada skenario peraturan-peraturan yang berlandaskan kebijaksanaan ekonomimakro yang lebih ketat kehati-hatian terhadap bank-bank komersial. yang membatasi defisit transaksi berjalan pada Cadangan wajib perbankan yang lebih tinggi tahun 1996/97 yang diperkirakan di bawah $9 dan pelebaran batasan intervensi (intervention miliar. Jumlah kebutuhan pembiayaan pada band) terhadap nilai tukar dapat meningkatkan tahun 1996/97 diperkirakan lebih besar efektivitas kebijaksanaan moneter. Jika arus dibanding dengan pada tahun 1995/96, karena modal secara mendadak terhenti atau berbalik defisit transaksi berjalan lebih besar dan arah, kebijaksanaan moneter perlu lebih keperluan untuk menaikkan cadangan devisa diperketat lagi. dengan jumlah yang aman dalam mengantisipasi impor. Arus masuk dari 8. Pemerintah juga dapat mengurangi pinjaman dan modal swasta yang cukup tinggi risiko dengan mengurangi hutang pemerintah, diperkirakan akan membiayai sebagian besar dan dengan demikian menciptakan peluang dari defisit pada tahun 1996/97. bagi swasta untuk melakukan pinjaman. Hutang luar negeri Indonesia tergolong besar. 11. Namun demikian, bantuan luar negeri Permintaan investasi yang lebih tinggi pada masih sangat diperlukan karena beberapa urnumnya melibatkan pinjaman luar negeri alasan. Pertama, bantuan tersebut menjamin yang cukup besar, sehingga akan menambah tersedianya dana yang memadai untuk jumlah hutang yang ada. Sektor pemerintah membiayai kegiatan-kegiatan pembangunan perlu membatasi pertumbuhan hutang luar yang tidak menarik bagi investor swasta. negeri dengan mengurangi hutang luar negeri Sebagai contoh, pembangunan sumberdaya Pemerintah. Pemerintah dapat mengurangi manusia, pembangunan prasarana di luar hutang dengan jumlah yang cukup besar dalam Jawa, dan selama kerangka kerja partisipasi tiga sampai lima tahun mendatang sehingga swasta masih dalam tahap penyempurnaan. menciptakan ruang bagi peminjam swasta dan Kedua, dalam jangka panjang, tingkat suku akan mempunyai dampak yang kuat dalam bunga yang lebih rendah dan diversifikasi mengendalikan pasar. Kebijakan ini didukung risiko sejalan dengan pemberian bantuan oleh pembatasan dari PKLN yang tepat tersebut akan memperbaiki struktur terhadap hutang Pemerintah dan hutang yang pembiayaan luar negeri dan mengurangi berkaitan dengan Pemerintah. ancaman dari perubahan mendadak terhadap arus modal swasta. Ketiga, ketersediaan 9. Swastanisasi akan meningkatkan bantuan luar negeri yang memadai menjamin efisiensi dan membantu mengurangi hutang proses transisi yang mulus menuju luar negeri. Realisasi sasaran swastanisasi pembiayaan swasta. Berdasarkan hal tersebut, yang cukup tinggi akan tergantung pada komitmen dari negara donor cGi untuk jumlah percepatan pengembangan kerangka kerja yang sekitar komitmen tahun lalu akan sangat transparan dan kompetitif untuk swastanisasi menunjang program di atas. (Bagian C.5). xii Ringkasan Eksekutif 12. Seperti pada pertemuan CGI tahun 1. Transparansi dalam pengelolaan tanah, 1995, prioritas dari bantuan tersebut adalah air dan hutan pembangunan sumberdaya manusia, pengentasan kemiskinan, dan penyediaan 14. Tanpa transparansi menyebabkan pasar prasarana fisik yang dapat mengurangi kendala pertanahan di Indonesia berfungsi dengan pertumbuhan sektor swasta. Prioritas-prioritas buruk. Kurang memadai pelayanan sertifikasi tersebut tidak diubah. Sebagai tambahan, tanah dan tidak transparansinya peraturan sangat penting peran pemerintah dalam kepemilikan tanah adalah sebagai akar menetapkan kerangka aturan kerja untuk penyebab permasalahan. Kesulitan dalam mendorong agar lebih besar keikutsertaan penjualan tanah akan mengurangi mobilitas swasta dalam pembangunan. Sejalan dengan sumberdaya. Masalah-masalah dalam itu perlu peninjauan kembali kebijaksanaan penggunaan tanah untuk keperluan sebagai belanja pembangunan berupa pengurangan atau jaminan dalam mendapatkan kredit. Gangguan pengalihan alokasi sehingga kegiatan pihak keamanan kadangkala muncul ketika terjadi swasta tumbuh lebih maju, dan bantuan lunak perubahan kepemilikan atau penggunaan tanah. agar dimanfaatkan secara maksimal melalui Mempercepat proses sertifikasi tanah pengendalian dalam pelaksanaannya. merupakan suatu prioritas utama. Selain itu, perbaikan dalam prosedur dan kebijakan harga C. Meningkatkan Transparansi dan untuk penjualan dan pembelian tanah negara Persaingan sangat diperlukan, dengan lebih memperhatikan pemberian hak bagi pemukin 13. Pertumbuhan ekonomi telah yang telah ada. Perhatian secara khusus harus meningkatkan rata-rata pendapatan pada diberikan kepada penggunaan ijin negara seluruh pelosok Indonesia dalam 30 tahun dalam mendapatkan tanah. terakhir ini. Basis pertumbuhan ekonomi- sektor industri pengolahan dan jasa yang 15. Hutan di Indonesia adalah sebuah tumbuh lebih cepat menarik pekerja pedesaan sumber daya alam yang utama; untuk bekerja pada kegiatan yang lebih Ketidaklestarian pemafaatan disebabkan karena produktif-menunjang kesinambungan kurangnya transparansi dalam pengelolaan dan modernisasi Indonesia. Selain itu merupakan kurang memadainya insentif untuk keperluan jalan yang terbaik untuk mencapai kemajuan pelestarian. Sistem pemberian pengusahaan yang terus-menerus dalam mengentaskan hutan yang berlaku saat ini mendorong kemiskinan. Tetapi, pertumbuhan juga akan terjadinya penebangan hutan yang cepat, menimnbulkan berbagai permasalahan yang karena beberapa hal berikut: (i) jangka waktu pada saat ini telah mulai dirasakan, paling pengusahaan hutan yang relatif pendek tidak akan diambil kebijakan untuk (biasanya 20 tahun dibandingkan siklus mengatasinya. Permasalahan tersebut terlihat pertumbuhan pohon-pohon tropis yang paling pada bidang pertanahan, sumber daya air dan cepat 35 tahun); (ii) risiko kenaikan iHH, yang kehutanan; polusi yang cenderung semakin pada saat ini sangat rendah untuk suatu meningkat; proses deregulasi; pada sektor pemanfaatan sumber daya publik; dan (iii) keuangan; dan pada proses swastanisasi. sanksi yang lemah terhadap penebang hutan Transparansi dan keterkaitan yang lebih besar konsesi yang berlebihan. Kelemahan sistem kepada mekanisme pasar dapat memperkecil konsesi ini diperburuk oleh industri perkayuan dampak dari permasalahan tersebut. yang bersifat kartel. Perbaikan yang Ringkasan Eksekutif xiii menyeluruh dalam sistem insentif untuk 2. Polusi Industri, Air dan Udara penebangan hutan yang berkesinambungan akan dapat tercapai dengan menderegulasi 18. Indonesia menghadapi kemungkinan sektor perkayuan, menaikkan IHH, dan makin meningkatnya biaya yang berkaitan memberikan kepercayaan yang lebih besar dengan pencemaran. Suatu kombinasi dari terhadap penyelenggaraan sendiri dari penetapan harga yang lebih didasarkan pada pengelolaan konsesi hutan melalui surat mekanisme pasar (misalnya, menaikkan harga tanggungan (performance bonds). BBM paling tidak sama dengan harga internasional), ketegasan pelaksanaan 16. Pengelolaan sumber daya air menjadi peraturan, dan sebarluaskan informasi kepada semakin penting di masa mendatang, masyarakat agar lebih memperhatikan kinerja khususnya di pulau Jawa yang menampung perusahaan-perusahaan dalam mengendalikan 60% dari penduduk Indonesia, 70% dari polusi karena apa yang disebut dengan pertanian beririgasi, dan 75% dari industri. transparansi dan kompetitif adalah sulit Masalah utama adalah persaingan di antara diharapkan berhasil karena kegagalan pemakai (pertanian versus industri), dan di mekanisme pasar (misalnya polusi air dan antara pengguna air tanah dan permukaan yang udara). makin cepat pertumbuhannya pada daerah perkotaan. Persoalan tersebut diperumit oleh 19. Akibat buruk terhadap kesehatan masalah polusi air yang semakin meningkat. karena terbatasnya akses air bersih sudah semakin serius. Mutu air yang rendah sebagai 17. Seperti halnya dengan tanah dan hutan, akibat dari fasilitas sanitasi yang tidak penetapan harga untuk pemanfaatan sumber mencukupi dan limbah industri. Teknologi daya air juga kurang tepat, yang dasar pendistribusian air dan sistem sanitasi mengakibatkan penggunaan air secara berle- sudah cukup mapan. Dengan demikian, bihan oleh sebagian kelompok masyarakat kebijakan dapat diarahkan kepada perluasan (terutama para petani dan kalangan rumah- penggunaan dan perbaikan dari air PAM tangga berpendapatan menengah dan tinggi di (termasuk mengurangi kebocoran), daerah perkotaan) dan dengan harga tinggi memperluas akses, dan memperbaiki fasilitas serta kelangkaan air bagi kelompok kebersihan atau sanitasi. masyarakat lainnya (termasuk penduduk miskin di daerah perkotaan). Iuran irigasi 20. Polusi udara merupakan masalah yang tinggi dan perbaikan harga air diperlukan kesehatan yang serius di daerah perkotaan di guna mengurangi pemborosan penggunaan air Indonesia. Yang mendapat risiko terbesar irigasi sehingga dapat digunakan di daerah adalah kelompok penduduk miskin. Beberapa perkotaan dengan permintaan yang makin pilihan praktis dalam memperbaiki polusi perlu meningkat cepat. Di daerah perkotaan dikaji lebih mendalam. Antara lain seperti reformasi harga diperlukan karena dengan mengurangi secara dominan penggunaan harga air tanah yang rendah akan mendorong bensin, menetapkan ukuran standar pengeringan persediaan sumber air dalam pembuangan gas, melarang penggunaan mesin tanah, dan harga yang rendah dari PAM ganda, mewajibkan cairan pembersih bagi mempersulit upaya perluasan akses dan mesin-mesin diesel, menaikkan harga BBM ke pelayanan yang memadai. tingkat harga internasional (dan, untuk selanjutnya dapat memperhitungkan biaya polusi), serta meningkatkan mutu pelayanan transportasi umum di daerah perkotaan. xiv Ringkasan Eksekutif 21. Limbah berbahaya dan bahan-bahan 23. Penuntasan agenda deregulasi tersebut beracun merupakan produk sampingan dari merupakan hal yang penting karena tiga pertumbuhan sektor industri yang tinggi. alasan. Pertama, dengan menyetarakan arena Bahan-bahan tersebut merugikan kesehatan, persaingan, deregulasi mendorong produsen mutu air, serta kegiatan-kegiatan pada sekitar untuk lebih efisien dan akan menguntungkan aliran sungai. Kerangka kebijakan dan konsumen. Kedua, deregulasi akan implementasi untuk menangani polusi industri meningkatkan tingkat kepercayaan. Para akan lebih efektif jika diarahkan kepada usaha- penanam modal menghargai lingkungan usaha pencegahan daripada membersihkan keadaan yang stabil dan kebijakan yang daerah yang sudah tercemar karena biaya lebih konsisten serta pemercepatan proses deregulasi mahal. Pada praktek bermaksud bahwa yang mencerminkan tekad pemerintah dalam kebijaksanaan harus diarahkan pada penetapan menciptakan keadaan lebih stabil dan sesuai peraturan yang baku bagi pabrik-pabrik baru dengan yang diharapkan. Ketiga, deregulasi dan disertai penggunaan teknologi yang lebih meningkatkan mutu pertumbuhan. Kebijakan "bersih," khususnya pada industri dan lokasi perdagangan yang menguntungkan kelompok yang berpolusi tinggi, serta mendorong sektor tertentu-memberikan perlindungan tarif swasta untuk menggunakan teknologi terbaik kepada Chandra Asri dan keringanan tarif dan melakukan investasi dalam pengendalian kepada usaha pengembangan kendaraan polusi melalui suatu kombinasi antara nasional-dapat menjadi salah satu sumber penegasan peraturan dan insentif. keresahan bagi sebagian masyarakat. 3. Ciptakan Kesetaraan Persaingan: a. Turunkan Hambatan Impor Agenda Deregulasi yang belum tuntas 24. Berpedoman pada pemotongan tarif 22. Paket Mei (Pakmei) 1994 dan Pakmei yang diumumkan pada bulan Mei 1995 akan 1995 telah banyak menyetarakan arena mengurangi perlindungan inpor yang cukup persaingan. Paket Januari 1996 melanjutkan besar. Penjadwalan tarif memiliki tiga pemotongan tarif (dari 15,1% menjadi 14,2%) tingkatan-0%, 5% dan 10%-dan rata-rata sesuai dengan jadwal yang dicantumkan pada tarif menjadi 7%. Jadi, agenda yang belum Pakmei 1995. Suasana yang makin tuntas dalam penghapusan hambatan nontarif transparans patut diakui telah turut sangat impor terdiri dari penghapusan hamnbatan tarif berperan dalam pertumbuhan investasi swasta untuk beberapa komoditi: beras, gula, terigu, pada dua tahun terakhir ini. Implementasi dari kedelai, dan berbagai hamnbatan yang erat Putaran Uruguay dan pemotongan tarif yang kaitannya dengan pabrik pengolahan tepung terjadwal dari Pakmei 1995 akan meningkat- terigu (perlindungan terhadap industri kan efisiensi dan pemerataan. Pemercepatan pengolahan kedelai untuk bahan makanan penjadwalan pemotongan pembatasan tarif dan dihapus sesuai dengan yang ditawarkan nontarif serta formalisasi penjadwalan Indonesia dalam Putaran Uruguay). Dari tersebut, akan memperkokoh program ini. beberapa dokumen yang dipercaya diketahui Yang paling penting, tahapan belum bahwa dengan pemberian hambatan nontarif dilaksanakan adalah penghapusan hambatan terhadap komoditi-komoditi tersebut tidak non tarif (dikaitkan dengan deregulasi dalam menguntungkan dilihat dari efisiensi dan negeri) terhadap komoditas pertanian yang keadilan. Sebagai contoh, hambatan nontarif ditangani oleh Bulog, penurunan tarif pada dalam mengimpor gula diberikan sebagai kendaraan bermotor, dibuka industri-industri perlindungan terhadap produsen gula dalam strategis, dan penghapusan pemberian subsidi, negeri tetapi menurunkan pendapatan riil serta penghapusan hambatan-hambatan ekspor. sekitar 0.6%. Penghapusan hambatan nontarif Ringkasan Eksekutif xv akan memberikan manfaat yang merata oleh masyarakat luas. Peningkatan pendapatan terhadap rakyat Indonesia secara keseluruhan. daerah juga merupakan alasan untuk melakukan intervensi dalain perdagangan b. Hapuskan Hambatan Ekspor bebas di dalam negeri. 25. Hambatan ekspor mencakup setengah 28. Pendekatan deregulasi yang berda- dari ekspor non-migas, atau hampir 2.000 sarkan peraturan (rules-based) yang jelas dan produk. Hambatan-hambatan ini sering transparan untuk menghapuskan hambatan- menekan pendapatan petani kecil, cenderung hambatan persaingan domestik sangat menguntungkan konsumen domestik, dan diperlukan. Pendekatan tersebut akan menurunkan efisiensi, serta ekspor non-migas. menghilangkan monopoli (yang ditetapkan Pemerintah) dalain pengendalian pemasaran 26. Penghapusan hambatan ekspor untuk dan penyaluran produk-produk penting/pokok, semua produk dapat mengurangi distorsi- serta membuka sektor perdagangan besar dan distorsi yang ada. Pengecualian dapat eceran kepada PMA. Pendekatan ini mencakup dilakukan pada pengelolaan Multi-Fiber peraturan yang menetapkan bahwa Surat Izin Arrangement kuota tekstil dan larangan ekspor Usaha Perdagangan (SIUP) merupakan satu- binatang langka. Penjadwalan terhadap satunya ijin yang diperlukan untuk penghapusan hambatan-hambatan tersebut mengekspor dan/atau bergerak di bidang dapat dipertimbangan, bila dengan adanya perdagangan dalam negeri. Di samping itu, hambatan tersebut telah mendorong investasi keikutsertaan dalam asosiasi-asosiasi besar-besaran dalam kegiatan industri yang perdagangan atau komoditas hanya bersifat terkait. suka-rela, bukan suatu syarat. Pendekatan ini juga dapat mencakup penghapusan retribusi e. Pelihara persaingan dalam negeri dan pajak khusus lainnya. Pendapatan yang berasal dari pajak-pajak tersebut dapat 27. Banyak campurtangan pemerintah yang digantikan oleh penetapan harga dari sudah ada sebetulnya bisa kompetitif. pelayanan Pemerintah yang lebih baik dan Intervensi yang banyak sekali tersebut pajak kepemilikan. mencerminkan banyaknya tujuan yang ingin dicapai. Beberapa komoditas dianggap sangat 4. Transparansi dalam Sistem Keuangan penting/pokok sehingga penyalurannya dianggap terlalu penting untuk diserahkan pada 29. Pengendalian yang tegas terhadap mekanisme pasar. Sebagai contoh adalah penilaian secara hati-hati atas perkembangan semen dan pupuk, yang pengaturan lembaga-lembaga keuangan permodalan dan distribusinya disertai dengan kehadiran pabrik mengurangi keterbukaan pinjaman pada BUMN. Untuk produk-produk lainnya, kelompok sendiri (related-group exposure), hambatan persaingan dilakukan untuk selama pengelolaannya dilakukan dengan baik melengkapi hambatan-hambatan impor, (better collections), akan meningkatkan meningkatkan nilai tambah pada kegiatan transparansi dalam sistem keuangan. Pada pemrosesan, tetapi memberikan keuntungan gilirannya akan meningkatkan kepercayaan, yang tinggi bagi investor swasta (misalnya mengurangi risiko ketidakstabilan tepung terigu dan kedelai). Hambatan- ekonomnimakro, dan meningkatkan efisiensi hambatan ini juga memanfaatkan kekuatan pada lembaga perantaraan keuangan (financial posisi Indonesia di pasaran dunia, misalnya intermediation), sehingga akan menurunkan pada kayu dan kayu-lapis, walaupun biaya dana investasi. Dimensi transparansi keuntungan yang didapatkan tidak dinikmati lainnya yaitu berkaitan dengan kelemahan dari xvi Ringkasan Eksekutif kerangka hukum/legal untuk transaksi- tidak dapat dihindari, maka transfer yang transaksi kredit. Sekali lagi, suku bunga berasal dari anggaran negara lebih baik rupiah menjadi lebib tinggi dari yang dibandingkan dengan transfer atau pinjaman seharusnya dan banyak manfaat lain yang dari Bank Indonesia yang kurang transparan bersumber dari peningkatan transparansi dalam dan mungkin dapat mengendorkan kebijakan transaksi kredit. moneter yang ketat. 30. Bank-bank Pemerintah mencatat 32. Bank-bank swasta, secara rata-rata, kemajuan yang lambat dalam mengurangi berkondisi lebih baik dibandingkan dengan hutang-hutang bermasalah (bad debts). Saat bank-bank Pemerintah. (Kecuali banyak bank ini, usaha yang lebih baik untuk swasta yaitu bank-bank kecil non-devisa.) mengembalikan hutang-hutang tersebut sangat Namun, insentif untuk memberikan hutang- diperlukan, baik untuk menurunkan potensi hutang yang berisiko terus meningkat karena "pengeringan" fiskal maupun untuk didorong oleh rendahnya modal, tingginya meyakinkan bahwa hutang-hutang itu harus pinjaman untuk sesama kelompok usaha, serta dibayar. Dengan adanya beberapa peminjam ringannya hukuman atas pelanggaran dari "penting," usaha pengembalian hutang peraturan yang telah ada, dan kecilnya tersebut memerlukan dukungan politis dari kemungkinan penutupan bank oleh pihak yang jajaran yang tertinggi. Pemecahan yang berwenang. Pemberi pinjaman dan pemilik langgeng bagi permasalahan bank-bank tabungan bereaksi atas insentif dari hutang- Pemerintah memerlukan perubahan dalam hutang berisiko tinggi dengan meminta tingkat "kebudayaan" mereka. Swastanisasi dapat bunga simpanan yang tinggi; yang akan lebih menjamin suatu insentif yang sesuai menjadikan tingkat bunga Rupiah menjadi untuk peminjam, pengelola dan pemilik. lebih tinggi untuk semua peminjam. 31. Usulan-usulan untuk menolong bank- 33. Bank Indonesia menurunkan insentif bank Pemerintah harus dievaluasi dengan terhadap pinjaman-pinjaman yang berisiko mengkaji dampaknya terhadap hutang-hutang dengan turut membebankan risiko yang yang telah ada. Restrukturisasi permodalan mungkin terjadi pada pihak pemilik modal. dan pengambil-alihan hutang-hutang yang Ketentuan ini dimulai sejak bulan Mei 1993. bermasalah (atau rekayasa finansial lainnya) Pada Desember 1996 angka rasio kcukupan mempunyai risiko penurunan pelunasan modal yang layak (capital adequacy ratio/CAR) kembali hutang bermasalah dan hutang-hutang terhadap setiap bank diperketat menjadi 8% lainnya. Peminjam akan cenderung untuk (setelah dikurangi aktiva yang akan jatuh menghentikan pembayaran hutang-hutangnya tempo terhadap modal dasar). Pemenuhan dengan harapan dapat di"putih"kan, seperti aturan ini akan meningkatkan kepercayaan yang telah terjadi di banyak negara lainnya. pada sistem keuangan Indonesia; dan setiap Pembayaran hutang yang lambat ini akan penundaan akan menurunkan tingkat meningkatkan biaya jaminan (bail-out). kepercayaan. Tingkat kepercayaan ini akan Usaha-usaha pengembalian hutang dapat turut semakin baik dengan peningkatan rasio memecahkan masalah ini. Lebih lanjut, usaha kecukupan modal bagi bank devisa menjadi restrukturisasi permodalan bank-bank 12% dalam waktu enam tahun. Langkah ini Pemerintah, tanpa perubahan budaya yang dapat diperkuat dengan mengurangi periode menyebabkan timbulnya masalah-masalah phase-in dan diberlakukan kepada bank non- tersebut, hanya akan membuat masalah- devisa. Risiko juga dapat diperkecil dan masalah yang lebih besar pada masa transparansi dapat ditingkatkan dengan mendatang. Jika restrukturisasi permodalan pelaksanaan peraturan yang ketat, dan Ringkasan Eksekutif xvii hukuman yang lebih berat untuk pelanggaran 36. Pemerintah mempunyai peranan yang batas pinjaman pada kelompok sendiri. penting dalam mengelola proses swastanisasi tersebut dan menjaga interaksi antara sektor 34. Penerapan peraturan tersebut dapat swasta dan sektor Pemerintah. Kerangka diperkuat dengan sebuah pendekatan yang peraturan yang transparan dalam upaya berdasarkan aturan yang transparan yang melibatkan sektor swasta dalam penyediaan memberikan hukuman yang meningkat secara prasarana akan meliputi: bertahap jika bank melanggar aturan CAR dan batasan exposure. Contoh hukuman ringan i) Pra-kualifikasi para penawar yaitu dengan membatasi akses terhadap kredit potensial yang akan ikut dalam Bank Indonesia. Hukuman terberat dapat pelelangan berdasarkan berupa penutupan dan pencabutan ijin pengalaman masa lalu; mendirikan bank (bank charter). Suatu aturan yang jelas untuk penutupan bank, terinasuk ii) Definisi dari proyek/konsesi transfer jaminan untuk likuidasi, juga sederhana dan jelas; diperlukan. iii) Definisi proses pelelangan 5. Penyempurnaan Proses Swastanisasi dalam satu atau dua parameter kunci; 35. Program-program pembangunan dalam Repelita VI memberikan peranan yang iv) Pemilihan atas dasar semakin besar pada sektor swasta. penawaran tertinggi untuk Keterlibatan sektor swasta, terutama dalam penjualan aset dan atas dasar telekomunikasi, sudah mulai tampak. Tetapi penawaran terendah untuk partisipasi sektor swasta masih dapat suatu kegiatan penyediaan dipercepat dan akan menghasilkan manfaat pelayanan; yang lebih besar (baik dari pendapatan yang diperoleh dari menjual aset dan konsesi v) Pengumuman pemenang lelang maupun dari kinerja sektor-sektor yang terkait dilakukan secepatnya dan dengan swastanisasi tersebut), jika Pemerintah hindari pelelangan ulang. menerapkan kerangka peraturan yang lebih transparan dan kompetitif, baik dalam 37. Swastanisasi sebagian aset melalui negosiasi maupun dalam sektor-sektor yang pasar modal dapat dipergunakan untuk partisipasi sektor swastanya meningkat. membayar pinjaman. Swastanisasi dengan Keberhasilan keseluruhan proses swastanisasi cara tersebut cukup kompetitif dan juga akan tergantung pada transparansi dan persyaratan-persyaratan yang ketat untuk kompetisi. Pengalaman di dunia menunjukkan memasuki pasar modal dapat memperbaiki bahwa berbagai persepsi yang mengarah pada kinerja perusahaan dan mengurangi ketidakterbukaan, kurangnya kompetisi, campurtangan politis. Kerangka kerja sektoral negosiasi yang tidak adil, dan kecenderungan yang jelas diperlukan untuk memaksimaLkan untuk memenangkan suatu kelompok harga penjualan. Tetapi, swastanisasi yang (favoritisme) dapat membahayakan proses setengah-setengah mungkin tidak akan banyak swastanisasi itu sendiri dan bahkan dapat memperbaiki pengelolaan perusahaan. membahayakan upaya-upaya reformasi secara Sedangkan kurangnya perusahaan yang diaudit keseluruhan. secara terbuka di masa lalu akan dapat membatasi jumlah perusahaan yang dapat masuk pasar modal. Executive Summary xxiii Problems caused by the lack of demand growth depends on keeping minimum transparency in land, water and forestry wage increases in line with productivity policies could slow modernization. These growth, macroeconomic stability and problems could be reduced by expanding land continued deregulation. titling and relying more on market mechanisms, such as higher forestry fees and All provinces benefitted from better pricing of water. A combination of Indonesia's broad-based growth. Per capita market-based instruments, regulation with income, per capita consumption, education credible enforcement, and public information and health status rose during 1983-93. The about firms' performance in controlling equality of the distribution of expenditure pollution are called for where transparency is improved modestly. Differences were in the difficult to achieve because of market rate of improvement. However, regional failure-air and water pollution for example. disparities are a concern. In the low-income eastern islands per capita GDP growth A healthy financial system is a exceeded 4% and health and education prerequisite for a modern economy. indicators improved. Despite this, poverty Enforcement of the programmed increases in rates are high and social indicators still are bank capital and the existing related-group similar to low-income countries. lending limits, along with support from the highest political level to collect overdue loans Continuedprogress in reducingpoverty from state banks, would increase confidence in still must contend with large numbers of poor the financial system and reduce domestic people in Java and Sumatra and high rates of interest rates. Greater transparency and poverty-though the absolute number of poor competition in the privatization process would is small-in the eastern islands. Sound benefit consumers, taxpayers and, by raising regional development will continue to be based more revenue for the prepayment of external on rapid, broad-based growth. debt, macroeconomic stability. Macroeconomic stability, again, is the foundation. Deregulation to eliminate anti- The labor market has performed well. trade bias would promote balanced regional Broad-based growth pulled workers out of development by dropping the prices of import- agriculture into higher productivity, higher competing products and raising the prices of income jobs. The Government extended exportables. Focused regional agricultural primary education and health services to and infrastructure development projects for virtually all Indonesians. Gender gaps in poor regions would help them use their education and earnings are falling fast. trading opportunities and their resources better. A further shift in public sector The labor market challenge is to spending toward pro-poor programs-basic sustain rapid job growth and to develop health and education-supported by institutions that permit the labor market to decentralizing the responsibility and continue to perform well. Large recent accountability for expenditures and their minimum wage increases have begun to reduce financing, would help sustain progress in competitiveness and slow job creation in the poverty alleviation across the archipelago. formal sector. Sustaining strong labor Ringkasan Eksekutif xix rata-rata nominal pekerja wanita sekitar 50% formal, khususnya bagi pekerja wanita dan lebih tinggi dibandingkan dengan kenaikan pekerja muda usia. Dengan demikian, UMR upah pekerja laki-laki dalam kurun waktu yang terlalu tinggi dapat memperlambat 1986-1993. pengurangan penduduk miskin. Hal ini disebabkan karena penduduk miskin di 45. Sebelum akhir 1980an, pemerintah Indonesia bukanlah pekerja yang mempunyai menyerahkan penentuan tingkat upah kepada upah tetap, melainkan pekerja sendiri dan/atau mekanisme pasar tenaga kerja. Tingkat upah pekerja di perdesaan. Kebijakan ketenaga- bagi pekerja industri di daerah perkotaan tidak kerjaan yang memperlambat pertumbuhan jauh berbeda dengan upah di sektor pertanian lapangan pekerjaan, khususnya di sektor dengan tingkat kualifikasi yang sama. Tingkat formal, akan mengurangi kesempatan bagi upah minimum para pekerja sektor formal penduduk miskin untuk mendapatkan umumnya setingkat atau lebih rendah daripada pekerjaan di sektor industri atau formal. yang ditentukan oleh mekanisme pasar tenaga kerja. Juga terdapat peraturan-peraturan yang 48. Walaupun telah terjadi kenaikan UMR, mengatur kondisi kerja, temasuk jumlah jam jumlah pemogokan, pemogok dan hari kerja kerja, waktu istirahat, lembur, cuti tahunan, yang hilang akibat pemogokan telah meningkat umnur minimum, dan cuti hamil dan haid untuk dalam periode 1989-1994. Makin banyaknya wanita. Walaupun demikian, peraturan- pemogokan ini mungkin mencerminkan peraturan ini sangat sulit dilaksanakan. Selain kesulitan yang dihadapi oleh pekerja dalam itu, peraturan-peraturan ketenagakerjaan ini melaksanakan perundingan dengan perusahaan juga tidak begitu bermanfaat bagi sebagian pada tingkat perusahaan. Mekanisme yang besar pekerja di perdesaan dan sektor lebih efektif dalam menyelesaikan informal. perselisihan, termasuk organisasi perwakilan pekerja (serikat pekerja) yang terdesentralisasi, 46. Dimulai tahun 1989, pemerintah mungkin dapat memecahkan masalah meningkatkan Upah Minimum Regional perselisihan pekerja dan membuat pasar tenaga (UMR), akibatnya tingkat upah riil meningkat kerja berfungsi dengan baik. Suatu peraturan sebanyak dua kali lipat dalam kurun waktu yang memperbolehkan terbentuknya serikat 1989 sampai dengan 1995. UMR yang lebih pekerja pada tingkat perusahaan (sPTp) telah tinggi menguntungkan para pekerja pada disahkan pada tahun 1994. Sejak itu telah perusahaan-perusahaan yang dipaksa terbentuk SPTP di 1.000 perusahaan. melaksanakan UMR, seperti perusahaan- perusahaan besar di daerah Jabotabek dan E. Pertumbuhan Bermanfaat Bagi Semua BUMN. Pada hal, para pekerja tersebut telah Daerah terlebih dahulu memperoleh tingkat upah di atas UMR. Pada sektor industri pengolahan 49. Di semua propinsi di Indonesia, tingkat yang padat-karya, kenaikan gaji telah mulai pendapatan dan konsumsi, serta indikator mengurangi daya saing sektor tersebut. kesejahteraan sosial telah meningkat, dan terus dicapai kemajuan dalam pengentasan 47. Jika kenaikan UMR lebih cepat dari kemiskinan selana kurun waktu 1983-93. Hal pada inflasi dan perbaikan produktivitas, daya ini disebabkan, antara lain, oleh kebijakan saing akan memburuk. Selain itu, perusahaan yang eksplisit dalam mendistribusikan akan cenderung menggantikan tenaga kerja pendapatan fiskal, khususnya pendapatan dari dengan mesin-mesin. Hal ini akan berakibat minyak dan gas dari propinsi yang relatif lebih menurunnya kesempatan kerja di sektor kaya kepada propinsi yang relatif lebih miskin. xx Ringkasan Eksekutif 50. Dibandingkan dengan negara-negara pertumbuhan permintaan tenaga kerja yang Asia Timur, Indonesia mempunyai distribusi tinggi dan berkesinambungan. Kebijaksanaan pengeluaran yang lebih baik. Dalam kurun tersebut juga akan meningkatkan pendapatan waktu 1983-93, distribusi pengeluaran secara per kapita riil masyarakat di luar Jawa, dengan keseluruhan sedikit membaik. Sedangkan menurunnya harga yang harus dibayar untuk distribusi pengeluaran di setiap propinsi tidak barang-barang yang bersaing dengan barang mempunyai kecenderungan yang saina. impor dan meningkatnya pendapatan dari Menurut BPS, semua propinsi di pulau ekspor. Sulawesi mempunyai distribusi pengeluaran yang membaik, sedangkan kesenjangan di 53. Investasi yang terarah pada pertanian Jakarta relatif meningkat. dan prasarana akan membantu penduduk di daerah-daerah yang miskin untuk 51. Kekuatan pertumbuhan daerah yang memanfaatkan peluang perdagangan dan berbasis luas tidak dapat dipungkiri. sumber-daya yang dimiliki. Program-programn Walaupun demikian, masih terdapat banyak Pemerintah perlu semakin diarahkan pada penduduk miskin yang tinggal di pulau Jawa daerah-daerah yang miskin tersebut. Untuk dan Sumatera. Di samping itu, tingkat mendukung perubahan tersebut sektor swasta kemiskinan (proporsi penduduk miskin perlu meningkatkan perannya di daerah-daerah dibandingkan dengan jumlah seluruh yang kaya, termasuk dengan membayar lebih penduduk) masih tinggi di pulau-pulau di banyak pajak daerah dan iuran-iuran untuk kawasan timur Indonesia walaupun dengan pelayanan yang didapatkannya. jumlah penduduk miskin yang relatif sedikit. Walaupun pertumbuhannya cepat, tingkat 54. Peningkatan berbagai pengeluaran pengeluaran per kapita di propinsi-propinsi untuk pendidikan dan kesehatan yang sesuai yang relatif miskin masih sekitar 40% dari bagi pengentasan kemiskinan juga didasarkan tingkat pengeluaran rata-rata nasional. pada berbagai pertimnbangan seperti efisiensi, Indikator kesejahteraan sosial dari propinsi- pemerataan dan ketersediaan anggaran. Dalam propinsi ini juga masih setara dengan tingkat kondisi penerimaan negara yang ketat, kesejahteraan dari negara-negara pertimbangan untuk mengarahkan anggaran berpenghasilan rendah, walaupun terdapat belanja negara pada kegiatan-kegiatan investasi pemerintah yang besar dalam rangka pembangunan yang menghasilkan barang- menyamakan akses terhadap barang dan jasa barang kepentingan umum (social good) yang pelayanan publik. paling besar merupakan upaya yang layak untuk dilakukan. Perluasan dan perbaikan 52. Tantangan pembangunan daerah adalah lebih lanjut pendidikan dan pelayanan mempertahankan pertumbuhan yang tinggi dan kesehatan dasar akan menghasilkan manfaat merata. Pertumbuhan ini harus dapat sosial yang tinggi, yang akan terus mengurangi lebih lanjut jumlah penduduk menurunkan angka kemiskinan. Upaya miskin yang masih banyak dijumpai di pulau- melanjutkan dan memperkuat dampak pulau yang padat penduduk, dan tingkat pemerataan dari pengeluaran pemerintah akan kemiskinan yang masih tinggi di tergantung pada kombinasi antara kemampuan propinsi-propinsi di luar Jawa. Stabilitas untuk menggali sumber-sumber pendapatan ekonomimakro sangat menentukan bagi negara yang baru dan belanja negara yang berhasilnya upaya tersebut. Deregulasi semakin produktif. perekonomian yang berlanjut, seperti yang disebutkan di atas, akan meningkatkan 55. Peningkatan produktivitas pengeluaran efisiensi dan memberi sumbangan pada negara untuk pelayanan-pelayanan pemerintah Ringkasan Eksekutif xxi tampaknya memerlukan pendekatan yang lebih semakin didengarnya suara pemakai jasa dan terdesentralisasi. Pada masa lalu, struktur pihak-pihak yang berkepentingan (stake- Pemerintah Indonesia yang sangat terpusat holders). Pengalaman di dunia menunjukkan sangat bermanfaat dalam menjamin bahwa dengan hubungan yang lebih dekat terpenuhinya pelayanan-pelayanan dasar antara pemakai dan pemasok, serta antara pendidikan dan kesehatan bagi seluruh daerah biaya dan manfaat, dapat meningkatkan di Indonesia. Namun pendekatan ini efisiensi, memperbaiki pelayanan, dan diperkirakan akan semakin berkurang meningkatkantanggungjawab(accountability). manfaatnya di masa datang, karena masalah Tetapi untuk itu diperlukan perubahan- kemiskinan yang sangat sulit untuk perubahan mendasar dalam sistem hubungan ditanggulangi di beberapa daerah, kebutuhan keuangan Pemerintah. Secara khusus, pembangunan yang terus meningkat dengan Pemerintah Daerah akan memerlukan sumberdaya yang semakin terbatas, dan pendapatan asli daerah yang lebih besar. kebutuhan akan pelayanan pemerintah yang Pajak atas kepemilikan (property tax) dan semakin besar dengan kualitas yang semakin biaya yang dibebankan kepada pengguna jasa baik. (user charges) merupakan sumber pendapatan yang paling potensial. Pemerintah Daerah 56. Desentralisasi menimbulkan harapan juga perlu meningkatkan kemampuannya agar akan semakin efisiennya beberapa pelayanan dapat melaksanakan tugas-tugas yang semakin Pemerintah. Desentralisasi lebih menjamin meningkat. xxii Executive Summnary EXECUTIVE SUMMARY INDONESIA: DIMENSIONS OF GROWTH Indonesia is one of the High- fiscal policy measures, such as higher Performing Asian Economies. Per capita GDP petroleum prices and forestry fees, and growth was in the top 10% of all developing cutbacks in public spending in areas where the countries during the last 30 years; poverty private sector is playing a larger role, also reduction was equally notable. According to would improve efficiency and equity. Tight the World Bank, Indonesia movedfrom low to monetary policy means setting conservative lower middle-income country status in 1993. targets for domestic credit growth, adjusting interest rates on Bank Indonesia monetary This report examines four dimensions policy instruments in line with movements in of Indonesia's economic performance and the international rates and strict enforcement of challenges they hold for modernizing financial sector prudential regulations. Indonesia: maintaining macroeconomic stability; increasing transparency and Continued strict control of public and competition in the economy (natural resources, quasi-public liabilities by the Commercial environmental pollution, deregulation, the Offshore Loan Team, and of explicit and financial sector and private provision of implicit guarantees of private debt, would infrastructure); maintaining a well-functioning support these policies. To create room for labor market; and sustaining equitable, broad- higher private sector borrowing the based regional development. Government could program significant prepayment of public external debt using Continued modernization of the budget surpluses and privatization proceeds. economy depends first and foremost on These policies would have a powerful positive maintenance of macroeconomic stability. The impact on market confidence. medium-term prospects include a large increase in private investment demand. Over The May 1994 and May 1995 the medium term, this will lead to faster deregulation packages raised transparency and growth but it also will raise the nonoil trade competition and contributed to the recent and current account deficits. The larger strength of investment demand and the record current account deficit would be financed foreign investment approvals. The January mainly from private external capital flows. 1996 package made further progress in line These can be volatile. The increased with the schedule of tariff cuts pre-announced dependence on volatile private external capital in May 1995. Completing the unfinished flows is a source of vulnerability. A prudent deregulation agenda is desirable for three course would be to implement macroeconomic reasons. First, it encourages producers to be policies that maintain confidence and reduce efficient and benefits consumers. Second, it risks. demonstrates the Government's commitment to policy stability and predictability, and thereby Such policies could include a enhances investors' confidence. Third, significant increase in the overall fiscal deregulation improves equity by subjecting surplus and tight monetary policy. These protected activities to the rigors of competition policies would reduce consumption to and increasing labor demand. accommodate private investment. Many of the Executive Summary xxiii Problems caused by the lack of demand growth depends on keeping minimum transparency in land, water and forestry wage increases in line with productivity policies could slow modernization. These growth, macroeconomic stability and problems could be reduced by expanding land continued deregulation. titling and relying more on market mechanisms, such as higher forestry fees and All provinces benefitted from better pricing of water. A combination of Indonesia's broad-based growth. Per capita market-based instruments, regulation with income, per capita consumption, education credible enforcement, and public information and health status rose during 1983-93. The about firms' performance in controlling equality of the distribution of expenditure pollution are called for where transparency is improved modestly. Differences were in the difficult to achieve because of market rate of improvement. However, regional failure-air and water pollution for example. disparities are a concern. In the low-income eastern islands per capita GDP growth A healthy financial system is a exceeded 4% and health and education prerequisite for a modern economy. indicators improved. Despite this, poverty Enforcement of the programmed increases in rates are high and social indicators still are bank capital and the existing related-group similar to low-income countries. lending limits, along with support from the highest political level to collect overdue loans Continuedprogress in reducing poverty from state banks, would increase confidence in still must contend with large numbers of poor the financial system and reduce domestic people in Java and Sumatra and high rates of interest rates. Greater transparency and poverty-though the absolute number of poor competition in the privatization process would is small-in the eastern islands. Sound benefit consumers, taxpayers and, by raising regional development will continue to be based more revenue for the prepayment of external on rapid, broad-based growth. debt, macroeconomic stability. Macroeconomic stability, again, is the foundation. Deregulation to eliminate anti- The labor market has performed well. trade bias would promote balanced regional Broad-based growth pulled workers out of development by dropping the prices of import- agriculture into higher productivity, higher competing products and raising the prices of income jobs. The Government extended exportables. Focused regional agricultural primary education and health services to and infrastructure development projects for virtually all Indonesians. Gender gaps in poor regions would help them use their education and earnings are falling fast. trading opportunities and their resources better. A further shift in public sector The labor market challenge is to spending toward pro-poor programs-basic sustain rapid job growth and to develop health and education-supported by institutions that permit the labor market to decentralizing the responsibility and continue to perform well. Large recent accountability for expenditures and their minimum wage increases have begun to reduce financing, would help sustain progress in competitiveness and slow job creation in the poverty alleviation across the archipelago. formal sector. Sustaining strong labor xxiv Executive Summary A. Macroeconomic Policy to Reduce Risk widen the current account deficit even further. The possibility of a significantly wider deficit 1. Indonesia has a well-deserved could make it difficult to maintain favorable reputation for strong macroeconomic market sentiment. Capital inflows quickly management. The track record includes rapid could become outflows, putting pressure on adjustment to the oil price shock in the mid- the economy. 1980s, the overheating early in the 1990s, and the spillover in 1995 from the Mexico crisis. 6. Reducing risk means implementing tight fiscal and monetary policies that limit the 2. Strong private domestic demand in widening of the current account deficit. The 1995 was met with monetary and fiscal policy main macroeconomic policy to reduce risk tightening but the current account deficit still would be higher public saving to reduce widened to $6.9 billion (3.4% of GDP) and consumption demand to accommodate rising inflation remained at 9-10%. Foreign direct private investment. Fiscal policy is most investment, portfolio investment and private effective for managing aggregate demand in borrowing financed the bulk of the current Indonesia. A reasonable estimate would be account deficit and a $2.7 billion increase in for the Government to increase its overall official international reserves. surplus (IMF/World Bank basis) by around 2 % of GDP. Among the measures that would help 3. The dominance of private financing achieve this goal efficiently and equitably are reflects the structural transformation of the higher petroleum and electricity prices, higher economy. A projected increase in the private forestry royalties (IHH), and cuts in public investment rate over the next few years will spending where the private sector is playing a quicken GDP growth. But it also will lead to larger role. higher imports and a further widening of the current account deficit to 4-4.5% of GDP. 7. Tighter monetary policy would involve Private capital-foreign direct investment and conservative growth in Bank Indonesia's private debt flows-would finance the bulk of domestic credit, continued adjustment of the deficit. Heightened dependence on private interest rates on monetary policy instruments capital flows is a source of vulnerability. in line with movements in international rates, Policies need to be set to reduce the risks and strict enforcement of prudential from this vulnerability (see below). regulations on commercial banks. Higher reserve requirements and a wider exchange 4. For 1996/97 tight fiscal and monetary rate intervention band could increase the policies are projected to slow nonoil import effectiveness of monetary policy. If capital growth modestly and shift its composition flows suddenly halt or reverse themselves, toward capital goods reflecting projected monetary policy would need to be tightened strong private investment demand. Nonoil even more. export growth is projected to pick up modestly. The current account deficit would 8. The Government also could reduce increase to $8.8 billion in 1996/97 (4% of risks by making room for private borrowing GDP). Financing this higher deficit will through public debt reduction. Indonesia's depend crucially on maintaining favorable external debt is large. Higher investment market sentiment. demand generally involves significant external borrowing, which will add to debt. The 5. Absent fiscal and monetary policy public sector needs to limit the growth of tightening, consumption demand could remain external debt by reducing its own debt. high or accelerate in 1996/97, which could Reducing public debt by a significant amount Executive Summary xxv over the next three to five years would create 12. As recognized at the 1995 CGI borrowing room for the private sector and Meeting, the priorities for this support would have a powerful impact on market sentiment. be in human resource development, poverty This policy would be supported by the reduction and the provision of physical Commercial Offshore Loan Team's continued infrastructure that eliminates bottlenecks to strict limits on public and publicly-related private sector growth. These priority areas external borrowing. have not changed. In addition, Government encouragement to private sector development 9. Privatization would raise efficiency and through the establishment of sound regulatory help reduce external debt. Realizing an frameworks would be important. It also ambitious privatization target will depend on would be important to re-examine the speeding up the development of a transparent, development budget to make reductions or competitive framework for privatization shifts in light of the growing private sector (section C.5). role, and to maximize the benefits of concessional aid by imnproving implementation. B. External Financing and Foreign Assistance C. Enhancing Transparency and Competition 10. Indonesia's projected external financing needs are based on a scenario in 13. Economic growth has raised average which tighter macroeconomic policy limits the incomes in all parts of Indonesia over the past current account deficit to below $9 billion in 30 years. The basis of that growth-rapid 1996/97. Total financing needs would be growth of manufacturing and services higher than in 1995/96 because of the higher attracting rural workers into higher- current account deficit and the need to productivity jobs-can underpin continued increase international reserves to maintain a modernization of Indonesia. It also is the prudent level of import cover. Higher private surest path toward continued progress in debt and equity flows are projected to finance reducing poverty. But, continued growth will much of the higher 1996/97 deficit. exacerbate strains that have begun to emerge, unless policy measures are taken. Such strains 11. Official assistance nevertheless is are appearing in the use of land, water and highly desirable for several reasons. First, it forestry resources; in the growing pollution ensures adequate financing for areas of problems; in the deregulation process; in development that are not attractive to private financial sector problems; and in the investors. Examples are human resource privatization process. Greater transparency development and public infrastructure in areas and greater reliance on market forces would off Java and while the framework for private relieve these strains. participation is being improved. Second, the longer term, lower rates and risk 1. Transparency in Land, Water and diversification associated with official Forestry Management assistance improves the structure of external finance and reduces vulnerability to the risk of 14. An absence of transparency makes the sudden shifts in volatile private capital flows. land market function poorly. Inadequate land Third, the availability of adequate assistance titling and non-transparent regulations are the ensures a smooth transition to private roots of the problem. Difficulties in selling financing. For these reasons, a level of land decrease resource mobility. Problems in comrnitments from Indonesia's Consultative using land as collateral reduce access to credit. Group (CGI) similar to last year's level would Disturbances occasionally break out when land be very supportive. ownership or occupancy changes. xxvi Executive Summary Accelerating land registration is a priority. In rapidly. In the cities, pricing reform is addition, reform in the procedures and pricing needed because low charges for groundwater policies for disposing of and acquiring public encourage exhaustion of aquifers and low lands is needed, with due attention to acquired charges for piped water make it difficult to rights of existing occupants. In particular, expand access and maintain adequate service. care should be exercised in the use of Government permits to acquire land. 2. Air, Water and Industrial Pollution 15. Indonesia's forests are a major national 18. Indonesia faces the possibility of resource; their unsustainable depletion is sharply escalating pollution-related costs. A related to the lack of transparency in combination of market-based pricing (for concessions and inadequate incentives for example, raising petroleum product prices to sustainable management. The present at least international levels), regulation with concession system encourages rapid depletion credible enforcement, and increasing public because of: (i) the short concession information on the performance of firms in period-typically 20 years compared with a controlling pollution is called for where growth cycle for tropical hardwoods of 35 transparency and competition are difficult to years at a minimum; (ii) the risk of an achieve because of market failure. increase in the current low royalties (IHH); and (iii) weak sanctions for excessive exploitation 19. The adverse effects on health due to of concession lands. The system's lack of access to safe water already are shortcomings are exacerbated by the cartelized serious. Poor water quality results from domestic plywood industry. Deregulating the inadequate sanitation facilities and industrial plywood sector, raising royalties, and relying waste. The basic technologies of water supply more on self-enforcement through and sanitation systems are well established. performance bonds on concessionaires would Policies could be directed at expanding the use improve incentives to harvest sustainably. and quality of piped water (including reducing unaccounted for water losses), increasing 16. Issues of water resource management access, and improving sanitation facilities. will be increasingly important in the years ahead, especially on Java, with 60% of the 20. Air pollution is a serious health population, 70% of irrigated agriculture, and problem in Indonesia's cities. The poor are 75% of industry. The main issues will be most at risk. Practical options for improving competition between users (agriculture vs air quality need to be exploited decisively. industry) and between groundwater and These include phasing out leaded gasoline, surface use in rapidly growing cities. The setting higher emission standards, phasing out issues are complicated by the problem of two-stroke engines, and substituting cleaner growing water pollution. fuels for diesel, raising fuel prices to international levels (and, over time, beyond to 17. Like land and forests, water resources reflect pollution costs) and improving the are mispriced, contributing to heavy use by quality of urban public transport services. some groups (farmers and middle and upper income urban households) and high prices and 21. Hazardous waste and toxic materials scarcity for others (including the urban poor). are a by-product of rapid industrial growth. Higher irrigation fees and other price reforms They threaten health, water quality, and could improve water use by discouraging downstream activities. The policies and waste of irrigation water and freeing it for use implementation framework to deal with in the cities, where demand is expanding industrial pollution are most effective when Executive Summary xxvii they focus on prevention rather than more the quality of growth. Use of the trade expensive "end-of-the-pipe" clean-up. In regime to benefit special groups-extending practice this means: focusing on regulatory tariff protection to Chandra Asri and providing standards for new plants and application of tariff relief to the joint venture developing the cleaner technology, concentrating on the most national car-can be a source of resentment to polluting industries and locations, and society at large. encouraging private businesses to adopt best practice technologies and investments in a. Reducing Import Protection pollution control through a mix of regulations and incentives. 24. Adherence to the tariff cuts pre- announced in May 1995 will reduce 3. Creating a Level Playing Field: significantly import protection. The tariff The Unrmished Deregulation Agenda schedule would have three principal rates-0%, 5% and 10%-and the average 22. The May 1994 and May 1995 tariff would be 7%. Thus, the unfinished deregulation packages went far in leveling the agenda for reducing import protection consists playing field for competition. The January mainly of removing nontariff barriers, notably 1996 package continued progress in cutting those on rice, sugar, wheat and soybeans and tariff protection-the average tariff declined to the associated restrictions that protect wheat 14.2% from 15.1 %-in line with the schedule flour milling (restrictions protecting soybean pre-announced in May 1995. The more meal processing are being eliminated as part transparent climate contributed to the growth of Indonesia's Uruguay Round offer). The of private investment demand in the past two efficiency and equity losses from nontariff years. Implementation of its Uruguay Round barriers protecting these commodities are well offers and the tariff cuts pre-announced in documented. For example, nontariff barriers May 1995 will improve further efficiency and restricting sugar imports protect domestic equity. Accelerating the scheduled cuts in sugar producers but reduce real incomes by tariff and nontariff barriers, and formalization 0.6%. Elimination of nontariff barriers on of the scheduled cuts, would strengthen this imports would benefit the vast majority of program. The most important, unfinished Indonesians. deregulation steps are removal of nontariff barriers (and associated domestic regulations) b. Removing Export Restrictions on the Bulog agricultural commodities, reduction of tariff protection on vehicles, the 25. Export restrictions cover half of total opening up of the strategic industries and the nonoil exports, affecting nearly 2,000 removal of their domestic subsidies, and the products. These restrictions often have removal of export restrictions. depressed smallholder incomes, to the benefit of domestic users of these products, and 23. Finishing this agenda is important for reduced efficiency and nonoil exports. three reasons. First, by leveling the playing field for competition, deregulation encourages 26. An across-the-board elimination of producers to be efficient and benefits export restrictions is warranted to correct consumers. Second, deregulation enhances these distortions. The main exceptions are confidence. Investors value a stable and management of the Multi-Fiber Arrangement predictable policy environment and steady textile quotas and the export bans on progress in deregulation demonstrates the endangered species. Where the restrictions government's commitmnent to policy stability have encouraged large investments in and predictability Third, deregulation raises processing activities, a schedule for xxviii Executive Sunmary elimination over a limited time period could be 4. Transparency in the Financial System considered. 29. Strong implementation of the c. Improving Domestic Competition prudential measures to increase financial institutions' capital and reduce their related 27. Numerous official interventions exist in group lending exposure, along with better what otherwise would be competitive markets. collections, would increase transparency in the The myriad interventions reflect myriad financial system. This in turn would increase objectives. Some commodities are termed confidence, lower the risk of macroeconomic "essential" and it is said that their distribution instability, and increase the efficiency of is too important to be left to the market. financial intermediation, thereby lowering the Examples include cement and fertilizer, where cost of investment funds. Another dimension regulation of domestic distribution is of transparency relates to gaps in the legal accompanied by a significant state presence in framework for credit transactions. Again, production. For other products, restrictions rupiah interest rates are higher than they need on domestic competition complement to be and large benefits would flow from restrictions on imports to promote value added increasing transparency. in processing activities (wheat flour and soymeal for example). For still other 30. The state banks are making slow products, the restrictions have exploited progress in reducing their bad debts. At this Indonesia's power in world markets (forestry stage, strengthened collections of overdue products), but the benefits have not accrued to loans to state banks are needed to reduce the the public. Local government revenue is potential fiscal drain and to signal another motivation for domestic trade unambiguously that loans must be repaid. interventions. Given the importance of many of the borrowers, better collections are likely to 28. A transparent, rules-based approach to require support from the highest political deregulation of the numerous restrictions on level. A lasting solution to the state banks' domestic competition is warranted. This problems is likely to require a change in their approach would dissolve Government- "culture." Privatization would help ensure sponsored or sanctioned monopolies in appropriate incentives for owners, managers marketing and distribution of "essential" and and borrowers. other commodities and open up further retail and wholesale trade to foreign investment. 31. Proposals to help the state banks deal The rules-based approach would include with their bad debt problems need to be legislation ensuring that an ordinary business evaluated with regard to their impact on license (Surat Izin Usaha Perdagangan) would existing debtors. Recapitalization or takeovers be the only permit required for exporting of bad debts (or other financial engineering) and/or engaging in domestic trade. run the risk of reducing incentives to service Membership in commodity or trade both the existing classified loans and current associations would be voluntary, not a loans; debtors are likely to stop servicing debt condition for engaging in these activities. The in hopes that debts will be "nationalized", as approach also would include repeal and has occurred in many countries. This slowing prohibition of commodity-specific taxes and of debt service will raise the cost of any retribusi. In localities where revenues from bailout. Strengthening collections can help such taxes are important, better pricing of reduce this problem. In addition, public services and property taxes could help recapitalization of the state banks, without a replace foregone revenues. change in the culture that gave rise to the Executive Summary xxix problems, leaves open the possibility that the basis for failure to comply with prudential problems will recur. If recapitalization regulations such as the capital adequacy becomes unavoidable, budgetary transfers are requirement and exposure limits. For preferable to Bank Indonesia loans or example, access to Bank Indonesia's credits transfers, which are less transparent and risk could be limited. The most extreme penalty loosening monetary policy. would be closure and revocation of the bank's charter. Clear regulations for closing banks, 32. Private banks, on average, are in including prompt transfer of collateral for better condition than the state banks. (The liquidation, are needed. numerous, small banks not licensed to engage in foreign exchange transactions, on average, 5. Improving the Privatization Process are an exception.) But incentives for risky lending are increased by low capital and the 35. Repelita VI envisions increased high related-group exposure, as well as the reliance on the private sector. The private low penalties for non-compliance with sector's involvement, especially in prudential regulations and the small probability telecommunications, already is apparent. But of closure. Lenders and depositors react to private sector participation could be speeded these incentives for risky lending by up and would yield increased benefits-both demanding higher rates of return; this higher the revenue from sales of assets and cost of funds translates into higher domestic concessions and the improved performance of interest rates. the sectors themselves-if the Government established a more transparent, competitive 33. Bank Indonesia is reducing the regulatory framework, both for the deals and incentives for risky lending by putting more in the sectors where private participation is owners' capital at stake. This process was growing. The overall success of the begun in May 1993. By December 1996 privatization process depends on transparency banks will have to meet the strengthened 8% and competition. Worldwide experience capital adequacy requirement (calculated after suggests that perceptions of non-transparency, deducting shortfalls in provisioning from core lack of competition, unfair dealing and capital). Meeting this requirement will favoritism can threaten the privatization increase confidence in Indonesia's financial process and even reform in general. system; any delay would reduce confidence. An additional increase in confidence will come 36. The Government has an important role from the announced increase in capital in managing the process and the interaction requirements for foreign exchange banks to between the private and public sectors. A 12% over a six year horizon; this measure transparent rules-based framework for could be strengthened by shortening the phase- involving the private sector in infrastructure in period and applying it to non-foreign provision would include: exchange banks. Riskiness also could be reduced, and transparency increased, by i) Pre-qualify potential bidders on the stricter enforcement of, and tougher penalties basis of prior experience; for violating, limits on lending to related parties. ii) Define the project/concession simply and clearly; 34. Enforcement of these rules could be strengthened by a transparent, rules-based iii) Define the bidding process on the basis approach that penalizes banks on an escalating of one or two key parameters; xrr- Executive Summary iv) Select the highest bid for the sale of obligations and any implicit guarantees assets or the lowest bid for the supply extended to the private sector, such as take-or- of a service; pay contracts. v) Announce the winning bid promptly D. Growth Beneritted Workers and avoid second-round re-bidding. 40. Indonesia's economic growth and 37. Partial privatization through financial structural transformation have been facilitated markets raises revenue that can be used for by a well-functioning labor market. The share debt retirement. It is competitive and the of workers has shifted dramatically from strict requirements for listing can improve agriculture to the rapidly growing industry and company performance and reduce political service sectors. interference. A clear sectoral framework is needed to maximize the sale price. But, 41. The speed and pattern of GDP growth partial privatization may not improve increased labor demand substantially. Higher management substantially and the lack of a labor demand translated into rapid wage history of transparent, audited accounts may growth. Thus, formal sector wage earners' limit the number of firms that can be listed. position improved. This constituted a major The Government could explore other options, channel for poverty reduction. such as competitive choice of a strategic partner, for some of these cases. 42. Employment of female workers has grown very rapidly in labor-intensive 38. A transparent sectoral regulatory manufacturing. Most women industrial framework is a major factor in maximizing the workers have primary education or less and benefits of either listing or private carry out unskilled or semi-skilled tasks. infrastructure provision. The clearer the Their main alternative is farm employment. regulatory framework, and the more it mimics By moving to industry, they earn somewhat the incentives to better service/lower prices higher wages and gain access to steadier, full- that would occur under competition, the higher time employment. the benefits to the country. These benefits would come in the form of higher sale prices 43. Government policy has increased the for government equity and improved sectoral educational level of the labor force and the performance. more educated workforce earns higher wages. The share of the workforce with primary 39. Public firms operating in competitive education or more doubled from about 30% in industries can be privatized without much the early 1970s to over 60% in 1994. This concern over the sector framework. The education pays off for Indonesian workers. market will encourage lower prices, better Average earnings of wage employees increase service and efficiency. In other sectors, gains with each level of schooling. to the country can be increased, and risks to investors can be reduced, by hiving off 44. Gender differences in wages and (unbundling) parts of public enterprises into rewards to education are narrowing. Although firms that can be regulated by competition or women still are paid less than men with a few, well-defined rules, and then privatizing similar education and average female earnings those firms. To the extent that the are only two-thirds of average male earnings, Government retains a significant share in the the gap is closing. The percentage increase in privatized companies, as has been the case so the average nominal wage for women was far, it also will have to maintain close about 50% more than for men in 1986-1993. management of the companies' external debt Executive Summary xxxi 45. Prior to the late-1980s, the 1989-94, despite the rise in minimum wages. Government left wage determination largely to The increase in strikes may reflect the the labor market. Wages for urban industrial difficulties workers face in organizing plant- workers typically were not much higher than level negotiations with employers. More for agricultural workers with similar effective mechanisms to help resolve disputes, qualifications. Minimum wages for formal including decentralized, representative worker sector workers generally were at or below organizations, might help resolve labor market wages. A generous umbrella of disputes and keep the labor market working legislation governed working conditions, smoothly. A regulation allowing the including hours of work, rest period, establishment of company unions (SPTP) was overtime, annual leave with pay, minimum passed in 1994. Since then sPrPs have been age of employment, and maternity and formed in about 1000 companies. menstrual leave for women, but it was difficult to enforce. These labor market regulations E. Growth Benefitted All Regions also were irrelevant to the large majority of Indonesians who worked in the informal and 49. Across all provinces of Indonesia, rural sectors. income and consumption grew, social welfare indicators improved, and there was continued 46. Beginning in 1989 the Government progress in reducing poverty during 1983-93. began to raise minimum wages sharply, These results are in part due to the explicit resulting in a doubling in real terms between policy of redistributing fiscal revenue, 1989 and 1995. The higher minimum wages especially revenue from oil and gas, from helped workers in companies where the wealthier to poorer provinces. minimum wage was more likely to be enforced-large companies around Jakarta and 50. Indonesia compares favorably with its public sector companies. But these workers East Asian neighbors in cross-country already have above-average earnings. comparisons of expenditure equality. During Further, the wage increases have begun to 1983-93 expenditure equality improved reduce competitiveness in labor-intensive slightly in Indonesia as a whole. Within manufacturing. individual provinces, there were no clear trends, except for improvement in the 47. When minimum wages increase faster provinces of Sulawesi. than inflation and productivity gains, competitiveness erodes and firms increasingly 51. The broad-based strength of the substitute capital for labor. The result will be regional growth performance is unmistakable. diminished formal sector employment Still, there are large numbers of poor people opportunities, particularly for women and living in Java and Sumatra, and high poverty young workers. In this way higher minimum rates-though fewer numbers of poor-in the wages could slow poverty reduction. The eastern islands. Despite rapid growth, the poor in Indonesia are, by and large, not wage level of per capita consumption in the poorest earners but the self-employed and/or in the provinces still is 40% below the national rural sector. Labor market policies that average. And despite significant public reduce employment growth, especially in the investments to equalize access to public goods formal sector, reduce the chance that these and services, social welfare indicators in the people will find manufacturing sector jobs. poorest provinces resemble those of low income countries. 48. The number of strikes, strikers and working days lost to strikes all rose sharply in xxxii Executive Summary 52. The regional development challenge is redistributive impact of public spending will to sustain rapid, equitable growth. Such depend on a combination of new revenue growth must reduce further the large numbers sources and more productive public spending. of poor on the populous islands and the high poverty rates in provinces off-Java. 55. Increasing the productivity of public Macroeconomic stability is essential. spending is likely to require a more Continued deregulation of the economy as decentralized approach to delivery of public discussed above would raise macroeconomic goods and services. The highly centralized efficiency and contribute to continued high Indonesian government structure was an growth of demand for labor. It also would advantage in the past in extending a basic improve real incomes off Java by lowering the package of health and education services to all prices paid for import-competing manufactures parts of Indonesia. It may be less of an and raising the prices received for exports. advantage in the future for it will be strained by the stubbornness of poverty in some areas, 53. Focused agriculture and infrastructure the need to do more with fewer resources, and investments would help residents of poor the need to provide better quality services. regions take greater advantage of their trading opportunities and natural resources. 56. Decentralization holds out the promise Government programs increasingly need to of being able to deliver some public services focus on the poor regions. To support this more efficiently. It gives greater voice to shift the private sector needs to play a larger users and stakeholders. Worldwide experience role in richer regions, including paying higher suggests that closer links between users and local taxes and service fees. suppliers and between costs and benefits can raise efficiency, improve service delivery and 54. Increasing the pro-poor focus of health increase accountability. But changes in the and education expenditures also is justified on system of intergovernmental fiscal relations efficiency, equity and fiscal considerations. In are needed to bring this about. In particular, an environment of shrinking revenue from oil subnational governments would need greater and gas it makes sense to focus public own-revenues. The property tax and user expenditures where they produce the highest charges offer the largest potential. social good. Extending and further improving Subnational governments also will need to basic education and health care services would upgrade their institutional capacity to carry out yield a high social return, reducing poverty their increased functions. further. Continuing and enhancing the A Macroeconomic Framework for Reducing Risk A MACROECONOMIC FRAMEWORK FOR REDUCING RISK A. Overview Figure 1.1 Despite policy tightening. 1.1 Indonesia has a well-deserved 4 SBI Interest rate, 30month 16 reputation for sound macroeconomic management. In the past decade, policy 2 8 adjustments have dealt effectively with a wide 0 - range of shocks: the loss of oil revenues after 0.-4 1985; overheating from the surge in oil -2 'al Balanceo (eft scal,FY) revenues and mega-projects in the early 1990s; and the fallout from the Mexico crisis in 1995. , -16 1993 194 1995 1.2 The economy began to overheat again in 1994-95. Increases in consumption and construction demand led to higher nonoil import growth. Despite tightening fiscal and s* strong domestic demand monetary policies, the current account widened markedly and inflation continued in the 9-10% range. 1.3 Foreign direct investment and other Z capital inflows financed the wider current _ account deficit as well as an increase of 0 100 $2.7 billion in official international reserves in 190 1904 1005 1995/96. Offshore revenues from privatization appropriately were used for a second round of - M_ohinery _Equipmnt (let scam) public external debt prepayment. Budget - Cndu t of cu and Sales (right scal) surpluses were committed for future prepayments. 1.4 The rise in foreign direct investment -led toa higher current acount defici and continued high Infltibn. (FDI) in 1995 may mark the beginning of a shift in the source of Indonesia's growth. In 4- 16 the past two years $64 billion in foreign direct 2 nilon (ight Scl)8 investment projects were approved. This new E investment will benefit the economy, by a o _ generating jobs, increasing tax revenues and 2 upgrading technology. Complementing the FDI - Currnt flows, continued support from the Consultative e4 ( scaef , FY) --1 Group for Indonesia will provide a stable toeS tw4 owe source of long-term funding, especially for projects with high social returns such as human Source: BPS, I, Indo. Auto. Ind. Asa., and stff resources, environment, poverty reduction and dtion1anted . 2 Chapter 1 areas of infrastructure that do not yet lend 1.8 As mentioned in President Soeharto's themselves to private investment. Budget speech, fiscal surpluses should be used to prepay more public external debt. The 1.5 With private equity bearing the 1995/96 surplus is earmarked for prepaying commercial risks, and in the deregulated high-interest public external debt. As in the environment following the May 1994 and May past two years, receipts from privatization 1995 packages, most investments should be should continue to be used for the same internationally competitive and cover their purpose. Taken together, the revenues from investment costs. However, the boom in fiscal surpluses and privatization proceeds foreign direct investment carries risks for could be used to prepay major amounts of efficiency and for the macroeconomy. From foreign debt over the next 5 years. Surpluses the efficiency side, some projects may not be also could be used to cover the Government's sufficiently competitive on the international underfunded long-term liabilities (such as the market to pay for themselves. In this case, the civil service pension fund). A pre-announced state may be pressured to extend some form of plan along these lines, together with explicit public assistance-for example, subsidies, line items in the annual Budget, would have an protection or loan guarantees. Strict limits are excellent impact on external confidence. needed on (implicit and explicit) public guarantees and other forms of public support to 1.9 Tight monetary policy also will be ensure proper incentives for private investor needed. This means setting conservative performance. targets for domestic credit growth, adjusting interest rates on Bank Indonesia's monetary 1.6 The macroeconomic risk concerns the instruments in line with movements in potential for economic overheating and international rates, and strict enforcement of fmancial markets' reactions to it. The higher prudential regulations. Higher reserve investment is projected to widen further the requirements and further widening of the current account deficit in the next two years. exchange rate bands would strengthen monetary A wider deficit represents greater risk. policy and deter hot money flows. Continued Volatile capital inflows could suddenly reverse improvements to the banking system, capital themselves, putting sharp pressure on the markets, pensions and other non-bank financial economy. The main macroeconomic challenge institutions also will be important to mobilize is to reduce this risk by limiting the widening domestic resources, to reduce reliance on in the current account deficit and the growth in external debt, to intermediate at low cost external debt. This will entail reduced between savers and investors, and to enhance construction and consumption demands and macroeconomic stability. further prepayment of public external debt. 1.10 A related challenge is to continue the 1.7 To minimize the macroeconomic risk progress in strengthening the financial system. and reduce inflation, the Government could The financial system is a focal point for further tighten fiscal policy, which is the most maintaining investor confidence. It also effective instrument for managing aggregate provides an alternative to external borrowing. demand in the Indonesian context. A The importance of progress in the financial reasonable estimate would be to raise the fiscal sector is underscored by Indonesia's high surplus by around 2% of GDP. State revenues external debt and the volatility of today's could be increased substantially through higher international financial flows, which leaves administered prices for petroleum products and governments with significantly less margin for power, non-tax revenues, and property taxes. error than in the past. Such measures also would increase economic efficiency and promote social equity. A Macroeconomic Framework for Reducing Risk 3 B. Supply and Demand: Domestic domestic investment approvals, which Demand-Led Overheating increased at an average annual rate of 33% in 1992-95 (Appendix Table 10.2). World Bank 1.11 GDP growth rose in 1995 to 8.1%, estimates suggest that private consumption again led by domestic demand; nonoil GDP grew faster than GDP. Some consumer durable grew 9.0%, compared with 7.9% in 1994 sales-for example, motorcycles (37% after (Table 1.1). Agriculture, Trade and Utilities 1994's 26% rise) and motor vehicles (18% in accelerated while Construction and 1995 after 53% in 1994)-continued to rise Manufacturing continued to expand rapidly. sharply. The rapid growth of private Within Manufacturing, evidence suggests that consumption demand may reflect continued the sectors oriented toward domestic strong real wage growth and the 1995 tax cuts. consumption grew strongly again, while export- In contrast to private consumption, government oriented sectors grew more slowly. The consumption rose by only 3% in 1995. Rapid Property sector, a component of Other Private domestic demand growth spilled over into a Business Services, slowed somewhat. sharp increase in imports, shifting net exports into deficit for the first time in many years. 1.12 Agriculture growth rebounded from the drought-depressed rate of 1994, especially food Inflation: 9-10% crops. Non-rice production continued to be much stronger than rice, a trend projected to 1.14 Consumer prices (December-over- continue (Box 1.1). Forestry was stagnant December) rose by 9.0% during 1995 because of weak export demand and supply (Figure 1.2).' While this is down from 9.6% problems that are attributable to unsustainable recorded last year, 1995 marks the fifth time in sectoral policies (Chapter 2). the past six years that consumer inflation has been in the 9-10% range. Slower growth in 1.13 On the expenditure side, final domestic housing prices accounted for most of the demand led growth for the second year in a decline in inflation during 1995, in part row (Table 1.1). Fixed investment rose by reflecting a slowdown in Jakarta's real estate 13%, reflecting the strength in construction, boom. Other price increases were contained foreign investnent (see para 1.38) and by increased imports, especially of basic foods Table 1.1 Real Growth in National Output and Expenditure (1993 prices, percent per year) 1988-91 1992 1993 1994 1995 GDP 9.0 7.2 7.3 7.5 8.1 Nonoil & LNG GDP 9.3 8.3 8.1 7.9 9.0 Agriculture 3.6 6.3 1.7 0.5 4.0 Nonoil/non-agric. GDP 11.1 8.9 9.8 9.7 10.1 Manufacturing 12.0 11.2 13.2 13.5 13.0 Utilities 13.7 8.9 11.1 12.7 15.5 Construction 15.0 12.4 14.5 14.9 12.9 Final Domestic Demand 11.9 6.0 7.1 8.5 10.2 Consumption a 10.9 7.0 7.4 7.0 9.1 Fixed Investment 14.6 3.6 6.6 12.6 12.9 Source: Biro Pusat Statistik. a Staff estimates, calculated as a residual based on an estimated stock accumulation of 2.5% per year. 4 Chapter I Box 1.1 Rice supply and demand are likely to grow slowly. Rice production is projected to grow slowly in the medium term. On the supply side, productivity increases have slowed because high-yielding seed varieties now cover most irrigated rice lands. The (net) increase in rice land, the other factor that contributed to the growth of rice output in the past, is likely to be limited. The Government has embarked on an expansion of rice land in Kalimantan, which is likely to be costly and may have adverse environmental consequences. Opportunities do remain for expanding rice land on Java and increasing efficiency inexpensively, for example, by eliminating restrictions requiring farmers to produce sugar. However, over time, higher productivity uses of rice land, such as higher value crops and urbanization, and alternative demands for water, are likely to reduce the land under rice cultivation. The demand for rice also is likely to grow slowly. Except for the lowest income group, per capita demand for rice has stagnated since the mid-1980s. Demand is likely to switch to other carbohydrates, a process that could be speeded-up by deregulation. In the near future, per capita demand for rice could fall, as it already has in Thailand. Once this occurs, the need for substantial increases in rice production and rice land is unclear; Indonesia could maintain rice self-sufficiency with rice output growing less rapidly than population. Source: Garcia-Garcia. such as rice and wheat. Inflation also was held were near 13%. The announcement also down by delays in raising certain administered included a provision that regular workers prices (Figure 1.2), mainly petroleum products receive a monthly minimurn wage based on 30 and electricity, which taken together account days per month, compared with the previous for more than 8% of the consumer price convention based on a six-day week (i.e., index. Core inflation-outside food and excluding Sundays). This effectively boosted energy-was a little below 8% during 1995, the minimum wage by a further 15-20%. As slightly lower than during 1994 (Figure 1.2). discussed in Chapter 3, it would be desirable to Slower growth in demand would reduce base minimum wage increases more on local inflation. labor market conditions than attempts to reduce poverty. 1.15 Inflation accelerated in the first quarter of 1996. Temporary, flood-related supply The Balance of Payments: Strong Domestic disruptions were a factor, but all major Demand Spilled-Over Into Imports categories (except energy, a largely administered category) rose sharply, indicative 1.17 Overview. The current account deficit of the strength of demand around the Idul Fitri nearly doubled, from $3.5 billion (1.9% of holiday season. In April the Government GDP) in 1994/95 to almost $7 billion (3.4% of announced increases in transportation tariffs GDP) in 1995/96. The deterioration reflected that will put additional upward pressure on rapid growth in nonoil imports that far inflation. Price increases in the rest of the year exceeded the 15 % increase in nonoil exports. will need to average around 0.5 % per month to In the capital account, increased foreign direct keep inflation below 10% during 1996. investment and other capital inflows financed the wider current account deficit and a build-up 1.16 The Government announced that the of reserves. Offshore privatization receipts daily minimum wage would rise by an were used to prepay high interest debt. (unweighted) average of 10.6% in 1996. The Official reserves rose by $2.7 billion, increases ranged from 5.4% in East Java to increasing to 4.3 months of imports of goods 14.3% in Central Sulawesi; in the heavily and services. industrialized areas of West Java, the increases A Macroeconomic Framework for Reducing Risk S Figure 1.2 Consumer Price Index (I12-month percentage change) 9% 9 6% 6 MoerhfandiseTrdn12 Exportse ofd plyoo-d,manitrdtoalse 12-month pereentoge changextentsgaments rontnetosfe fo h declinedby almos $3 billon in 195/9.opices pexplinonly paert ogte do f%i Non-food & no-energtax2on pkwdlyod whc soudrue 15% in19.Rpdgot curdi eim-emprpcie%xot ildpn Miningandis Tawde vaityo ndsril o sustanabl managementof, Indtona esiaes prodcts,incldingproesse ruber,aper foestryt grmensourcsnthrough maosufr changtesi elecTrica gos,rpand orend metalds product polic (Chapters 2). Withot moare sustainableo (Tabled 1.3) Texotil and filootwea exports managemexpant, lyprto the WoldBn rojpt tha the i grewi modrately Texilsounited f rrteukom ah volumeofo oetbsd exports; oue wivfllbegn torl dtrise atinoni vTablues that reesdThe decline wofl delieshrpyaon the lstwyends of the en rtuy 1994. Cofee, mcoco landgea excpt ort delie inr em noesaspyodepot aeei 1995,odemn matein to9 (Falingur internationalsreenliplmetdxpr commodity prices. lyoo, hih holdreuc 6 Chapter I Table 1.2 Balance of Payments (US$ billions) 1990/91 1992/93 1993/94 1994/9S 199S519 est. Gross merchandise exports 28.1 35.3 36.5 42.0 46.0 Oil & LNG 12.7 10.4 9.4 10.3 9.7 Nonoil 15.4 24.8 27.2 31.7 36.3 Gross imports (cif) -25.8 -30.2 -32.3 -37.7 -44.5 Oil and LNG -4.2 -3.8 -4.2 -4.0 -3.8 Nonoil -21.6 -26.4 -28.1 -33.7 -40.6 Trade Balance 2.3 5.1 4.2 4.3 1.5 Net Non-Factor Services -0.5 -1.4 -1.2 -0.8 -1.0 MLT Interest Payments -3.4 -3.8 -4.1 -4.3 -4.7 Other Factor Services and Transfers -2.0 -2.4 -1.9 -2.7 -2.8 Current Account Balance -3.7 -2.6 -2.9 -3.5 -6.9 Oil/LNG current account 6.0 4.1 2.7 3.8 3.1 Nonoil/LNG current account -9.7 -6.6 -5.7 -7.3 -10.0 Capital Account Balance 9.0 7.3 3.2 2.0 10.1 Net Disbursements of Public MLT debt 0.6 1.8 1.4 0.2 -0.6 Disbursements 5.2 7.1 7.0 6.4 6.7 Amortization 4.6 5.3 -5.6 -6.2 -7.3 Foreign Direct Investment, net 1.4 1.7 2.0 2.5 5.7 Other Capital, net 7.0 3.8 -0.2 -0.7 4.9 Change in Net Foreign Assets (- increase) -5.2 -4.8 -0.3 1.4 -3.1 Memo items: Official Reserves 9.6 12.0 12.7 13.3 16.0 Months of imports 4.4 4.8 4.7 4.2 4.3 Current Account/GDP (%) -3.2 -1.8 -1.8 -1.9 -3.4 MLT Debt Service/Exports (%) 29.2 29.1 31.6 28.2 27.6 Terms of Trade (1993 = 100) Total 106.8 101.0 100.0 104.9 106.5 Nonoil 90.5 92.9 94.8 102.2 103.7 Source: Bank Indonesia, Biro Pusat Statistik, and World Bank staff estimates. 1.21 Growth of garments exports is down growing domestic market; and slow-moving sharply from the boom years of the early bureaucratic procedures, like those for 1990s.2 Factors in the slowdown include: the allocating quotas and providing import duty tripling of minimum wages since 1989; drawbacks to producers. Exports of garments intensified competition from new low-cost and textiles may be stimulated by the January producers; diversion of output to the rapidly 1996 deregulation package (Chapter 2). A Macroeconomic Framework for Reducing Risk 7 Flgur 1.3 Quarterly Nonoll Trade (US$ billions) 10 a Nonoll Imports c.Lf. 6 Exot2ceeae o2% n19 rm19 n19 Nonoll Trmfm Balance -2 1066 1N08 1000 1001 1002 1003 l00 1005 Source: Biro Pusat Statistik and World Bank staff O.Umats& Table 1.3 Growth and Composition of Nonoil 1.22 Nonoil import growth (customs basis) Exports accelerated to 27 % in 1995 from 13 % in 1994 Value (Table 1.4; on a payments basis, nonoil in '95 imports grew by 20% in 1995/96, unchanged (US$ 1994 1995 from the previous year). Nonoil imports Sector (based on Si6C) bn.) (% change) surged in the middle of 1995 (reaching 30% Total Nonoil Exports 35.0 12.1 15.1 growth from September to September) before Mining 2.7~~~~ 23. 489 slowing sharply at year end. The acceleration Garments 2.3. 6 48..9 Agriculture 2.9 22.7 2.5 of nonoil inport growth fueled concern about Industry 29.3 10.3 14.1 economic overheating, raising the possibility of Processed wood 5.0 -5.7 -3.9 a significant widening of the current account Plywood 3.5 -12.0 -6.8 deficit. The worst of these fears subsequently Other 1.5 15.1 3.7 subsided and the surge later was traced largely Ores & metal 1.8 19.4 40.0 to lumpy capital goods imports.A This Textiles 6.2 -6.2 7.0Q experience highlights the imnplications of the Garments 3.4 -8.1 5.0 imlmnainoinetntpjcs.Sh Woven fabrics 1.6 -16.7 4.5 imlmnainoivetntpjcs.Sh Other 1.2 23.9 16.4 projects are likely to be associated with large, Processed rubber 2.2 30.9 57.5 lumpy capital goods imnports. As discussed Processed food 0.8 10.1 0.7 below, these are projected to sustain high Paper & products 1.0 34.1 50.7 nonoil import growth during the next few Other industry 12.3 28.2 16.7 years, which will widen the nonoil trade and Footwear 2.1 13.7 8.8 current account deficits. Indonesia's Vegetable oils 1.1 60.3 -7.4 dependence on private capital flows for Toys & sport equipment 0.3 -16.6 90.9 f c th current account deficit also is Gold 0.3 214.9 -544 fiancmg e Plastics 0.5 -0.0 85.6 projected to increase. Policies discussed below Electrical goods 0.9 40.6 28.5 are designed to lessen the vulnerability Other 6.8 25.2 25.8 Indonesia faces because of heightened dependence on private external capital flows. Source: Biro Pusat Statistik and World Bank staff. 8 Chapter 1 1.23 About 70% of the annual increase in discounting is common, which has contributed nonoil imports was accounted for by strong to slower growth in spending per visitor. growth of Intermediate Goods (Table 1.4). In addition to rising aggregate demand, imports in Table 1.4 Growth and Composition of Nonoil this category may have been boosted by the Imports possibility that the VAT and luxury tax (% change) exemptions for BKPM approved project imports Value would be eliminated. The Government in '95 resolved uncertainty on this issue with an (US$ 1994 1995 October 1995 circular confirming continued tax Sector (based on BEC) bn.) (% change) relief for projects undertaken by the end of Total Nonoil Imports 37.6 13.2 27.4 1998/99. Consumer goods imports grew the most rapidly of the three major categories, but Consumer Goods 2.3 22.7 67.2 they accounted for only about 15% of the Food & beverages 1.1 77.6 99.8 increase in imports. Even if consumer goods Passenger vehicles 0.1 49.9 82.5 imports had been constant, total imports would Durable goods 0.9 14.3 34.5 have grown over 20%. Few consumer goods Other 0.1 -24.0 94.3 are imported directly; generally, consumer Intermediate Goods 26.7 15.8 28.4 demand is satisfied by local production using Food & beverages 1.7 22.1 38.7 imported inputs. Raw materials 17.1 13.6 29.3 Fuel & lubricants 0.0 -42.1 135.2 1.24 Capital goods imports grew less rapidly Parts & accessories 7.8 19.9 24.2 than total imports, and accounted for about 15% of import growth. Capital goods import Capital Goods 8.7 5.1 17.3 growth accelerated in the second half of the Machinery & equipment 8.0 1.0 20.5 year. Data from the pre-shipment import Other 0.7 58.5 -9.0 inspection agency suggest that private capital goods imports grew at about the same rate as Source: Biro Pusat Statistik, data processed by total imports, while public capital goods World Bank staff. imports declined substantially. As noted above, capital goods imports are projected to The Capital Account: Buoyed by Foreign grow rapidly in 1996, especially as the Investment, Fluctuating in Line with telecoms program speeds up and foreign External Shocks investmnent projects are implemented. 1.26 The capital account surplus improved 1.25 The services account deficit increased by $8 billion in 1995/96 (Table 1.2). There by $0.7 billion in 1995/96. The larger deficit was a major expansion in estimated net foreign mainly was due to higher interest payments on direct investment and a sizable increase in net external debt. Profit transfers from foreign private borrowing (Table 1.2). Estimated net investments in Indonesia also increased. Rapid inflows of foreign direct investment were $5.7 growth of tourism-now larger than any single billion, up from $2.5 billion in 1994/95. merchandise nonoil export-helped narrow the Portfolio investment, estimated at $1.7 billion non-factor services deficit. Foreign visitors to in 1995/96, was $1 billion higher than in the Indonesia continue to increase at a substantial previous year. Public borrowing (net) was pace each year (by about 13% in 1995/96), but $0.2 billion in 1995/96. It has been declining accommodation capacity is expanding rapidly in relation to total borrowing since the late among star-rated hotels. Occupancy rates at 1980s (Figure 1.4). Estimated net private such hotels have come down and rate sector borrowing was $3.6 billion in 1995/96. A Macroeconomic Framework for Reducing Risk 9 Figure 1.4 Cumulative MLT Figure 15 Country risk stbiliing Borrowing Slnce 1989 Omhor d Ofhu 8$ DepoWM DlbDndl 3monf,%pA) u 25 0lPrvate I 3 10 0 isi 1990 1991 1992 19 1994 19951 Source: World Debt Tables and stff esimatesL oum: Buk hanwsel Interest Spreads Have Fallen Since the Early then leveled off (Figure 1.6). It rose in early 1990s, But Risen Since the Mexico Crisis 1994 when the US Federal Reserve tightened monetary policy, continued rising through the 1.27 Capital flows and investor confidence in Mexico crisis, and increased further during the emerging markets, including Indonesia, second half of the year when the overheating followed developments in Mexico during 1995. issue came into the headlines. By year end, "Country risk" (as measured by the spread exchange rate risk appeared to have stabilized between the interest rate paid for US dollar around 9% at annual rates, which is similar to deposits onshore and offshore) rose steadily recent levels. throughout the first quarter of 1995 (Figure 1.5) as the Mexico crisis stayed in the Figure 1. Exchange rae risk sabiliing headlines and net portfolio flows to East Asia llswet d,b d_ b*h n 3.monUt nrpih dropped sharply. By mid-year the spread ud t t1hmadeposb dt pi toMIborxm leveled off; Indonesia and Thailand were regional beneficiaries of renewed capital Is inflows, and regional stock markets generally rebounded above their pre-Mexico levels. In the third quarter, the rally of the US dollar 10 coincided with renewed problems in Mexico, which caused a drop off in inflows to Indonesia and other East Asian economies. Between November 1995 and February 1996, capital flows to East Asia picked up sharply, fueling sharp increases in regional stock markets. 1.28 Exchange rate risk (as measured by the 2 2 2 spread between onshore rupiah and US dollar deposits) also rose during the first half of 1995, Scums: BankhdaonseI. 10 Chapter 1 Extermal Debt: Prepayment of Public Debt Management of External Borrowing and Reduced Reliance on Public Borrowing 1.32 One reason for the recent improvement 1.29 Indonesia's external debt was in the indicators of public sector external $96.5 billion at end-1994 (World Bank 1996b). indebtedness is the Commercial Offshore Loan Of this amount, about two-thirds was public Team or COLT. The COLT was established in medium- and long-term debt. Estimated October 1991 to improve management of borrowing during 1995 suggests that external commercial public debt. The COLT regulations debt was over $100 billion by end-1995. set ceilings on commercial foreign borrowings by Bank Indonesia, state banks, state-owned 1.30 The most notable development companies and state-related projects for the five concerning external debt during the past year fiscal years ending in 1995/96 (Table 1.5). was the continued use of privatization proceeds Export Credits are managed by the office of to retire external debt. In 1995/96 the the Coordinating Minister for Finance, Government used its share of the privatization Economy and Development. Bank Indonesia proceeds of PT Telkom and PT Tambang Timah also issued regulations in 1991 establishing a to prepay $760 million of loans to the Asian queuing system that applies to banks seeking to Development Bank and the World Bank. borrow abroad. These loans dated from the early 1980s and carried interest rates exceeding 10%. 1.33 Regulations with varying degrees of Indonesia has prepaid $1.5 billion of high-cost restrictiveness govern certain borrowers. The debt in the past 2 years, reducing the amount regulations take five forms (Table 1.5 and para of outstanding public debt by more than 2%. 1.60): In his budget speech, the President committed future fiscal surpluses to speed up the (i) COLT approval for commercial repayment of public external debt. As high- borrowing. This covers state-owned interest, multilateral loan candidates for enterprises, state-owned banks, and prepayment are exhausted, Indonesia could state-related projects. consider using the revenue from selling state enterprises to prepay commercial public debt. (ii) The net open position requirement, Other countries in the region, such as Malaysia which limits banks' and non-bank and New Zealand, also are using privatization financial institutions' net foreign proceeds to prepay such public debt. exchange position (on- plus off-balance sheet) to a percentage of their 1.31 A second notable external debt capital-now 25%. development during 1995 was the impact of the sharp swings in the dollar/yen exchange rate. (iii) Bank Indonesia monitoring and The depreciation of the yen/dollar rate in the indicative ceilings. This covers first quarter of 1995 added about $6 billion to large-over $20 million-money or Indonesia's external public debt and could have capital market borrowings by private raised 1995 debt service by $750 million. banks, non-bank financial institutions, However, the rally of the US dollar in the third and non-fmancial companies. quarter of the year wiped out the earlier increase in the stock of yen-denominated debt (iv) Required reporting to the COLT and to and most of the rise in debt service. Bank Indonesia. Borrowing not subject to COLT approval must be reported. A Macroeconomic Framework for Reducing Risk 11 Table 1.5 Ceilings on Foreign Commercial Borrowing (USS millions) 1991/92 1992/93 1993/94 1994/95 1995196 Bank Indonesia 400 500 500 500 500 State banks 1000 1000 1000 1000 1000 Private banks 500 500 500 500 500 Private companies a 2500 2600 2700 2800 2900 State-owned companies 1500 1000 1200 1400 1600 Total 5900 5600 5900 6200 6500 Source: Bank Indonesia. a The figure is indicative only and used by Bank Indonesia as a basis for monitoring. The only exceptions are trade finance from the government. Regarding purely for non-financial companies and private company borrowing, recent commercial borrowing related with improvements in Bank Indonesia's debt money market transactions of less than reporting system argue for keeping the ceilings $20 million. indicative only. Consideration also could be given to transforming the ceiling on private (v) A queuing system exists for projects by banks' borrowing into an indicative ceiling and state banks and project finance by relying on prudential regulation, especially of private companies, including banks. the net open position, to control their borrowing. This would eliminate the Short-term trade fiance, short-term money regulatory disadvantage private banks now face market borrowings, and purely private relative to offshore banks and domestic non- borrowings for projects with no public sector banks, and provide the authorities at Bank connection are exempt from coordination. Indonesia with the information they need to * rlmonitor external indebtedness. 1.34 The regulations have restrained offshore borrowing by state banks and state-owned Officia Reserves Rose $2.7 billion enterprises. They also have inproved significantly Bank Indonesia's ability to 1.36 Official reserves reached an estimated monitor external borrowing. However, private $16 billion at end 1995/96 (Table 1.2). In bariks note that tight ceilings disadvantage them relation to imports of goods and services, to the benefit of their offshore branches and official reserves increased to the equivalent to domestic non-banks. For private companies, 4.3 months coverage. Official reserves loan signings during 1995/96 were more than dropped early in the year during the Mexico double the indicative ceiling. crisis. They rose in June-July when interest rates and the dollar rally attracted capital flows 1.35 Macroeconomic stability requires to East Asia. The increases stopped near the continued tight monitoring of public debt and end of the third quarter when short-term publicly guaranteed debt. It also requires interest rates declined, the dollar rallied against continued adherence to the policy of no the yen and renewed concern arose over governmnent guarantees of private debt. The Mexico and domestic overheating. Government should continue COLT's ceiling on any private borrowing that relies on a 1.37 As additional insurance against government guarantee or other forrn of comfort contingencies, Bank Indonesia maintains 12 Chapter I significant stand-by lines of credit. In addition, $25 million in the early 1990s to more than repurchase agreements have been reached with $50 million in the past two years (see paras several central banks in the region to provide 1.44 - 1.45). liquidity in the event of speculative attacks on the currency. Moreover, Bank Indonesia has 1.41 The largest expansion in investment increased the yen portion of official foreign approvals has been in Secondary Industry, with exchange reserves to hedge its exposure to the great bulk of this expansion accounted for currency fluctuations. by the Chemicals Industry; the Paper Industry is a distant second (Figure 1.7a). The United Increased Foreign Investment Approvals Kingdom expanded as a country-of-origin (in Foreshadow a New Source of Growth Petrochemicals, Paper and Power) as has the United States, especially in 1995 (Petroleum 1.38 As noted, foreign direct investment Products and Electric Power).4 There has also increased significantly in 1995/96 (Table 1.2). been a major expansion in large "Joint" This is the early result of a dramatic surge in country projects, particularly in the foreign investment approvals (which exclude Petrochemicals sector (Figure 1.7b). Japan certain key sectors of the economy; see and Singapore accounted for the largest Box 1.2) in the last two years (Figure 1.7). numbers of individual projects (more than 100 The increase is the second wave of foreign annually each), mainly in the $10-25 million investment into Indonesia. The previous surge range. Neither Japan nor Singapore has been occurred in 1988-90 when Indonesia's textile the country-of-origin for any of the large sector received significant amounts of projects mentioned above. investment from North Asia. That investment led to the trebling of textile exports in the four 1.42 On the basis of plans submitted with years to 1992/93, when they were Indonesia's investment applications, foreign investment largest nonoil export. approvals are becoming slightly more export- oriented (Figure 1.7c). Expected annual 1.39 Foreign investment approvals already exports have increased by a factor of 3.7 were on the rise in early 1994, driven in part between 1991-93 and 1994-95 while total by a worldwide boom in foreign direct approval increased by a factor of 3.5. investment. But they have increased markedly Virtually all of the anticipated increase in since the Government significantly liberalized exports is from two sectors-Chemicals and foreign investment regulations in May 1994. Paper. However, these figures (and thus the The high investment approvals foreshadow a totals) are likely to be inflated because of the period of private sector, investment-led growth. requirement that only "export-oriented" The accompanying equity inflows should refineries would be approved. On the basis of provide substantial fmnancing for the current firms' intentions, exports from newly-approved account deficit. Implementation of a successful foreign investment projects in some of state enterprise privatization campaign could Indonesia's traditional export sectors, textiles add to these flows and make it possible to and primary goods for example, would decline retire large amounts of public external debt. (Figure 1.7c). 1.40 After averaging around $9 billion (for 1.43 Approved projects continue to be 361 projects) per year during the period concentrated in East and West Java and 1990-93, foreign investment approvals jumped Sumatra, notably Riau province (Figure 1.7d). in 1994 to $23.7 billion (449 projects). In The value of investment approvals was little 1995 they surged, to $39.9 billion (799 changed in Jakarta and remained low in many projects). Average project size doubled from provinces in the eastern islands. A Macroeconomic Framework for Reducing Risk 13 Figure 1.7 Foreign Investment Approvals (Annual Average) Figure 1.7a By Sector Figure 1.7b By Country of Origin US$ millions US$ millions 30000 j oew 30000. Ebcw 25000- 0_w a 25000 GMrn, gf J*it 20000 MGMlll"l a / | t UK 150. BKpd. : B.15000 10000 owe 10000 KOM 5000 5 0004 Uo 0 0 u ..11 .S. 1990-03 19943 my 19090o 1994ff Soure: BKPM. Source: BKPM. Figure 1.7c Amnount of Exports Figure 1.7d By Location US$ millions US$ miiiions TuIuy 14000.300 06w ~ ~ ~ ~ ~ ~ ~ ~~~d 12000. 5 5000 WYLI000 10000- 4000. am00 2000. q 0 0 1991-93 19504 1504950 Source: WKM. Source: BKPM. 14 Chapter 1 1.44 Much of the jump in FDI approvals is than one-third of the value of all approvals in attributable to big projects. In the early 1990s 1994-95. It is not clear that all of these it was unusual to find $1 billion projects. In projects will be realized; the oil refmeries are 1994 there were six and in 1995 there were 11. unlikely to go ahead until the law granting The big projects account for virtually all of the state-owned Pertamina the monopoly right to doubling in the value of the average project. the domestic oil industry is modified to allow The large projects are concentrated in a few others in, and one firm already has canceled its activities, oil refineries, petrochemical plants, application. Finally, as noted, there are pulp and paper mills, and power plants. several large projects that are not captured in Eleven petrochemical projects (including oil the data, notably the multi-billion dollar Natuna refineries) worth $23 billion account for more gas project and two new LNG trains (Box 1.2). Box 1.2 The links between investment approvals and the balance of payments. The current increase in foreign investment approvals eventually will translate into inflows of foreign direct investment in the balance of payments. But, historically only about 40% of approved foreign investments are realized, and the changing composition of approvals (see main text) may further reduce this percentage. The average lag between approvals and direct investment in the balance of payments is estimated at 1.5-2 years with the largest impact in year 2. Investment Coordinating Board (BKPM) data on investment approvals represent the total cost of a project, and they exclude oil and gas development activities (including the giant Natuna project) as well as bank and non-bank financial institutions. Foreign investment in the balance of payments covers the same sectors of the economy and measures the equity and debt components of project costs. The equity component of projects is generally 20% or more. Countries that benefit from large inflows of foreign investment generally show large profit transfers to the foreign owners. Countries estimate profit transfers in different ways. Bank Indonesia uses a rule based on the historical equity share of foreign investment, the historical return on this investment (which they estimate by a sample) and an assumption about the operational share of equity. Using Bank Indonesia's rule, profit transfers are projected to grow to $2.5 billion over the next five years. 1.45 Stripping out the large (over $1 billion) C. Macroeconomic Policies projects, foreign investment approvals still have increased by more than 50% annually in the 1. Fiscal Policy: Tightening in 1995/96 past two years with some very healthy characteristics. For example, the projects are 1.46 In 1995/96 the Government ran a distributed widely across sectors, including surplus of roughly 0.8% of GDP (IMF/World Food Crops, Plantations, Food Industry, Basic Bank basis5), tighter than the 0.3% surplus in Metals and Metal Goods Industries, Transport 1994/95 and much tighter than the original and Housing. Also, this increase has been well budget. The surplus reflects higher-than- spread-out among major investing regions: budgeted international oil prices, better-than- East Asia (Japan, Korea, Hong Kong and projected nonoil tax collections, less-than- Taiwan, China); ASEAN (Singapore and budgeted development spending, and restrained Malaysia); Western Europe (the UK, Germany net off-budget spending (Table 1.6). The and the Netherlands); and the United States. improved nonoil tax collections partly reflect A Macroeconomic Framework for Reducing Risk 15 Table 1.6 Central Government Fiscal Operations a (Rp trillions) 1993/94 1994/95 1995/96 199619 Budget Actual Budget Estimate Budget Revenue & Grants 54.2 60.2 60.1 65.5 69.0 78.2 Oil/LNG taxes 12.8 12.9 13.4 13.3 14.8 14.1 Nonoil taxes 34.2 40.1 40.7 45.0 48.4 56.0 Non-tax revenues 6.7 6.8 5.5 6.7 5.2 7.6 Grants b 0.5 0.5 0.5 0.5 0.5 0.6 Current Expenditures c 33.3 35.2 35.3 40.3 43.6 48.3 External interest 6.3 7.1 6.5 7.2 6.9 7.8 Subsidies d 1.7 0.2 0.5 0.1 0.2 0.1 Other, of which: 25.2 28.0 28.4 33.0 36.5 i k 40.3 Personnel e 18.2 19.7 19.8 23.3 23.2 27.8 Capital Expenditure 22.4 24.0 25.3 27.0 26.0 i 30.2 Estimated Off-Budget (net) f 0.6 - -1.7 ... -4.2 ... Total Expenditure 56.2 g 59.2 58.9 9 67.3 65.3 78.5 Overall Fiscal Balance -2.0 1.0 1.3 -1.8 3.7 -0.3 Financinm External (net) 1.7 -1.0 -0.7 0.5 -0.0 -0.3 Disbursements 12.5 9.5 11.5 11.2 12.9 11.8 Amortizations 10.7 10.5 12.2 10.7 12.9 12.1 Domestic (net financial drawdown) 0.3 0.0 -2.3 1.3 h -5.4 0.5 h Exceptional: privatization receipts 0.0 0.0 1.7 0.0 1.8 0.0 (as % of GDP) Revenue & Grants 16.4 15.9 15.9 14.7 15.5 15.5 Current Expenditures 10.1 9.3 9.3 9.0 9.8 9.6 Capital Expenditure 6.8 6.3 6.7 6.1 5.8 6.0 Total Expenditure 17.1 g 15.6 15.5 B 15.1 14.7 2 15.6 Overall Fiscal Balance -0.6 0.3 0.3 -0.4 0.8 -0.1 Memo item: Oil prices (S$bbl)' 14.8 16.0 16.6 16.5 17.3 16.5 Source: Ministry of Finance, Bank Indonesia, and World Bank staff estimates. a This table presents Central Government fiscal accounts in the format of the IM's Government Financial Statistics, which differs from Government of Indonesia's Budget format. Section 5 of the Statistical Annex presents the fiscal accounts in the Government's format. b Estimated grant component of external financing. c Includes spending of a current nature classified as development expenditure in the Government's Budget (fertilizer subsidy, defence expenditure, operations and maintenance expenditure). d Includes fertilizer and petroleum subsidies. e Central Govemment's personnel spending plus transfers to regional governments for personnel expenditure. f Derived as the sum of government saving (revenues less current expenditures) and net financing (externa plus domestic), less estimated on-budget capital spending. (See note C. 9 Includes estimated net off-budget transactions. h Drawdown of off-budget government deposits (reforestation funds). Indonesian crude, annual average for the fiscal year or projection at Budget. Includes re-classification of pre-shipment import-inspection fees from capital to current expenditure. k Includes re-imbursements of Rpl.5 trillion to Pertamina for domestic oil operations. I Includes debt prepayment. 16 Chapter I the booming economy. However, improved some extent the changes in the latter category administration, some new taxes and increases include a bringing on-budget of spending in other tax rates also were helpful. For financed by own-revenue (the Swadana example, in July forestry fees were increased account) of certain current expenditures by by 10% (although they remain a much smaller some government agencies (for example, percentage of log values than in 1987), and a hospitals and educational institutions). tax was imposed on the sale of luxury homes. The lower-than-budgeted development spending 1.49 The Budget programmed a large contributed to fiscal tightening as well as to increase in several categories of nonoil slower disbursements of some foreign revenues, including income taxes, value added assistance. It is notable that the surplus in taxes and excises.6 The ambitious targets for 1995/96 occurred despite large reimbursements income and value added tax may be achieved to Pertamina for its domestic operations in without additional measures. Exceeding these 1993/94. revenue targets and generating a stronger overall fiscal position will be more difficult The 1996/97 Budget: Additional than in previous years. This is especially true Tightening Warranted considering the revenue losses stemming from the introduction of incentives for the national 1.47 Although the President's Budget speech car (para 2.41) and the tax-deductible status of recognized the dangers of overheating, the individual contributions to the poverty Budget for 1996/97 tightened the fiscal stance alleviation initiative of Presidential Decree only slightly relative to last year's Budget; No. 90/1995. higher-than-budgeted revenues or less-than- budgeted spending will be needed to match the 1.50 The Budget speech underscored the 1995/96 surplus. Such tightening of fiscal Government's readiness to take steps to policy would be desirable to reduce the risks of overcome abrupt movements in international overheating and make more room for higher capital flows. It also pledged to use any investment demand. Tighter fiscal policy is the budget surplus to prepay external debt. The Government's most effective policy instrument Ministry of Finance's recent track record also for reducing aggregate demand. It also was an needs to be kept in mind; in the past two years, appropriate response to capital inflows in the fiscal outturn has been tighter than the 1995/96. Finally, tighter fiscal policy can help Budget (Table 1.6). tighten monetary policy (para 1.55). 2. Exchange Rate Developments: 1.48 The Budget also continues to reduce the Toward a More Market-Determined share of public investment in public spending. Exchange Rate The share of development expenditure in total spending declines to 38% in 1996/97 from 1.51 Indonesia follows a "managed float" almost 40% the previous year and almost 42% exchange rate policy. Bank Indonesia sets the at the beginning of the decade. At the same central value of the rupiah based on a basket of time, current expenditures are projected to rise foreign currencies, and intervenes in the in relation to GDP. Some items of current market to buy/sell rupiah in an "intervention spending increased sharply, notably the wage band" around that central rate. By widening and salary bill (19% growth in 1996/97 the intervention band, Bank Indonesia has although any across-the-board wage increase moved to allow market forces a greater role in was left to the Parliamentary discussion) and setting the value of the rupiah. Bank Indonesia Domestic Materials Expenditures, which has widened its intervention band to Rp2O in more than doubled in the past two years. To January 1994, Rp3O in September 1994, Rp44 A Macroeconomic Framework for Reducing Risk 17 in June 1995, and to Rp66 in December.7 The regarded as having a "fixed' exchange rate announcement had no noticeable immediate against each other, have a band of 4.5%. impact on the foreign exchange market. 1.53 Bank Indonesia has roughly followed a 1.52 Although the band is ten times wider real exchange rate rule since the devaluation of than in 1992, it is still small (less than 3%) in September 1986 (Figure 1.8). The rule is that comparison to many countries. For example, the rupiah is depreciated to compensate roughly Chile, which also follows a managed float for the excess of domestic inflation over exchange rate policy, has an intervention band inflation in major trading partner countries. of 20%; Colombia has a 14% band; the Czech Since 1987, the real effective exchange Republic is considering a 5-10% band; most rate-the nominal exchange rate adjusted for countries in the European Monetary System inflation differentials between a country and its maintain 30% bands; and even Germany and main trading partners, as calculated by the the Netherlands, two countries that are IMF-has depreciated by an average of about 1 % per year.8 * Figure 1.8 The Real Exchange Rate (Jan 1988 - Jan 1906) Index 180 ison- 120 60 se 87 88 89 90 91 n2 9 94 96 96 Sourae: IMF. 3. Monetary Policy Tightened in 1995 Flur o1.0 Rupih Interet R_t.. (reent) 1.54 Responding to the Mexico crisis and signs of overheating, monetary policy tightened so ng: for w ng capital during 1995. Interest rates increased in the first half of the year (Figure 1.9) and reserve 145 money growth came down substantially, mainly v I=I - due to a build-up of government deposits. On t0 the external side, net foreign assets increased O r substantially over the course of the year __ v_............. although foreign capital shifted direction, often o nh abruptly, on several occasions during the year. - a .nk k idoansi. 18 Chapter 1 Reserve money growth declined... Table 1.8 Monetary Survey (Rp trillions, change over year earlier) 1.55 Reserve money growth was 16.7% in 1995 compared to 25.8% in 1994 (Table 1.7). 1993 1994 1995 The build-up of Government deposits offset the expansionary impact of foreign assets on Net Foreign Assets 0.9 -4.4 7.4 reserve money ("Claims on government" in Net Domestic Assets 32.5 32.7 41.3 Table 1.7). Bank Indonesia unwound some of Lending to Business 30.2 37.8 47.4 its money market instruments (Table 1.7). Broad Money (M2) 26.1 29.3 48.1 Bank Indonesia also provided large amounts of Narrow Money (MI) 8.0 8.6 7.3 liquidity credits (below-market directed credits Time/Saving Deposits 15.3 15.6 32.7 from Bank Indonesia) to Bulog, the State Foreign Currency Deposits 2.8 5.1 8.1 Logistics Agency, to finance rice purchases and Memo Items: (% change) to Bapindo, the troubled state-owned bank, Reserve Money 19.5 25.8 16.7 near year-end.9 The increase in liquidity Lending to Business 22.7 23.2 23.6 credits amounted to roughly half of the increase Broad Money 22.0 20.2 27.6 in Government deposits. Source: Bank Indonesia. Table 1.7 Sources of Reserve Money Expansion (Rp trillions) 1.57 In an attempt to strengthen the link between reserve money and M2, in December 1993 1994 1995 Bank Indonesia raised commercial bank reserve requirements from 2% to 3% and excluded Foreign exchange contribution 5.0 -1.5 5.2 vault cash from reserves. Effectively these imeasures increased the reserve requirement by of whichy about 2 percentage points. Higher reserve Claims on government 1.9 -3.1 -6.9 money demand in February 1996 (when the Liquidity credits -2.3 0.9 3.4 new reserve requirement took effect) Money market instruments -4.3 10.8 3.7 contributed to capital inflows and an accumulation of international reserves. The Other 2.6 -2.5 -1.7 rise in M2 in relation to reserve money-the Reserve Money 2.9 4.6 3.7 money multiplier-(Figure 1.710) higlights (growth rate, % per year) (19.5) (25.8) (16.7) the complications of translating a slowdown Source: Bank Indonesia. Flgur. 1.10 Broad Money Mulitpiler ... but broad money and credit growth (Ja.m 1 - Nov. low stayed high. 11 Uxe4 a . banks 10 1.56 For 1995 as a whole, the growth of 9 broad money (M2) actually accelerated * (Table 1. 8), despite the drop in reserve money 7_ growth. Higher growth of M2 sustained strong , credit growth, which exceeded Bank Indonesia's target range through the year. In 4 addition, there was substantial growth in credit ,_.- from the non-bank financial sector (which is l * . so el 92 93 04 sa outside the coverage of M2). Sou: kIndne A Macroeconomic Framework for Reducing Risk 19 in reserve money growth into a slowdown in margin throughout most of the year broad money or credit growth (Box 1.3). It (Figure 1. 11). Several factors can be cited for also argues for setting conservative targets for the slower growth of property lending, credit expansion. including higher interest rates, new tax measures and evidence of weakening demand 1.58 During 1995, the expansion of bank (for example, softening rental rates and rising lending was distributed evenly across sectors, vacancy rates), especially at the upper end of with the exceptions of agriculture and property the housing and apartment markets. lending. Lending to agriculture expanded slowly. Growth of credit for property 1.59 Looking at the flow of funds in the development decelerated sharply, though it monetary survey, net foreign assets financed exceeded total loan growth by a substantial approximately 15% of the total increase in Box 1.3 Making monetary policy in Indonesia. The limits to conducting an excessively 'loose' monetary policy are well-known in Indonesia: attempts to maintain interest rates much below (risk-adjusted) international levels will lead to capital flight and eventually exhaust international reserves. There are also limits to an excessively 'tight" monetary policy. In both cases, monetary policy is ineffective for a simple reason; in an open economy, international capital flows respond fluidly to variations in domestic interest rates, thereby offsetting the central bank's attempts to control interest rates and money supply, unless exchange rates are allowed to vary (Mundell). Very simple econometric analysis provides a quick assessment of the strength of these offsets in an Indonesian context. The results indicate that offsets are powerful and they act quickly; 58% of Bank Indonesia's actions (to change domestic credit) is offset within one month and an additional 21% is offset within two months. The total offset, of 80%, is higher and faster than previous estimates, probably because of the increasing integration of international and domestic capital markets. Nevertheless, room does remain for Bank Indonesia to change the money supply and interest rates in the short run. Central banks in the region have been experimenting with various means to strengthen monetary policy to deal with capital inflows. For example, Thailand raised commercial bank capital ratios and the cash reserve requirement on short-term foreign loans raised by financial institutions. International experience indicates that such instruments can increase the importance of domestic monetary factors in determining domestic interest rates immediately after controls are imposed. However, the effects of these changes typically are short-lived. Moreover, controls tend to push legitimate business offshore (Garber and Taylor). The implications for policy are clear. First, monetary policy has a role to play in dealing with overheating. But that role is limited and ultimately it can become complicated (Boediono). Second, monetary policy's impact could be strengthened by allowing the foreign exchange market a greater role as a transmission mechanism-for example, by widening the exchange rate intervention band. In this way, Bank Indonesia would not be forced to offset the impact of its own policies in the foreign exchange market. Third, monetary, exchange rate and fiscal policy need to be coordinated to achieve high growth, low steady inflation and prudent levels of official reserves. Finally, it is desirable for Bank Indonesia to err on the side of tightness in following international interest rates, owing to the strong impact that Bank Indonesia's policy can have on international reserves. Source: Hanson 20 Chapter I Figure 1.11 Credit D.wlopmenft at would be 17%. Tighter regulation and higher Depoalt Money eanks capital and reserve requirements should help (Yeer-oYeer % Chane) slow credit growth. However, Bank Indonesia so did not raise interest rates on its money market so / = \instruments when it announced the tighter credit growth target. so Total crdt D. Update on the Banking Sector 2c Excludiln pr 1.62 Appreciable progress continued in working out from under the burden of bad o I J 8ND " J S I > debts in 1995. After increasing for several 94 94 P4 94 sa 9C 9a e years, classified credits (comprising "bad", Sourc: Bank indonel. "doubtful" and "substandard" credits as defined by Bank Indonesia) declined in relation to total credits during 1994, and this trend business lending (Table 1.8). The rest was continued through 1995 (Table 1.9). However, financed by the growth of broad money, the absolute amount of classified loans mainly rupiah time and savings deposits. increased markedly during 1995, by almost Rp2 trillion. Within classified loans, the value 1.60 Bank Indonesia stepped-up non-market of bad debts also increased, but only a little, interventions to slow credit growth during owing mainly to extensive write-offs at 1995. There was extensive use of moral Bapindo late in the year (para 1.55). suasion to slow lending to the property sector. In August Bank Indonesia promulgated new Table 1.9 Commercial Banks' Classified Credits regulations that limited banks' participation in (percent of total credits, end of period) the commercial paper market. In September, Bank Indonesia set up a schedule for increased 1993 1994 1995 capital requirements, which should slow bank lending and make it less risky (para 2.80). In All Banks December measures were announced to slow Total Credits 100.0 100.0 100.0 December measures were announced to slow Classified 14.2 12.1 10.4 the growth of finance company lending. New Bad 3.3 4.0 3.3 entry into the industry was halted. Also, finance companies' total borrowing in relation State Banks ' to net worth was limited to 15 times, and to 5 Classified 19.8 18.6 16.6 times for offshore loans. Issuance of Bad 4.2 5.9 5.3 promissory notes and their equity position in other companies also were restricted." Also, Total Credits 100.0 100.0 100.0 finance companies must submit regular Classified 7.3 5.4 4.9 financial reports to Bank Indonesia. The Bad 2.1 1.9 1.4 effectiveness of these measures in controlling Memo items: (Rp tm.) credit growth will depend on their strong Total credits 177.5 217.0 267.8 implementation. State banks 99.1 104.1 120.9 Private banks 79.8 108.5 141.3 1.61 For 1996, the President's Budget Speech emphasized the need to control liquidity Source: Bank Indonesia. growth. As follow-up, Bank Indonesia Includes the five state commercial banks, Bank announced that the target growth of credit Regional Devegloprneantdapindo Excludes the A Macroeconomic Framework for Reducing Risk 21 1.63 During 1995, both the state and private of commercial banks increased by only 6, banks reduced classified credits in relation to reaching 240 where it stayed through late 1995. total credits (Table 1.9). However, among the Bank Indonesia has discouraged the state banks there is a wide variation in portfolio establishment of new banks by a tighter quality. The Government has targeted Bank selection process, especially as regards the Negara Indonesia for public listing. Two other source of capital and persons eligible to hold state banks account for much of the classified positions as bank shareholders or managers. credits. Bank Indonesia also has been active in encouraging takeovers, changes in management 1.64 Among the private banks, classified and technical assistance to management. Some credits are lowest in the private foreign 20 banks have experienced changes in this exchange banks, a group that constitutes more regard during the past 2 years. In many cases, than one-third of the entire banking sector. the new owners or managers strengthened the The private non-foreign exchange banks, which capital structure of the banks. represent only 5% of assets of the banking sector but 38% of the number of banks, have 1.67 As noted above (para 1.60) and a classified credit problem that is comparable discussed in Chapter 2, Bank Indonesia in percentage terms to the state banks'. tightened prudential requirements in 1995. Bank Indonesia also issued guidelines on 1.65 The Directorate General of Taxation in derivatives trading by banks, including the Ministry of Finance took a step in 1995 disclosure requirements to customers and that may change banks' reported classified weekly reporting to Bank Indonesia. Such assets. It limited the tax deduction for bad trading by banks, which was essentially debt provisions to 3% of loans (the previous unregulated in the past, is restricted to maximum) or the amount reported in transactions in foreign exchange and interest commercial financial statements, whichever is rates. Banks may transact in stock-related less. The excess (deficit) of provisions in derivatives with the permission of Bank relation to actual write-offs is to be reported as Indonesia. income (loss) in the subsequent year. This will continue to penalize banks with classified assets 1.68 The banking sector's compliance with over 3 %, but eliminate the incentive to over- key prudential regulations was mixed as of report classified assets to the tax authorities. mid-1995. The capital adequacy ratio exceeded This action renewed debate as to reliability of the required 8% for commercial banks as a financial reports in Indonesia and banking whole, and for each group. But there still secrecy, particularly in the light of recent were 22 banks (out of a total of 240 banks) that decision by Bank Indonesia to reduce the did not meet the required capital adequacy ratio reporting frequency (from quarterly to and 65 (27% of all banks) that did not meet the biannually) of commercial banks' financial legal lending limits. Of the 65, 20 were accounts. foreign exchange banks and 31 were non- foreign exchange banks. 25 banks (or more 1.66 Bank Indonesia has encouraged than 20% of the eligible total) exceeded the net consolidation in the banking sector in the past open position requirement on foreign exchange few years. This partly reflects Bank exposure. However, there were indications of Indonesia's case-by-case approach to dealing progress in some of these areas around the end with insolvent banks. During 1994 the number of 1995. 22 Chapter I E. Macroeconomic Policies to Reduce could lead to an increase in private saving, a Risks stronger public sector contribution to raising saving would be the most prudent policy. 1.69 Indonesia has the potential to "take off" as President Soeharto said when he launched 1.73 A reasonable estimate would be for the Repelita Vi, the current five-year plan. Since Government to increase its overall surplus then, the rebasing of the national accounts (IMF/World Bank basis) by around 2% of GDP. indicated that growth in Repelita v was higher Such adjustment would require more than tight than previously thought (Technical Annex) and implementation of the Budget and continued the annual growth target for Repelita vi was improvements in tax administration. The revised upward to 7.1% from 6.2% in August additional measures, including some adjustment 1995. of development spending, could include: 1.70 Stronger investment demand, including (i) Raise public enterprise prices, notably foreign direct investment, could provide the fuel and power, to efficiency levels. basis for the take-off scenario. The capital Increased fuel prices would get them goods imports associated with investment will closer to parity with international prices. strain the nonoil trade and current account This policy also would benefit the deficits. The wider current account deficit environment (Chapter 2). Likewise, largely would be financed by private external electricity prices need to be increased in capital. Thus, the success of the take-off line with the existing formula, and the scenario depends crucially on maintaining formula re-examined in the context of investor confidence. Prudent policy is to current over-capacity in generation and contain domestic demand-consumption and the prospective growth of private power. construction-so that growth in consumer goods and intermediates imports slows in order (ii) Reduce public spending o n to accommodate higher capital goods imports. telecommunication and power generation Failure to slow nonoil import growth in this where the private sector is playing a way could lead to a much wider current larger role. Also, power generation account deficit than projected below. One capacity is excessive (Chapter 2). In lesson from Mexico is that sooner or later general, public enterprises can finance confidence falters in countries with large, more spending by mobilizing more increasing current account deficits. revenue. The management of public/private interactions and 1.71 The task for macroeconomic policy is adjustments in the development budget to minimize the risks of overheating, and the will become increasingly important as likelihood of a fall in confidence. Briefly, this Repelita Vi draws to a close. means offsetting private sector investment demand by raising saving. This will reduce (iii) Raise forestry fees (IHH), improve pressures on inflation and the current account collections and bring reforestation levies deficit. A principal focus of the effort to on-Budget to improve transparency. increase saving is tighter fiscal policy. Tight monetary policy is also needed. (iv) Carry out decentralization by transferring personnel and functions to the regions, 1.72 Fiscal policy is the most effective not by increasing staff. instrument at the Government's disposal to raise saving. Although the development of the (v) Raise property assessments and property financial system, including the pension system, tax rates. Higher taxes on property A Macroeconomic Framework for Reducing Risk 23 would help to further contain international rates and strict enforcement of construction demand and support prudential regulations on banks. Monetary decentralization. Similarly, the motor policy could be strengthened by raising reserve vehicles tax could be raised and re- requirements and by giving the market a structured as a means to cover road greater role in exchange rate determination maintenance costs. (Box 1.3) by further widening the intervention band. This would make it possible to pursue a (vi) Slow the growth of overall personnel more independent, anti-inflationary monetary spending (to below projected nominal policy. GDP growth). F. Projections and Foreign Assistance (vii) Develop better sources of non-tax revenues, fees for services and user 1.76 Indonesia is projected to benefit from charges. an investment-led expansion in the next 2-3 years, supported by tighter fiscal policy 1.74 Another policy that would enhance (Table 1.10). The resulting upgrading and confidence and reduce risks would be for the structural transformation of the economy are Ministry of Finance to announce an ambitious projected to boost GDP growth to 8-8.2% in the program to reduce public external debt using medium-term. The main source of growth will fiscal surpluses and the proceeds of remain the nonoil, non-agricultural sector. privatization. Indonesia remains highly Agriculture, which still accounts for 15% of indebted externally; the debt associated with GDP, would expand more slowly, while the investment projects will make it more so. oil/LNG sector would be essentially flat. Prudent policy would be to create room for private external borrowing by prepaying public 1.77 Tighter fiscal and monetary policy and external debt. Setting an ambitious target for continued prudent debt management will be reducing Government external debt to be met desirable to reduce the risks of overheating over the next three to five years, accompanied from rapid, private sector-led growth. Tighter by a line item in the Budget, would have a fiscal policy could be brought about efficiently powerful impact on market sentiment. To be and equitably by raising petroleum, power, and credible such a program would require both other public enterprise prices, raising fees tighter fiscal policy and implementation of a (especially IHH), raising property taxes, and transparent, rules-based framework for reducing personnel spending, and public privatizing public enterprises such as elaborated spending on telecoms and power where the in Chapter 2. Public surpluses also could be private sector is playing a greater role, as used to cover unfunded liabilities such as civil noted above. Tighter monetary policy would service pensions. entail prudent expansion of Bank Indonesia's domestic credit and tracking of international 1.75 As discussed earlier, monetary policy interest rates, so as to achieve a reasonable has limitations in Indonesia. Nevertheless, increase in official reserves. Prudent debt Bank Indonesia is expected to carry out management will entail continuing to limit counter-cyclical monetary policy and, indeed, public and publicly-related external borrowing, may have to take a major role. Tight monetary and use of fiscal surpluses and privatization policy means restrained targets for Bank proceeds to prepay public external debt. Indonesia's domestic credit growth, adjusting interest rates on Bank Indonesia's monetary 1.78 Even with this policies, the investment- instruments in line with movements in led expansion is projected worsen the nonoil 24 Chapter I Table 1.10 Summary of the Medium-Term Outlook Estimated Projected 1995 1996 1997 1998 1999 Average real growth rates (%) GDP 8.1 7.6 8.2 8.2 8.0 Nonoil GDP 9.0 8.3 9.3 8.9 8.6 Gross Fixed Investment 14.0 15.0 13.0 8.0 7.0 Prices Oil ($/bbl, average OPEC price) 15.6 16.1 16.6 17.1 17.4 Nonoil Termis of Trade (1983/84=100) 103.7 103.5 103.1 102.9 102.7 Balance of Payments a ($ billions) Merchandise Exports (fob) 46.0 51.7 58.3 67.0 77.6 Nonoil 36.3 42.3 49.5 58.0 68.5 Merchandise Imports (cif) -44.5 -51.5 -59.6 -68.6 -78.5 Nonoil -40.6 47.5 -55.6 -64.5 -74.2 Interest Payments (MLT) 4.7 -4.9 -5.0 -5.1 -5.3 Current Account Balance -6.9 -8.8 -10.7 -11.7 -11.4 Public MLT Loans (net) -0.6 -0.1 -1.3 -1.5 -1.4 Direct Foreign Investment 5.7 8.4 9.1 10.5 10.0 Other Capital (net) 4.9 4.4 5.2 5.4 4.5 Use of Foreign Assets (- = increase) -3.1 -3.6 -2.3 -2.7 -1.7 Memo Items: a Net Official Reserves ($ billions) 16.0 18.5 21.4 24.6 28.1 months of imports 4.3 4.3 4.3 4.3 4.3 Current Account/GDP (%) -3.4 -3.9 4.3 -4.3 -3.8 Source: Central Bureau of Statistics, Bank Indonesia and World Bank staff estimates. I Fiscal year. trade account. The merchandise trade balance international commodity prices is an on-going is projected to swing into deficit in 1997/98, concern. International oil prices were at their and widen through 1998/99, before narrowing highest levels in several years in early 1996. as nonoil import growth moderates and nonoil If prices remain high, there is the possibility of export growth picks up. The current account significant relief for the widening current deficit would increase to $8.8 billion in account deficit. Cyclical fluctuations in nonoil 1996/97 and peak at $11.7 billion in 1998/99. commodity prices also are a possible problem; In relation to GDP, the peak of 4.3% would commodity-based exports represent 40% of occur in 1997/98 and 1998/99, before declining Indonesia's nonoil exports. In addition, there to 3.8% in 1999/00. remains the possibility of a renewed decline in the value of the dollar against the yen, which 1.79 In the absence of strong policy would substantially increase Indonesia's debt adjustments and reduced construction and servicing costs (World Bank 1995a). consumption demand, the deficit could widen by significantly more in 1996/97. Sustaining 1.81 There also is the vulnerability from investor confidence and strong economic increased reliance on private external capital to growth with such a large deficit could be finance the current account deficit (see below). complicated. Greater dependence on increasingly volatile private capital highlights the need for 1.80 As always, these projections are subject macroeconomic policies to reduce risk, as to several important risks. Volatility in discussed above. Provided private sector A Macroeconomic Framework for Reducing Risk 25 confidence can be maintained, the projected projected to rise by two-thirds during 1994-98 current account deficit would be financed in (Table 1.11). Projected rapid growth of large part by foreign direct investment, private debt leads to a worsening in the private portfolio investment, private short-term and debt-to-GNP ratio. But projected strong nonoil medium- and long-term loans. It will be export growth keeps the private debt-to-exports important that foreign direct investment results ratio from increasing. in sound projects that pay for themselves through internationally competitive exports or 1.83 Saving-investment balances summarize by efficiently displacing imports. the macroeconomic developments (Table 1.12). The widening current account deficit-required 1.82 Projected rapid growth of GDP and net inflows-arose from a considerable increase nonoil export growth and the prepayment of in the private investment rate and a modest public external debt would lead to significant decline in the private saving rate. The improvements in indicators of aggregate projection is for a further increase in private external indebtedness (Table 1.11). investment. Policies to contain consumption Prepayment of public external debt is projected demand are projected to raise the private to lead to negative net disbursements of saving rate slightly. Central Government $1-s1.5 billion in 1997/98-1999/2000 investment is projected to decline slightly in (Table 1.10) and a decline in the stock of relation to GDP. Most importantly, significant public external debt (Table 1.11). Indicators of fiscal tightening is seen in the projected public external indebtedness improve increase in public saving, which generates a significantly. Prepayment of public external 2% of GDP increase in the surplus of public debt is needed to limit the growth of debt in saving over public investment and contains the light of higher private borrowing, which is current account deficit. Table 1.11 Medium- and Long-Term (MLT) Debt Indicators 1995 1998 1986 1990 1994 Estimated Projected MLT Debt Outstanding and Disbursed (US$ bn.) 39.4 58.3 79.4 82.2 87.2 Public 35.6 48.1 63.8 64.3 61.5 Private 3.8 10.2 15.6 17.9 25.7 Debt Oust. & Disb. (MLT DOD)/GNP (%) 51.9 53.5 43.4 42.6 34.0 Public 47.0 44.1 34.2 33.2 24.0 Private 5.0 9.4 9.2 9.4 10.0 MLT DOD/Exportsa(%) 257:3 184.3 151.1 151.8 110.7 Public 232.6 151.9 119.0 118.3 78.1 Private 24.7 32.4 32.1 33.5 32.6 MLT Debt Service/Exports a (%) 41.6 29.2 28.2 29.0 22.6 Public 35.2 23.4 19.2 19.0 12.9 Private 6.4 5.8 8.9 10.1 9.7 MLT Interest/Exports a (%) 17.1 10.8 8.9 8.8 6.5 Public 15.0 8.9 7.0 6.6 4.2 Private 2.1 1.9 1.9 2.2 2.3 Source: Bank Indonesia and World Bank staff estimates. a Denominator is exports of goods and services. 26 Chapter I Table 1.12 Saving-Investment Balances, the structure of external finance, which reduces 1994-1997 a vulnerability to the risk of sudden shifts in (percent of GDP at current prices) volatile private capital flows. Third, the availability of adequate assistance ensures a 1994 1995 1996 1997 smooth transition to private financing. For these reasons, a level of commitments from the Gross investment 30.3 31.3 33.0 34.5 CIruhysmlrt atya' ee ol Gross national saving 28.4 28.2 29.1 30.2 cGi roughly similar to last year's level would Saving-investment gap b -1.9 -3.1 -3.8 A4.3 be very supportive. Central government 1.86 To make the best use of the available Gross investment 9.7 9.5 9.5 9.4 donor assistance, Indonesia needs to improve Public saving 9.9 10.0 11.0 11.9 the effectiveness of government spending in Saving-investment gap 0.3 0.5 1.5 2.5 key areas. For instance, public investment could be significantly reduced for power Private Sector and Public Enterprises generation and telecommunications, in line with Gross investment 20.6 21.8 23.5 25.1 the new emphasis on privatization at PT Saving 18.5 18.2 18.2 18.3 Telkom and PLN. Project implementation Saving-investment gap -2.2 -3.6 -5.3 -6.8 could be speeded up. Priority areas for public SraIndonesia spending and donor support, as recognized by Source: Central Bureau of Statistics, Bank bothesi th oos n noeinsdso h andWord BnkStaf etimte. both the donors' and Indonesian sides of the anld World Bank Staff estimates. a All data converted to calendar-year basis. July 1995 CGI Meeting, are human resource b The (negative of the) current account of the balance development (especially health, education and of payments, expressed on a calendar year basis. skills development), poverty alleviation, environmental protection, and infrastructure 1.84 Indonesia's projected external financing that is not amenable to private sector needs are based on a scenario in which investment. macroeconomic policy limits the current account deficit to below $9 billion in 1996/97 1.87 As mentioned above Indonesia is (Table 1.13). Total financing needs would be vulnerable to risks. The authorities are aware higher than in 1995/96 because of the higher of the risks in the outlook, and they continue current account deficit and the need to increase to manage the economy to reduce them. To international reserves to maintain a prudent cite some recent examples: prepayment of level of import cover. Higher private debt and foreign debt with receipts from privatization; equity flows are projected to finance much of shifting the currency composition of official the higher 1996/97 deficit. assets to match more closely the composition of official debt; preservation of external 1.85 Official assistance will continue to be confidence during the Mexico crisis; very necessary in these scenario. First, it progressive widening of the exchange rate ensures adequate financing for areas of bands to absorb shocks; and containment to development that are not attractive to private date of collateral danage from a weak banking investors. Examples are human resource sector. The beginning of a period of private development and public infrastructure in areas investment-led growth raises additional risks, off Java and while the framework for private notably increased reliance on volatile private participation is being improved. Second, the external capital flows. Macroeconomic policies better terms and the risk diversification to reduce risk, as discussed above in section E, associated with official assistance improves are appropriate for these times. A Macroeconomic Framework for Reducing Risk 27 Table 1.13 Sources and Uses of External Flnancing (US$ billions) Actual Proiected 1994/95 1995/96 1996/97 1997/98 1998/99 Uses of Financing 11.7 21.S 23.9 25.0 27.0 Current account deficit 3.5 6.9 8.8 10.7 11.7 (of which, MLT interest payments) (4.3) (4.7) (4.9) (5.0) (5.1) Principal repayments 9.6 11.5 11.5 12.0 12.6 Increase in net foreign assets -1.4 3.1 3.6 2.3 2.7 Source of Financin2 11.7 21,5 23.9 25.0 27.0 Direct foreign investment (net) 2.5 5.7 8.4 9.1 10.5 Private MLT loans 4.9 6.6 6.9 8.1 8.7 Other (net) -2.1 2.5 2.1 2.3 2.5 Public MLT loans 6.4 6.7 6.5 5.5 5.3 CGI assistance ' (3.8) (4.1) (3.9) (3.9) (3.9) Other, incl. non-concessional (2.6) (2.6) (2.6) (1.6) (1.4) Source: Bank Indonesia and World Bank Staff estimates. a Excludes grants, which are included in transfers in the current account, following standard methodology. 28 Chapter 1 Technical Annex to Chapter 1: Revision of GDP Growth for 1988-93 lA. 1 The average GDP growth rate for methodology, GDP growth in many sub-sectors Repelita v (1988-93) was 8.3% per year is calculated by using indicators of physical according to the Central Bureau of Statistics's output weighted by value added. (BPS's) new, 1993 based national accounts. Correspondingly, revisions of GDP typically This compares with an estimated 6.9% per produce higher growth estimnates because of i) year using the 1983 based national accounts. larger weights for faster growing sectors; and Reflecting the revised, higher growth rate in ii) higher growth in some sectors. Repelita v, President Soeharto, in his August 17 Independence Day speech raised the target IA.3 In Indonesia, the higher GDP growth growth rate for Repelita vi from 6.2% per year rate in 1988-93 in the revised national accounts to 7.1% per year. is largely due to higher growth rates in secondary and tertiary sectors. The weights 1A.2 Indonesia,andothercountries,typically used to calculate GDP growth from 1988 to revise their GDP accounts every 10 years or so. 1993 (the 1988 sectoral shares of GDP) are very The revisions are done to take into account similar in the two series (Annex Table 1). new data, new products and technological Correspondingly, alternative calculations of change, which may change the ratio of the GDP using the 1983 and 1993 base sectoral sectoral value added (GDP) to the total value of growth rates with the "opposite", 1993 and sectoral output. In addition, up-to-date data on 1983 weights, respectively, are very similar to value added in each sector are needed to the actual 1983 and 1993 base GDP estimates. compute annual growth rates more accurately. (Annex Table 1, Memo item.) Following the national accounts standard Annex Table 1. Comparison of 1993 and 1983 base National Accounts Comparison of Weights Comparison of GDP and Secaoral (share of real GDP in 1988) Growth 1988-1993 Sector 1983 prices 1993 prices 1983 base 1993 base Agriculture 0.21 0.22 3.0 3.7 Mining (incl. Pet.) 0.16 0.10 4.0 6.3 Manufacturing 0.18 0.20 10.2 11.1 Electricity, Gas & Water 0.01 0.01 13.2 12.2 Construction 0.05 0.05 11.9 14.4 Trade, Hotel & Restaurant 0.16 0.15 7.9 10.2 Transport & Communications 0.05 0.07 9.8 8.8 Banking & Finance 0.04 0.03 13.5 14.4 Real Estate 0.03 0.03 4.3 10.4 Other Services 0.12 0.14 4.6 4.7 Total 1.00 1.00 6.9 8.3 Memo item: GDP Growth 6.9 a 8.1 b Source: Biro Pusat Statistik a 1988 weights using 1993 base accounts, 1983 base sectoral growth rates. b 1988 weights using 1983 base accounts, 1993 base sectoral growth rates. A Macroeconomic Framework for Reducing Risk 29 1A.4 The higher sectoral growth rates in the in real consumption spending in 1994 and 1993 based accounts (and the 9% higher 1995. Concerning other components of nominal GDP in 1993) mainly reflect improved expenditures, Investment also was revised sectoral estimates of output by BPS, especially upward, by around 10%; the Change in better data on output in fast growing products Inventories (which includes the residual and sectors. Examples include products such between the expenditure and output sides of the as: cashews in Agriculture; leasing, venture accounts) was revised downwards. Other capital, factoring and money changers in components were roughly unchanged. Services; private short courses in Education; and, private telecoms and power generation in 1A.6 The revisions to expenditure suggest Utilities. It also reflects, to a smaller degree, that the Indonesian economy is more efficient new estimates of sectoral value added in the than previously estimated. The revised latest (1990) Input-Output Table (up-dated to estimates of growth are much higher, while 1993). investment is only slightly higher. Technically, this is seen in the widely-used Incremental IA.5 On the expenditure side of the National Capital Output Ratio (ICOR)-the investment Accounts, Private Consumption was revised associated with an extra unit of output that is upwards by a large amount-by an essentially often used as an indicator of the efficiency of constant percentage adjustment of 16% to each investment. The smaller the ICOR, the more year starting in 1990. Nonetheless, this efficient investment macroeconomically. The revision does not appear sufficient to resolve ICOR (calculated as the ratio of investment to fully the likely underestimate of this component GDP divided by the growth rate of GDP, all in of expenditure that results from use of sample constant prices) averaged 4.0 from 1989-93 surveys. In particular, estimated growth rates using the old accounts, but 3.2 using the new, (of 5.8% and 6.5%) seem to understate the rise re-based accounts (Annex Table 2). Annex Table 2. Rebased accounts suggest higher investment efficiency 1989 1990 1991 1992 1993 1994 Constant (1993) price GDP growth(%) 9.1 9.0 8.9 7.2 7.3 7.5 Gross Fixed Inv. 24.8 26.4 27.4 26.4 26.3 27.6 (% of real GDP) iCoR93 ' 2.7 2.9 3.1 3.7 3.6 3.7 Constant (1983) price GDP growth (%) 7.5 7.2 7.0 6.5 6.5 6.8 Gross Fixed Inv. 2 26.6 28.4 28.3 27.9 27.7 ... (% of real GDP) 1COR83 2 3.5 3.9 4.0 4.3 4.3 ... Source: Biro Pusat Statistik and World Bank Staff estimates. 1993 Base National Accounts 2 1983 Base National Accounts 30 Chapter 1 Endnotes 1. This compound growth is higher than the rate reported by the Central Statistical Office, Biro Pusat Statistik, which is the sum of monthly inflation rates, ignoring compounding. 2. As mentioned in previous Bank reports, the levels of earlier years may be inflated by fraud associated with a subsidized export financing scheme (WESEL EKSPOR), which was in place until May 1993. 3. Marine propulsion engines, turbo jets, laboratory equipment, machinery parts, centrifuges, telephone sets and machinery for the pulp, textile and rubber industries recorded large increases. 4. Hong Kong recorded a major expansion, mainly because of one large project (a $3.5 billion ethylene plant) in 1994. Korea and Australia expanded significantly in 1994 on the basis of a small number of plants. In the case of Korea, there was one steel mill, valued at $1.2 billion in 1994; for Australia, two petrochemical projects (of $1.6 billion and $1.8 billion, respectively) in 1995. 5. See the footnotes to Table 1.6. The PMF/World Bank presentation mainly differs from the Govermment's (GoI's) in three respects: i) certain development expenditures (e.g., military spending, fertilizer subsidies, and estimated maintenance expenditures) in the GOI presentation are classified as current expenditures on an IMF/World Bank basis; ii) foreign borrowings, which are a revenue item in the GoI format, are treated as foreign financing on an IMF/World Bank basis; and iii) amortization payments, which are classified as current expenditure by GoI, are treated as negative external financing by the IMF and World Bank. 6. The Ministry of Finance subsequently announced higher indirect taxes on tobacco and alcohol, effective I May, which could help achieve the Budget's high target for excises. 7. At that time the authorities also distinguished between the intervention band-the new Rp66 band-and a conversion band, which was defined as the old Rp44 band. The conversion band is used for legally required official transactions between the Government and Bank Indonesia. A larger buy/sell spread for these transactions would be considered a multiple currency practice under the IMF Articles. 8. Measures of the real effective exchange rate are sensitive to the choice of country weights and price indexes, for example, the index of consumer prices, wholesale prices or unit labor costs. The IMF measure pictured in Figure 1.8 uses trade weights (including an allowance for third country effects), and the consumer price index. Japan has a weight of 37% (reflecting the large volume of oil & gas exports to Japan as well as imports from Japan), European countries 25 %, the USA 13 %, ASEAN countries 12 %, North Asia ex-Japan 7%, and China, Canada and Australia 2% each. Because of the high weight for Japan, movements in the dollar-yen exchange rate have a strong impact on the real effective exchange rate. A depreciation of the dollar/yen exchange rate translates automatically into a real effective depreciation of the rupiah. An index calculated with a smaller weight for Japan and a correspondingly larger one for the USA would show a loss of competitiveness since the early 1990s. 9. SBIS outstanding increased somewhat in the fourth quarter offsetting the increase in liquidity credits on reserve money. 10. Promnissory notes can only be issued as collateral against bank loans and finance companies can only take equity positions in other financial sector companies (which places them on an equal footing with banks). In addition, total capital participation of a finance company must not exceed its not worth, and a finance company may not take up more than 25 % of the equity of that company. Increasing Transparency and Competition 31 2 INCREASING TRANSPARENCY AND COMPETITION 2.1 The term "quality of growth" is low capital, and violations of the restrictions frequently used to characterize the relation on related group lending suggest that the between economic growth and the financial system sometimes benefits "insiders." environment. Economic growth that destroys These problems, in turn, raise the risk the environment is low quality growth. But the premium and domestic interest rates term "quality" also is used to characterize (Chapter 1). The listing of state enterprises growth that is in some sense fair. Economic and private provision of infrastructure hold out growth that overly favors one group, especially tremendous promise for efficiency gains. But if their gains do not come transparently or the processes for greater private participation competitively, also is sometimes considered lack transparency and competition. This low-quality growth. This chapter looks at five chapter looks at measures the Government dimensions of the quality of growth: land, could take to increase transparency and forestry and water management; environment; competition and raise the quality of growth. restrictions on international and domestic trade; the financial sector; and the process for A. Transparency in Land, Forestry and privatization/private infrastructure provision. Water Management The general conclusion is that the quality of growth could be improved significantly through 1. Land introduction of more transparency and competition in all these areas. 2.4 An absence of transparency makes the Indonesian land market function poorly and 2.2 The quality of growth is an issue in leads to conflicts and inequity. Inadequate land Indonesia today. Depletion of forests and land titling and non-transparent regulations are the and water conflicts are visible problems that roots of the problem. An overarching problem could be reduced by more transparent property with land markets in Indonesia is the low rate rights and better, more competitive pricing. of registration of land titles. Only about 22% Action on air and water pollution is needed to of the non-forest parcels have been registered. avoid sharp increases in health costs. In the provinces of West and East Java, where the total number of parcels is increasing rapidly 2.3 There also is a growing perception that with economic growth, the rate is only about although Indonesia's broad-based growth has 13% (and falling). Lack of registration raised most incomes substantially, some have reduces tenure security and ease of transfer. benefitted very substantially. Some public Non-transparent, cumbersome and unrealistic actions have reinforced this perception. legal/procedural requirements are a major Deregulation has led to rapid growth in GDP factor in the low rate of registration: current and labor demand by increasing competition. regulations basically require a landowner to But deregulation has by-passed the Bulog have written evidence tracing ownership back commodities and their distributors, to 1960. This problem is compounded by the petrochemicals, the automotive sector, forestry lack of a procedure to formalize rights of long- and the strategic industries. Financial term and locally accepted occupants, a concept deregulation has increased access to credit used in other countries to avoid lengthy (Harris et al, Goeltom). But large classified procedures, disputes and uncertainty of loans by the state banks to large borrowers, outcome with land registration. Institutional 32 Chapter 2 inefficiencies and insufficient human resources where environmental and other externalities in the responsible agency (the National Land exist. The law supports modern land market Agency or BPN) also contribute to problems in principles such as local participation, registration and transfer. The uncertainty decentralization of decision making and about the amount of time and cost for land information disclosure. However, regional acquisition dampens interest for investment. governments have had a difficult time trying to prepare these spatial plans, due to the lack of 2.5 In Indonesia, land markets are heavily implementing regulations, as well as their own regulated (with about 2,000 land-related laws problems of institutional capacity and financial and regulations identified by the World Bank) resources. and are subject to ad hoc government intervention. While prices of prime 2.8 The following actions would be reduce metropolitan real estate are high by these problems, and by improving property international standards, possession of a rights and la& management, allow more government permit can enable an investor to transparent, market forces to play a greater acquire land at considerably below-market role in allocating land: prices. Disputes have occurred when landowners feel that they were disadvantaged * Accelerate land registration to provide a in selling their land, or occupants feel they basis for well-functioning land markets. were unfairly compensated. The most benefit will be derived from registration in urban and urban periphery 2.6 The use of Government permits for areas, where land transactions are land acquisition (izin lokasi or location permit), frequent and the probabilities of conflict should be minimized, since they cloud are high. The Government has been transparency, reduce market efficiency and moving forward on this front, with disadvantage the poor (World Bank 1995a). support from a land administration project When such permits are issued, the developer cofinanced by the World Bank and the gets the exclusive right to purchase the land Government of Australia. Under the covered by the permit, which can result in a project, systematic registration, which land price as low as 25% of the fair market capitalizes on economies of scale and price. The permit also contributes to beneficiary participation by mobilizing inefficient, high-cost urban land markets by special adjudication/registration teams blocking out and freezing large tracts of land, door-to- door, will be implemented for the which constrains land supply. The issuance of first time in Indonesia. The new these permits appears to have increased approach was recently tested in Kabupaten substantially after the deregulation package of. Bogor with positive results. It is 1993. scheduled to be implemented in ten Java districts. The project also supports 2.7 The lack of effective implementation of review of land management policies, and the Law for Spatial Planning (Law No. improvement of land laws/regulations 24/1992) also creates problems of transparency (including the regulations for land and land management and is a drag on registration). decentralization efforts (Chapter 4). The law authorizes regional governments to prepare * Review land management policies, in their own spatial plans, called "Strategic particular the location permit. The Structural Plans," suited to local needs and location permit should be reviewed by conditions, and based on market principles, reconsidering the changes introduced in while allowing for restrictions on land use the October 1993 deregulation package, Increasing Transparency and Conmpetition 33 developing means to ensure that the limited to loss of concession, often after the AMDAL environmental assessment process damage is done. is followed, and exploring more equitable land acquisition options by drawing on 2.11 The low price of logs contributes to experience from other countries. An waste through in inefficient logging and inter-ministerial effort is underway to industry practices. Present rates of felling of improve the land permit system. The natural forests, mostly in the outer objective is a one-stop permit with islands-officially estimated at 30 million cubic greater coordination with local residents. metric meters annually but believed to be more than 40 million cubic meters annually far * Implement the Law for Spatial exceed the sustainable yield (22 million cubic Planning to increase transparency in land meters a year). Wasteful logging practices and use planning and support Indonesia's inefficient use of wood are pervasive. Because decentralization efforts, by making of this, forestry-based exports are expected to available to the regional governments fall off sharply in the next decade, while local implementing regulations, as well as communities that depend on natural forests assistance on technical aspects and experience further alienation. Bio-diversity resources. losses will accelerate. 2. Forestry 2.12 The low price of logs also reduces the attractiveness of developing industrial 2.9 Indonesia's forests have been estimated plantations of longer rotation hardwoods, and to be worth more than its proven oil reserves Government revenues. The effective subsidy (World Bank 1994a). Lack of transparency to domestic log processors, mainly plywood discourages the sustainable management of and paper and pulp processors, is estimated at these valuable forests. Prohibitively high about $2-$4 billion a year by the World Bank export taxes on logs reduce domestic log prices (the wide range is because of a wide range the below world market prices, effectively giving estimated size of logging operations). The plywood processors a large input subsidy. cartelized domestic plywood industry is Logging fees claw back only a small part of estimated to absorb some $750 million of this this effective subsidy. The market for logs and figure through excessive use of logs in their most important processed product, processing. This figure, in turn, is much plywood, is cartelized. Apkindo, the larger than the total revenues from forestry Indonesian Plywood Association, controls entry royalties (IHH) derived by the Government. to the industry. Forestry concessions are restricted to existing processors. Finally, all 2.13 Greater transparency in the plywood manufacturers are required to market management of Indonesia's forests would their exports through Apkindo. contribute toward sustainable logging, higher nonoil exports and higher government revenue. 2.10 Concessionaires have little interest or The following measures could be considered: incentive to regenerate the forest or maintain its overall condition. Forest concessions * Deregulate plywood. The main measures typically are granted for a 20 year period, are the elimination of prohibitive export which is shorter than the growth cycle for taxes on logs and of barriers to entry-the tropical hardwoods. Concessions are not requirements that forestry concessions transferable. The current low royalties may must be linked with processing plant not last. The penalty for over-exploitation is capacity and manufacturers must market all exports through Apkindo. The 34 Chapter 2 resulting increase in competition for logs measures that would increase the role of the would raise the efficiency of processors. private sector and local communities in But it would not ensure a sustainable sustainable forestry. Communities in Indonesia pace of logging. For that the living in or near forests are currently excluded Government needs to: from title to or any participation in forest management, and are not consulted before new * Raise royalty fees. Currently, total forestry projects are approved. Without a legal royalties are about $22 per cubic meter, claim to the land, local communities have a far below the estimated difference powerful incentive to deforest and use the site between world and domestic log prices for other purposes. (about $90). Actual collections appear to be far less. A strong case exists for 2.15 Greater community participation could raising fees to over $50 per cubic meter be encouraged by increasing the transfer of (to approximate the ratio of public to forestry royalty proceeds to provincial private revenues on oil), which would governments and, in order to give an incentive imply an increase of at least $30 in the to provincial governments to work with local stumpage fee (IHH). Even allowing for communities and concessionaires, linking a part some phasing-in, this should yield about of the transfer to protection of regenerating Rpl trillion more revenue in the short areas. Finally, interest in sustainable forest run. The fee could be further adjusted management would go up if communities through annual royalty review and/or linked to forest land were given title to forest bidding for raw material supply. land. As a precursor, local communities could be given a say in awarding concessions or * Improve monitoring of concessions. shares in concessions. The concession system relies on Government monitoring. But monitoring 3. Water strains administrative capacity. Greater involvement of the private sector could 2.16 More transparent management of help economize on administrative Indonesia's water resources, with greater capacity and provide effective monitoring reliance on market forces, will be needed to of concessionaires. Measures include: avoid potential conflicts in this area over this making a professional pre-logging increasingly scarce resource and maximize the inventory; use of performance bonds on efficiency of its use. Issues of water resource concessionaires to ensure sound management (both quantity and quality) will be regeneration practices; and improved increasingly important in the years inspection of all logging operations and ahead-especially on Java, with 60% of the regeneration areas (with actual inspection population, 70% of irrigated agriculture, and carried out by accredited firms). For 75% of industry. Resolving problems of example, the Government could mandate competing uses, including between surface and the new Ecolabelling Institute, an groundwater use in rapidly growing cities, are independent body, to oversee inspection. among the issues. 2.14 Modern forestry management is 2.17 In volume terms, water use in experiencing a paradigm shift away from a agriculture currently accounts for 98% of total focus on the supply of industrial wood and demand. Industrial and municipal requirements toward activities that involve local communities together account for only about 2%. However, in keeping their forest ecosystems sustainable. the consumption of water by households and Deregulation needs to be complemented by businesses will grow rapidly over the next two Increasing Transparency and Competition 35 decades. Accommodating this growth will B. Air, Water and Industrial Pollution' require a shift of water from agriculture to municipal and industrial use. This already is 2.22 Pollution problems are classic cases of becoming an issue in some parts of Java. market failure and nontransparency. When property rights are not well defined, pollution 2.18 The challenges of meeting the demand costs are not taken into account. Without for water in the dry season are complicated by strong public action, Indonesia faces the the growing volume of pollution from urban possibility of going through a long period of and industrial sources (section B.2). Many of sharply escalating pollution costs (Figures 2.1 the major rivers on Java are polluted with a and 2.2). combination of untreated human waste, uncollected municipal refuse, and largely Flgure 2.1 Pollution Prevention: Is There A uncontrolled effluents from industry-including Choloe? increasing amounts of toxic and hazardous waste. During the dry season, when river 8 A NoAc00n f flows are greatly reduced, pollution loads 6 . - Now hdu Only increase dramatically. s-x- EidWng Also 2.19 River basin management will be need to improve, to manage water quality and the 2 underlying conflicting demands for water. o | Many of the water companies are too small to low 1995 2000 2005 2010 do this effectively. Souros: World Bank 190t 2.20 Better pricing could help in the management of scarce water resources. Low FIgure 2.2 QuantIfying the Tradle-M: prices contribute to excessive use by some Costs and Beneft of Pollution Control groups (chiefly farmers and middle and upper loo class urban householders), while others H |thSwAngs (including urban dwellers and the poor) lack AOateb bme Co / access and often must pay high prices to 600 H-. H ang:9.3 bin vendors. Increased irrigation fees are needed 400: to reduce the use of irrigation water, freeing it *cas up for use in the growing cities. At the same 2 time, pricing reform is needed in the cities. 0 Low charges for groundwater are leading to 19" 2000 2005 2010 rapid exhaustion of deep aquifers; low charges Source: World Bank 101t on piped water preclude increased access and the maintenance of adequate service levels. 2.23 Problems of air and water quality are 2.21 In aditothepicnbecoming severe. By the year 2020, one-half of 2.21 In addition to the pricing r~eforms, Indonesias~ population will be urban residents significant investments in improved water Indonem Ihin in be Unless supply, sanitation and drainage are needed in (68% of them living in Javg. cities). Unless Indone,sia'snitaies. andedrinageee inveeeinet measures are taken to deal with the growing Indonesia's cities. Meeting these investment threat to air and water quality, future health needs would be facilitated by higher water costs could be large. In Jakarta, deaths due to prices, as well as by the use of public respiratory illnesses already are twice the revenues. national average, and annual air pollution costs 36 Chapter 2 are estimated to be about $0.5 billion. The lead or low-lead gasoline, but it is being adverse effects on peoples' health due to unsafe done slowly, and prices are higher than water may be even higher. Poor water quality leaded gasoline. The Government could often is the result of inadequate sanitation accelerate the process by undertaking a facilities and industrial waste. complete phase-out within say 3 to 4 years in major urban centers, as has been 2.24 Development and effective done in Thailand (program announced in implementation of environmental policies and 1992, completed in October 1995), and is appropriate technology could help Indonesia being done in Malaysia, the Philippines, avoid a long period of rising pollution and and Mexico. Adequate supplies of low- health costs. Quickening and improving the lead and unleaded gasoline can be process would yield enormous potential achieved by imports of unleaded gasoline benefits. The benefits to the poor would be and non-leaded additives, Pertamina especially large, since they suffer refinery conversions, and new private disproportionately from environmental sector refineries. Raising the cost of degradation. leaded gasoline above unleaded gasoline could be an initial key to its use. 1. Improving Air Quality - Set Higher Emission Standards, and/or 2.25 The main health threatening air Phase-Out Two Stroke Motorcycles. pollutants in Indonesias cities are suspended Two-stroke engines are a major source of particulate matter (sPM), lead, carbon pollutants. Higher emission standards, monoxide, sulfur and nitrogen oxides and and/or a phase-out program should be carcinogenic hydrocarbons (HC). Motor agreed with manufacturers. vehicles emissions are the biggest source of this threat, contributing some 40-60% of SPM, * Reduce Diesel Emissions. Diesel- 90-100% of lead, 89% of HC and 30-90% of powered vehicles represent a difficult remaining air pollutants. Rapid growth in the problem, since they are a major source of number of motor vehicles (over 20% a year), SPMS, but are more fuel-efficient and increasingly congested traffic, and longer cheaper than gasoline vehicles. The commutes and rising daily exposure are all technology to control diesel emissions also leading to sharply accelerating health costs. is more expensive and difficult. The health costs in Jakarta from SPM and lead However, alternative fuels such as are projected to double to $1 billion a year in compressed natural gas should be five years. The poor are most at risk. The introduced for all public buses operating average blood-lead levels of bemo drivers, in major metropolitan areas, such as street-vendors, and slum-dwellers are about 2-5 Jakarta. times higher than farmers in Jakartas fringes, with devastating long-term health 2.27 The above technical/regulatory options consequences. for vehicles and fuels would produce a major improvement in air quality. Additional 2.26 Managing and reducing this threat is an measures to manage both the demand and urgent task. Immediate and practical options supply of urban transport more efficiently also are available, and need to be exploited are need&: decisively: Higher Fuel Prices. Fuel prices were * Phase Out Leaded Gasoline. The raised two years ago but have not been Government already has introduced no- adjusted since. Existing prices do not Increasing Transparency and Competition 37 cover the externalities of pollution. and making it easier to transfer from one Gasoline and diesel prices should be transport mode to another (for example adjusted to international levels and then from train to bus) would help. adjusted upwards over time to include Congestion pricing could provide some of pollution costs. the revenues for traffic management improvements. * Improved Public Transport. Public transportation can be unpleasant. It will 2. Improving Water Quality be difficult to get people to abandon their cars if their public transport alternative is 2.28 Water pollution is a leading cause of hanging half outside an over-crowded bus. death and disease in Indonesia. It mainly Measures to ease congestion need to go originates from the fecal contamination of hand in hand with improvements in the groundwater due to inadequate sanitation quality of public transportation or they facilities, and inadequate supplies of safe piped will be perceived as unfair. Competition water. The basic technologies of water supply could be expanded above the low end, for and sanitation systems are well established. example by allowing luxury busses to ply Reforms are needed in service mix and cost more routes. The authorities also could recovery, water conservation, demand use this as an opportunity to phase out management and regulatory and delivery dirty diesel fuel in favor of clean institutions, together with stepped-up public compressed natural gas. investments. While people assign a high priority to safe water, less urgency is normally 3 Congestion Pricing. More vehicles mean attached to the urban problem of treatment and clogged roads and heightened pollution disposal of household waste. However, the loads. Studies suggest that congestion latter is the major contributor to illness and costs alone range from Rp700 per hour disease-causing contaminants. Some of the for a car or light truck, to Rp4700 per critical issues in improving water quality are: hour for a bus, with a weighted average congestion cost of about RplOOO per hour * Expand Piped Water Use. The first per vehicle. Including the pollution load priority is reducing "unaccounted-for" effects could easily double this figure. water losses. Some 35-40% of piped Such congestion costs should be priced, water is lost. Reducing these losses by levying equivalent charges, especially requires major institutional improvements at peak-times. Area-licensing schemes as in the operational efficiency of water operated successfully in Singapore could companies. They need to be run like be introduced in the Central Business businesses but their social Districts of major cities through color- mission-getting cheap water to poor coded monthly or daily passes. Area- people-gets in the way (section E). licensing may be a ways off. But higher Many small water companies need to be parking charges could be introduced consolidated. Concessions to private quickly in inner city areas to reduce water companies to deliver services are an vehicle use. option that municipalities in other countries have used successfully. (For * Better Traffic Management. Substantial concessions to fulfill their potential of room exists for better traffic management. delivering clean water at a reasonable Bus lanes, traffic signals and price it would be better if they were intersections, one-way streets, improved awarded competitively. The Jakarta city pedestrian and non-motorized provisions, government recently signed, without 38 Chapter 2 competitive tender, a memorandum of (iii) Increase public investment in "trunk" understanding on management of Jakarta's sewerage services to reduce gradually the water with two well-connected firms investment backlog. (section E).) Improved river basin management would improve quality. On 3. Reducing Industrial Pollution the demand side, households would be more prone to connect to the system if 2.29 High levels of hazardous waste and pricing reforms reduced the burden of up- toxic matters are a by-product of rapid front connection fees. This fee could industrial growth, threatening already covered by higher tariff levels- dwindling sources of natural water, causing consumers already are willing to and do death and disease, and putting downstream pay much higher prices for access to activities at risk. In Surabaya, in 1988 water. irrigation water had to be released to "flush" a river that was so badly polluted by domestic * Improve Sanitation Facilities. While and industrial waster that the municipal water many areas (some 60%) of most treatment plant could not handle the load, and Indonesian cities can continue to rely on all local industry was closed for about two private on-site sanitation solutions (pit weeks. Suits are being filed against pulp and latrines and septic tanks), the rest-the paper companies for polluting rivers, in one densely populated inner areas-will need case so badly that the processing plant of the to be connected to a sewerage system, local drinking water company had to cease with adequate treatment facilities. The operations. Jakarta Bay fish samples already urgency of sewerage systems is have unsafe levels of mercury, ranging from 7 increasing. In part this is because of to 18 ppb, compared to 6 ppb World Health inadequate investments and planning. In Organization limit for human consumption. A part, it is the high price. Only a small combination of industrial pollution and severe part of the total population can afford full drought damaged almost 10% of Indonesiak sewerage services, which range from shrimp ponds in 1994, causing losses estimated $300-$1000 per household. Three at $0.5 billion. solutions need to be pursued simultaneously: 2.30 Rapid industrialization and the change in industrial structure will cause a sharp rise in (i) Require private developers in higher- industrial and hazardous waste. Air and water income and commercial areas to provide pollution intensities are especially high for piped sewers. certain industries such as cement, wood- processing, glass and pulp and paper. (ii) In lower-income, high density areas, Pollution loads also vary by industry: pulp and where on-site sanitation solutions paper, agriculture processing and basic increasingly are unsafe, experiment with chemicals contribute the most toxic wastes; alternative technologies. For example, wood processing and cement contribute the less costly small-bore sewers, where most to particulate matter; while biological solids are collected in an on-site tank oxygen demand (BoD) is highest for the food before they reach the sewer, and systems products, pulp and paper, and basic chemical in which small groups of houses develop industries. In all, 9 sub-sectors account for at (and pay for both construction and least 75% of the industrial release of all three maintenance of) a joint system in which key indicator pollutants. As discussed in pipes are run from yard to yard before Chapter 1, manufacturing is projected to grow they connect to the street sewer. rapidly in the near to medium term. Future Increasing Transparency and Competition 39 pollution loads are expected to increase private businesses to adopt best practice dramatically, by about 6-9 times 1990 levels technologies and investments in pollution for particulates, BOD and toxic waste by 2010. control through a mix of regulatory and Geographically, industrial pollution loads are incentive approaches. expected to be highly concentrated, with a dozen or so kabupatens accounting for much of 2.33 Indonesia has made significant progress the total load in Java for example. Still, these in its industrial pollution control regime. locations also are expected to hold large Following the basic law on environmental populations, and the health costs of unabated protection, the Ministry of the Environment industrial pollution are expected to be very established the AMDAL program for high. environmental impact assessments, standards for ambient air and water quality, and the 2.31 Fortunately, Indonesia can take PROKASIH clean rivers program. Pollution measures to reduce the amounts of industrial control got an added boost from the formation pollution and their associated health costs. of BAPEDAL in 1990. Since then, progress has New technology can reduce the growth of been made in setting standards for the pollution and the associated health costs; new management of industrial waste (Box 2.1). industries start cleaner; older and dirtier industries can be replaced by more efficient 2.34 Unfortunately, this progress has met ones; and labor can shift from declining with legal, institutional and technical barriers, industries to fast-growing ones. limiting the effectiveness of industrial pollution controls. The main issues are: 2.32 Development of policies and an effective implementation framework to deal * Ensure Better Compliance with with industrial pollution should focus on Standards. There must be a credible prevention rather than more expensive clean-up penalty for continued pollution above later on. In practice this means: (i) focusing permitted levels. Enforcement of the on regulatory standards for new plants and 1982 law has been too lenient to provide application of cleaner technology; a real deterrent. One of the greatest (ii) concentrating on the most polluting difficulties in enforcing regulations is the industries and locations; and (iii) encouraging difficulty of pursuing cases through the court system. There is a need to assess Box 2.1 Chronology of environmental protection measures Bsic Law on Environment Air & Water Ou1y Effluent Prml New Efhnt & Stondws Emjldoi Sutndud AMDAL PROKA Reed ADAL 4S 2 is i4 low 11M 1914 1 a 2 i ~ ~~t Tr Atmoapheo BAPEDAL EMU" HNidouis & Embisons Sbmndds Stbndsd Toxic Wasb Reulaion 40 Chapter 2 administrative penalties without needing as PROPER), which is a published rating access to the court system. Alternative of industrial facilities according to their dispute settlement mechanisms involving performance in abating industrial pollution local communities can be valuable. For (Box 2.2). example, in a case in Semarang, Central Java, BAPEDAL facilitated direct * Monitor Reliably. There must be negotiations between villagers and firms reliable monitoring of industrial pollution. for compensation and clean-up. Expanded Trained personnel with the right public information also can be a way of equipment, skills and legal authority to inducing firms to pollute less. BAPEDAL collect and analyze samples regularly are is moving ahead rapidly with its Business needed at the provincial level and below. Performance Rating system (also known Box 2.2 Reputational incentives as an enforcement mechanism: The PROPER systemn Enforcement of regulations is difficult in many countries because it uses scarce administrative resources. In Indonesia, where the budget of the National Pollution Control Agency (BAPEDAL) is limited and pollution loads are increasing with rapid industrial growth, the Environmental Ministry decided that a large-scale public disclosure program could help reduce pollution. The essence of the approach is that environmental reputation matters for firms through the reactions of customers, suppliers, stockholders and local residents. The use of reputational incentives can lead to significant pollution abatement by polluters in sectors, communities or markets where reputation has high value. In June 1995 Indonesia launched a program for public disclosure of polluters' environmental performance. Firms would be re-rated in subsequent years to give them an ongoing incentive to reduce pollution. This initiative, called the Program for Pollution Control, Evaluation and Rating (PROPER) iS expected to promote compliance with existing regulations and reward firms whose performance exceeds regulatory standards. Under PROPER, polluters are assigned one of five "color" ratings ranging from gold for excellent performance to black for very poor performance. The first phase of PROPER has focused on 187 polluting facilities in Java, Sumatra and Kalimantan. It focuses on water pollution because of the existence of a database. In subsequent phases PROPER will be expanded to cover air, water and hazardous solid pollution from all medium/large industrial sources in Indonesia. PROPER'S implementation is based on the idea that the public will be skeptical of environmental performance ratings from a government agency that is committed to rapid industrial development. Thus, PROPER embodies a very conservative rating system. A polluter must be judged adequate in every environmental dimension to receive an adequate rating. Good or excellent performance in several dimensions are not allowed to compensate for inadequate performance in even one. The PROPER program is new and obviously its success will depend on the importance of reputational incentives among Indonesian manufacturing firms. Moreover it is not entirely trouble-free. Like all numerical rating systems, PROPER'S is often uncertain and expert judgement as well as measurement is likely to be important in its implementation. However, its main attractiveness over conventional enforcement, which relies on time-consuming legal procedures, are its lower cost and, in markets where reputation is especially important, greater pollution abatement efforts compared with other forms of regulation. Early results are hopeful. Firms were given advance notice of their PROPER ratings before they were publicized and several approached the authorities to inquire about how they could get their rating upgraded. Increasing Transparency and Competition 41 Support Technical Information. Even the surge in private investment with adequate enforcement and demand-foreign and domestic. Higher monitoring, the private sector still needs investment demand, as discussed in Chapter 1, technical experts to help them comply could modernize the economy and support an with standards, and make production increase in medium-term growth. cleaner and more efficient. The Government could help ensure that 2.38 Indonesia already has programmed industry has adequate access to further significant trade reforms through its information and technical expertise. Uruguay Round offer and the May 1995 deregulation package (World Bank 1995a). 2.35 The Government also could experiment Accelerating the scheduled cuts in tariff and more with market-based incentives. The first nontariff barriers, and formalization of the step would be to induce industries to reduce scheduled cuts, would strengthen this program. their waste by setting prices for energy and The unfinished deregulation agenda consists of water efficiently. Another way would be to set the removal of tariff protection on vehicles, the pollution charges, which would permit firms opening-up of the strategic industries to import with low abatement costs to profit from their competition and the removal of their domestic investments. Legal authority for this already subsidies (the strategic shipbuilding industry is exists for setting such charges for hazardous the subject of Box 2.3), the removal of export toxic wastes and a pilot BAPEDAL project is taxes on forest products, and the removal of being proposed. Finally, subsidies financed by nontariff barriers on the Bulog agricultural pollution charges can be an effective means to commodities. finance pollution control investments, particularly for small and medium industries. 2.39 Completing the deregulation agenda is Grants from international donors can also be important for three reasons. First, by leveling used to meet such costs, where there are few the playing field for competition it encourages other alternatives. producers to be efficient and it benefits consumers. Second, deregulation enhances 2.36 Measures to relocate industries outside confidence. The medium-term outlook laid out residential areas and to promote the use of in Chapter 1 depends on maintaining private industrial estates with common waste treatment investors' confidence. Investors value facilities could also be valuable. An important predictability and stability most of all, step towards this was the 1994 guideline from including a stable policy environment. Steady the Minister of Industry for all industries in progress in deregulation demonstrates the Java to be located in industrial estates in their Government's commitment to policy stability areas. The implementation of the measure and predictability, and thereby enhances should be given priority. More generally, confidence. Third, deregulation raises the existing policies concerned with spatial quality of growth. Use of the trade regime to planning should be implemented more widely benefit special groups is a source of resentment and consistently. to society at large. By subjecting protected activities to the rigors of competition and C. Unfinished Deregulation Agenda raising labor demand, deregulation improves equity. 2.37 The May 1994 and May 1995 deregulation packages went far in leveling the 2.40 Indonesia continued progress toward playing field for competition in Indonesia. The fulfilling its pre-announced tariff reduction more open climate for investment created by targets by promulgating another deregulation these packages deserves part of the credit for package in January 1996. The unweighted 42 Chapter 2 Box 2.3 The high-cost strategic shipbuilding industry Shipbuilding is a strategic industry. Trade barriers-tariffs and bans on the import of used vessels-protect this infant industry. Prices of domestically-produced ships are higher than the prices of competing imports. High-cost ships in turn inhibit the development of the domestic shipping industry. Only 40% of inter-island shipping is handled by Indonesian shipping companies. The domestic fishing industry, which is forced to buy high-priced domestically produced boats, also is disadvantaged. A new 300 ton fishing boat costs about $6 million in Indonesia compared with $4-4.5 million on the international market. Deregulation to expose the shipbuilding industry to competition would be the first-best policy. This would force the industry to become more efficient and competitive and reduce the cost of inter- island shipping. But if the Govermnent wants to continue to promote the domestic shipbuilding industry, the best way to do it would be through a small, transparent, time-bound production subsidy to the ship-building industry in the State Budget. Putting the subsidy in the State Budget in a transparent way would make it clear to taxpayers how much they are paying to develop the shipbuilding industry. The time-bound subsidy would guarantee that taxpayers would not be burdened with subsidizing an inefficient industry indefinitely. average tariff dropped by nearly one processing zones. The Government also percentage point to 14.2%. Virtually all tariff undertook steps to review regulations on reductions were by five percentage points, with exports and imports to see whether these were the largest to 10% from 15% (163 items) and hampering export performance. to zero from 5% (92 items). The tariff code also was simplified. Prior to the January 1996 2.41 In a case of two steps forward and one package the Indonesian tariff code contained step back, in February 1996 the Government nearly 9,400 items. The tariff code was acceded to Chandra Asri's request and streamlined by over 1,100 items. This introduced a 20% tariff surcharge-previously simplification accounted for half of the drop in there was none-on two of its main outputs, the unweighted average tariff. Nontariff propylene and ethylene. Petrochemicals were barriers-restrictive import licenses-were not included in the pre-announced tariff cuts of removed on 80 products, most significantly hot May 1995 and although tariff protection is and cold flat rolled steel products, which had more transparent than other forms of protection been the only remaining steel products that had been discussed for the plant, the hike protected by restrictive import licensing. in domestic propylene and ethylene prices Monitoring charges for textile and garment again raises the spectre that Indonesia is exports subject to Multi-Fiber Arrangement developing a high-cost petrochemicals sector quotas were shifted from firms to the (World Bank 1994a). Government and tariffs on capital goods and some raw materials directly linked with textile 2.42 Then in March 1996 the Government and garment exports were cut. To promote announced that an influential group would be backward linkages between exporters and given an exclusive three-year exemption from domestic input suppliers, duty-free status was import duties and luxury sales tax in order to extended to suppliers of inputs to processors develop a "national car." Automotive operating in bonded zones and export components already are highly protected by a Increasing Transparency and Competition 43 local content scheme and very high import these commodities are well documented (World taxes on vehicles imported in completely built- Bank 1994a, Jones). Elimination of nontariff up condition. While the objective of the barriers on imports would benefit the vast national car initiative-putting a low-priced car majority of Indonesians. within ordinary Indonesians' reach-is laudable, the non-transparent and 2.45 In addition to Bulog's sole right to discriminatory manner in which protection was import the above items, other agricultural given is out of step with the rules-based products protected by restrictive import approach to trade reform launched in May licensing include milk and dairy products, 1995. A more transparent, equitable approach, onions, garlic and cloves. In industry, the in line with Indonesia's policies to increase main items protected by restrictive import competition, would be a cut in tariffs on licensing include alcoholic beverages, salt, vehicles. including iodized salt, fertilizers, propylene copolymers, printed matter, hand tools, motor 1. Reducing the Anti-Trade Bias of the vehicles and motorcycles and keyboard Trade Regime instruments in a completely knocked-down condition. 2.43 Indonesian trade policy still has an anti- trade bias. For import-competing activities, 2.46 Attempts to develop the domestic this means domestic production is favored over automobile industry through local content importing; for exportables, domestic sales are schemes and high tariff and nontariff barriers favored over exports. Import extend back to the 1970s. Even with the protection-tariffs and nontariff implementation of the tariff cuts programmed barriers-accounts for two-thirds of the anti- in May 1995-the highest tax was reduced to trade bias and export restrictions account for 200% and it is scheduled to decline to 90% by the remainder. The anti-trade bias also 2003. The May 1995 package reduced the disadvantages the outer islands (Chapter 4). maximum import tax (tariff plus tariff Elimination of the anti-trade bias would raise surcharge) on vehicles to 200% (from 275%) efficiency in import-competing industries, and scheduled a reduction to 90% by 2003. stimulate nonoil exports, and enhance the Advancing the implementation of this import quality of growth. tax cut would reduce vehicle prices and promote a competitive automotive components a. Reducing Import Protection sector. 2.44 Adherence to the tariff cuts pre- 2.47 The rationale for restricting iodized salt announced in May 1995 will reduce anti-trade imports is not clear. Iodine deficiency is a bias by one-third. The tariff schedule would problem in some parts of Indonesia. Although have three principal rates-0%, 5% and deregulating iodized salt imports alone would 10%-and the average tariff would be 7%. not solve the public health problem, the Thus, the unfinished agenda for*reducing restriction is questionable. The rationale for import protection consists mainly of removing restricting imports of hand tools also is nontariff barriers, notably those on rice, sugar, unclear. These nontariff barriers keep wheat and soybeans and the associated domestic prices above the price of competing restrictions that protect wheat flour milling imports. For example, the domestic wholesale (restrictions protecting soybean meal processing price of a hand pump was recently estimated at are being eliminated as part of Indonesia's more than double the comparable price in Uruguay Round offer). The efficiency and Singapore. There appears to be an equity losses from nontariff barriers protecting inconsistency between policies that raise the 44 Chapter 2 domestic price of hand tools and the objective competitive bidding for quota rights are an of promoting small and medium industry. appropriate instrument for controlling exports subject to quotas in importing countries. 2.48 Nontariff barriers to imports lower the Export restrictions also are appropriate in some quality of growth. Those on wheat flour and instances to protect endangered species. soybean meal protect large, well-connected However, export restrictions are not private interests. They also raise domestic appropriate instruments for the other prices and reduce real incomes. For example, objectives. They have negative side effects, elimination of the nontariff barrier on sugar encourage smuggling and depress nonoil imports would raise consumers' real income by exports. 0.6% (World Bank 1995a), and more for the lowest income groups. An across-the-board 2.51 Export restrictions on inputs are an elimination of nontariff barriers is warranted. inappropriate means of promoting downstream As a transition measure, the protection afforded industries. They lead to resource misallocation by the nontariff barriers could be replaced by from under-production of the input, over- temporary import surcharges. production of the processed good, and inefficiency in production. (Export taxes on b. Removing Export Restrictions forestry products are discussed in section A of this chapter and taxes on rattan exports are 2.49 Indonesian exports remain subject to discussed in Chapter 4.) considerable regulation and control. Export restrictions cover half of total nonoil exports, 2.52 In competitive markets, export affecting nearly 2,000 products. The export restrictions are unnecessary for regulating restrictions take four forms: Export Bans, domestic supply. The Minister of Industry and Regulated Exports, which can only be exported Trade supervises the export of some by exporters approved by the Ministry of commodities-salt, cement, fertilizer, pulp and Industry and Trade, Supervised Exports, which paper, crude palm oil (Box 2.4)-in order to require approval by the Ministry of Industry ensure sufficient domestic availability. Export and Trade, and Export Taxes. Specific export restrictions on cement, fertilizer, salt, and pulp taxes on forestry products are the most and paper are only one part of a regulatory numerous followed by regulated exports. Most framework whose aim is to ensure adequate restrictions are directed toward agricultural supplies of these "essential commodities" for exports. By value, nearly two-thirds of the domestic market. Indonesia's greater agricultural exports, including all the large cash openness has made these regulations crops-rubber, palm oil, coffee, and unnecessary. copra-are subject to some form of export restriction. Trade associations also affect the 2.53 An across-the-board elimination of marketing of some commodities, primarily export restrictions is warranted for virtually all agricultural. commodities subject to export restrictions except those on textiles, which are justified 2.50 Five reasons are officially cited for while they remain subject to Multi-Fiber using export restrictions: (i) to deal with Arrangement quotas, and the export bans on quotas imposed by importing nations; (ii) to endangered species. Where the restrictions conserve natural resources and endangered have encouraged large investnents in species; (iii) to promote higher value added processing activities, their progressive downstream industries; (iv) to raise the quality elimination over a limited time period could be of the exported products; and (v) to regulate considered. domestic supplies. Export restrictions with Increasing Transparency and Competition 45 Box 2.4 Export restrictions on crude paln oil are the wrong tool for the job. Indonesia is one of the lowest-cost producers of vegetable oil in the world. Comparative studies on production costs generally estimate average costs at around $200/ton but a recent study puts the cost of production at only $127/ton. With palm oil prices now above $600/ton and projected to remain above $400/ton for the foreseeable future, the future of the industry seems bright. Motivated by concern for inflation and a desire to protect the poor, the Government has intervened frequently in the marketing of palm oil since 1991. But income growth has led to a diversified household budget with less weight given to cooking oil, even among poor households. Cooking oil comprises 1.4 % of the cpi and 4% of the household budget of the poorest 20 % of the rural population. As a result the 21% increase in the price of cooking oil in 1994 contributed only 0.3 percentage points to the inflation rate and reduced the household income of the poorest consumers by 0.8% and better-off consumers much less. The Government currently uses three policy instruments to affect domestic prices: an export tax; buffer stock operations; and directed sales from public palm oil estates. The export tax is triggered when fob prices reach $435/ton and targets only above-average profits. The tax limited the rise in domestic prices, but did so by transferring income from the oil palm growers, who primarily are off Java, to the Government and to consumers, who primarily are on Java. 22% of the growers are smallholders, whom the Government would like to help, not hurt. The Government should reconsider the tax. Restrictions on trade have been lifted (except for the tax) so that domestic prices of crude palm oil and refined products, including cooking oil, have followed international prices. Crude oil and refined product stockpile operations and directed domestic sales cannot have had a substantial, enduring effect on domestic prices. These interventions transfer income but do not accomplish their intended purpose-improving consumer welfare. The interventions also create needless uncertainty for potential investors ("policy risk"). These interventions also should be abandoned. Source: Larson. 2. Increasing Domestic Competition 2.55 The myriad restrictions on domestic competition reflect myriad objectives. Some 2.54 Deregulation of international trade commodities are termed "essential" and it is restrictions will expose many of the most said that their distribution is too important to highly protected activities in the economy to be left to the market (for example, cement, competition. But restrictions on domestic fertilizer). For other products, restrictions on competition take many forms, including cartels, domestic competition are used along with price controls, entry and exit controls, restrictions on international trade to promote exclusive licensing, public sector dominance, infant industries or promote value added in and ad hoc interventions by Government in processing activities (for example, wheat flour, favor of specific firms and sectors. Some soymeal). For still other products, the restrictions are imposed by the national restrictions are instruments for exploiting Government, others by subnational Indonesia's power in world markets (plywood). Governments, and still others by trade and In other cases, restrictions on domestic business associations (often with official competition are second-, third- or fourth-best sanction). A rules-based approach to policies for problems that have arisen due to deregulating barriers to domestic competition is existing distortions (rattan). needed. 46 Chapter 2 Finally, local revenue raising is another 2.58 Deregulation along with privatization motivation for domestic trade interventions. of publicly-owned plants would increase domestic competition. The Government would 2.56 Some Indonesian industries are have to abandon the idea that intervention is organized as cartels with controls on prices, necessary to protect consumers of "essential" outputs, entry and exit enforced through trade commodities, which has led to protection of associations (often with Government sanction). inefficient producers. The development of a Most such industries are characterized by a national market with competitive private traders sharp dichotomy with relatively efficient firms allows the Government to rely on the private at one extreme and inefficient, high-cost firms sector for their production and distribution. at the other. The two are able to co-exist because the cartel rules prevent price 2.59 Subnational Governments also restrict competition within the sector and protect trade in various ways. Strictly speaking, sub- inefficient firms. This is the case, for national Governrments are prohibited from example, in the cement and paper and pulp imposing commodity taxes without prior industries. The cost of supporting inefficient approval from the central Government. firms is passed on to consumers in the form of However, "user charges" (retribusi) can be higher average prices. Often, Government implemented with approval of only the supports the cartel arrangements because they provincial Government and these are used to protect state-owned enterprises in the sector. tax trade. Chapter 4 discusses the retribusi on copra in Central Sulawesi and Box 2.5 2.57 Exclusive dealing arrangements restrict discusses the case of beer in Bali. marketing of a variety of products. For wheat flour, Bulog's sole agent imports wheat on 2.60 As discussed in Chapter 4, trade taxes behalf of Bulog and, in exchange for a fee, appear to be attractive vehicles for raising processes the wheat into wheat flour. revenue. This is false. Although they appear Although restrictions on investments in the to tax "someone else" (middle-men traders or wheat flour industry were lifted in 1993, new consumers in other provinces or countries), the investors still would have to buy wheat from most common result is that those consumers Bulog-in practice, through the agent-and have substitutes and the main impact of trade export 65 % of their output. Investor interest in taxes is to depress local producer incomes. the sector is not strong. Box 2.5 The case of beer in Bali The case of beer in Bali is a recent example of intervention in commodity trade. The Governor of Bali imposed a Rp200/bottle tax on beer and alcoholic spirits. He granted PT Arbamass a monopoly right (SK No. 636 A/ 1995) to collect the tax on each bottle of beer sold. But Pr Arbamass added a Rp400 fee on top of the Rp200 tax. The distributors of domestic beer offered to pay the tax directly but refused to pay the collection fee, and halted their distribution of beer in Bali. Bali hoteliers were drawn into the dispute by the prospect of tourists going where the beer was flowing. The matter became so heated that the President of Indonesia eventually ordered the Ministry of Industry and Trade to halt PT Arbamass from collecting the tax. In yet another example of how difficult it can be to eliminate such things, the expected denouement was delayed when the office of the Governor of Bali stated that the levy was a matter of provincial authority, not subject to the Minister of Industry and Trade. In the end the Governor of Bali revoked the decree. Increasing Transparency and Competition 47 Despite central Government efforts to dissuade 2.63 Strong transparent implementation of subnational level Governments from taxing measures to reduce risks in the banks and to trade, such interventions are pervasive. User improve collections would generate large charges are a potentially large source of benefits and build on these accomplishments. subnational government own revenue. But the In particular, the programmed increases in pricing of local public goods is complicated capital requirements and the tighter legal and there could be high returns to technical lending limits on exposure should be assistance on the setting of user charges implemented, with stiff penalties for non- (Chapter 4). compliance including closure of institutions. These measures, and better collections of 2.61 In view of the number and variety of existing bad debts, would increase confidence, restrictions on domestic competition and their lower the risk of macroeconomic instability and myriad objectives, a rules-based approach to increase the efficiency of financial deregulation is warranted. This approach intermediation, thereby lowering the cost of would dissolve Government-sponsored or funds. sanctioned monopolies controlling marketing and distribution of "essential" and other 2.64 Other dimensions of transparency relate commodities and open the distribution (retail to gaps in the legal framework for credit and wholesale trade) sector to foreign transactions. Again, rupiah interest rates are investment. The rules-based approach would higher because of the lack of transparency and include legislation ensuring that an ordinary large benefits would flow from improving the business license or sIuP (Surat Izin Usaha framework for credit transactions. More Perdagangan) be the only permit required for transparent laws relating to collateral would exporting and/or engaging in domestic trade improve access to credit. As noted in and that membership in commodity or trade Chapter 1, development of the financial system associations be voluntary, not a condition for could help raise private saving. As noted in engaging in these activities. It also would other World Bank reports, formal retirement include repealing and outlawing commodity- savings plans, as regulated by the Pension specific taxes and retribusi. In localities where Law, need to develop soundly (World Bank revenues from such taxes are important, 1995k). technical assistance on pricing of public services could help replace foregone revenues. 1. Bad Debt in the Commercial Banks To ensure a strong supply response, domestic trade deregulation should be done in tandem 2.65 Indonesia, like many countries, faces with measures to open the economy to the problem of a large stock of bad commercial international trade-reduction of nontariff bank loans. Experience worldwide suggests barriers and elimination of export restrictions. that such an overhang contributes to high lending rates for four reasons: (i) banks try to D. A Healthy Financial System raise spreads to rebuild capital (but the ability to raise spreads is limited by the entry of new 2.62 Much has been accomplished to banks and the development of non-bank improve Indonesia's financial system. It is competitors); (ii) the possibility that the moving from a tightly controlled, state-run overhang may lead to macroeconomnic system into a vibrant, competitive marketplace. instability, directly and because the non- The stock market is growing rapidly and the payment culture tends to spread; (iii) money and capital markets are developing. uncertainties about the mechanisms to deal with 48 Chapter 2 weak banks; and (iv) uncertainty that the Restrictions on the state banks' loan growth, practices that led to the bad loans have been imposed as part of action plans to strengthen corrected. the banks, limited their growth to an average of about 12% per year in 1994-95. This has 2.66 Experience worldwide suggests that the limited the new losses in these banks and workout of bad debts involves: placed emphasis on collection as the way to reduce their bad debt burden. Classified assets (i) Improving collection of existing loans, have fallen as a fraction of total credit as a which requires support from the highest result of better collections, growth, and recent political level in the case of bad loans writeoffs (Chapter 1). extended for "non-economic" considerations. 2.69 At this stage, an aggressive collection campaign is needed for the remaining (ii) Offsetting financial support to failing delinquent loans. This would reduce the institutions with fiscal surpluses and financial cost to the Government of the bad tight money. debts and the threat of systemic risk in the financial system. The list of delinquent (iii) Developing transparent methods for borrowers from state banks that circulated in dealing with bad loans and insolvent 1993 contained many well-connected business banks, such as regulations for prompt groups. Significant strengthening of collections takeover of collateral, and clear by the state banks thus will require support arrangements for lending to, and from the highest political level. takeover of, problem banks. 2.70 Proposals to allow the state banks to (iv) Improving the lending culture by grow faster, with Government takeover of bad ensuring that borrowers who default, debts and injection of new capital, have a particularly when they can pay, suffer number of problems. First, the state banks' prompt loss of collateral, and that bank classified loan ratio is nearly four times private owners and managers bear the costs of banks'. They are unlikely to grow their way imprudent lending, for example through out of the problem. loss of capital. 2.71 Second, what matters for efficiency is 2.67 Indonesia has begun many of these how state banks use new funds entrusted to measures. The approaches to the state banks them by depositors, not what happens to the and the private banks have been different and stock of bad loans. The culture of borrowing the next two sections discuss how the from, and lending by, the state banks is largely respective approaches could be improved to responsible for their problems. Provision of hasten the workout from the bad loan problem. new funds, without changing the culture, is likely to lead to even larger, more costly a. State Banks problems later. A lasting solution requires changing the state banks' culture. But changes 2.68 State banks have classified loans in culture are difficult. World Bank experience equivalent to about 17% of total loans indicates that privatization is likely to be (Chapter 1). This represents nearly three- necessary to create appropriate incentives for quarters of total classified loans of the borrowers, managers, and owners. In those commercial banks. The Ministry of Finance, state banks where privatization is likely to be the Government's agent in ownership of the difficult, strict limits on asset growth, like state banks, is handling their workout. those in place since 1993, continue to be Increasing Transparency and Competition 49 desirable. Significant downsizing and loan ratio of 14%. Joint-venture and foreign consolidation of activities, branch networks and banks account for 9% of total loans and in staff also would be appropriate. terms of the health of their loan portfolios are comparable with the private foreign exchange 2.72 Third, proposals to help the state banks banks. should be evaluated with regard to their effect on existing debtors. Bailouts (recapitalization 2.76 Bank Indonesia, which regulates or financial engineering for example) would commercial banks, follows a consensual reduce pressures for collection from existing approach with problem private banks (World borrowers. Bailouts also would run the risk of Bank 1995a, pp. 56-58). The first step is inducing solvent borrowers to stop paying in providing liquidity to the troubled banks. The the hope that their debt will be nationalized. conversion of that liquidity in some failing When this occurs the cost of the bailout rises. institutions has left Bank Indonesia a major shareholder in some private banks. In more 2.73 Finally, the proposals also should be difficult cases, the preferred approach has been evaluated in terms of their impact on to assist the bank to find a merger partner or macroeconomic stability. The larger the new capital. (To increase the incentives to take proposed assistance, the more public resources over a weak bank, rather than open a new one, will compensate for non-payment and the larger Bank Indonesia has gone slow on granting new the threat to macroeconomic stability. If licenses since 1994.) Closure has been rare. assistance is needed the most transparent and least risky way is through budget surpluses. 2.77 The low expected losses to bank Injections of funds from Bank Indonesia are owners-because of low capital and the low less transparent; if they are made, then they probability of closure in the case of need to be offset by tighter liquidity elsewhere insolvency-increases the riskiness of the in the system to maintain macroeconomic financial sector. The smaller the chance that stability. bank owners will lose large sums, the greater the incentive to make risky loans. The rapid b. Private Banks growth of real estate lending by private banks in 1994 would be consistent with this view. 2.74 Private banks have an average classified Moreover, insolvent banks that remain in loan ratio of 5 % (Chapter 1). In most cases, operation have an even greater incentive to the private banks began their adjustment make risky loans. A high-return, high-risk process with a lower proportion of classified project may be their only (slim) chance for loans than the state banks. The private banks' survival. Violation of related group lending also reduced their classified loan ratio through limnits (Chapter 1) also increases risks in the rapid growth, 28% per year in 1994-95. This banking system. Riskiness, in turn, raises the growth de facto is privatizing the banking country risk premium and rupiah interest rates. system; private banks now account for over 50% of bank loans (Chapter 1). 2.78 Thus, although rapid loan growth and the consensual, case-by-case approach to deal 2.75 Within private banks, banks licensed to with weak banks have helped the private banks engage in foreign exchange transactions reduce their bad loan ratios and kept their account for 39 % of the total loans and have an banking problems out of the news, incentives average classified loan ratio of less than 4%. for risky lending remain high. This approach Non-foreign exchange banks account for only does little to reduce the high risk premium, and 5% of total loans but they have a classified may require substantial injections of public 50 Chapter 2 funds. Bank Indonesia could reconsider the critical if deposit insurance were to be current approach in terms of ways to reduce introduced. the incentives for risky lending. 2.83 Risky lending also could be reduced by 2.79 The incentives for risky lending would limiting inter-group lending. Regulations that be reduced if owners of insolvent banks faced came in force in September 1995 are a major greater possibility of loss. In particular, step in that direction, limiting lending to putting more of the owners' capital at stake related companies to 20% of capital.2 Again, should make bankers less prone to make risky an important issue is the implementation of loans. these regulations, and the penalty for non- compliance. Many banks still exceed the limit 2.80 In Indonesia, this process was begun in (Chapter 1). In enforcing banking regulations, May 1993, and by December 1996, banks are Bank Indonesia needs to step-up its use of scheduled to meet a strengthened 8% capital sanctions, for example, by levying fines on adequacy requirement (to be calculated after banks that are consistently out of compliance. deducting shortfalls in provisioning from core The Ministry of Finance should be prepared to capital). Meeting this schedule will increase revoke the license of banks that are chronically confidence in Indonesia's financial system, in violation of key regulations. further delay would reduce it, and reduce transparency. 2. Transparency and Access to Credit 2.81 In addition, in September 1995, Bank 2.84 Lack of transparency caused by an Indonesia further raised the capital inadequate legal framework lessens requirements for foreign exchange banks from transparency and slows the development of a 8% to 12% of risk-weighted assets and modern financial sector in Indonesia. Rapidly increased the minimum capital to Rp 150 billion growing per capita income raises demand for from Rp5O billion. However, the increases financial assets and Indonesia's deregulated could be phased in more rapidly than the financial system is responding. But the currently prescribed six years. The increased response is slower than it needs to be because capital requirements of September 1995 also gaps in the legal framework. could be extended to non-foreign exchange banks. 2.85 The potential gains from improving transparency and the legal framework for credit 2.82 Of course, the threat of loss must be and capital market transactions are huge. The made credible. One way to bring this about lack of transparency makes it difficult for would be to adopt a more transparent, rules- owners (equity holders) and creditors to based approach that penalizes banks on an monitor the actions of managers. This escalating basis for failure to comply with the contributes to the high proportion of private capital adequacy requirement, for example, by sector investment that is self-financed (three- limiting access to Bank Indonesia's discount quarters of private sector capital formation in window. The most extreme penalty would be 1994 according to the Indonesian flow-of- closure and revocation of the bank's charter. funds). A more modern system for reconciling In order to do this effectively, Bank Indonesia the needs of borrowers who seek long-term needs to establish clear regulations for funds or credit commitments and lenders who liquidating banks. These should include prefer shorter-term, liquid investments could whether and how depositors would be paid, improve the allocation of capital by ensuring and provide for the prompt seizure of collateral that it goes to the highest yielding investment for liquidation. Such procedures would be projects. Increasing Transparency and Competition 51 2.86 Another result of the lack of a long way of saying that the interest rate is transparency is a higher cost of funds. The higher than it otherwise would be. uncertainty that a lack of transparency introduces cannot be hedged and must be paid 2.89 Establishing true ownership of for in a higher interest rate. Other ways collateral ("perfection" of security) also is include over-collateralization. Small businesses difficult in Indonesia. To have confidence in suffer most from the lack of transparency. collateral, the lender must be sure there are no Wealthy, well-known and highly creditworthy prior claims on it. In well-developed financial borrowers have no difficulty raising funds in narkets, information registries keep track of the cheapest worldwide market. The ownership of assets. Currently, registration is Government of Indonesia has made increasing only available for real property (land and small entrepreneurs' access to credit a priority. structures) but it is not a national system, nor Greater access could be achieved by improving is it computerized. There are no systems to transparency and the legal framework for credit register movable assets like industrial transactions. machinery and financial assets. In large part, lack of registries for these assets reflects the a. Gaps in the legal framework... inability to use them as collateral or security. 2.87 There are three main gaps in the legal 2.90 The third problem is the enforcement framework that deserve attention. First, a of debt contracts in Indonesia. Money lenders, change in law is needed to permit a wider from the largest, most sophisticated commercial variety of property to serve as collateral. banks to the smaller, informal lenders, are Second, make it easier to verify and ensure the concerned about getting their money back. true ownership of collateral. Third, improve The greater the risk that their loan will not be the enforcement of debt contracts. repaid on schedule, the higher the rate of interest, the shorter the period of credit, and 2.88 It is hard to establish a legal basis for the greater the extent of credit rationing. In assets to be used as collateral or security in Indonesia today these risks are unusually high credit transactions in Indonesia. Banks cannot because of lack of credit enforcement. Two easily lend without security. In Indonesia basic methods of improvement in the area of "hypothecation" or mortgage is the standard enforcement are the court system and the form of security in credit transactions. But alternative dispute settlement system. The hypothecation is restricted to immovables and Indonesian court system has not proven to be ships. It is impossible to secure loans with an effective instrument for recovering debts. movable assets like industrial machinery, stock The debtor enjoys a strong position. in trade, or monetary assets. Legal structures Enforcement of credit transactions may take such as "fiduciary transfers of ownership" and several trials and many years before the courts assignment of rights, often in conjunction with issue an order of payment or execution of "powers of attorney," are used to secure credit collateral. transactions at different stages in a marketing chain. But these security mechanisms don't b. ... produce inefficient market always work well. As a result some kinds of outcomes... credit transactions simply don't occur. For example, ordinary car loans-80% financing 2.91 Banks and businesses have tried to find against the right to re-possess the vehicle-do ways around the inability to create and enforce not exist in Indonesia. Transactions that take security interests. Since the range of assets place must include a charge for the uncertainty that can be used as collateral are limited, other that surrounds security interests in Indonesia, methods of collateralizing loans are used. 52 Chapter 2 Pledges are one way, but require physical themselves. The needed regulatory reforms are possession by the lender. Lenders end up the subject of this section. adopting multiple forms of security and over- collateralizing loans. 1. Where is Indonesia in Privatization? 2.92 To get around the difficulty of securing 2.95 There are 180 state enterprises whose loans, banks rely on guarantees, excessive book value of equity was Rpl43 trillion (about collateralization, and reputations and business $66 billion) at end-1994. Although some of links. But this solution not only adds to these enterprises are in sectors where the administrative costs, which must be passed on public sector traditionally dominates (defense, to borrowers, it also favors large, well- the postal service for example), most are in established firms over new, small firms. The sectors where the private sector now dominates successful Kupedes scheme (Box 2.6) exists to economic activity (Table 2.1). provide credit to small rural borrowers but the conditions that account for its success, Table 2.1 Public enterprises at a glance especially the close relationship between loan (as of 31 December 1994) officers and borrowers and use of social pressure to encourage repayment, are difficult to replicate in large urban areas. Ministry No. of Equity enterprises (Rp. trillion) c. ... and measures are needed to help the market find better solutions. Industry 28 5.2 2.93 Many of the gaps identified above Agriculture 35 3.8 would be filled by the establishment of Finance 30 12.2 authoritative, Indonesian language code of Communications 17 1.32 conduct for commerce. The Law Development Trade 8 0.3 Agency is reviewing the relevant provisions of Mining 7 32.4 the Indonesian Civil and Commercial Codes Post and Telecom- dealing with commercial transactions. The munications 7 4.0 Ministry of Finance is coordinating the Forestry 6 0.7 initiative to draft a law on Secured Information 4 0.01 Transactions. Health 4 0.4 Defense and Security 2 0.1 Culture 1 0.02 E. Privatization in Indonesia Manpower 1 0.1 Non-departmental 1 0.1 2.94 Repelita VI programs an increased Strategic Industries 10 7.3 reliance on the private sector. Privatization and a greater private sector role in Total 180 143.3 infrastructure provision will increase efficiency and yield resources to retire public debt and Source: Ministry of Finance make new investments. Private sector involvement, especially in telecoms, already is 2.96 Indonesia has followed the East Asian apparent. But private sector participation could 2.96 oferiatatio ll privtization yield greater benefits if the Government pattern of privatization: partial privatization of established a more transparent, competitive some firms through the stock market; and regulatory framework, both for the sale of concessions for stand-alone infrastructure assets and concessions and for the sectors projects. However, progress has been slower Increasing Transparency and Conpetition 53 Box 2.6 A Success of Rural Finance: BRI's Unit Desa System, Kupedes and Slmpedes Much of the world is familiar with the success of Bangladesh's Grameen Bank. It is less well-known that Indonesia has over a decade of experience with a small-scale, rural credit scheme. In 1968, Bank Rakyat Indonesia (BRi) was charged with responsibility for smallholder agriculture and rural development. One of the major initiatives in this regard was the Bimas rice intensification program, which contributed to Indonesia's becoming self- sufficient in rice in 1984. The Bimas program included, among other features, credit to farmers at below-market roles. When the Bimas program was terminated in 1984 (in part owing to ever-increasing lending losses) BRI had more than 10,000 employees in the rural credit program scattered among 3,300 village units across the country. To make use of this investment in human and physical resources, BRI launched a new rural lending program to be based on two main principles: it should not be dependent upon government subsidies; and it would be demand driven by the needs of the rural community. This program became known as Kupedes (Kredit Umum Pedesaan). Kupedes has been very successful. Growth has been strong; collection rates are very high; village units reach all regions of the country, roughly in proportion to density of rural population; and, the scheme has recently become the largest, single source of profits for BRI. Lending rates are market-determined (currently some 30% or more). BRI has a similar experience with village savings. Based on experience with a nationwide, central-bank driven savings scheme known as Tabanas, BRI introduced its own saving scheme, Simpedes, in 1985. This was an immediate success based upon easy access to own deposits, fast service and simple procedures. Moreover, savings mobilized in this way actually exceed lending through Kupedes, striking evidence of the potential for savings mobilization at the village level. Some lessons from Indonesia's experience with rural credit schemes are: * Subsidized credit programs can be very costly. Indonesia's early experience with various credit programs (for instance, Binas and 1rK/lKmP) suggests the likelihood of high default rates brought on by undue pressure on banks to accommodate high-risk customers, fraud by bank personnel and lack of "ownership" by banks, which saw themselves as administrators of a government program. * Village units can be profitable. Kupedes demonstrates that the size of loans is not a hindrance to profitability because high overhead costs can be offset by high lending rates and by high collection rates. Borrowers are attracted to the commercial lender despite high interest rates because they otherwise are dependent upon informal moneylenders. * Quality of service is important. To hold down overhead costs, loan procedures need to be simple; to compete with the informal moneylender, service must be fast. For savings programs, like Simrpedes, depositors need ready access to their savings; they are put-off by restrictions on their access to their money. * The local credit officer matters. Physical collateral needs to be de-emphasized. To substitute and maintain the quality of the portfolio, the local credit officer must have personal contact and detailed local knowledge, including on such matters as local cash flow patterns. * Social pressures can be effective at improving repayment. Social or peer-group pressures are powerful motivators for repayment at the village level. For this reason, loans financed through revolving-funds are relatively successful, as is third-party pressure that can be brought to bear by the knowledgeable local credit officer. * Rural people are not too poor to save, and they will put their saving into financial assets. The lessons of Simpedes are that rural savers respond to the same incentives as more "sophisticated" urban savers-a reasonable rate of return, good service, and reasonable assurance that their savings are safe from the twin evils of inflation and low repayment rates on loans. * The "group lending" approach can be effective and efficient because it can reduce transactions costs and risks. Sources: Binhadi, Martokoesoemo. 54 Chapter 2 than elsewhere in the region (World Bank concession with two large local groups. 1995a). In 1989, the Government began an ambitious public enterprise restructuring 2.100 Regarding divestiture outside program to support divestiture. However, the telecommunications, PT Tambang Tinah, a tin program's results were less than expected. mining company, sold 25% of its capital in a Only one state-owned firm was listed in 1990- London listing and increased capital by 10% 93. Concessions for ports and one power through a parallel listing in Jakarta and generation plant were negotiated in this period, Surabaya, raising nearly $225 million. In roads with well-connected local private sector addition, the Government has expressed interest partners. In 1993, PT Satelindo was given a in partially divesting Krakatau Steel; parts of franchise for international telecommunications PLN, the state-owned power company; Garuda, and cellular phones. a state-owned airline; and Bank Negara Indonesia. The publicly-owned plantations 2.97 Indonesia speeded up its privatization (PTPS) were consolidated in early 1996 in program in 1994-96. The greatest advances anticipation of their divestiture. were in telecommunications, as is common worldwide. Joint operating schemes were set 2. The Potential Benefits of Privatization up, under competitive arrangements, between and Private Provision of Infrastructure PT Telkom, the state-owned domestic telephone company, and the private sector; they will 2.101 Greater reliance on the private sector bring private management and investment to would benefit Indonesia in three ways: the phone system outside Jakarta and Surabaya. PT Telkom and PT Indosat, the state-owned * Greater efficiency in operation-better long distance telephone company, also were service at lower cost. partially divested (Box 2.7). - Resources for increased investment, 2.98 Two private power plants with capacity without relying on tax revenue or of 2450 MW (Paiton 1 and Paiton 2, a joint increased public debt. venture between Siemens and a local firm, reached financial closure). Power purchase * Receipts that can be used to retire public agreements also exist for another 1320 MW of debt. private capacity, and are under negotiation for more than 5000 MW (in total equivalent to 65 % The lessons of international experience suggest of PLN's capacity at end-1993). None of the that efficiency gains and investment increases power plants were awarded under competitive following privatization can be substantial tender. The earlier agreements had a much (Box 2.8). While international experience higher price/kwh than the later ones. Gas and shows that ownership matters, it also shows coal contracts, as well as financing, remain to that so too does policy. Substantial gains only be finalized. are available when private participation is accompanied by sound policies. 2.99 Lack of transparency also exists in many of the public/private deals. The Public 2.102 Substantial financial and efficiency Works Ministry chose private operators from gains appear to be available in Indonesia among 20 pre-selected companies for through privatization. The average return on negotiation on 19 toll road segments. In assets and equity in listed private enterprises October 1995, the Jakarta water supply was nearly twice as high as in public company (PAM Jaya) signed a Memorandum of enterprises (excluding Pertamina and the state Understanding to negotiate a 25 year banks). In the plantations sector, where private Increasing Transparency and Competition 55 Box 2.7 Privatizing Indonesia's Telecommunications Opening telecommunications to the private sector is a key element in the Government's strategy to bring performance standards up to the levels in competitor countries. Through a program of phased deregulation, going further in most aspects than other Asian countries, the Government is creating a competitive multi-operator environment. Private companies, some with minority public participation, are now operating in the satellite, international and wireless communication segments. The Government has used two approaches to involve the private sector in telecommunications (prior to beginning this process the Government awarded a franchise to provide additional international telecommunications service to well-connected Pr Satelindo, which went on to sell 25% of its equity for $586 million to Deutsche Telekom AG): * awarding concessions to five international consortia under joint operating schemes, with Pr Telkom as a passive partner, for the development and operation of basic telecom services in Indonesia outside the metropolitan areas of Jakarta and Surabaya. The process-pre-qualification criteria, scope and content (including performance obligations) of the rights to the concessions, common denominator bidding variables, due diligence procedure, final negotiations, and award-was carried out with full transparency and strict adherence to clearly defined rules. The international investor community has given Indonesia high marks for the professional and transparent conduct of this process. Investment bankers have estimated that the capital value of PT Telkom, which will share in the revenues of the new consortia, has increased by about $2 billion as a consequence of this new strategic arrangement. * Divesting assets of PT Indosat and PT Telkom. Pr Indosat went public first by divesting 25% of Government equity through a listing in the NYSE and raising capital (10% increase) through a listing in the local stock market. The transaction raised a total of $1.16 billion. It was considered a success in the market. Pr Telkom went public in November 1995 with the Government selling a 20% share of its equity in the company. $1.68 billion was raised through listings in the Jakarta and Surabaya stock exchanges (12.5%), and listings in New York and London plus small placements in Asia (for a total of 7.5%). Unlike Pr Indosat, PT Telkom's offering encountered some difficulties: it had to be scaled back in volume and price. The timing of the Pr Telkom offering coincided with an unpredictable decline of telecom stocks world-wide and a weakening in emerging markets associated with problems in Mexico. But there also were other factors involved. The experience with yr Indosat and Pr Telkom provides lessons for Indonesia's future privatization: * market structure and regulatory oversight (tariff policy in this case) of the sector in which the privatized companies is operating have to be closely defined in order to mitigate risk perception of investors; * the track record of performance (including all sources of revenues) of the company to be privatized needs to be sufficiently long to allow predictability of revenue streams; * the international and domestic tranches have to be carefully coordinated; * the number of managers has to be limited and the lead authority clearly established to avoid conflicting advice and messages to both issuer and buyers (the number of lead agencies with Pr Telkom was unprecedented). Uncertainties contributed significantly to a weakening in demand for PT Telkom shares. Local pension funds took up half of the domestic listing and agreed to hold it for two years. The Government also reduced the price of the offering and scaled back the inernational listing. This action was well received and enhanced the credibility of the Government in the market. The Government action helped convince investors that the clearing price of the offering was below fair market value and Pr Telkom shares mounted an impressive rally, increasing by 70%. 56 Chapter 2 Box 2.8 Quantifying the beneflts of privatization The Galal study analyzed the impact of privatization-divestitureof majority ownership-on net economic welfare by comparing the performance of divested firms with the counterfactual of what would have happened if the firms had remained in state hands. The result was that: * welfare improved in 11 out of 12 cases; * the gains averaged about 30% annually of pre-divestiture sales; * in more than half the cases the gain in welfare exceeded 10 per cent; and * in the single negative case the loss was only 7%. The great bulk of the welfare gains from privatization stemmed from three sources: relaxing the investment constraint; increased productivity; and more economic pricing. The origin and distribution of the welfare effects varied across the cases: perhaps surprisingly workers did not lose; consumers won or broke even in a majority of cases; foreign buyers did well but so did nationals; and government sellers gained in three quarters of the cases. The overall conclusion is that ownership matters. The Megginson study focussed on companies that were sold through a share issue and for which comparable pre- and post-issue financial and accounting data could be obtained. Again the striking result was significant improvements among privatized firms in terms of: * profitability up 459% on average; * output per employee 11 %; * capital spending up 44%; * output up 27%; and * perhaps surprisingly, employment up 6 %. The Megginson study did not precisely document the causes of the performance improvements. But its evidence supports the view that privatization has a positive impact on outcomes. A study of privatization in Argentina documented the efficiency improvements in three enterprises: * telecommunications-the growth rate of the telephone network quadrupled, price distortions were reduced, quality of service improved and private investors earned an attractive return; * railroads-80 % of freight services were concessioned and the amount of freight doubled and prices fell 20%; ridership on suburban passenger services in Buenos Aires increased by 30% to 40%; labor productivity in the sector increased by a factor of seven or eight; and subsidies fell by one half; and * oil and gas-government realized $10 billion; more than 25 international companies entered; and labor productivity doubled. Drawn from Galal, A. and others, Megginson, W. and others, and World Bank 1995m. firms and public firms (PTPs) are directly 2.103 The domestic listings of the two comparable, the public firms have incurred telecommunications companies and the tin high levels of debt to fund an ill-conceived mining company raised about Rp3.3 trillion expansion program. The costs of private palm ($1.4 billion) in new capital for these oil development are one-quarter to one-third companies' investment. In addition, higher than those of private estates and the cost PT Telkom expects to receive Rpl5 trillion of a PrP mill is 40% higher than a private mill. from its joint operating schemes (KSOS) over Private estates' productivity is consistently the next 15 years and the 5 KSOS are expected higher in palm oil and rubber. to invest about $3 billion in new telephone lines. The proposed Jakarta water concession Increasing Transparency and Competition 57 also would involve substantial investment. 2.107 A major policy recommendation for Private investment in power generation and maximizing the benefits of privatization is to roads is expected to be about $12 billion in sell assets or concessions competitively and Repelita VI (World Bank 1995a, p. 71). This transparently. This maximizes the price for the private investment still is likely to lead to asset and/or reduces the charge for services by increases in Indonesia's private external debt.3 the owner or concessionaire. In contrast, However, the payments are the obligation of negotiated, non-competitive deals leave room the concessionaires, not the country. And, for excess profits for the buyer and the these obligations give the projects' owners and possibility of side-payments. This, in turn, operators an incentive to construct and operate reduces the sale price or contributes to a high- effectively. cost economy, to the ultimate detriment of consumers. 2.104 Privatization also would benefit Indonesia by generating revenues that could be 2.108 Extensive negotiation on the terms of used to reduce external debt. Indonesia already the deal and unsolicited bids also are time- has used receipts from the offshore partial consuming, judging from experience worldwide divestiture of PT Indosat, PT Telkorn and and in Indonesia (ports, power generation, toll PT Tambang Timah to reduce external debt by roads, and water supply). Lengthy negotiations more than $1.5 billion (Chapter 1). raise costs to the private sector. The result is a lower sales price or an increase in the price 3. Maximnizing the Benefits of Privatization the concessionaire must charge. Lengthy negotiations also delay the time before benefits 2.105 Achieving the benefits of privatization begin to flow to the country. Excessive is not automatic: governments must pay restrictions on how the product or service will careful attention to many elements of the be produced or inputs sourced also tend to overall environment including: the enabling raise costs. framework of market structure, competition and regulatory policies; divestiture policies and 2.109 A transparent, competitive approach to processes, including preparation of enterprises divestiture or sale of concessions reduces these for sale; institutional approaches; and public problems. The transparent, competitive debt management. To be successful, approach can be summarized as: privatization must be done right. (i) Pre-qualify potential bidders on the basis 2.106 The overall success of the privatization of prior experience; process depends greatly on the extent that it is transparent and the sale of assets and the (ii) Define up-front the project/concession sectors are kept competitive. Worldwide simply and clearly (prepare the project experience suggests that perceptions of non- and provide as much information on it as transparency, lack of competition, unfair possible within the time frame.4 Define dealing, and favoritism can threaten the carefully the government's future role. privatization process and even reform programs Limit contract specification to the in general. The Government thus has an essential parameters; avoid restrictions important role to play in managing the process that limit the way the private sector and the interaction between the public and satisfies these parameters, such as input private sectors (Chapter 1, and World Bank sourcing requirements.) 1995a, Chapter 3). 58 Chapter 2 (iii) Define the bidding process on one or tradables can be divested easily and quickly two key parameters (for example the will achieve benefits. Within competitive, or price of the price of the asset or the cost at least potentially competitive markets, prices to consumers of a service); set a benchmark for efficiency. Accompanying liberalization and deregulation of product and (iv) Choose the highest bid for the sale of factor markets may be necessary to make assets or the lowest bid for the supply of domestic markets more competitive and ensure a service; efficiency improvements from divestiture. The main issues for the government are to ensure (v) Announce the winning bid promptly and that deregulation continues along established avoid a second round of re-bidding. lines, with no special protection or below- market credit for producers, and that the sales 2.110 Privatization through financial markets of assets or concessions are conducted as tends to be competitive. The strict described above. Protection or access to below requirements for listing can reduce political market credit (including Government interference. The main issue is securing guarantees) can improve the sales price of an effective underwriting services through a asset or a concession. However, these policies competitive procedure. However, prompt reduce the benefits to the country as a whole. divestiture through financial markets may be difficult for firms lacking a history of 2.113 Privatization of or private participation transparent, audited accounts. Perhaps more in infrastructure typically requires closer importantly, sale of a non-majority portion of attention to market structure and economic equity to many small investors or passive regulation. It typically involves nontraded holders (like pension funds) may not improve services and some elements of so-called management much. Competitive sales of "natural monopoly." The definition of a ownership or management contracts, along the transparent regulatory framework is a major lines above, may yield smaller up-front cash factor in attracting investors and will enhance returns and increase economic concentration, the benefits from private participation but they also may improve management more significantly. than partial divestiture through financial markets. 2.114 In many of these cases, infrastructure activities can be "unbundled"- split up into 2.111 A second way to increase the benefits parts where competition or a few well-defined of privatization is through a transparent, rules can provide much of the regulation for competitive sectoral regulatory framework. firms. Examples include long-distance The more clarity and transparency in the telephone service and power generation with sectoral regulatory framework and the more it take-or-pay contracts. Of course these mimics the incentives to better, lower-price arrangements are only an imperfect substitute service that occur under competition, the for a public regulatory framework. For higher and more sustainable the benefits to the example, take-or-pay contracts reduce the country of privatization. commercial risk that operators might bear in a market where they sold directly to buyers 2.112 In looking at the enabling policy through transmission networks.5 In other framework it is useful to distinguish between cases, infrastructure activities may face the privatization of firms producing goods and effective competition from substitutes-for services in fairly competitive, open sectors, and example various modes of freight infrastructure and utilities. Firms producing transport-and can be privatized as if they Increasing Transparency and Comnpetition 59 were in a competitive market. In such cases mimic the market and encourage privatization and private infrastructure innovation-will be required. Such provision can go ahead. frameworks would address concerns over the misuse of market power, while assuring 2.115 Where "natural monopoly" elements investors of the opportunity to receive a remain-such as water supply systems and reasonable return on investment and providing electricity transmission and distribution incentives for efficient service provision. The networks-establishment of a suitable approach for involving the private sector in framework for economic regulation, essentially Indonesia's natural gas sector illustrates some the control of prices or profits in ways that of these issues (Box 2.9). Box 2.9 Private participation in building Indonesia's gas infrastructure Development of Indonesia's domestic gas sector would have several major benefits. It would help meet fast growing domestic energy demand, enhance industrial competitiveness through increased security of energy supply and improve the environment through the substitution of cleaner natural gas for fuel oils. In addition, development of a national gas system could free an estimated 900 million barrels of oil for exports annually, yielding net savings of $800 million a year. Despite these potential benefits, Indonesia's domestic gas sector has been slow to develop. The government recently adopted a comprehensive approach to developing the sector, including plans to develop a competitive market structure, a regulatory framework and the corporate structure needed to build an efficient domestic gas system. In this approach, private participation would be sought to help build a national gas system. PGN, the State-owned gas company, would be converted into a limited liability holding company with subsidiaries to construct and operate segments of a national transmission system. International gas utilities would be recruited as joint venture partners for those subsidiaries through a transparent and competitive process. Potential investors, including all partners that would participate in bidding consortia with international gas utilities, would be pre-qualified on the basis of their technical capabilities, record of operating performance and financial strength. Bids would be evaluated on the basis of quantitative variables specified in the bid document that is being prepared with the assistance of PGN's Financial Advisors. The evaluation would be carried out by an inter-departmental government team empowered to negotiate with the highest-departmental bidder. After selection of the Strategic Partner, PGN and its partner would finalize the design, implementation and financing plan for the proposed South Sumatera-West Java pipeline, which will be a key link in the planned national gas system. 2.116 Resolution of a number of such to be reduced further. The sooner and the regulatory issues will be important in further more clearly these issues are resolved, the privatizations or granting of concessions: in lower the risk to the potential investor or power, water and plantations, the costs of the concessionaire, and the higher the benefits for companies' social missions have not been the country. defined or allocated between the Government, the companies, and potential new investors; in 2.117 Full or partial privatization raises the power, the burden of excess generating issue of the management of existing and new capacity and take-or-pay contracts in setting external debt. In Indonesia's four partial future tariffs is unresolved as is the appropriate divestitures to date, the issue of existing debt pace of tariff increases; in power, steel, gas has not come up-the companies' majority and coal supply contracts need to be concluded; owner remains the Government. The in banking, the still-large classified assets need international markets probably would consider 60 Chapter 2 the Government responsible for the existing guarantees at this point might well raise debt despite the lack of explicit government questions in the market about the continuation guarantee, and the debt overhang is reflected in of this record, and certainly would lead to the share price. However, in divestitures of more requests for guarantees. Moreover, full the PTps and other firms that have a large debt Government guarantees of debt tend to reduce overhang, the Government will have to incentives for the concessionaire to perform consider existing debt more explicitly. effectively. Guarantees of the policy framework, which the World Bank could 2.118 New debt from the partially privatized provide, might reduce investor uncertainty finms likely will continue to benefit from the somewhat, but they also might reduce the market's assumption that the Government credibility in policy reform that the implicitly guarantees the issue, at least for Government has built up over many years. awhile. The Ministry of Finance and the Commercial Offshore Loan Team (COLT) need 2.120 Institutional oversight at a high level is to manage carefully the debt issues by these needed to resolve these issues. In Indonesia an firms to ensure that their new external or inter-ministerial team (Team Seven) headed by domestic debt does not impose a burden on the the Minister of Finance provides this oversight. Government, and is consistent with the Team Seven has the mandate to coordinate the macroeconomic program. privatization process for state-owned companies, including selecting the companies 2.119 The Government also needs to reiterate to be privatized and the method of its policy of not providing guarantees of private privatization. The Government also is the debt. To date, Government guarantees have developing a KEPRES to manage the contracting not proved necessary for raising finance for procedures for private participation in private infrastructure projects. Offering infrastructure. Increasing Transparency and Competition 61 Endnotes 1. This section is based on World Bank 1994f, 1995f. 2. To encourage more companies to list on the stock exchange, the legal lending limit for companies with more than 30% of capital listed was set at 30%. 3. The private companies undertaking the investments typically are set-up in Indonesia. Hence, their offshore borrowing is counted as Indonesian private sector debt, even if the majority shareholder of the borrowing company is foreign. 4. An important issue in some privatizations is the degree to which a company should be prepared for privatization by reducing excessive labor costs and taking-over its debt. A clear tradeoff exists here: the degree to which these issues can be resolved will increase the price of the company, but raise the cost to the Govermment prior to the sale. Hence, to the extent that the Government can resolve these issues more cheaply and quickly than the private sector, it should resolve them. If the Government is likely to take a long time resolving these issues, and pay high costs, then it should proceed with the privatization directly. Experience suggests that more extensive restructuring usually does not pay-off (World Bank 1994b). 5. The sale into the transmission and distribution network can be done in various ways. Take-or-pay sales to the transmitter/distributor, as has been done in many developing countries, means the only risk is failure to comply with the contract, and the commercial risk of sales falls on the transmitter/distributor. Competitive sales through a network to final distributors or users, as is done in the U.K. power system and the U.S. natural gas sector, provides a better division of risk. Of course, the risk remains that the still-publicly owned transmission and distribution firms may suffer financial difficulties that affect their ability to fulfill contracts and tariff-setting policies. But these risks are similar to, although much larger than, those that would occur in a fully private system where the final buyer may have difficulty fulfilling contracts. 62 Chapter 3 3 GROWTH BENEFITTED WORKERS 3.1 Deregulation since the mid-1980s has enormous increases in productivity (World led to a manufacturing boom and to rapid Bank 1995b). As a country moves from poor growth of wage employment and earnings of to rich it can expect to see the share of Indonesian workers, especially women. This employment in agriculture drop from 90% to boom represents a major shift in the sources of 5% (World Bank 1995b). The choice of output and employment growth, and was technologies in traditional industries changes as associated with rising productivity (World Bank the rising cost of labor, together with 1994a). However, there is a growing common technological advances, encourages new concern in Indonesia that labor has not shared methods. Job opportunities expand in services commensurately in the growth of the last and industry, as employment in agriculture and decade. Part of this concern is fueled by the the informal sectors declines and workers move perception that an increased concentration of to urban areas and the formal sector. wealth has widened Indonesias social gap. Expressions of dissatisfaction from workers 3.5 In Indonesia, changes in the pattern of themselves, in strikes and other forms of growth since the mid-1980s are following this industrial action, reinforce the concern. pattern. Agriculture is declining in relation to industry. The decline is even more striking in 3.2 The Government has responded by relation to manufacturing, whose growth rate increasing interventions in the labor market, exceeded agriculture's by a factor of 3 especially in setting wages and benefits. In (Table 3. 1). The services sector has grown recent years, it has increased minimum wages steadily by 7% a year since the early 1980s. sharply; passed an all-encompassing social security law that provides health insurance, life 3.6 Employment followed output and value insurance, accident insurance, and pension added growth. Agriculture sector employment benefits to all workers; and passed a ruling that growth declined steadily to the point that compels companies to pay their workers a 13th agriculture shed labor at the rate of 2% a year month of salary each year. in 1990-93 (Table 3.1). Employment growth in the industrial sector, led by the 3.3 This chapter looks at some of the issues manufacturing sector, has remained strong, raised by these developments. It shows that though it slowed in the early 1990s. workers in Indonesia have indeed been major Employment in services, which grew rapidly beneficiaries of the country's sustained growth. during the oil-boom years, thanks to increased It also shows, however, that the rapid government spending, slowed during the industrialization and formalization of the second half of the 1980s, then picked up again economy since the mid-1980s has led to some and actually exceeded manufacturing challenges for Indonesian workers that now employment growth during the early 1990s, in need to be tackled. part due to growing financial sector employment. Agriculture accounted for over A. Structural Change Increased Jobs in half of job-creation in the first half of the Manufacturing and Services 1980s, industry for less than one-fifth. Those shares nearly reversed during 1985-90 and by 3.4 Economic development means dramatic the early 1990s agriculture was losing jobs to changes in the structure of employment and the services and industrial sectors (Table 3.1). Growth Benefitted Workers 63 Table 3.1 Output Trends are Reflected in the Labor Market (annual change, percent) Agriculture All Industry (Manufacturing) Services All Sectors Growth of value added a 1980-85 3.4 4.2 13.0 6.9 5.0 1985-90 3.0 7.0 10.7 7.3 6.3 1990-93 3.2 7.7 9.6 7.0 6.6 Growth of employment b 1980-85 4.0 5.3 5.7 3.8 4.1 1985-90 0.8 7.0 7.2 3.2 2.5 1990-93 -1.8 6.3 4.5 4.9 1.5 Distribution of incremental enployment % 1980-85 53.5 16.7 12.3 29.8 100.0 1985-90 17.1 41.5 29.3 41.5 100.0 1990-93 -67.6 61.8 32.4 105.9 100.0 a Constant 1983 prices. b Employment data are unavailable from a common source for the entire period, 1980-93. Employment estimates for 1980-85 and 1985-90 are based on Census and Inter-Census data, while those for 1990-93 are based on Labor Force Survey data. The Move into High-Productivity Jobs productivity per worker (output per person in industry is more than five times that of 3.7 Productivity growth has been rapid in agriculture). Employment growth also has the manufacturing and service sectors: been rapid in the services sector, where between 1980 and 1990, output per person in productivity is triple that of the agricultural manufacturing grew by 65%, and in services sector. The shift into higher productivity jobs by 42%. Agricultural productivity grew slowly is associated with a decline in the labor- till 1990 but, now that the sector is shedding intensity of growth and would be a problem if labor, productivity can be expected to start to it were associated with rising unemployment grow more rapidly. There also has been a and underemployment. However, as discussed reallocation of workers to higher-productivity below (para 3.23), unemployment has remained jobs: the slowest growth in employment over constant and low. While underemployment is the last two decades has been in agriculture, high, few of the underemployed willingly the sector with the lowest productivity per would work more. Also, increases in worker, and the fastest growth has been in education levels have reduced labor supply industry, the sector with the highest growth (World Bank 1994a). 64 Chapter 3 Figure 3.1 Value Added Per Worker and Sectoral Distribution of Employment in East Asia Malaysia: Value Added per Worker Malaysia: Employment by Sector 600 3000 SW 500 p2500 _ 400 . 2000 U* 100 _ __ 1 1970 1980 1990 lf 1970 1960 1990 Year Yer Korea: Value Added per Worker Korea: Employment by Sector 700- 10000 1300 600 400 - ~ ~ ~ ~ ~ ~ ~ 40 200 -~ 2 00 1 2000 1968 1970 1975 1960 1985 1990 1966 1970 1975 1980 1985 1990 Yer Y"r Indonesia: Value Added per Worker IndonesIa: Employment by Sector iO00- 240000 :4 200 3 10000 !, O- 0 1971 1980 1985 1990 IE 1971 1980 198S 1990 Year Year + Agriculture Industry Services Source: World Bank 1995b for Malaysia and Korea; staff estimnates for Indonesia. B. Labor Market Developments active" to include household activities, there is no difference between the share of men and the 1. Labor Supply share of women in the workforce-about three- fourths. 3.8 There are almost 150 million people of working age (defined as 10 years and older) in 3.9 The Indonesian labor force is projected Indonesia, of which 58% are economically to grow by an average of 1.5% annually over active-either working or looking for work the next 30 years, down from 2.5% between (Table 3.2). The other 42% is attending 1965-95. There are several reasons for the school, engaged in household work, or retired. slowdown. The total fertility rate in Indonesia Correcting the definition of "economically halved between 1970 and 1993, and is expected Growth Benefitted Workers 65 to continue to decline. Rising urbanization also in urban areas, for both men and women). should reduce labor force participation rates for Finally, lengthening school attendance also will both men and women (the labor force reduce participation. participation rate is higher in rural areas than Table 3.2 "Economically Active" People Work T)pe of Activity Numnbers in 1994 ('OOs) Percentage Male Female Total Male Female Total Econornically Active 52,328 33,447 85,775 72.0 44.5 58.0 Working 50,308 31,730 82,038 69.2 42.2 55.5 Looking for Work 2,020 1,717 3,737 2.8 2.3 2.5 Not Economnically Active 20,341 41,690 62,031 28.0 55.5 42.0 Attending School 14,865 14,124 28,989 20.5 18.8 19.6 Housekeeping 293 22,119 22,412 0.4 29.4 15.2 Other 5,183 5,447 10,630 7.1 7.2 7.2 Total 72,669 75,137 147,806 100.0 100.0 100.0 Source: Labor Force Survey, 1994. 3.10 The labor force participation rates for Indonesian men and women, as in most F1Pl2 FUhL ePhllWD,l911N countries, tend to follow a life-cycle pattern 70 and vary by age. In a wide range of countries, a almost all men between twenty-five and fifty- 5 four are directly engaged in income-generating , a activities, whether in the home, on the family 3 / farm or enterprise, or in the labor market (World Bank 1995b). Between-country differences in labor force participation rates of 1 men are confined to the young and the old. t ; ; $ ; ; t ; ; i The Indonesian male labor supply pattern is 6 ^ 3 t typical of that in most countries. At least 95 % Ap&" of Indonesian men aged twenty-five to fifty- i -f ti o -.-_ four are economically active, with participation tapering off after the age of fifty-five. 3.11 With the opening up of new 2. "Formalization" Accelerates in the 1990s employment opportunities in the manufacturing sectors in the mid-1980s the labor force 3.12 The 5.5% annual average rate of wage participation of urban Indonesian women employment growth in 1986-94 is an increased rapidly (Figure 3.2). Although urban unmistakable sign of a rapid expansion in the women of almost all ages increased their economy§ demand for labor (Table 3.3). participation in the workforce, the participation Formal sector employment-non-agricultural of women of 20-24 years of age increased wage employment- grew faster. Thus, even most. The participation behavior of rural though the unemployment rate has remained women, and of men, did not change much over more or less constant since the mid-1980s, this period. about 2.7 per cent a year, and never rose 66 Chapter 3 above 3% over the period, the rapid growth of as garments, footwear and, more recently, wage employment suggests a tightening labor electronics) use female labor more intensively market. than male labor. Consequently, formal sector employment has grown much more rapidly for 3.13 All workers have benefitted from the females than for males, 7.3% a year since the employment opportunities created by mid-1980s versus of 5.3% for males. In Indonesia's rapid economic growth. However, manufacturing, female employment grew by the kinds of labor-intensive industries that have 13% a year compared with 10% for male grown in Indonesia since the mid-1980s (such employment. Table 3.3 Populatlon and Employment Growth (annual growth, percent) 1986-90 1990-94 1986-94 Male Female Total Male Female Total Male Female Total Working Age Population 2.7 2.5 2.6 2.0 2.3 2.2 2.3 2.4 2.4 Total Employment 2.9 2.3 2.6 2.0 1.9 2.0 2.5 2.1 2.3 Wage Employment 4.2 5.7 4.6 6.6 6.0 6.5 5.4 5.9 5.5 Formal Sector a Employment 2.9 5.6 3.6 7.9 9.0 8.2 5.3 7.3 5.9 Source: Labor Force Surveys, 1986-94. a Non-agricultural wage employment. 3.14 Growth of wage employment and F13T*hP qS,l* l formal sector employment growth accelerated during the 1990s (Figure 3.3). The rate of growth of formal sector employment more than doubled to 8.2 % from the late 1980s to the a early 1990s as a result of which the share of gi formal sector workers in total employment, ;_ rose from 21% in 1990 to 27% in 1994. j x 3.15 Economic growth typically brings i ' __ about increased formalization of the workforce -- (Table 3.4). With growth comes an increase in _ wage employment, and employment relationships become increasingly formal. For | i I I I i I I example, in Malaysia, which has a per capita .r income three times that of Indonesia, 62% of _ -g+ -x the workforce works for wages, double b Pw_ bi_ Indonesia's rate. Growth Benefitted Workers 67 Table 3.4 The East Asian Workforce (percent) Country Agriculture Industry Sevices Total Wage __Wloyment Wage Nonwage Wage Nonwage Wage Nonwage China 1.0 60.0 4.0 14.0 11.0 10.0 16.0 Indonesia 6.5 43.9 10.0 5.8 14.3 19.5 30.8 Philippines 9.6 35.7 12.3 3.7 23.6 15.1 45.5 Thailand 6.6 59.7 8.7 3.2 11.6 10.2 26.9 Malaysia 8.8 21.8 19.0 3.6 34.0 12.7 61.8 South Korea 1.2 15.5 30.5 5.1 29.0 18.7 60.7 Source: World Bank 1995b. 3. Workers at All Levels Benefitted 4. Unemployment 3.16 Indonesian policymakers are concerned 3.17 Indonesians, from policymakers to the about the distribution of the benefits of growth man in the street, are concerned about the level among different groups in society. Using and nature of unemployment. However, open education levels as a proxy for skill levels, the unemployment in Indonesia is low-4.4% of benefits of growth in Indonesia have indeed the labor force' (Table 3.6). The unemployed been widely distributed between skilled and are predominantly young people. The unskilled labor (Table 3.5). The earnings of unemployment rate is highest in the age groups all workers grew at an average rate of 12% per 15-19 years (13%), when secondary school year between 1987 and 1994, with the rates leavers join the workforce, and in the age ranging from 9% for those with university group 20-24 years (14%), when the tertiary education to 15% for those with a Diploma I & education graduates enter the workforce. II (which includes diplomas for teacher training and from various polytechnics). The earnings Table 3.6 Unemployment In Indonesia, 1994 of those with lower levels of education (no (Unemployment as a percentage of economically active schooling, primary and junior secondary), grew population) at about 11 % per year, only slightly below the average for all workers. Age Group Male Female Total Table 3.5 Growth benefitted workers at all levels. 10-14 3.2 5.1 4.0 Schooling Level Nominal Earnings Growth, 15-19 11.9 14.3 12.9 1987-94 20-24 13.6 14.9 14.1 (annual avg., %) 25-29 5.0 6.8 5.7 30-39 1.2 1.5 1.3 No Schooling 11.0 40-49 0.4 0.4 0.4 Incomplete Primary 11.5 50-59 0.2 0.4 0.3 Complete Primary 10.8 60-69 0.2 0.2 0.2 Junior High School (General) 9.7 Junior High School (Vocational) 11.1 70+ 0.2 0.0 0.2 Senior High School (General) 10.8 Senior High School (Vocational) 11.5 Total 3-9 S.1 4.4 Diploma I/II 15.2 Diploma m 12.7 University 9.2 Source: Labor Force Survey, 1994. Source: Labor Force Surveys 68 Chapter 3 Together these two age groups account for Tenggara to 8.2% in North Sulawesi and 9.2% almost 70% of total unemployment, while in the Greater Jakarta area. Variations between accounting for only a fifth of total employment. provinces are related to a number of factors, Unemployment in those aged 30 years or more including income, education and urbanization. is very low in Indonesia. Unemployment rates also vary by gender, higher for females 3.20 One dimension of the unemployment (5.1 %), lower for males (3.9%). problem is the extent of long-term unemployment. Duration of recorded 3.18 Unemployment rates are highest among unemployment typically has been long in those with a general senior high school Indonesia: 10 months for males and just under education and those with a university education one year for females in 1992, longer than in (Table 3.7). Those with only primary school several other Asian countries (Manning, 1996). education or less generally come from poorer Moreover, although there has been some families; they cannot afford to be without some tendency for durations of unemployment to fall kind of work. This group makes up 73% of slightly over time, they have remained high the employed but only 27% of the unemployed. since the late 1970s (Dhanani). By and large, those with higher education can afford to wait to find better jobs, because they 3.21 To summarize, outright formal come from richer families (university graduates unemployment in Indonesia is largely frictional in Indonesia come primarily from the top in nature and results from the normal operation income deciles, World Bank 1993d). of markets. It is part of the normal process of workers looking for the right jobs and Table 3.7 Educated entrants wait for jobs. employers looking for the right workers. (unemployment rate as of % of economically active There is no evidence in Indonesia of the types population) of unemployment that require corrective policy Schooling Level Male Female Total action-such as cyclical unemployment- associated with fluctuations in aggregate demand, or structural unemployment associated No Schooling 0.4 0.4 0.4 with economic stagnation, malfunctioning labor Incomplete Primary 0.8 1.1 0.9 Complete Primary 2.0 3.2 2.4 markets, or policy failures. Junior High School (General) 5.5 8.2 6.3 Junior High School (Vocational) 4.5 10.5 6.2 5. Mainly Rural Underemployment, Mainly Senior High School (General) 13.6 24.9 16.9 Senior High School (Vocational) 8.9 14.8 11.0 Urban Overemployment" Diploma 7.2 14.9 10.1 University 10.3 24.9 14.8 3.22 In Indonesia, as in most developing Total 3.9 5.1 44 countries, human resources are underutilized. Many people want to work but cannot find as Source: Labor Force Survey, 1994. much work as they would like. In poor rural areas this takes the form of seasonal and 3.19 Unemployment is an urban chronicunderemployment. However, inurban phenomenon, as in other developing countries. areas many people have to work long hours for The urban unemployment rate was more than their incomes. Over the course of triple the rural rate in 1994. Urban areas development, underemployment declines and account for 30% of total employment but gives way to more formal emiploviiienit and almost 60% of unemployment. There also are higher open unemployment. This tranisitionl is large regional variations in unemployment rates partly due to rising incomes aiLd l urt%aniZai0ion0. in Indonesia, from only 1.5% in the Eastern As countries grow and houseliold inconies rise, Islands of East Nusa Tenggara and West Nusa people increasingly can aflord Co) N.Iil tor a Growth Benefitted Workers 69 desirable job. Also, more modern economies 3.24 Although there still is significant organize work in ways that do not lend underutilization of resources, especially in rural themselves as easily to work sharing or areas, many Indonesian workers, especially adjustment of hours, as agricultural those in urban areas, work long hours arrangements do. (Table 3.8). According to the Indonesian labor law, the normal work week consists of no more 3.23 Underutilization of labor is common in than forty hours with no more than seven hours Indonesia, though most of it is voluntary. in each day. However, only a quarter of all Defuiing underemployment as working less Indonesian workers work some kind of than 35 hours per week, and severe "normal" working week of between 35-44 underemployment as working less than 25 hours. Nearly 40% work either more or less hours a week, 38% of workers were than this and 6% work more than 60 hours per underemployed, and 21 % were severely week. Long hours mainly are an urban underemployed in 1994 (Table 3.8). Of these, phenomenon: over half of urban workers work however, only 12% were looking for additional more than 45 hours per week, compared with work. Underemployment and severe only 30% of rural workers. With the rapid underemployment are twice as severe in rural urbanization of the economy long working areas as in urban areas. About 45% of rural hours may become more common. The group workers are underemployed compared with working between 45-59 hours per week was the 21% of urban workers, and about 25% of rural fastest growing of all groups of workers in workers are severely underemployed compared 1986-94 (Table 3.8). with 10% of urban workers. Table 3.8 Rural Underemployment, Urban Overemployment (percent) Hours of Work Annual Employment Growth, Share of Employed, 1994 1986-94 Rural Urban Total 1-9 -0.1 3.6 1.4 3.0 10-24 1.0 21.8 8.8 17.9 25-34 2.1 19.3 10.9 16.8 35-44 1.3 24.9 26.6 25.4 45-59 5.3 26.1 41.7 30.8 60+ -1.6 4.3 10.5 6.1 Source: Labor Force Surveys. 3.25 The number of hours worked differs by working hours is concentrated in the industrial sector, with the longest working hours in and services sector. Just over half of all industry and services (Table 3.9). When industrial workers, and 45% of service workers move out of the agriculture sector a workers, work more than 45 hours per week or large part of their increase in earnings occurs more. Workers in the service sector work because they work longer hours. Most of the particularly long hours: 12% of them report underemployment and severe underemployment working 60 hours or more per week. is in the agriculture sector, with almost two- thirds of the workers working less than 35 hours per week, and with a third working less than 25 hours per week. The problem of long 70 Chapter 3 Table 3.9 When you leave agriculture, you work 6. Wages and Earnings Growth longer hours. 3.27 Rapid and sustained economic growth Hours of Work APerceztntaRwe ofn y Services. 1994 since 1970 has led to big gains in wages and incomes for Indonesian workers (Table 3.10). Under 10 5.4 1.4 2.0 Since the mid-1970s, real agricultural wages 10-24 26.2 8.9 8.8 grew at about 3.7% per year. Real 25-34 31.9 13.3 17.8 manufacturing wages grew even faster, at about 35-44 22.0 25.9 26.3 5.5% per year, surpassing the rate of growth 45-59 13.5 46.8 33.1 of real per capita GDP. 60+ 1.1 3.7 12.1 Total 100.0 100.0 100.0 3.28 Indonesian wage earners also improved their position in relation to workers in most Source: Labor Force Survey, 1994. other countries in terms of wage growth during the last two decades (Table 3.10). Wages of 3.26 Surveys of workers in the industrial agricultural workers rose faster than those of sector indicate that for many of them long Indonesian agricultural workers in only three working hours are a problem and they countries-Egypt, Korea, and Malaysia. In the complain of forced overtime work. They manufacturing sector only Korea surpasses suggest that the long working hours are not Indonesia's rate of growth of wages. In really voluntary-working a 10-12 hour shift countries in other parts of the world-South daily is part of the job. Female workers, Asia, Latin America or Africa-either growth especially, find the long hours a problem, has not been as rapid as in Indonesia, or given their other household responsibilities. workers have noj shared in the growth as they Surveys also indicate that, in violation of labor have done in Indonesia. regulations, workers are often not paid at overtime rates for the overtime hours that they put in. Table 3.10 Indonesia's growth translated into higher wages. (annual growth, percent) Period Real Real Period Real Real GDP per Agricultural GDP per Manufacturing Capita Wages Capita Wages Indonesia 1976-88 4.0 3.7 1970-91 4.2 5.5 Bangladesh 1960-91 0.8 -0.7 1967-89 0.7 -1.1 Colombia 1960-88 2.3 2.2 1968-92 2.5 0.4 Egypt 1970-88 4.5 5.2 1970-87 4.6 0.9 Ghana 1969-88 -1.2 -4.0 1964-87 -1.3 -3.6 India 1960-90 1.9 1.8 1963-90 1.9 1.7 Kenya 1964-92 2.1 -0.9 1963-91 2.1 -1.0 Korea 1960-78 6.9 - 7.1 1966-91 7.4 9.1 Malawi 1968-89 1.0 -3.7 1968-86 1.2 0.2 Malaysia 1971-92 4.4 4.0 1968-92 4.1 2.2 Mexico 1962-85 2.9 1.3 1970-91 1.6 -1.2 Pakistan 1970-92 2.3 2.9 1963-88 3.0 4.9 Peru 1960-86 1.0 -2.0 1963-86 0.7 -1.0 Philippines 1960-77 2.4 -1.1 1963-91 1.2 0.9 Sri Lanka 1980-90 2.8 -1.1 1966-90 2.9 1.0 Source: World Bank 1995b. Growth Benefitted Workers 71 3.29 Average real earnings-the product of hours (Table 3. 11). Real earnings of workers wages and hours worked-of Indonesian grew by an average rate of nearly 6% a year in workers grew even faster than wages, as 1989-94, and the earnings increases for female workers have moved to better paying jobs, and workers exceeded those for male workers. have found steady employment for longer Table 3.11 Real Gains in Monthly Earnings of Wage Employees 1989 1994 Annual Rate of Growth, 1989-94, percent Nominal Monthly Earnings (Rp) Male 89,361 176,834 14.6 Female 50,933 113,497 17.4 Total 77,164 157,343 15.3 cpI Index, 1989=100 100 153 8.9 Real Earnings Index, 1989=100 Male 100 129 5.2 Female 100 145 7.8 Total 100 133 5.9 Source: Labor Force Surveys. 3.30 Income growth in labor-intensive longer working hours (Table 3.12). manufacturing has been particularly rapid for Consequently, women earn twice as much in female workers. Most women in industry are labor-intensive manufacturing as in farming. poorly educated (primary school or less) The small differential between hourly wages unskilled or semi-skilled workers. Their main for agriculture and manufacturing for women alternative is farm employment. By moving to with similar qualifications indicates industry, they earn higher wages and they gain underemployment in agriculture persists. access to steady, full-tine employment, and Table 3.12 Hours worked, not wages, rise when workers leave agriculture. a Year Average Hours per Week Average Weekly Earnings Average Hourly Wage (Rp) (Rp) Agriculture Labor-Inten. Agriculture Labor-Inten. Agriculture Labor-Inten. Manufac. Manufac. Manufac. 1989 29 44 5,685 9,607 199 218 1990 27 44 6,123 10,237 228 232 1991 29 41 8,373 13,251 285 320 1992 25 44 8,704 15,268 344 346 1993 29 44 9,711 17,284 352 411 1994 28 44 11,284 22,283 421 507 Source: Labor Force Surveys. a Earnings and hours in the main job only for fenale primary school graduates in lava. Labor-intensive manufacturing refers to the following industries: textiles, garments, leather products and footwear. 72 Chapter 3 C. Education Improvements and Earnings 3.32 People will further their education if it is likely to pay-off. The labor market has 3.31 The increasing educational attainment encouraged workers to invest in education by of the labor force is one of the most dramatic rewarding these investments handsomely. The changes in Indonesia in recent decades. 70% higher levels of education have contributed to of the workforce had no or incomplete primary the increase in productivity of Indonesian education as recently as 1971 but as a result of workers, and to a rise in their earnings. the massive investment in basic education Average earnings of wage employees are enrollment rates at all levels of education higher with each level of schooling, with the increased (Figure 3.4) and the proportion of earnings of university graduates being five the workforce with less than a primary school times as high, on average, as those of workers education fell to one-third by 1994. with no schooling (Table 3.13). FRMi3A Rbk'E6xAduLWUvdIhdimaIW;9N 3.33 The difference between earnings of * workers with complete and incomplete primnary U education (Table 3.13) is the smallest. As noted in Chapter 4, this may reflect problems U ,/// with the quality of educational services. Indonesia still is a rural society-70% of the 1' * //,/1990 population lived in rural areas-and youths in some rural areas make an important *I , , , economic contribution in poor households. NW bo A NW High opportunity costs for staying in school, ehi Nb HNO combined with low wage differentials, make L.wdk*q for low primary school completion rates in 3-i. -'-im -i Indonesia's poorest regions. Chapter 4 bECE ~FUShW~L discusses ways of reducing the opportunity cost of finishing primary school in the context of a pro-poor development strategy. Table 3.13 Schooling Pays Schooling Level Index of Average Earnings Female/Male Earnings (No Schooling =100) (%) No Schooling 100 50 Incomplete Primary 129 55 Complete Primary 156 53 Junior High School (General) 204 60 Junior High School (Vocational) 236 70 Senior High School (General) 282 75 Senior High School (Vocational) 290 79 Diploma Illl 384 86 Diploma III 507 75 University 546 66 Average 217 64 Source: Labor Force Survey, 1994. Growth Benefitted Workers 73 3.34 There are gender differences in the 3.35 Although the level of schooling rewards to education. At each level of increased for both male and female employees education, women workers are paid less than between 1986 and 1993 (Table 3.14)2, male workers, with the result that the average schooling levels grew considerably faster for female earnings are only two-thirds of average females. As a result gender differences in male earnings (Table 3.13). This gender gap schooling that were prevalent in 1986 have in earnings follows a U-shape as the level of narrowed significantly. The gender gap in education rises, ranging from a high of 50% education status declined at all levels of for women with no education to a low of 14% education between 1986 and 1993 (Table 3.14). for women with a Diploma (I or 1I), then The male-female wage gap also has narrowed widening to 34% for women with a University from 85% in 1986 to 40% in 1993. education. Table 3.14 Men are better educated and paid, but women are catching up. Variables 1986 1993 Males Females Males Females Percent of Individuals having: No schooling 6.1 18.2 3.9 8.8 Incomplete Primary 17.8 22.3 11.9 14.1 Complete Primary 29.8 22.2 28.5 25.8 General Junior High 11.6 5.6 13.5 8.9 Vocational Junior High 2.8 1.3 2.1 0.9 General Senior High 12.2 7.7 17.3 14.2 Vocational Senior High 13.7 18.1 14.2 19.1 Diploma 1,2 1.0 1.3 1.3 1.9 Diploma 3 2.6 2.2 2.9 2.8 University 2.4 1.1 4.6 3.6 Average Hourly Wage Rate (Rp) 741 400 996 711 Average Age (Years) 33.8 31.0 34.6 30.8 Source: Behrman and Deolalikar (1995) for 1986 and staff estimates for 1993. 3.36 An additional year of schooling led, on At subprimary and primary levels of education, average, to an increase in earnings in the range the returns to an additional year of schooling of 2.8-9.7% in 1986 (Table 3.15).3 The wereaboutthesameforbothmenandwomen. percentage increases in earnings per additional However, at post-primary levels, the marginal year of schooling were significantly smaller for increases in earnings with schooling were subprimary and primary schooling than for the greater in percentage tenns for females than for higher schooling categories. Also, there were males. These patterns also were found in no significant differences between the estimated 1993. impacts of vocational and general schooling. 74 Chapter 3 Table 3.15 Impact of Additional Schooling on Earnings, by Gender, 1986 and 1993 Level of Schooling Impact of Additional School Year on Impact of Additional School Year on Earnings in 1986 Earnings in 1993 (percent) (percent) Males Females Males Females Incomplete Primary 2.8 2.8 3.9 2.8 Complete Primary 3.6 3.6 3.7 3.9 General Junior High 4.1 6.3 4.9 7.1 Vocational Junior High 4.6 5.7 4.9 9.4 General Senior High 4.7 9.1 4.3 10.1 Vocational Senior High 4.7 9.3 5.2 11.7 Diploma 1,2 4.7 8.9 5.8 9.7 Diploma 3 6.1 8.9 6.3 10.7 University 6.9 9.7 6.5 10.8 0 Source: Behrman and Deolalikar (1995) for 1986 and staff estimates for 1993. D. Minimum Wage Policy there was a generous umbrella of legislation governing working conditions-hours of work, 3.37 There are two approaches that rest period, overtime, annual leave with pay, governments can adopt to improve economic minimum age of employment, and maternity efficiency and social equity through labor and menstrual leave for women-these market interventions. One is allow workers, or regulations were seldom enforced.4 Prior to their freely elected representatives (unions or the mid-1980s most of these labor market other organizations), to bargain with regulations were irrelevant to the large majority employers. The second is to intervene through of Indonesians who worked in the rural and direct government legislation that sets wages informal sectors. and working conditions. Most countries adopt a mixture of the two. For example, in addition 1. Minimum wages are rising fast to legislation establishing workers' basic rights (freedom of association and organization), 3.39 In 1989, the Government introduced many countries also have legislation to achieve new legislation on minimum wages. The particular social goals. The most common minimum wage refers to the lowest basic wage interventions include minimum wages, bans on plus permanent allowances, where the basic child labor, and protection of women and wage must be at least 75% of the minimum minorities. wage. Minimum wages are to be fixed based on considerations of "minimum physical need" 3.38 Prior to the mid-1980s, the Government (KFM), the cost of living, and labor market largely left wage determination to the labor conditions. The minimum wage is set market. Wages for urban industrial workers separately by region, and sometimes, by were typically not much higher than for sector. The 1989 regulation states that agricultural workers with similar qualifications. minimum wages must be reviewed at least Although there was legislation governing every two years. A 1990 Decree requires that minimum wages for formal sector workers, minimum wages be adjusted once a year in line minimum wages were not binding. Although with CPI changes. Growth Benefitted Workers 75 3.40 Minimum wages on average tripled in F' &A a w _ _hlTM nominal terms and doubled in real terms between 1989-95 (Figure 3.5). Underlying the U national averages are large variations in minimum wage increases by province. if Looking at the nine provinces in which manufacturing accounts for more than 10% of employment there was a wide range of minimum wage increases in real terms in 1990-95 (Table 3.16). Central Java and West ____, Java, which is the second most industrialized province in Indonesia, experienced a tripling of | I i I I | J real minimum wages. In Greater Jakarta, the s most industrialized region in Indonesia, -11hUSisif - +D° iWI minimum wages increased by a smaller 55%. Table 3.16 Minimum Wages Increased In the 1990s Province Minimum Wage Minimum Wage Increase in Nominal Increase in Real in 1990 in 1995 Minimun Wage, Minimum Wage, (Rp per day) (Rp per day) 1990-95 1990-95 (percent) (vercent) Lampung 1750 3500 100 47 Jakarta 2100 4600 119 55 West Java 1200 4600 283 231 Central Java 780 3000 285 234 Yogyakarta 900 2850 217 160 East Java 1409 3700 163 105 South Kalimantan 1000 3500 204 159 Bali 1800 3900 117 65 East Nusa Tenggara 1600 2900 81 36 Source: Annex Table Al. 3.41 Productivity growth in Indonesia has Rpm SbPAdl ll llVro been rapid enough to keep pace with the large increases in minimum wages, at least until X 1993 (Figure 3.6). Between 1993 and 1994, minimum wages grew about 10% faster than overall productivity. In the large / manufacturing sector, for which data is j available only until 1992, productivity growth " \ was so rapid that it has outpaced the rise in minimum wages. It is in this sector that I minimum wages are most likely to be enforced, I__ _' and therefore potentially are most damaging. Thus, at least until 1993 overall manufacturing i I I i ! i productivity kept pace with minimum wages Tr and the recent increases in minimum wages had Y little adverse impact on employment growth. b1 *_bV_h 4_' kw LiF= km 76 Chapter 3 2. ... and beginning to bind. minimum wage increased from about a quarter in 1992 to a third in 1994 (Table 3.17). There 3.42 More recent increases in the share of was a large increase in the percentage of workers earning less than the minimum wage manufacturing workers earning less than the indicates that the minimum wage is becoming minimum wage between 1992 and 1994 in more binding. The percentage of every region except East Java. manufacturing employees earning less than the Table 3.17 Minimum wages are beginning to bind. (percentage of manufacturing workers earning less than the minimum wage) Region Male Female Total 1992 1994 1992 1994 1992 1994 Jakarta 3.9 8.0 12.6 23.3 7.0 13.1 West Java 9.7 25.4 22.2 45.6 14.4 32.5 Central Java 13.4 31.4 48.1 64.2 27.6 45.9 East Java 24.1 23.9 56.8 58.9 38.6 38.8 Sumatra 12.6 22.6 12.6 57.9 23.1 33.0 Kalimantan 3.0 5.3 23.8 45.1 8.8 12.7 Sulawesi 11.9 17.4 11.9 70.0 25.8 34.2 Bali 23.6 36.0 23.6 72.0 39.3 57.6 Eastern Islands 17.3 31.4 17.3 73.5 27.7 45.0 All Regions 13.2 23.4 39.0 53.8 23.3 35.0 Source: Labor Force Surveys. 3.43 Looking at the increase in the average wages in 1990 to 60% by 1994 proportion of workers earning less than the (Figure 3.7). While this proportion has gone minimum wage, it appears that minimum up for both men and women, it suggests that wages are binding for female workers in most the minimum wage is more binding for provinces, and for male workers in some. The women. In 1994, the minimum wage as a percentage of manufacturing workers earning proportion of average wages was a staggering less than the minimum wage is particularly 83% for women compared with 53% for men. high for females. In six out of the nine regions, over half of the female workers in the FbpS37 RiodVlUnWqesbAvuqEmi*ngbyGv manufacturing sector reported earning less than the minimum wage in 1994, and in four regions (Central Java, Bali, Sulawesi, and the Eastern Islands) over two-thirds of female industrial workers earned sub-minimum wages. C= This is true despite a rapid increase in real wages for female workers between 1989 and 1994, as discussed earlier. 6 1.4 YW 3.44 The increase in the minimum wage in +.- .-X T relation to the average wage also suggests that km 6w F=%n A the minimum wage is becoming more binding. Minimum wages have gone up from 48% of Growth Benefitted Workers 77 3.45 Provincial variation in the ratio of 3.46 The relation between minimum and minimum to average earnings in manufacturing average wages at the provincial level differs by is large (Table 3.18). The ratio ranged from gender (Table 3.18). It is further evidence that 0.3 in South Kalimantan to 0.8 in Central Java, the minimum wage is binding in most of the Bali and East Nusa Tenggara. In 1991, it went industrialized provinces, especially for women. up in all but two provinces (Table 3.18); in The minimum wage by 1994, for females, was Greater Jakarta it remained constant, and it equal to at least 70% of average manufacturing came down slightly (from 0.8 to 0.7) in East earnings in Jakarta, and in six of the nine Nusa Tenggara. Minimum wages were equal provinces it actually exceeded average female to at least half of average manufacturing earnings. In contrast, for males the minimum earnings in all the provinces by 1994, and in wage did not exceed average male earnings in Bali the minimum wage actually exceeded any province, though in Lampung it came close average manufacturing earnings by 10%. (90%). Table 3.18 Minimwn wages are approaching average earnings. (ratio of minimum wage to average earnings in manufacturing) Province Male Female Total 1991 1994 1991 1994 1991 1994 Lampung 0.6 0.9 0.8 1.0 0.7 0.9 Jakarta 0.5 0.4 0.6 0.7 0.5 0.5 West Java 0.5 0.7 0.8 1.0 0.6 0.8 Central Java 0.6 0.7 1.1 1.2 0.8 0.9 Yogyakarta 0.4 0.5 0.7 0.8 0.5 0.6 East Java 0.4 0.6 0.8 1.1 0.5 0.7 South Kalimantan 0.3 0.4 0.6 0.8 0.3 0.5 Bali 0.6 0.8 1.1 1.5 0.8 1.1 East Nusa Tenggara 0.8 0.6 1.3 1.8 0.8 0.7 Source: Annex Table A2. 3. Impact of Minimum Wages on Average garments and footwear, and mostly in Greater Wages and Employment Jakarta and West Java. Hence, the impact of minimum wage regulations is likely to be most 3.47 These data suggest that compliance with binding in these sectors and regions. In sectors minimum wage regulations is an issue, one that that are dominated by smaller, less visible is typical in developing countries. Compliance fnrms, compliance is lower. Independent with minimum wage regulations in any unions, which in other countries help enforce developing country is likely to be low because compliance with minimum wages, do not exist. enforcement is expensive. Compliance in Indonesia largely is limited to sectors that are 3.48 The recent sharp increases in minimum dominated by more visible investors, such as wages during the 1990s are estimated to have foreign investors, mulfintintals (who often increased labor costs in Indonesia and reduced follow their own labor standards) or large wage employment and investment.5 The domestic conglomerates, for whom the risks 100% increase in minimum wages are associated with non-compliance are higher. estimated to have pushed up average wages by Most of such investors are in the export- about 10% (Table 3.19). oriented, labor-intensive sectors such as textile, 78 Chapter 3 3.49 A doubling of minimum wages also is women, there is likely to be a stronger impact estimated to lead to a 2-3 % decrease in total on female employment than male employment. wage employment. Since minimum wages are These results indicate that urban wage more binding for young workers, an increase employment, especially of women and of in this ratio has a much more adverse impact young workers, is likely to have suffered as a on their employment: the wage employment of consequence of rapid minimum wage growth. workers aged 15 to 24 years goes down by Moreover, the loss in employment is likely to twice as much (7%) as the average. Similarly, become greater, the closer the minimum wage since minimum wages are more binding for approaches the average. Table 3.19 Higher minimum wages raise average wages but reduce employment and investment. Policy Impact on Short-run Impact A 100% increase in (1) Average wages About 10% increase the minimum wage (2) Average employment of urban About 2-3% decrease wage employees (3) Average employment of young About 7% decrease (15-25 year old) urban wage employees (4) Total investment About 5-7% of GDP decrease Source: Rama (1996). 3.50 Part of the slowdown in manufacturing to a more productive and better paying job has employment growth during the early 1990s been an important means of escaping from from the late 1980s, can be attributed to the poverty in the past. Governments minimum wage policies. Table 3.19 indicates that a doubling of 4. Minimum Wages: Not a Tool for minimum wages has a strong negative impact Reducing Poverty on investment: total investment is estimated to decline by about 5-7 % of GDP. This decline in 3.52 The minimum wage is not an investment will lead to further decreases in appropriate instrument for poverty alleviation. employment. It only covers wage employees, and of those, only formal sector employees. The poor in 3.51 While some workers in companies Indonesia are, by and large, not wage earners where the minimum wage is more likely to be but the self-employed and rural people. Over enforced, such as large companies in the 48% of the reduction in the number of people Greater Jakarta area and public sector living below the poverty line (or the national companies, will have experienced a gain in headcount index) between 1984 and 1987 was their earnings due to the minimum wage due to the drop in poverty among self- policy, this is likely to have been at the employed rural farmers (Huppi and Ravallion). expense of other workers, particularly women The second most important contribution came and young workers, who will have experienced from rural agricultural workers, who accounted a decline in their employment opportunities in for another 11% reduction in the headcount the formal sector. A slowdown of index. These two groups within the employment creation also is likely to lead to a agricultural sector accounted for almost 60 % of slowdown in poverty alleviation since moving the reduction in poverty as measured by the Growth Benefitted Workers 79 headcount index. In all, about 21% of the 3.53 Poverty in Indonesia in 1993 remains a decline in the number of people living below predominantly rural, agricultural phenomenon the poverty line between 1984 and 1987 was (Mason and Baptist, 1996). 87% of the poor due to within-sector improvements in the live in rural areas, and 70% of the poor are living standards of wage-earning households, farmers in rural areas (Table 3.20). Among with over half of this impact resulting from the the 13 % of the poor that live in urban areas, gains to rural, agricultural households. less than half are wage earners, and only about Another 13% of the decline in the number of a third are wage earners in the formal sector. poor was due to population shifts among In other words, urban formal sector wage various employment sectors. These shifts employees, which is the group most likely to occurred largely from rural to urban areas, be affected by minimum wage regulations, which initially had lower poverty measures. make up less than 5 % of the remaining poor in 1993. Table 3.20 Poverty in Indonesia, 1993 Primary Income Employment Status Incidence of Poverty Contribution to Poverty Source Head Count Index (percentage) Urban Rural Urban Rural Agriculture Wage earner 20.2 25.3 1.8 13.6 Self-employed 13.8 20.7 2.0 56.5 Mining Wage earner 1.7 12.6 0.1 0.3 Manufacturing Wage earner 4.0 10.3 1.1 2.1 Self-employed 3.8 16.9 0.2 2.6 Construction Wage earner 6.6 12.4 1.2 2.4 Self-employed 7.5 7.5 0.2 0.2 Trade Wage earner 1.9 8.1 0.2 0.4 Self-employed 5.5 7.8 2.8 4.2 Transportation Wage earner 3.6 9.7 0.5 0.8 Self-employed 8.4 8.1 1.0 1.0 Finance Wage earner 0.4 4.3 0.0 0.1 Services Wage earner 2.0 4.2 1.2 1.8 Self-employed 5.5 8.0 0.6 0.7 Source: Mason and Baptist (1996). 3.54 Labor markets began to play a much alleviation remained about the same in the two more important role in poverty alleviation periods, at about 12-13%. Directly and during the 1990s compared with the 1980s indirectly, labor markets contributed to about (Mason and Baptist 1996). 31% of the decline 40% of the decline in poverty in the 1990s in the number of people living below the compared with one-third in the mid-1980s. poverty line between 1990 and 1993 was due to within-sector improvements in the living 3.55 Since most of the poor are self- standards of wage earning households. This is employed, the direct role of labor markets in significantly higher than the 21% figure for the welfare of the poor continues to be small. 1984-87. However, the contribution of However, the indirect effects are important and population shifts among sectors of employment, growing. Over time, the shift of population usually from self-employment in rural areas to out of self-employment in rural areas and into wage employment in urban ones, to poverty urban wage employment has played an 80 Chapter 3 important role in poverty alleviation in provinces, such as Lampung, Jakarta, and East Indonesia. Labor market policies, such as the Java, the workers earn up to 6-7 times the minimum wage policy, that slow down the rate poverty line. While workers earn less than this of creation of wage employment, especially multiple in others, in no province do they earn wage employment in the highly productive less than at least three times the urban poverty formal sector, are therefore likely to have an line. There is, as usual, some gender variation adverse impact on poverty alleviation in in earnings in manufacturing. Males in Indonesia. manufacturing earn an average of six times the poverty line, and the ratio ranges from 4-7 3.56 Formal sector workers are not poor in times the poverty line across provinces. Indonesia. Manufacturing workers, on Female earnings in manufacturing average four average, earn more than five times the official times the poverty line, and across provinces urban poverty line (Table 3.21). In some range from 1.5-6 times. Table 3.21 Urban manufacturing workers are not "poor." (Average earnings of urban workers in manufacturing in relation to official urban poverty line, 1993) Province Male Female Total Lampung 7.1 5.2 6.7 Jakarta 6.2 4.2 5.6 West Java 5.3 3.5 4.6 Central Java 4.4 2.3 3.5 Yogyakarta 4.1 2.1 3.2 East Java 5.7 5.9 5.8 South Kalimantan 5.2 3.7 4.7 Bali 4.0 2.5 3.0 East Nusa Tenggara 4.9 1.5 3.5 All Indonesia 6.2 4.0 5.3 Source: Annex Table A3. 5. Minimum Wage Increases May Not especially Tangerang and Bekasi, where Improve Industrial Relations foreign capital plays a major role. Summaries of the 47 major strikes reported in the major 3.57 Increasing labor unrest in Indonesia in national newspapers in 1991 indicate the the 1990s is a cause for concern. The number following pattern: just over half of all strikes of strikes per year went from 19 to 296 occurred in the labor-intensive textiles, (Table 3.22). The number of strikers went garments, and footwear sectors; almost all of from just over a thousand to over a 140 these took place in Jakarta and the surrounding thousand or from 0.4 to 3.3 strikers per 1,000 areas (Jabotabek); close to half the strikes non-agricultural workers. The economic loss occurred in establishments with 500 workers or from these strikes, measured by the number of more; and finally, a few of the strikes involved working days lost, went from about twenty- thousands of workers and extended over nine thousand hours in 1989 to almost a million several days (Manning 1993). In 1994, 95% and a half hours in 1994. of all strikes took place in three provinces: Jakarta (19%), West Java, mostly in the areas 3.58 Many of these strikes occurred in surrounding Jakarta (39%), and East Java export-oriented zones close to Jakarta, (37%), predominantly in Surabaya. Growth Benefitted Workers 81 3.59 Wages and working conditions have increases-one-third of all strikes in 1994-and been the main issue in recent unrest. The complaints about unsatisfactory working strikes appear to have been primarily associated conditions (Manning 1996). with non-compliance with minimum wage Table 3.22 Strikes are increasing. Year Strikes Strikers Work-Hours Strikers per I, 000 Non- % of all Strikes in Lost Agricultural Workers Manufactunng 1989 19 1,168 29,257 0.4 68 1990 61 27,839 229,959 0.8 89 1991 130 64,474 534,610 1.8 96 1992 251 143,005 1,019,654 5.2 na 1993 185 103,490 966,931 2.6 90 1994 296 147,662 1,421,032 3.3 94 Source: Human Resources Profile of Indonesia, 1995 and data provided by Ministry of Manpower. 6. Summary and Conclusion on Minimum minimum wage policy are clearly visible but Wages the benefits are not, reliance on minimum wages as a tool to improve workers' welfare 3.60 Minimum wages are beginning to bind and to reduce poverty should be reduced. and to have a negative effect on the creation of wage employment, especially of women and 3.62 The Government raised minimum young workers. Caution must be exercised in wages in April 1996 by 10.6%. As noted in raising them further for fear of eroding Chapter 1, the Ministry of Manpower also competitiveness, lowering employment growth mandated that regular workers must be paid for and, paradoxically, of increasing poverty and a 30-day month, an increase over the previous labor unrest. There is little evidence that 25 or 26 days (depending on the number of minimum wages are an effective tool for Sundays in the month, for which workers were reducing poverty, which is largely a rural and not paid). Thus, effectively minimum wages informal sector phenomenon in Indonesia. increased by 30%. Future minimum wage Compliance with mandated, minimum wages is increases need to take into account local labor limited to the formal, industrial sector. Even market conditions and to be based increasingly there, workers may not experience an increase on local indicators of the state of the labor in their welfare if employers respond to market, such as the local rates of growth of increases in minimum wages by reducing other wages and employment, rather than on poverty- forms of non-wage compensation that are not based measures. covered by minimum wage law, such as holidays, vacation, sick-leave pay, health E. Emerging Issues of Labor Standards insurance, and retirement benefits. 3.63 Indonesias rapid and broad-based 3.61 The higher minimum wages mandated pattern of growth has had a spectacular effect by law are raising workers' expectations and, on poverty reduction. Only 25 years ago, at in the absence of adequate enforcement, are the beginning of the First Twenty Five Year leading to non-compliance and increased Long Term Development Plan (PJP 1, 1969/70- worker unrest. Given that the costs of the 1993/94), Indonesia was one of the poorest 82 Chapter 3 countries in the world (World Bank 1990a). In wage, which typically lagged "minimum 1967, Indonesia& GNP per capita was $50, physical needs," in line with that indicator in roughly half that of India, Bangladesh, or all regions by April 1994, as noted above. Nigeria. Poverty was widespread throughout the country. The earliest estimates of poverty, 3.66 Aggressive minimum wage increases in 1970, indicated that 60% of the population are not an appropriate policy to deal with or about 70 million Indonesians were living in problems of worker welfare, poverty absolute poverty. By 1993, the proportion of alleviation, or income distribution, as discussed poor had declined to 14%, or about 26 million in the previous section. Moreover, the large people (Chapter 4). minimum wage increases are provoking increasing non-compliance, which can be 3.64 The model of development that anticipated to lead to more industrial relations Indonesia has adopted-market-led growth problems. combined with investments in physical and social infrastructure-has proved to be the most 3.67 The focus of government policy needs beneficial one for workers in developing to be on employment creation, with the countries, and also the one that has been most determination of wages left largely to market successful in alleviating poverty. Beginning in forces. In addition, the govermnent needs to the late 1960s, the Government adopted a intervene in certain areas to improve social development strategy, which has been pursued outcomes, such as with issues of child labor through successive Five Year Development and women in the workforce. The government Plans, with a commitment to broad-based can also promote improvements in workers' economic growth, particularly rural welfare by providing an environment where development. The Governments development workers can negotiate freely with employers efforts were focused primarily on agriculture for better wages and working conditions. (especially rice), education, and transport 1. Child Lbor infrastructure. The emphasis of Government policy was on providing opportunities to 3.68 The term child labor covers a wide workers to find productive employment, and on range of situations to which ethical, economic enhancing the quality of labor through and legal responses could be very different education and training. Beyond that, the (Grootaert and Kanbur 1995). Children could determination of the rates at which wages, be helping out on the family farm, as they employment, and incomes would grow, and of traditionally did in Indonesia, or they could be labor market conditions, was left largely to engaged in onerous industrial work. For the market forces. purpose of defining a policy towards child labor, both the nature of the work and the 3.65 Dissatisfaction with this model is being nature of the relationship between the child and expressed for the first time in the 1990s. the employer must be considered. Recent labor market policy initiatives have tended to be justified publicly in terms of their 3.69 According to the Labor Force Survey impact on workers' welfare, poverty alleviation of Indonesia, there were about two million and income distribution. For example, recent child workers between the ages of 10-14 years increases in minimum wages have been in 1994. No data are available on the number explained in terms of ensuring low-income of working children below the age of 10 workers the ability to afford a minimum basket years.6 of goods. Thus, the Governmentd stated long- 3.70 The prevalence of child labor is linked term objective with respect to the minimum to poverty and to poor quality or availability of wage policy has been to bring the minimum education. As incomes have risen and as Growth Benefitted Workers 83 education has spread, the number of children minimum age for admission to employment or working declined by 26% during 1986-94 work at "the age of completion of compulsory (Table 3.23). The number of children working schooling and, in any case, ...not less than 15 in urban areas doubled but this largely reflects years" (ILO 1994). However, the increased urbanization. The participation rates administrative capacity to enforce this law is of urban child labor have risen about 25%. lacking and children work to supplement low Nonetheless, the rapid growth of urban child family incomes. The Department of labor is disturbing, since it is more likely to be Manpower issued new regulations on child associated with onerous forms of child labor. labor in 1987 acknowledging a class of For example, official statistics, indicate a children under the age of 14 who, for socio- quarter of all urban working children work economic reasons, must work. It seeks to more than 45 hours a week, and a third of protect these children by legalizing their these report working more than 60 hours a employment and by setting minimum working week. In contrast, only 9% of rural working standards for them. children report working more than 45 hours a week, and only 1 % work more than 60 hours b. Measures to Reduce Child Labor a week. 3.72 Child labor is a consequence of Table 3.23 Child labor increasingly is an urban poverty. But is also is a cause of poverty, and phenomenon. therefore requires some action. Some forms of (thousands of workers) child labor affect childrens' health and prevent them from attending school. When this occurs, 1986 1994 the children's capacity to earn a decent living in the future is compromised, making them prime candidates for a lifetime of poverty. Rural 2,583 1,803 Urban 135 276 3.73 National legislation and conventions banning child labor can only deliver results Total 2,718 2,079 ,Uwhen accompanied by measures to shift incentives away from child labor and toward Source: Labor Force Surveys, education. The most important role for a. The Legal Framework governments is to provide a safety net to protect the poor, expand opportunities for 3.71 Indonesia has enacted legislation to quality education, and gradually increase prohibit the employment of children under 15 institutional capacity to enforce legislated bans. years of age and to specify the conditions Programs that provide income security for poor under which minors may work when they are households, such as food-for-work or other legally permitted to do so, like most other public works programs, can reduce child labor. countries. IndonesianLabor Act Number I of Measures to reduce the cost of school 1951 specifies that children 14 years of age or attendance (subsidies, construction of schools 1951 specifies that chriltedren14ye ars. or closer to childrens homes) and to improve the lesshly ae lino p itted toe workinimu. T Ac quality of education (changes in curricula, roughly mn line with the ILO Minimum Age mr n etrtahr)cudas.A Convention, 1973 (No. 138) which sets the more and better teachers) could also. As poverty falls and education improves, child labor will decline. That in turn will make enforcement of legislated bans easier. 84 Chapter 3 2. The Working Conditions of Women documented cases of women being fired because of marriage, pregnancy or birth. 3.74 Women's working conditions have improved throughout Indonesia. Broad-based a. The Legal Framework growth has been supported by healthier, more educated women. But women continue to have 3.77 Indonesian labor laws provide a wide a higher illiteracy rate than men (Chapter 4) range of workplace protection and anti- which partly explains the earnings gaps in discrimination measures for women. Indonesia Table 3.14. ratified the 1979 United Nations Convention on the Elimination of All Forms of Discrimination 3.75 The Indonesian Government has Against Women (subsequently shortened to the enacted a number of standards to improve the Convention on Women) through Law No. 7 of lot of women workers. These standards can be 1984. The Convention is an international divided into two groups. The first provides agreement containing stipulations that the women with special rights and protections in countries which have ratified it have a legal the workplace because of their role in bearing obligation to take steps to eliminate all forms and raising children. An example is maternity of discrimination against women, including leave. The second seek to end discrimination discrimination in education, access to health in the labor market by establishing equal pay and family planning services, opportunities to for work of equal value or prohibiting the obtain work, legal status in family law, and in exclusion of women from certain jobs. participation in political life. Article 11 of the Convention on Women relates to women in the 3.76 Indonesia, like nearly all countries in workforce and provides for elirnination of the region, has legislation establishing standard discrimination in the field of work including periods of maternity leave and other special equality in wages, opportunity, choice of career benefits for women workers (Agrawal 1995). and work, health protection and work safety, In addition, there are usually other protective prohibition of dismissal due to marriage or standards, such as limitations on night work, pregnancy, provision of day care centers, etc. and on working in certain hazardous places, such as mines. Typically, such legislation 3.78 While most elements of Article 11 of requires employers to provide these benefits to the Convention on Women are in line with female workers, effectively increasing the cost Indonesian labor laws, some important aspects of hiring them. So there is a risk that are not in line with the State Ideology and legislation aimed at protecting women will end Marital Law of Indonesia. For example, up depressing their wages or discouraging their Articles 31 and 34 of the Marital Law describe employment. However, in many countries of the division of roles between the sexes and the region, including Indonesia, employers state that "a man is obliged to give a livelihood often fail to meet government-legislated to his wife and a wife is obliged to take care of standards. Very often, women workers, who her husbands household to the best of her are overrepresented in the informal sector, are ability" (Katjasungkana 1995). Thus, it is so eager for jobs in the modern sector that they assumed that the man is the main breadwinner willingly ignore this failure. A survey of of the family, which is not the reality in all female workers in non-unionized factories in parts of the labor market today. This ideology Java found that 47% of those who applied for leads to a difference in the way that men and maternity leave received it, and only 12% were women are treated in the labor market and is paid for that leave. Many are not even aware one reason for the discrepancy between their that standards exist. There also are many earnings. There are certain family allowances Growth Benefitted Workers 85 that married workers are entitled to. However, they could earn in the informal sector or in with regard to these allowances, women rural areas. Perhaps more important, having a workers are always treated as having a single stable source of income can change their status status, because it is assumed that their wages within the household and provide them with are complementary to those of their husbands. greater say in the allocation of household Moreover, it is feared that a family may expenditures. In many countries there is a receive double family allowances if the wife is difference in secondary education attainment not given a single status. Thus, family between formal and informal sector workers. allowances and medical allowances are not This implies that improving womenzi access to received by women labor, so that for the same secondary education is likely to improve their work, the financial remuneration given to probability of getting a job in the modern women workers is lower than that received by sector and, therefore, is more likely to improve men (Ihromi 1995). This practice clearly their lives than high centrally-mandated violates the provision of Indonesian labor law. benefits. 3.79 There is ample evidence in Indonesia of 3.81 There also are direct measures that a wide gulf between the provisions of the law could improve womens' access to more and and its implementation-resulting in widespread better modern sector jobs. One example could discrimination against women in the labor be through merit-based hiring and promotion of force. Standards designed to protect women more women in the public sector, since the from job discrimination are often difficult to public sector is an important source of enforce in any country, but in Indonesia this employment for educated persons. Indonesia problem is compounded by the lack of effective had almost 4 million civil servants in 1992, of labor unions to represent workers. which 35% were women (Table 3.24). On average, female civil servants have higher b. Improving the Status of Working educational qualifications than their male Women counterparts-more than 90% of female civil servants had at least completed secondary 3.80 Women gain more from better access to school as compared with only 74% of males. modern sector jobs than from special standards Yet, as Table 3.24 indicates, women are under- to protect those who already have good represented in the higher ranks of the civil employment. Evidence from many countries service. An affirmative action program aimed indicates that despite the frequent failure of at ensuring equality in the promotion of employers to provide female workers with equally-qualified men and women in the civil centrally-mandated benefits, women workers service would improve the position of women are usually better off with jobs in the modern in the civil service and-by setting an example sector-their wages, although low by formal for the private sector-perhaps more broadly. sector standards, are more than double what 86 Chapter 3 Table 3.24 Women are under-represented in the civil service. Civil Service Rank No. of Total No. of Femalesl Percentage of Females Civil Servants Total in Rank Female Civil (percent) Servants in Rank I (Juru) 66,989 519,372 12.9 4.9 II (Pengatur) 1,024,269 2,578,322 39.7 74.9 III (Penata) 271,245 826,686 32.8 19.8 IV (Pembina) 5,091 40,220 12.7 0.4 Non PGPS/Non State Salary Scale 224 1,178 19.0 0.0 Total 1,367,818 3,965,778 34.5 100.0 Source: Statistik Indonesia, 1994. 3. The Right to Organize 3.84 How have other East Asian economies handled this issue of the appropriate role of 3.82 Since the mid-1980s, there has been unions? This is one of the most controversial rapid urbanization, industrialization, and issues in the lessons from East Asias success formalization of the workforce. Education of (World Bank 1996). Based on East Asiak younger workers has increased, reaching example, many observers ask why developing secondary school levels. Employment countries need to concern themselves with trade opportunities have grown rapidly and there are unions, collective bargaining, and labor signs of tightening labor markets in certain relations legislation. South Korea and Taiwan, pockets of the country, such as in the areas China achieved almost unbelievable rates of surrounding Jakarta, West Java, and North economic growth by letting entrepreneurs Sumatra. With this tightening has come manage their workforces as they saw fit. They increased opportunity for workers to demand obviously paid wages that were sufficient to and negotiate over better wages and working acquire and retain the workers they needed. conditions. For example, an increasing Would unions have raised wages above true number of strikes in 1995 were for higher market levels, reduced profits, and eventually wages rather than for the enforcement of impaired the process of growth and existing minimum wages. development? Was repression of unions a necessary condition for the success of East 3.83 There are growing demands from Asia? workers for free and effective trade unions that could act as their agents and could help them to 3.85 The high-performing economies of East negotiate for higher wages and better working Asia followed a diversity of industrial relations conditions. In the areas of the country where policies (Freeman 1993). Even though some labor markets are slack and workers have less East Asian economies were able to repress bargaining power than employers, effective unions for some periods of time, most are labor unions could play an important role in under pressure now to put in place a more preventing labor abuses by helping to enforce modern system of labor relations. Several existing labor regulations governing wages and factors have contributed to this pressure. One working conditions. Where labor markets are of the main forces at work is the tightening of beginning to tighten, unions could provide an labor markets, especially in the Newly important channel for collective bargaining and Industrialized Economies and more recently in negotiations between employees and employers. Malaysia and Thailand. Tight labor markets Growth Benefitted Workers 87 make it more difficult for an employer to and labor productivity decline owing to labor replace dissident employees, and higher wages strife during the last two years" (World Bank enable workers to sustain themselves on their 1990). Similar political and economic savings for at least short periods of time and to developments in Taiwan, China also led to an support unions by dues payments. Secondly, upsurge of labor activity there, though not as the rapidly changing comparative advantage of explosive as in Korea. some countries in the region, from labor- intensive goods to skill-intensive goods, 3.87 Indonesia is under pressure to ease requires more sophisticated production restrictions on unions. In 1994, it passed a techniques, which also require more regulation allowing the establishment of sophisticated worker-management relations. company unions (SPTP) and since then, sPTPs And finally, as workers become more educated have been formed in about 1000 companies. In and more vocal, resentment over working considering future policy, it would be conditions that were stifled in the past can now important to consider that effective, be expressed openly. In the absence of an democratic, plant level worker organizations, industrial relations system that allows by providing "voice" at the workplace, may be grievances to be aired and disputes to be able to play a positive role and reduce some of resolved, strikes and other forms of job action, the costs associated with worker unrest. sometimes violent, multiply. Legislation encouraging collective bargaining at the enterprise level could enable workers and 3.86 The lesson from East Asia for industrial managers to negotiate outcomes that enhance relations seems to be that while there are workers' productivity. Improving the dispute undoubtedly benefits from untrammeled labor resolution mechanism and the ability of the markets in the early stages of economic workers to be heard can reduce the incidence development, after a certain level of of illegal or wildcat strikes. What would be development is reached, countries will needed, however, would be more than inevitably feel the need for putting in place a legislative changes. In order to move to a modern industrial relations system. Failure to mutually beneficial industrial relations system, do so may entail serious costs later. South appropriate and responsible changes in Korea provides an example. After years of behavior from employers and workers would almost complete labor peace the number of also be required. Careful changes in strikes increased enormously beginming in legislation, industrial relations practices, and 1987. This was costly to the economy. The increased deregulation and competition in disappointingly low growth of the economy in product markets could improve the positive 1989 was attributed to two major factors: role that unions can play while controlling their appreciation of the South Korean currency, and negative role. "large wage increases, workplace stoppages, 88 Chapter 3 Annexes Annex Table Al Regional Minimum Wages, 1990-95 Province Minimum Wage Minimum Wage Increase in Nominal Increase in Real in 1990 in 1995 Minimum Wage, Minimum Wage, (Rp per day) (Rp per day) 1990-95 1990-95 (percent) (percent) Sumatra Aceh 2133 3500 64 14 North Sumatra 1930 4200 118 68 West Sumatra 1600 3250 103 52 Riau 2000 4150 108 60 Jambi 1100 3300 200 154 South Sumatra 1600 3500 119 69 Bengkulu 1300 3500 169 121 Lampung 1750 3500 100 47 Java DKI Jakarta 2100 4600 119 55 West Java 1200 4600 283 231 Central Java 780 3000 285 234 Yogyakarta 900 2850 217 160 East Java 1409 3700 163 105 Kalimantan West Kalimantan 1400 3500 150 100 Central Kalimantan 1150 3700 270 217 South Kalimantan 1000 3500 204 159 East Kalimantan 1600 4200 163 110 Sulawesi North Sulawesi 850 4200 354 337 Central Sulawesi 850 2800 329 184 South Sulawesi 1599 3100 210 161 Southeast Sulawesi 1000 3350 110 48 Other Islands Bali 1800 3900 117 65 West Nusa Tenggara 1275 2950 131 79 East Nusa Tenggara 1600 2900 81 36 East Timor a 2000 3800 90 56 Maluku 1800 3800 111 69 Irian Jaya 1800 4750 164 116 a For East Timor, data are for 1991 instead of 1990. Source: The minimum wage data are from "The Human Resources Profile of Indonesia," Ministry of Manpower, 1995. The price data are from Statistik Indonesia, BPS, 1994, and Indikator Ekonomi, BPS, October 1995. Growth Benefitted Workers 89 Annex Table A2 Ratio of Minimnum Wage to Average Earnings in Manufacturing by Province, 1991 and 1994 Province Male Female Total 1991 1994 1991 1994 1991 1994 Sumnatra Aceh 0.4 0.5 0.7 1.3 0.4 0.6 North Sumatra 0.5 0.7 1.0 1.1 0.6 0.8 West Sumatra 0.4 0.4 0.9 1.1 0.5 0.6 Riau 0.4 0.3 0.5 0.7 0.4 0.4 Jambi 0.4 0.6 0.6 0.8 0.4 0.6 South Sumatra 0.2 0.2 0.3 0.8 0.2 0.3 Bengkulu 0.4 0.5 0.8 0.9 0.6 0.5 Lamnpung 0.6 0.9 0.8 1.0 0.7 0.9 Java DKI Jakarta 0.5 0.4 0.6 0.7 0.5 0.5 West Java 0.5 0.7 0.8 1.0 0.6 0.8 Central Java 0.6 0.7 1.1 1.2 0.8 0.9 Yogyakarta 0.4 0.5 0.7 0.8 0.5 0.6 East Java 0.4 0.6 0.8 1.1 0.5 0.7 Kalimantan West Kalimantan 0.4 0.5 0.5 0.7 0.4 0.5 Central Kalimantan 0.3 0.4 0.4 0.5 0.3 0.4 South Kalimantan 0.3 0.4 0.6 0.8 0.3 0.5 East Kalimantan 0.2 0.4 0.4 0.6 0.3 0.5 Sulawesi North Sulawesi 0.6 0.6 1.3 1.6 0.8 0.8 Central Sulawesi 0.4 0.5 0.5 0.8 0.5 0.6 South Sulawesi 0.5 0.5 1.0 1.6 0.6 0.7 Southeast Sulawesi 0.5 0.7 1.6 0.9 0.5 0.7 Other Islands Bali 0.6 0.8 1.1 1.5 0.8 1.1 West Nusa Tenggara 0.7 0.9 1.1 0.8 0.8 0.8 East Nusa Tenggara 0.8 0.6 1.3 1.8 0.8 0.7 East Tirnor 1.2 0.5 na 0.2 a 1.2 0.4 Maluku 0.5 0.5 0.5 0.7 0.5 0.5 Irian Jaya 0.6 -0.5 0.6 0.4 0.6 0.5 a For East Timor, this ratio is implausibly low because there appears to be an error in the reported average earning for females (Rp400,00 per month): these earnings are more than twice the male earnings and significantly higher than the earnings in any other province. Source: Labor Force Survey. 90 Chapter 3 Annex Table A3 Comparison of Average Monthly Earnings of Urban Manufacturing Workers to Official Urban Poverty Line, 1993 Province Ratio of Average Earnings of Urban Workers in Manufacturing to Official Urban Poverty Line, 1993 Male Female Total Sumatra Aceh 7.9 4.4 7.5 North Sumatra 6.3 4.0 5.5 West Sumatra 7.0 3.2 5.6 Riau 6.9 4.0 6.1 Jambi 23.7 a 3.0 19.5 a South Sumatra 8.2 2.1 5.8 Bengkulu 3.8 1.8 3.0 Lainpung 7.1 5.2 6.7 Java DKI Jakarta 6.2 4.2 5.6 West Java 5.3 3.5 4.6 Central Java 4.4 2.3 3.5 Yogyakarta 4.1 2.1 3.2 East Java 5.7 5.9 5.8 Kalimantan West Kalimantan 5.3 3.7 4.8 Central Kalimantan 4.7 3.2 4.6 South Kalimantan 5.2 3.7 4.7 East Kalimantan 6.4 3.7 5.6 Sulawesi North Sulawesi 4.9 1.8 3.3 Central Sulawesi 5.1 1.1 4.9 South Sulawesi 5.0 2.4 4.3 Southeast Sulawesi 5.1 7.4 5.5 Other Islands Bali 4.0 2.5 3.0 West Nusa Tenggara 2.7 1.2 2.0 East Nusa Tenggara 4.9 1.5 3.5 East Timor 5.1 3.5 4.6 Maluku 5.2 4.8 5.1 Irian Jaya 5.7 2.9 5.1 All Indonesia 6.2 4.0 5.3 Source: Labor Force Survey and BPs Official Poverty Line. Growth Benefitted Workers 91 Endnotes 1. The 1994 rate of 4.4 percent is not comparable to earlier rates because there was a change in the definition of unemployment in the 1994 Sakernas Survey. 2. The data in Table 3.13 is from Behrman and Deolalikar (1995) who examined the issue of whether there are differential investments and differential returns to schooling by gender in Indonesia. Their study was based on data from the 1986 Indonesian Labor Force Survey (Sakernas)-a stratified national sample of about 250,000 individuals over the age of ten. Their paper focused on the 30,227 individuals who received wages as paid employees, of whom about 30 % were female. Their estimates were updated using data from the 1993 Sakernas. 3. The data in Table 3.14 are obtained by econometrically estimating the relationship between earnings and different levels of education. These estimates use the age of workers to control for differences in years of work experience. The estimates also take into account the dropout and repetition rates for each level of schooling and are based on the expected number of years that it takes to complete each year of schooling, rather than the standard years of schooling. It is assumed that the expected years to complete each schooling level have remained unchanged since 1986. 4. For details of labor market legislation in Indonesia see World Bank 1994i. 5. These results are from Rama, 1996, which uses the variance between provinces to estimate the impact of minimum wages on average labor costs and employment. To do this, it uses data from 27 provinces from the annual Labor Force Surveys (Sakernas) for the five years 1989-93. 6. Other estimates indicate that there are 2-3 million children working in the non-agricultural sectors (Goderbauer, H. and R. Trienes). 92 Chapter 4 CHAPTER 4 GROWTH BENEFITTED ALL REGIONS A. Overview poor provinces, disparities in levels persist. Despite the large improvement in social 4.1 Indonesia's national growth record is indicators, some indicators remain similar to well known. Rapid economic growth sustained low income countries. Finally, despite the over 30 years places Indonesia among the reduction in poverty, the numbers of poor High-Performing Asian Economies (World remain large on Java and Sumatra and poverty Bank 1993c). It raised Indonesia from a per incidence remains high in the eastern islands. capita GDP of under $100 in 1970 to lower- middle income status in 1993. The incidence 4.4 To meet these challenges Indonesia will of absolute poverty fell from an estimated 70% need to continue to adapt its policies and of the population in 1970 to under 15% institutions. To presage what follows below, currently. Particularly notable was the period five elements will be needed: 1983-93, when per capita GDP, per capita consumption, and social indicators improved * Continued macroeconomic stability, to despite the drop in oil prices. Sound maintain rapid growth of labor demand Government policy deserves much of the (Chapters I and 3). credit; macroeconomic stability was maintained, the economy was deregulated, and * Continued deregulation to improve social expenditures across the provinces were efficiency and labor demand (Chapter 2). sustained with support from the international It also would reduce the anti-trade bias of community. The regional dimension of this the trade regime, lower prices paid for process is less well known than the national import-competing manufactures and raise record' and is the subject of this chapter. prices of many agricultural exports. 4.2 Per capita GDP and per capita * Focused agricultural and infrastructure consumption improved in every province development programs for poor regions during 1983-93, the period for which consistent to help them take advantage of their regional accounts are available. Social resources and trading opportunities. indicators confirm this development, improving in every province. Poverty incidence also * Increased pro-poor focus of spending. declined in all provinces. More and better primary education, would raise wage incomes. More spending on 4.3 Rates of improvement differed between health, targeted to the poor, and improved the provinces. Per capita GDP converged delivery of safe water, would raise the among the middle income provinces and effective income of the poor. relative to the oil-based provinces. The poorest provinces, East and West Nusa * Decentralization. Service delivery could Tenggara and East Timor, grew about as fast be improved by greater devolution of as the rest of the country and faster than 90% responsibility and accountability to sub- of the developing world. But despite the national governments, along with a closer impressive gains, a number of challenges link between services and revenues, through remain. Although GDP growth was rapid in the user fees and property taxes. Growth Benefitted All Regions 93 B. Regional Disparities Decline became increasingly inward-looking as the government used oil revenues to set up import 1. Background substituting manufacturing industries such as steel, cement, and fertilizer. Java was a major 4.5 61 % of Indonesians lived in Java and beneficiary of these investments. When Bali in 1990, 20% in Sumatra, and 19% in the Indonesia began to deregulate and open to eastern islands. Population densities vary from import competition in 1986, Java's natural very high in Java (813/km2 in 1990) and Bali advantages-in particular the large, low-wage (500/km2) to very low in Irian Jaya (4/kmi2) labor force-attracted the lion's share of and Kalimantan (17/km2). In the rest of the foreign investment in labor-intensive country population density ranges from 70 to manufacturing (Hill 1987, 1990a, 1990b, Hill 180/km2. The population imbalance and fears and Weiderman, and Azis 1991). of overtaxing Java's limited land (Geertz) have motivated Governmentout-migration programs, 2. Regional GDP beginning in the Dutch era (Harjono). 4.8 Provincial per capita GDP was fairly 4.6 The composition of GDP and similar in 1993, with some major exceptions employment differs significantly across (Figure 4.1). Jakarta and the oil-producing provinces. In most of the poorer provinces and provinces were much higher than average. especially those in the eastern part of the This is not surprising given the typical country, agriculture remains the largest sector. developing country pattern of high incomes in In 15 of the 27 provinces, agriculture makes up the capital and the concentration of mineral over 30% of provincial GDP. The percentage wealth, especially oil, in a handful of is over 40% for 8 of the 9 eastern islands. In provinces. Although the provinces with the most of these areas, agriculture employs over lowest per capita GDP were in eastern 50% of the labor force. Export crops and, in Indonesia, some eastern provinces with some areas, non-rice food crops are more favorable natural resource endowments-East important off Java than on Java. Agriculture Kalimantan and Irian Jaya-had high per capita on Java is more rice-based. These differences GDP. Differences in levels of provincial per largely are explained by ecological differences, capita GDP to diminished in 1983-93.2 Figure in particular water availability. Public 4.1 presents the GDP data, listing the provinces investment in irrigation also plays an important from west to east on the horizontal axis. role. In eastern Indonesia and in more than half of the provinces of Sumatra, agriculture is 4.9 Oil and gas production is concentrated likely to remain the major source of economic in four provinces. It accounts for about 58% growth for at least the next decade. of Aceh's GDP, 72% of Riau's GDP, 20% of South Sumatra's GDP, and 54% of East 4.7 Manufacturing is concentrated in Java, Kalimantan's GDP. Oil and gas operations are with 66% of total manufacturing GDP, and enclaves in these provinces. Revenue from oil especially in Jakarta (15% of the total). and gas accrues to the Central Government, Sumatra has another 19%, mostly oil and gas which constitutionally owns the resources. The refining and textiles. Almost all the remainder Central Government redistributes the income is in East Kalimantan (12%), mostly oil and back to the provinces through its own spending gas refining (80%) and plywood processing. and its transfers to subnational governments The concentration of manufacturing in Java is (section C). the result of policy and natural economic forces. From 1973 to 1986 the economy 94 Chapter 4 Figure 41 Laves of per capita GDP we similar axce for Jakat, de Oil Producing P"nice., Nusa Tnggarn and East Timor. Per capit QDP, 1SS, Rp thousands, *sted from Wet to Et In the Orehipelago 4000 amo o Per caprts nondll GDP, 1993, Rp thousands 0. 5aswce: Wmf a Puma 5Wh Growth Benefitted All Regions 95 4.10 Nonoil and gas GDP is more similar capita consumption was above-average and per across provinces than GDP (Fig. 4.1, bottom capita nonoil GDP below-average. panel). East and West Nusa Tenggara and East Timor have the lowest per capita GDP 4.12 Based on per capita consumption the (about RpO.6 million). Excluding Jakarta, East provinces can be divided into four groups: Kalimantan, and Irian Jaya (where mining eight provinces whose per capita consumption raises GDP), the provinces with the highest per was RpO.6-0.8 million (Aceh, North and South capita non-oil GDP are Bali, North Sumatra and Sumatra, Riau, East Java, and East, West and Central Kalimantan (about Rpl.5 million). Central Kalimantan); twelve provinces with per capita consumption of RpO.4-0.6 million 4.11 Per capita private consumption is an (Bengkulu, Lampung, North Sumatra, West alternative measure of provincial welfare that and Central Java, Yogyakarta, South also reduces the weight of oil and gas Kalimantan, the four provinces of Sulawesi, production.3 The levels of per capita private and Maluku); and four provinces with per consumption in 1993 for all provinces, again capita consumption of RpO.3-0.4 million (East listed from west to east, are shown in Figure and West Nusa Tenggara, East Timor and Irian 4.2. As with per capita GDP, most provinces Jaya). Jakarta and Bali had high levels of per have similar per capita consumption. For the capita consumption, Rpl.5 million and RpO.9 most part, provinces with below-average per million respectively. Note that the differences capita non-oil GDP had below-average per in nominal figures tend to overstate differences capita consumption. The exceptions were in purchasing power because of the higher Bengkulu, South Kalimantan, Maluku and Irian prices of service-related products in higher Jaya, where per capita consumption was below income regions. average and per capita nonoil GDP was average or above, and Central Sulawesi, where per Pgumu 4.2 P.r capS. prtvsts consumption 1svsi so are similar. P r prhA aonsumpdon, t1ns, Rp Shousands, 11.fd frwm West to Est In Uahlim 12 gm am asesu" ess Puc 5§M LI 96 Chapter 4 3. Rapid Growth in Per Capita GDP and fastest-7.5%- followed by Lampung, Central Private Consumption Java, Jakarta, South Sulawesi and North Sumatra. The slowest-growing provinces were 4.13 Per capita GDP grew in all provinces East Kalimantan, Riau, South Sumatra and (Figure 4.3, lower tier). Bali grew the Irian Jaya. The main reason for their slow Flgure 4.3 Per capla prnte consumption and GDP grow fast In most places. Annual grow re l per capita consumpdon (1983-190, percent) 4.0. 1.0 Annual growth od per capit GDP (198343, percent) 6.0 4.0 Souros. EW*PUmd ttt Growth Benefitted All Regions 97 growth is the slow growth of real oil and gas Sumatra, Central Java, and Southeast Sulawesi production. Nationwide, real oil and gas GDP all advanced their positions. rose only I % annually between 1983 and 1993. 4.17 Results were similar when provinces 4.14 Private per capita consumption also were classified by real nonoil/gas GDP per increased in all provinces (Figure 4.3). The capita, or by real consumption in 1983 and growth rate of per capita consumption varied 1993 (Figure 4.5). As with GDP per capita, the much more across provinces than per GDP. top and bottom groups largely remained the Among the reasons for this variation are the same, but changes occurred in some rankings. differential impacts of oil and gas, the The exact changes vary by indicator, reflecting differences in savings and investment the different composition of GDP and variations (particularly local construction which increases in price levels between provinces. GDP) in the provinces, and the differences in the amounts and types (consumption or 4.18 Although provincial rankings remained construction) of Central Government transfers. fairly constant, the gap between rich and poor provinces is narrowing very slowly. But it is 4.15 Population growth differences tended to narrowing. Differences in per capita GDP increase the differentials in per capita growth. declined about 1.7% per year on average, Generally speaking, GDP and consumption grew imnplying that the average 1983 gap would faster in provinces with lower population halve in 40 years. Notice, however, that this growth. is an average concept, based on the average relationship between income growth and GDP in 4. Provincial GDP and Consumption Per the base year. Even when this (standard) Capita are Converging Slowly definition of convergence is achieved, some provinces would still have much lower GDP per 4.16 Provinces with the highest and lowest capita than others. Notice also that this result, per capita GDP in 1983 generally retained their and the actual convergence that occurs, depend rankings in 1993. (Figure 4.4; note that the very much on the developments in the oil and data are for real GDP. For convenience, the gas-based provinces. Continued slow growth provinces are listed in order of their 1983 GDP in these provinces automatically will reduce the per capita; a break in the upward trend in 1993 GDP gap. However, it also will reduce the oil figure thus indicates a change in ranking.) rents and related revenues that the Central East Kalimantan, Riau, Aceh, Jakarta, South Government can redistribute (section C). Sumatra and Irian Jaya started and fmiished with the highest per capita GDP; East Timor, 4.19 The growth rates of provincial GDP per East and West Nusa Tenggara and Laimpung capita also are converging. Narrowing growth started and finished with the lowest per capita rate differentials across provinces is a common GDP. Rankings of provinces in the middle finding in studies of provincial or inter-country group varied somewhat between 1983 and growth and is called relative convergence to 1993. Some provinces that grew fast overtook distinguish it from absolute convergence, which others with higher initial levels of per capita refers to the tendency for levels of per capita real GDP, but slower growth. Bali, North GDP to get closer together over time. 98 Chapter 4 Figure 4A Few changes In per capita GDP rmnidngs between 1993 and 1993. (Noe. Provinoe graphed fom lowt to hht aP per clpt In 1913) tLO o lncreaw Botween 1993 and 1983 * GDP per capta 1963 115 IL 17. Sao~. mm Puma 3 Figure 4.5 Few Changes In per capita consumption rankings (Note: Provtno_ g d fron lowest to highest oonsumpfon per capit In 1963) 110 o Inrease Between 1983 and 1993 *Consumption per capit, 1983 175 Iu 3ro 1Pu mja XI, SousUn PhIL Growth Benefitted All Regions 99 5. Equality within provinces: generally improving. standards-the lower the Gini coefficient the more equal the distribution-and down slightly 4.20 Indonesia compares favorably with its from 1983.4 The provincial Gini coefficients East Asian neighbors in terms of expenditure for 1983 and 1993 indicate improving equality equality (Krongkaew). The Gini coefficient of expenditLre within the provinces of Sulawesi measure of expenditure equality in Indonesia and East Kalimantan, a worsening in Bengkulu was 0.31 in 1993, low by international and little change elsewhere (Figure 4.6). Rgure46 Sumlid km Ineqity. I'll~j** i 1' +'* *I i *1 1 .1-@ U1 > A A rM MP' I k- } | { j t i 1 EufrMibuiIIkbmIsInISud1S s SoweE ESSU 100 Chapter 4 C. Regional Fiscal Issues revenues. The largest part (about two-thirds) of subnational government revenue comes from 1. Overview transfers from the Central Government. Shared revenues-mainly the property tax, and 4.21 The Central Government has natural resource royalties-account for another redistributed revenue to the poorer regions, 10-15%, and own-source revenues the including flows from donors and, in effect, oil remainder (Table 4.1). These patterns are not rents. The decline of oil revenues as Indonesia surprising in light of the unitary government becomes a net oil importer around the turn of structure and the importance of oil, gas, and the century poses a challenge for the mineral revenues, which under the constitution Government. Like governments everywhere it belong to the Central Government. In other will be under pressure to do more with fewer economies with large oil and mineral revenues, resources. Decentralization, backed with including Malaysia and the United Kingdom, greater resource mobilization by subnational the central government also accounts for a administrations (discussed below), would help large percentage of total government revenues the Central Government meet this challenge. and expenditures (Shah and Qureshi). Elimination of the anti-trade bias of the trade regime (discussed below) also would help the 4.24 For both provincial and local off-Java provinces grow faster and reduce the governments, the largest component of shared need for large scale fiscal transfers. revenues is the property tax. This component has grown rapidly in the past several years, 4.22 Indonesia has a highly centralized and there is great potential for further government. This reflects the fact that increasing its revenue base in virtually all Indonesia is a unitary state, not a federal state. subnational governments. User fees are In a unitary state, all levels of government are another significant-but generally under- in effect branches of the central utilized-source of own revenues for government.There are three levels of subnational governments. Their importance subnational governments: 27 Daerah Tingkat varies greatly by level of government and by I (known as Dati 1), which correspond to the region. For example, for the total of all provinces; 296 Daerah Tingkat nI (or Dati II), provincial governments user fees amount to which comprise 55 Urban Municipalities only 15% or so of own-source revenues; in (Kotamadya) and 241 Regencies (Kabupaten); contrast, they are about half for local and some 62,000 Rural Villages (Desa). governments. Profits from state enterprises are Central government expenditures account for a small source of revenue for subnational about 85% of total government expenditures, governments;5 they represent 1-3% of own with Dati I and Dati 11 making up the revenues for both provincial and local remainder. Services are delivered to citizens governments. by the Central Government directly, through "deconcentration"-establishment of Central 4.25 Central transfers are an important tool Government ministries at all subnational for provincial economic policy in Indonesia. Government levels-and through the Dati I and They are of two types, general- and specific- Dat II governments with various degrees of purpose transfers. There are three types of decentralization and participation as in Central general purpose transfers: INPRES Dati I, a Government financing of elementary school formula-based grant to improve regional teacher salaries (section D.4). development on a provincial basis, with recommended priority areas for expenditure; 4.23 The Central Government raises 90% or more of consolidated domestic government Growth Benefiuted All Regions 101 Table 4.1 Current revenues of provincial and Local Governments (as % of current revenues) 1985/86 a 1990/91 a 1989190 1992/93 1993/94 1994/95 A. Provincial Governments Own Source Revenues 21.4 25.1 26.2 31.0 of which: User fees ... 3.7 4.0 4.5 Shared Revenues 4.6 6.7 7.7 7.8 of which: Property tax 2.5 4.1 4.9 4.8 Loans 0.3 0.5 0.5 0.5 Grants from Center 66.8 60.0 60.8 54.7 Previous Year's Surplus 6.9 7.6 4.8 6.0 Total Current Revenue 100.0 100.0 100.0 100.0 (in Rp billions) (3,433.8) (6,379.5) (8,382.3) (9,709.0) B. Local Govermments Own-Source Revenues 18.2 13.0 11.2 ... of which: User fees ... 7.0 6.1 ... Shared Revenues 11.2 12.5 13.3 ... of which: Property Tax 9.9 10.2 10.4 ... Loans 2.2 1.0 0.6 ... Grants from Center 64.8 70.9 70.9 ... Previous Year's Surplus 3.5 2.7 4.0 Total Current Revenue 100.0 100.0 100.0 ... (in Rp billions) (2,018.5) (5,457.0) (8,404.0) ... Source: Ministry of Finance. a Annual average. iNPRES Dati II, a per capita grant for 2. Fiscal Redistribution infrastructure projects; and INPRES Desa, an equal per-village grant (supplemented by the 4.26 The Central Government collects the INPRES Desa Tertinggal (ID) program for the vast majority of tax revenue and redistributes it poorest villages). Specific-purpose grants are to the provinces, as noted. An estimate of the targeted on individual sectors (for example regional net impact of fiscal redistribution is health, primary education) or they provide provided in Table 4.2. Three comments are in fiscal support, primarily for personnel and order: first, the geographical source of operating costs, to subnational governments. revenues and expenditures are an Since the mid-80s, general-purpose transfers approximation, and oil and gas revenues have have been increasing faster than specific- been estimated based on provincial shares of purpose transfers (19% annually compared with total oil and gas production. Second, the 15% in the 8 years ending 1994/95), especially coverage excludes about 18% of income and for general-purpose transfers to villages, which VAT taxes and oil and gas revenues, which have increased by almost 20% per year since were not available on a regional basis, and the mid-80s. This shift reflects the central assigns to Jakarta the taxes that were paid govermnent's devolution of greater spending there, even if the underlying revenue- autonomy to the local level. generation activity was located elsewhere. 102 Chapter 4 Third, the table does not show donor funding, high-income Jakarta, where taxpayers are which in many cases is tied to Central "located" (even if production is elsewhere) to Government transfers to lower level other provinces. In addition, the largest per governments. Often these are loans that the capita transfers have favored some of the Central Governrment repays. poorest regions, for example, Irian Jaya and East Timor. This finding supports other 4.27 Excluding oil revenue (the penultimate studies that show the redistributive impact of column of Table 4.2) the overall impact of INPRES and other transfers to the subnational fiscal redistribution is to reduce regional governments (Azis 1990, 1991). disparities by transferring revenue collected in Table 4.2 Estimated net impact of Central Government fiscal operations on provinces of Indonesia, 1990/91 Collections Central Per Capita of Income Imputed Transfers & Net Imputed Transfer Net Impact Taxes & Oil/gas Expendi- Excl. Incl. Excl. Incl. VAT Taxes tures Oil/gas Oil/gas Oil/gas Oil/gas Provinces (Rp bil.) (Rp bil.) (Rp bil.) (Rp thous.) (Rp thous.) Aceh 99.3 2,174.0 470.3 371.0 -1,803.0 108.6 -527.9 North Sumatra 486.9 284.2 802.6 315.6 31.5 30.8 3.1 West Sumatra 77.0 363.5 286.6 286.6 1.7 1.7 Riau 183.1 7,636.6 282.3 99.2 -7,537.4 30.2 -2,298.9 Jambi 44.7 39.8 188.6 143.9 104.1 71.4 51.7 South Sumatra 192.4 1,087.8 522.8 330.4 -757.4 52.7 -119.6 Bengkulu 17.0 155.0 138.0 138.0 117.0 117.0 Lampung 73.4 340.9 267.5 267.5 44.6 44.6 DKI Jakarta 11,733.4 3,210.8 -8,522.6 -8,522.6 -1,036.5 -1,036.5 West Java 1,003.2 2,895.9 1,664.3 661.1 -2,234.8 18.7 -63.1 Central Java 601.6 7.7 1,325.2 723.6 715.9 25.4 25.1 Yogyakarta 67.5 241.7 174.2 174.2 59.8 59.8 East Java 1,566.6 13.7 1,773.5 206.9 193.2 6.4 6.0 Bali 92.5 313.8 221.3 221.3 79.7 79.7 West Nusa Tenggara 27.2 224.9 197.6 197.6 58.7 58.7 East Nusa Tenggara 24.8 300.2 275.4 275.4 84.3 84.3 East Timor 16.7 135.4 118.7 118.7 158.8 158.8 West Kalimantan 72.2 286.2 214.0 214.0 66.1 66.1 Central Kalimantan 21.9 191.4 169.5 169.5 121.4 121.4 South Kalimantan 80.6 34.0 297.1 216.5 182.5 83.4 70.3 East Kalimantan 222.9 3,320.1 - 284.2 61.2 -3,258.8 32.7 -1,738.0 North Sulawesi 41.5 276.0 234.5 234.5 94.6 94.6 Central Sulawesi 27.2 224.2 197.0 197.0 15.7 15.7 South Sulawesi 111.6 543.6 432.0 432.0 61.9 61.9 South East Sulawesi 15.9 167.0 151.1 151.1 112.0 112.0 Maluku 39.7 9.6 214.2 174.5 164.9 94.3 89.1 Irian Jaya 67.1 234.6 365.5 298.4 63.8 183.2 39.3 Total: All Provinces 17,008.0 17,738.0 15,165.1 -1,842.0 -19,580.9 -10.3 -109.3 Source: Shah and Qureshi (1994), Table 3.9 and World Bank staff estimates. Growth Benefitted All Regions 103 4.28 Oil and gas revenues in effect are the (ii) Continued deregulation. Carry out the source of much of the fiscal redistribution. preannounced program of tariff cuts and When oil and gas revenues are included in net reduce protection to inefficient transfers (the final column of Table 4.2), there production by extending deregulation to is a close relationship between net transfers and nontariff barriers, distribution per capita private consumption.6 The total net restrictions, and restrictions on exports. transfer from some of the large oil and gas producing regions-Aceh, Riau and East (iii) Focused regional agricultural and infra- Kalimantan-is about double Jakarta's. structure development programs for poor regions to help them take advantage of 4.29 Government oil and gas revenue is their resources and trading opportunities. projected to drop-off relative tO GDP over the medium term.' The central government will (iv) Increased pro-poor focus in education lose its largest and most easily collected source and health spending. More and better of revenue for fiscal redistribution. Although primary education will raise wage donor funds are shifting toward regional incomes. More spending on health, projects, the net overall flow from donors, targeted to the poor, and improved including interest and amortization, is likely to delivery of safe water also would decline. Thus, the Central Government will improve the productivity and effective have to raise significantly more nonoil taxes income of the poor. and non-tax revenues. But, in many other countries, the redistribution of such revenues (v) Decentralized delivery of public services from richer to poorer regions has posed to support quality improvements and the political problems. Thus, the scale of fiscal pro-poor focus. To be effective, redistribution that exists today may not be decentralization needs to include a closer sustainable. This argues for greater selectivity link between revenues and services and efficiency in government spending, and through user fees and property taxes. more reliance on local revenues and user fees. And, as noted above and discussed further 4.31 Policies to support continued below, it also argues for spurring regional macroeconomic stability are discussed in growth through deregulation. Chapter 1. Policies to deregulate at the national level are discussed in Chapter 2, and D. A Pro-Poor Approach to Regional their regional implications are discussed below. Development Targeted agriculture and infrastructure regional development programs are the subject of 4.30 The challenge of regional development subsection D.2. Policies to make health and is sustaining strong growth in GDP and labor education more pro-poor are discussed in demand and poverty reduction. Reducing subsection D.3. Decentralization is discussed poverty is complicated by the fact that the in subsection D.4. largest numbers of poor people live on populous Java and Sumatra, but the highest 1. Deregulation to Eliminate Anti-trade poverty rates-though the number of poor is Bias smaller-are in the eastern islands (Figure 4.7). Meeting this challenge will depend on action in 4.32 Indonesia has pursued different five areas: development strategies over the past 30 years, with different regional implications. The (i) Maintenance of a stable macroeconomic import substitution phase of growth (1973-86) environment. favored the development of heavy industry on 104 Chapter 4 Flgure47 Wherethe poorare is notthe same as where poverty ra uare high. (Populdton below w reglonal poverty line, 193) 35 *Thousands ot poor persons bk scale) a Peren:t of populafon in poverty (ight sal) 2) ,0 15 'a ~~~~~~~~~~~~~~~~~~~~~~~~~~~IC o 0 Soure: BPS, Penduduk Mliein dan Doe Terlnggp 1993, Jakta, 19S6. Java. Consumers paid higher prices for improved the allocation of resources and forced import-competing products. Import producers to become more efficient, it has substitution also hurt exporters by generating a reduced the cost to consumers of previously more appreciated real exchange rate. high cost clothing and footwear, as these became competitive in world export markets. 4.33 The outward-oriented development strategy followed since 1986 led to higher 4.34 To the extent that the anti-trade bias of growth of GDP and labor demand (Chapter 3); the trade regime persists (see Fane and Phillips total factor productivity increased after 1985 and Fane and Condon), it biases development (World Bank 1994a). Deregulation has against the outer islands (Henderson and gradually and significantly reduced the high Kuncoro, Azis 1991). Two-thirds of the 1995 tariff and nontariff barriers to imports that anti-trade bias is attributable to tariff and were a legacy of the import substitution nontariff barriers to imports. Indonesia's development strategy. This not only has major deregulation package of May 1995 Growth Benefitted All Regions 105 substantially reduced the anti-trade bias from efficiency and competitiveness directly as tariffs on imports and it programs further discussed above, they often have more major cuts (World Bank 1995a). This package complicated negative effects on efficiency, for will force import-competing manufacturing to example encouraging over-exploitation of become more competitive and reduce domestic renewable resources in the case of forestry. prices to the benefit of consumers. They also may shift production from goods in which Indonesia is internationally competitive 4.35 For import-competing prodtiction the to less competitive goods, with a corresponding unfinished import policy agenda consists net loss of foreign exchange earnings and a mainly of reducing nontariff barriers on sugar reduction in the growth of non-oil exports. wheat, soybeans, sugar, rice, livestock and milk products and the associated domestic 4.37 These restrictions have a regional bias regulations, reducing protection on vehicles and when they reduce the price received by off- exposing the strategic industries to international Java primnary producers. For example, this has competition (Chapter 2). Protection of occurred in the case of rattan, where export inefficient industries reduces efficiency and bans on unfinished and semi-finished rattan raises the price of food. Deregulation would may have wiped out unfinished and semi- lower prices, reducing the high profits that finished rattan producers, mostly located off currently go to the limited number of producers Java. This characteristic of export restrictions and/or distributors who, in many cases, are biases the trade regime against the primary located on Java. In this way deregulation product producers and toward the processors would raise substantially the real incomes of who use the primary products. Ironically, the consumers, particularly lower income bans have led to a crisis among rattan consumers (Chapter 2). processing (furniture) manufacturers, who were the intended beneficiaries (Box 4.1). 4.36 The other one-third of the anti-trade regime is attributable to export taxes; removal 4.38 Levies are sometimes charged by local of these restrictions would improve efficiency governments on commodity trade. While the and regional equity. Specifically, deregulation rates usually are low, at times they increase would raise the prices of many primary exports marketing costs and depress farmgate prices. whose prices now are depressed by export The Central Government has in the past restrictions. A major rationale for these attempted to eliminate these levies and, more restrictions is to increase domestic value added recently, has begun to denounce trade by "moving downstream" into processing- restrictions more openly. However, these what has been called "forced export efforts have not always been successful, and substitution" (Hill 1994). But these restrictions especially not when local governments have work by breaking the link between domestic limited alternative sources of revenue. The production of the primary product and the example of copra levies in Central Sulawesi world market, and forcing the primary (Box 4.2) shows it is not easy to eliminate producers to sell their products domestically at local charges on commodity trade. As a much lower price; this lower price enables discussed below, concerted action by the protected processors to operate less efficiently central government to restrict local commodity than international competitors. The export trade taxes needs to be accompanied by taxes on logs are the most conmmonly cited measures that permit localities to raise revenue (Chapter 2). But export taxes or restrictions of in ways that do not tax business. varying kinds exist, covering nearly 50% of exports, mainly agricultural and forestry products. These restrictions not only reduce 106 Chapter 4 Box 4.1 Export taxes on raw rattan are wiping out rattan producers and processors. The case of rattan is almost identical to the case of logs that was discussed in Chapter 2. Raw and semi-finished rattan account for about 90% of Indonesia's non-timber forest products. As in the case of logs, exports of raw and semi-finished rattan were prohibited (in 1986 and 1988). The objectives of the bans were fourfold: (i) to capture the value added in processing rattan; (ii) to generate income and employment; (iii) to increase profits for Indonesian firms; and (iv) to stimulate non-oil exports. The immediate impact of the bans was to dramatically depress the domestic price of raw rattan and stimulate the rattan processing industry. Exports of finished rattan rose sharply by 71 % in 1989 and 40% in 1990, by which time they had reached $220 million. The objective of generating income and employment also was realized, for a while. Prior to the ban there were 150,000 full-time workers employed processing rattan, mainly off Java. The jump in processing activities created new jobs and by 1991 total employment in rattan industries had risen to 187,000. Because of their superior infrastructure to support exports (especially West Java), Java was the main beneficiary of new investments in rattan furniture production. The number of rattan processing companies jumped by over 40% in the five years after the bans were imposed. But as with log and sawn timber export controls, there were unanticipated side-effects. First, low raw rattan prices-prior to the bans the price of raw rattan was Rp 70,000 per quintal but by 1992 the price had fallen to Rp3O,000-began to drive rattan gatherers out of the business. Large areas of cultivated rattan no longer or rarely were harvested. The focus of rattan furniture processing on Java meant that traditional rattan processing industries in Kalimantan and Sulawesi, which mainly were engaged in producing semi-finished rattan for export, declined sharply. Many opted to leave the business. The number of rattan processors in Sulawesi fell by nearly one-quarter while the number in Kalimantan nearly halved in the five years following the ban. Ultimately, supplies of raw rattan for the Java-based processors began to dry up. Significant rattan supplies were diverted to the much higher-paying world market through smuggling, while land previously valued as a source of rattan was converted to other uses, for example rubber in Kalimantan and cocoa in Sulawesi. As a consequence the Java-based rattan processing industry is in crisis. Employment in the industry fell to 68,000 by 1993. Sources: Bennett and Tambunan. 2. Targeted Agricultural and Infrastructure (Chapter 3). This transition path may not be Development Programs replicable in the off-Java provinces. Slow growth in some provinces is related to low 4.39 Deregulation that lessens the anti-trade natural resource endowments (low soil fertility, bias of the trade regime will improve the off- remoteness, and aridity) and therefore may be Java provinces' terms of trade. This is an difficult to surmount. Low population densities attractive regional development policy because in most eastern provinces will slow the policies that led to the tremendous reduction in movement of labor-intensive manufacturing to poverty in Java may not be replicable across all these areas. Exploiting trading opportunities provinces. Rapid growth in Java was based on through agriculture-led growth will require the massive shift of workers from low- greater access to information and markets productivity jobs in agriculture to much higher- inside and outside the province and better productivity industry and service sector jobs infrastructure. Growth Benefitted All Regions 107 4.40 The objectives of a targeted rural Government helps smaller towns and villages development strategy are: to raise rural improve infrastructure services so that they are incomes and improve regional agricultural more acceptable to the inhabitants. The towns productivity and market orientation of and villages require better roads, bridges, smallholders currently at subsistence or semi- drinking water and other services whose subsistence level; to encourage a more provision is beyond local means. Standard environmentally sustainable approach to budgets, geared to districts and municipalities, agricultural development in the various agro- will continue to play an important role in ecological zones; to promote broad-based developing these areas. participatory development that will assist in identifying area-specific constraints and permit 4.43 In regions at an internediate level of efficient targeting of the rural poor; to development private sector involvement in strengthen decentralized planning and delivery of agricultural and infrastructure implementation capacity of agricultural services is possible and should be exploited. services, including a viable rural finance One concrete way of increasing private system; to remove national and regional trade participation would be through an active distortions; and to develop regional agricultural program of privatizing public agricultural estate programs based on an integrated farming corporations (Chapter 2), which mainly are systems approach, with emphasis on adaptive located in Sumatra and Kalimantan. At the on-farm research, and with due attention to same time a reasonable level of public sector upland (non-irrigated) areas. support for agricultural support services and infrastructure would be needed, including 4.41 Implementation of this strategy requires natural resource and watershed management, regional investment projects directed at the research, some forms of extension, and support agricultural and infrastructure sectors with a for specialized services (the integrated pest strong focus on income generation and poverty management program for example). alleviation, and policy and institution building Kalimantan provides an example of tailoring to support decentralized delivery of agricultural service delivery to a low population density support services (section D.4). Regional area with some relatively large and isolated differences could be dealt with through region- agglomerations (Box 4.3). specific strategies. This approach is attractive for Indonesia, being so vast and heterogeneous. 4.44 In more advanced regions (a number of In light of this heterogeneity the following areas on Java/Bali for example) public support strategy could be envisaged. for agricultural and infrastructural services could be decreased in favor of greater private 4.42 In poorer and more remote regions the sector involvement. There needs to be an delivery of agricultural support and active promotion of, and transfer of activities infrastructural services would continue to be to, farmer and water users associations, and dominated by the public sector. Most of the private sector provision of services. Public eastern islands would fall into this group. Pilot provision could be limited to those cases of programs to promote private sector demonstrated market failure. Development of involvement (universities in agricultural the framework for private provision of research, NGos in extension services and health infrastructure services as outlined in Chapter 2 services for example) could be instituted. The obviously is a prerequisite for progress in this Governmnent's Village Infrastructure Projects area. are an example of this approach. The Central 108 Chapter 4 Box 4.2 Local copra levies reduce fanngate prices in Central Sulawesi Between 1979 and 1991, Copra Rehabilitation Fund (DRK) charges were an important source of local government revenue in coconut-producing areas. For example, in kabupaten Toli-Toli in Central Sulawesi, an arid, rural and isolated area whose economy relies heavily on copra, cloves and forest products, revenue from the DRK covered about 8% of total local government expenditure in 1989. The fixed DRK rate of Rp 15/kg levied on inter-island trade of copra was equivalent to a 3% ad-valorem tax on copra exports. This had to be absorbed mostly by coconut smallholders who produce 99% of all coconuts in the kabupaten. Most of DRK revenue became part of the local govermment budget, contrary to the original objective of re-investing the funds into rehabilitation of smallholder coconut trees. When the central government abolished DRK in June 1991, the local govermnent of Toli-Toli reacted quickly to prevent a revenue shortfall. It issued an instruction letter in July (No. 525.26/2143/VIl/Ekon) that, in effect, forced farmers to sell copra only to village cooperatives (KUDS), and inter-island traders to purchase copra only from KUDS. The margin between KUD's buying and selling prices amounted to Rp80-90/kg (about one-third of the farmgate price), much of which was to be transferred to the local government. This measure led to a fall in farmgate prices of copra in Toli-Toli, which had already been lower than in other areas of the province (Table 1). Table 1. Average farmgate prices of copra in Central Sulawesi (Rp/Kg) Year Toli-Toli Rest of the Province Toli-Toli in Relation to the Rest of the Province (%) 1989 348 437 87.9 1990 204 247 82.6 1991 274 372 73.7 1992 461 520 88.7 1993 368 424 86.9 1994 522 567 92.1 Source: Kanwil Perdagangan Province Sulawesi Tenggara, Palu, 1995. The KUD monopoly lasted for only about six months, since the KUDs had limited operational/financial capacity, and because farmers found ways to sell directly to inter-island traders (albeit at prices lower than elsewhere in the province). In the meantime, Ministry of Trade decree of 1991 (No. 144/Kp/VI/91) deregulated the copra and coconut oil trade at the national level. The Toli-Toli local government continued to seek alternative revenue sources, and in July 1992 it issued a local regulation (No.2 Seri B 10 July 1992) that authorized levying of trade charges (retribusi) not only on copra but also on some other commodities. Although the retribusi rate for copra in Toli-Toli was low-about 1 % of the farmgate price at the time-it was against the deregulation trend and hence opposed by the central and provincial governments. The Governor sent a letter to the Regent (bupati) of Toli-Toli on 21 September 1992 reminding him that the retribusi charges on copra were not in accordance with the Ministry of Trade decree of 1991, and requesting him to discontinue the practice. As of end-1995 the retribusi on copra was still in place. Growth Benefitted All Regions 109 Box 4.3 Public-private partnership to deliver infrastructure services in Kalimantan The region of Kalimantan, comprising 4 provinces, has an overall low population density with increasing population concentration in cities; the cities are separated by vast distances and mostly connected by river transport-many do not have all weather access to roads. Central and local governments have identified focal point cities to serve as regional centers, promote rural-urban linkages and trade, and have further growth potential. The objective is to promote regional development by focussing on these growth centers, and provide infrastructure in support of linkages. Three priority "packages" of complementary infrastructure investments are to be identified in parallel, also for parallel implementation; interurban transport, regional/municipal water, and municipal non-water serves. Both planning and implementation will be decentralized. Interurban transport links may require the most investment. A pattern of improvements radiating from the focal point cities will result from the studies to enable the inland cities to trade with the port cities or others, but also to improve connections between the smaller cities in the hinterland and the main cities. The network development approach will improve national, provincial and district roads, river section and ports, to ensure connectivity, rather than trying to complete a notional national network on a priority basis. Regional, municipal water development is necessary given the fast growth of the focal point cities and towns, and the need for long-term planning for adequate water resource selection, environmental concerns, and optimal technical solutions among alternatives. Currently mostly small and ad hoc service expansions are provided at high cost and inefficiently, compared to what could be done with a different approach. Also, greater accountability and autonomy in water enterprises to increase efficiency and allow private participation and more qualified staff will be sought. Municipal non-water services include solid waste disposal, sanitation, drainage, urban roads, markets and even urban renewal and some municipal administration improvements. Solid waste volumes are increasing and current disposal methods and locations tend to be inadequate. Drainage may be inadequate and results in flooding during the heavy rainy seasons in the low lying cities. Sanitation also is difficult to ensure, technically because of the high water levels, and because of inadequate awareness of the consequences of improper sanitation. Therefore, campaigns to increase awareness of the enviromnental and health consequences would be undertaken up front, and neighborhoods would be involved in planning and carrying out projects. Bappedas I and II would be very involved in the studies, as they already have been in the development of strategic regional and land use plans, to ensure that priorities are well selected and also that the larger aspects, such as river basin management, are coordinated. 3. Pro-Poor Health and Education Spending remain but are at least partly explained by the higher per capita cost of service delivery to the 4.45 Expanding access to essential health more sparsely populated regions off Java, and education services has been a Government lower demands for services (for example priority for 25 years. Literacy, primary education in poor, rural areas), and institutional education and primary health care have difficulties of service delivery from a improved in all provinces. Regional disparities centralized bureaucracy to distant areas. 110 Chapter 4 4.46 The Government's approach has been 1960s to over 1,350 in 1999/93. The to increase the supply of inputs-teachers, Government also has agreed to the schools, health care workers and health establishment of private medical schools and centers. Within this approach, most emphasis there now are 14 such schools, mostly in Java, was on training teachers and health care producing nearly 30% of all new doctors. workers. Toward that end, in health, nine new public medical schools were established in the 4.47 Increases have been recorded in most 1950s and 1960s, and three more were opened indicators of the penetration of health services, in the late 1970s and 1980s. These public for example the population per health center schools have produced increasing numbers of and the number of doctors per health center general practitioners, from 460 per year in the (Table 4.3 and World Bank 1994d). The Table 4.3 Population and doctors per health center, 1985 and 1992 1985 1992 Population Doctors per Population Doctors per per Health Health per Health Health Center Center Center Center Aceh 20,418 0.66 22,701 0.91 North Sumatra 33,137 0.97 34,708 1.15 West Sumatra 26,000 0.93 24,672 1.03 Riau 27,326 1.13 28,933 1.40 Jambi 22,737 0.91 26,454 1.01 South Sumatra 32,401 0.99 29,954 1.09 Lampung 47,515 1.02 46,860 0.95 Bengkulu 11,848 0.85 11,180 1.08 Jakarta 27,961 1.35 35,926 1.38 West Java 49,972 0.98 32,109 1.20 Central Java 44,446 0.99 41,222 1.19 Yogyakarta 29,376 1.09 33,871 1.08 East Java 37,991 0.88 39,702 1.08 West Kalimantan 20,547 0.74 25,455 1.12 Central Kalimantan 12,391 0.61 25,770 0.84 South Kalimantan 18,460 0.68 18,744 0.79 East Kalimantan 14,110 0.64 13,679 1.29 North Sulawesi 20,833 0.97 19,734 1.24 Central Sulawesi 21,375 0.82 23,024 1.14 South Sulawesi 29,730 0.80 25,994 1.07 South East Sulawesi 15,696 0.59 5,973 0.84 Bali 31,783 1.01 25,251 1.74 West Nusa Tenggara 34,625 0.92 27,024 1.08 East Nusa Tenggara 22,774 0.53 26,100 0.69 Maluku 16,330 0.60 15,978 0.79 Irian Jaya 10,856 0.32 19,498 0.65 East Timor 10,230 0.61 15,110 0.88 Indonesia 32,267 0.90 30,608 1.10 Source: Ministry of Health. Growth Benefitted All Regions 11) manpower oriented focus of the Government's 4.48 Improved access has been accompanied effort is seen in the fact that while only about by improved health indicators. For example, half of all provinces in Table 4.3 recorded infant mortality fell sharply between 1980 and increases in population in relation to the 1990 in all provinces (Figure 4.8), though the number of health centers, virtually all-the national average of 71 deaths per 1,000 live ratio declined marginally in Lampung and births remains high. Infant mortality rates are Yogyakarta-recorded gains in the number of below the national average in most of Sumatra, doctors per health center. The effort to redress Java and Bali and exceed the average in many regional imbalances is seen in the fact that of the eastern provinces, especially West Nusa number of doctors per health center increased Tenggara. most rapidly in the provinces that were farthest behind-Aceh, Bengkulu and most of the 4.49 Average fertility also fell, from 3.8 to eastern islands. 3.6 between 1980 and 1990, with all regions Figue 4.8 DespIte improements, Inftu moitity remains high. (nInt moMfIty ml. p.0I0 Ito hhuis) Is440 Reducdon, 198000 -19S0 140 -Ido In Iwo I In 190 120 r 100 * lllI iiil11tl'l 1111 '1 I I SosuulkoPuulWl 112 Chapter 4 showing declines (Figure 4.9). East and West produced a fall in the student-teacher ratio to Nusa Tenggara, Sumatra and Sulawesi continue 21 by 1992/93 from 34 in 1980/81 (Table 4.4). to have the highest fertility rates. The largest Class sizes decreased in all regions, and in the reductions were in parts of Sulawesi and eastern provinces are close to the national Kalimantan, Jakarta, Bali, and parts of average. Moreover, differences in class size Sumatra. However, East and West Nusa are not systematically related to average per Tenggara showed only small reductions. The capita income levels (World Bank 1993d). regional differentials and changes only partly reflect differentials in the availability of health 4.51 Indonesia's emphasis on investment in services (which themselves reflect differences education has led to one of the fastest rates of in population density). They also reflect a educational transition in the world. Between number of well-known "background variables," 1973 and 1984 school enrollments increased especially education and employment sharply, especially in primary education. Gross opportunities for women. primary enrollments rose from 60% to 106% partly because the Government expanded 4.50 Increased supply of education inputs primary schools massively through the special also produced impressive gains. A massive INPRES-SD program and provided free primary teacher training program was launched schooling. At least one public university was resulting in an increase in the number of opened in each province and private schools at primary school teachers. From the early 1980s secondary and tertiary levels were allowed to to the early 1990s the number of teachers expand unhindered. Indonesia achieved near nearly doubled to 1.24 million (Table 4.4). universal (93%) net primary enrollment by Much slower growth in the number of students 1984, a feat achieved by few upper-middle- income countries. Figure 4.9 Women have fewer children In 1990 then In 1900 ILO Reduction, 19 80-0 190 4 - -~~~~Indonesia In IM@ IndonoMb In 1900 4.5 3.0~~~~~~~~~~~~~~~~~~~~~~~~~3 Sh U~~~~~~~~~~~ LU or, Pus gSIIs 3i] Src fir. Pua 3ISk. Growth Benefitted All Regions 113 4.52 Nationally, illiteracy was halved in the Kalimantan and Sulawesi. Illiteracy rates are 1980s, falling to 15% in 1990. Illiteracy highest in East Timnor, West Nusa Tenggara dropped in all provinces though there were and Irian Jaya. Bali and parts of Java continue substantial regional disparities (Figure 4.10). to have higher-than-average illiteracy rates, School enrollment rates in the 7-12 age group which is consistent with the still-high numbers exceed 90% except in East Timor (87%) and of poor in these regions. North Sulawesi (86%). Sumatra and Jakarta are have significantly less illiteracy than the 4.53 The expansion of Central Government national average, along with parts of spending on health and education has narrowed Table 4.4 Increasing numbers of teachers reduced the student-teacher ratio Students in relation Teachers to teachers 1980/81 1992/93 1980 1993 Aceh 12,402 24,643 32 21 North Sumatra 40,555 78,764 38 24 West Sumatra 18,303 31,537 32 22 Riau 10,206 23,923 31 25 Jambi 6,849 17,542 31 20 South Sumatra 21,477 44,641 34 24 Bengkulu 3,708 10,937 34 20 Lampung 17,350 40,818 41 25 Jakarta 26,627 45,545 36 22 West Java 99,855 249,761 42 20 Central Java 116,850 181,213 32 22 Yogyakarta 15,376 21,269 30 18 East Java 134,871 173,647 30 22 Bali 11,548 22,394 37 16 West Nusa Tenggara 12,504 22,021 31 23 East Nusa Tenggara 15,130 28,151 31 20 East Timor 1,686' 5,013 42 20 West Kalimantan 10,978 25,841 34 22 Central Kalimantan 5,557 14,062 28 18 South Kalimantan 11,786 21,192 25 17 East Kalimantan 5,761 16,470 31 21 North Sulawesi 16,121 24,637 25 14 Central Sulawesi 6,670 16,414 34 18 South Sulawesi 24,326 55,970 41 19 South East Sulawesi 5,262 12,858 33 19 Maluku 7,914 15,836 29 23 Irian Jaya 7,278 12,617 22 21 Indonesia 666,950 1,237,716 34 21 Source: BPS, Statistical Yearbook of Indonesia, 1982, Tables IV. 1.2 and Statistical Yearbook of Indonesia, 1994, Table 4.12. 1981/82. 114 Chapter 4 Flgumt 4101lir" de*wlned vywhem 70 I MIN D o~~~hoo Ino19r0 -1 980 S so - nlOIdnhl8 30 r,,,n,,,,Xlllllll 31d, 1' 10~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 10 X '5f I f;sfi|t!!g|]|l| Ndt DAMIN10ha bl"slK i i SW M N D InmtaEhub LtI Soe Wlle Piulk. J11t but not closed the regional imbalances in health have gained ground in the last five or six years and education status. Moreover, there are and average daily patient contacts in mnany signs that the approach based on the provision health centers and public hospitals remain low. of physical inputs could be irnproved. The trained doctors, nurses, midwives and paramedics staffing these underutilized facilities 4.54 One sign from the health field is low do not appear to be fully occupied. utilization of public facilities and staff, especially off Java (World Bank 1994d). 4.55 Low utilization of health centers is Governmnent service outlets do not seem to related to the range and quality of available Growth Benefitted All Regions 115 services and the effectiveness of staff, not only Education and Culture (MoEC) study suggests the accessibility of centers or the numbers of that students absorb, on average, less than 50 health workers found there. In part this percent of the curriculum in primary schools reflects rigid, centrally determined staffing (Suryadi). The MOEC study notes that an guidelines-one to three doctors per health International Education Assessment study center, three general practitioners per class D among fourth grade students in 27 provinces in hospital, etc.-that are unresponsive to local 1990/91 showed low literacy standards and demand conditions. In short the problem may serious deficiencies in reading-comprehension be related with the demand side of the health skills. services market, not the supply side. 4.58 Another indicator of low educational 4.56 There also are indications that the quality is the percentage of entrants to primary supply side approach is experiencing internal school who graduate. The national average strains. It is becoming increasingly difficult to primary graduation rate is about 68%. Java induce newly graduated general practitioners, and Bali are well above the average, while all whose compulsory assignment now is handled of the eastern islands are below (8 of 13) or through a non-renewable three-year near the average (Figure 4.11). The lowest appointment as "non-permanent employees" completion rates are in East Timor, East Nusa (the Indonesian acronym is frr), to take Tenggara, and Irian Jaya. The regional assignments in remote areas. Some differences reflect low population densities, the provinces-Irian Jaya, East Timor, Aceh, prevalence of agriculture in the eastern Central Kalimantan and Southeast Sulawesi for provinces and the fact education is seen as example-are experiencing difficulties in reducing the economic contribution of children obtaining doctors for available jobs. In an in poor rural areas. In the high growth effort to even out the availability of physicians provinces the problem of "low payoff/high across the country, special incentives are paid opportunity cost" is seen in high drop-out rates to nrr doctors to induce them to practice in from secondary schools among the poor (World remote parts of Indonesia. Increasing the Bank 1994a). differential for working in remote areas could work. But it would cost more and create 4.59 Significant differences still exist in net resentment among the civil service doctors, enrollment rates for primary schooling between who still make up a large share of the health the richest and poorest provinces of Indonesia work force. (East and West Nusa Tenggara, West Kalimantan, Irian Jaya, South East Sulawesi). 4.57 Quality also may be an issue in the Incomplete enrollments reflect the combined education sector, as noted in the discussion of influence of weak demand for education (which returns to education in Chapter 3. Those who is partly caused by low achievement) and complete primary education command only a inadequate schooling opportunities. small wage differential over those with incomplete primary education (Chapter 3). 4.60 The findings that some areas remain Pupil scores on reading-achievement tests for well below average in basic health and several East Asian countries showed that education status and that low quality services Indonesia had the lowest among its neighbors, also are a problem in some areas suggest that about 2% below the Philippines but some 20% the pro-poor focus of health and education below Thailand and 30% below Singapore spending may require an approach that (Greaney). Tests of cognitive ability indicate weak learning abilities. A Ministry of 116 Chapter 4 Figure- 11 Prlmroy school graduatlon remins low In theastern pnce. (G.io hi 1U2 _ a pnet d4 eauh hi INS) 11011d11-1- In 1. 1. a of ,ntl IIn I I so 70 W7 so 40 30 SJuro Elida of Edu_ao md Cultu. combines supply and demand. As noted the demand side of the market means listening above, for the past 25 years the Government more to these groups. This means withdrawing has tried to even out access to basic health and from the current approach that emphasizes education services, and, as noted above, there close management by the Central Government has been a lot of progress. Further gains and allowing local units greater scope to would come from intensifying the supply side determine their response to local demands for approach of increasing the number of health health and education services. and education inputs across the archipelago. For example, reducing the distance from 4.62 Implementation of a more market- schools and health centers could raise oriented, pro-poor approach to health and enrollments where they are low and increase education public spending could be facilitated utilization of health services. But more by assigning greater accountability and progress also will depend on quality authority to subnational governments for health improvements. A more balanced approach in and education spending. Local governments which local demands for health and education need to be more responsible for decisions and services are given more importance could lead actions relating to the coverage and to quality improvements. performance of public facilities. 4.61 The demand side of the education 4.63 In education, for example, greater services market is made up of students and autonomy could be given to school principals their parents. Sick people and those seeking for managing their schools. Greater autonomy preventive care account for most of the demand given to principals would encourage the for health services. Putting greater weight on community to become more involved in school Growth Benefitted All Regions 117 oversight, which in turn would increase the spending will become increasingly important in responsiveness and accountability of teachers Indonesia in light of the projected decline in oil and administrators. More autonomy could be revenues and (net) aid. These were the sources given to teachers to determine classroom of fiscal redistribution; their slowdown will practice within limits set by the national make it difficult to sustain fiscal redistribution curriculum, and to have more choice over on the previous scale. More efficiency in textbooks. spending will be needed to offset the projected drop in these revenues; decentralization would 4.64 In health local governments could be promote greater efficiency. given greater responsibility for determining the allocation and deployment of different worker 4.67 However, decentralization is not a categories in the public sector-provision of panacea. Its benefits depend on decentralizing drugs, means of transport and staff housing (as services to the level of Government that needed), and supervision and assessment of captures most of the externalities and/or can workers and facility performance. handle the spending most efficiently, linking Administrators could be selected through an decentralized expenditures to decentralized open and competitive hiring process. In revenues (to get a better reading on demand), remote areas the local authorities could and improving institutional capacity in the experiment with alternative management and subnational governments. delivery mechanisms, including turning over facilities to NGOS, using non-physicians as 4.68 In Indonesia's centralized government administrators, and subcontracting specific structure certain tasks are assigned to services to private practitioners. subnational-provincial or local-government levels for implementation. In addition to their 4. Decentralization very small own resources, subnational governments (provincial and local) receive 4.65 Decentralization could achieve the transfers from the Central Government: block objective of efficiently increasing the pro-poor grants (INPRES funds); and subsidy transfers to focus of public spending on health and pay civil servants and for primary education. education spending. Smaller distances between Provincial and local government agencies also service users and providers and closer links may participate in the "co-administration" of between costs and services will tend to raise investments and activities financed through the efficiency, improve service delivery, and national line ministry budgets or the special increase accountability. Decentralization also development budget. In this case, little would allow better adaptation of expenditures discretion is allowed as detailed budgets are to local conditions. Where capacity is approved each year by the Central sufficient it makes sense to rely on the greater Government. Although implementation is to ability of subnational governments to identify some degree decentralized, the subnational their needs and manage the delivery of public govermnent usually has little authority to define goods and services. Worldwide experience, in either the nature or budget for these countries as diverse as Bolivia, Ecuador, the decentralized tasks and is essentially acting as Philippines, and Mexico, suggests that an "agent" of the Central Government. decentralization can be effective in reducing costs and improving service delivery. 4.69 Some decentralization initiatives have begun. The Central Government has stated its objective to delegate the planning and execution 4.66 Increasing the effectiveness of public 118 Chapter 4 of a large cluster of public investments to local further divided into ten elements. Similar (Dati ll) governments. The Government also problems exist with spending on roads at the is deconcentrating Central Government Dati I and Dati II levels. bureaucracies to the kabupaten level, in a pilot project (Projek Percontohan Otonomi Daerah 4.72 Simply loosening the Central Tingkat II) being run by the Home Affairs Government's strings on its transfers to Ministry. Bappenas, the planning ministry, is localities may not lead to the hoped-for leading an effort to design and implement efficiency gains. Efficiency only will come if targeted development strategies for more than a way is found to change the incentives of 200 strategic regions (kawasan andalan). The service providers to make them more Government also has supported substantial responsive to local demands. A good way to community level decision-making in do this is to require local service providers to infrastructure under the donor-funded mobilize increased funding from own sources, Infrastructure for Lagging Behind Villages especially at the margin. Excessive reliance on Program, associated with the IDT program, and grants reduces incentives for responsible local the World Bank's Water Supply and Sanitation decisions. An example is the neglect of Services for Low Income Communities project operations and maintenance spending after the (World Bank 1995a). As discussed in Box 4.4, project and the associated financing-the so gaps occasionally exist between decentralization called DIP transfers-finish. In some sectors, policy and its implementation. including agriculture, irrigation and road maintenance, this neglect has resulted in the 4.70 The Central Government also is need for additional projects to rehabilitate run- moving to increase the authority of subnational down public works. governments over their spending of central government transfers. Recent examples are the 4.73 The best potential for greater own- consolidation of some specific-purpose source revenue of local governments seems to transfers (for example, the iNPRES grants for lie with the property tax, vehicle taxes and user provincial reforestation and conservation and charges. Property rates are fairly low, and for provincial local road improvement) into the assessments appear to have lagged behind the block grants to Dati I and Dati II and the growth in property values. Because of the low creation of a new block grant for poor villages, rate (0.1 % of self-assessed value) and the low the IDT. The Central Government also has assessments, property taxes only amount to increased the subnational governments' share about 0.25% of GDP. Indeed, the name is of property taxes to 91%. Despite these something of a misnomer-it is largely a tax on efforts, Dati I and Dati II levels of government mining, which accounts for 50% of the revenue lack their own resources to carry out and nationwide, and 10% even in Jakarta. Better maintain projects. administration of the property tax could increase local government revenue, particularly 4.71 Central Government oversight of in urban areas and the high-income housing national budget expenditures is strict but developments being built on the fringes of coordination across sectors and levels of Jabotabek. In Chile, another unitary state, the government usually is not as tight. property tax is used to redistribute income Considerable fragmentation has occurred as the (Box 4.5). sources of finances for government programs have multiplied. For example, there are as 4.74 User fees also represent a potential way many as ten sources of funds for health to generate revenues for improving local services, with one, the health INPRES grant, services. There is significant scope for higher Growth Benefitted All Regions 119 Box 4.4 The implementation gap in decentralizing responsibility for urban land use planning The case for greater decentralization and private sector involvement is strong, as discussed in section D.2. The Government of Indonesia has established a framework for allowing municipalities to plan and implement urban development programs. However, implementation of the framework has lagged, and recent measures have actually reduced the role of subnational governments vis a vis the central government in land use planning. With large deficiencies in urban infrastructure and a fast-growing urban population the Government issued a statement of urban policy in 1987 strengthening local governments' capacity to build, operate and maintain local services; improving the planning and programming of urban infrastructure investments; allowing greater local resource mobilization; and strengthening the consultative process at various level of government, particularly the participation of municipalities and regencies. An inter-ministerial team known by its Indonesian acronym TKPP was formed to support the policy statement. Repelita VI and the second 25 Year National Development Plan shifted the focus of urban programs from overcoming current service deficits toward a more forward-looking emphasis on the investments needed to realize the economic potential of urban areas, including their functions as service centers for regional development. To accelerate decentralization and implementation of urban development plans, emphasis was placed on better use of resources, mobilization of local revenues, developing financing mechanisms, and increasing cost recovery by municipalities and their agencies. The Law for Spatial Development, which was passed by the Parliament in September 1992, would contribute to these objectives by unifying land-use planning. It assigned the task of setting the overall policy framework for land and water resource management to the central government and left local governments to fill in the details consistent with the national plan. It also includes requirements for information dissemination, local participation and environmental management concerning spatial planning. However, implementing regulations for the Law on Spatial Development have yet to be promulgated. Responsibility for land and water use management remains scattered among different levels of government. Responsibility for financing and managing the provision of services remains unclear in many aspects, particularly regional-scale facilities and those protecting health and environmental quality. Lack of clear responsibility for land use management has inhibited the fulfillment of the loftier goals of Repelita VI and the 25 Year National Development Plan relating to the forward looking, strategic urban planning. At the local level, the approach continues to be too focused on alleviating current service deficits rather than realizing economic potential. Further, as discussed in Chapter 2, continuing the current practice of BPN issuance of izin lokasi and izin prinsip without regard to national development objectives-protection of watersheds, sensitive wetlands, prime agricultural lands, cultural heritage sites, for example-and local service capacities makes it difficult to create a well-coordinated system of development management. user fees, especially in urban areas-for water supply, local health services and public example, vehicle parking fees and periodic transport for example) the low prices mainly auctioning of public parking lots. Many public benefit the better-off, because the poor lack services are underpriced; the low fees act as a access (World Bank 1995a, 1994b). If more barrier to the provision of greater access and realistic fees were charged, it might even be better-quality service. In many cases (urban possible to divest these services to the private 120 Chapter 4 sector. However, care also must be taken with 4.76 The returns to technical assistance in the relations between the local governments the procedures of managing and operating local and such companies. In some cases, such as government public services can be high. The water, the local government's appropriation of probability that technical assistance achieves a revenues from local corporations has hindered sustainable improvement in local capacity service provision.8 Thus, user charges need a increases if the assistance is demand driven and major revamping, and there is an educational responsive to local governments' needs and not role for the Central Government (and aid supply driven. Training in pricing of public donors) in assisting in this respect. services, in competitive preparation of contracts, procurement, land use and planning, 4.75 Increasing own revenues sounds good evaluation of aid and business offers, and other but, as the example of the levies on copra in areas is likely to be needed for many Toli-Toli (Box 4.2) demonstrates, allowing subnational governments. There is a role for localities to tax may lead to inefficient the Central Government to play in facilitating outcomes. Taxes on trade are appealing, coordination among local governments, the particularly if they appear to hit middlemen private sector and NGOs for the training of engaged in marketing, not local residents. But local government administrators. such taxes reduce incomes and efficiency. Box 4.5 Chile uses property taxes to redistribute income between provinces Chile is effectively a unitary state, like Indonesia. Chile has a much smaller population but has to administer a country that is nearly as 'long" as Indonesia, with disparate regional conditions and incomes. As with other unitary states, Chile uses revenues from VAT, income taxes, and copper to support investment in the regions and municipalities. These funds partly are allocated through the National Regional Development Fund on the basis of redistributive formulas and competitive submission of projects by municipalities. The novelty of Chile's tax system is that it also uses a national property tax to redistribute income between regions and municipalities. Sixty percent of all property taxes, fifty percent of vehicle taxes, and parts of taxes on firms in the capital region are allocated to the Municipal Common Fund. The Fund is then redistributed to the local governments on the basis of tax base, population, share of tax-exempt property, and tax revenue per capita. Effectively the fund transfers revenues from municipalities with high income from taxable property to those with less taxable property. Growth Benefitted All Regions 121 Endnotes 1. See Hill (1991) is a compendium of recent english language articles on regional development. 2. The coefficient of variation (a standard measure of dispersion equal to the standard deviation divided by the average) of provincial per capita GDP declined to 0.94 in 1993 from 1.21 in 1983. See also section B.4. 3. The consumption figures, for both the provinces and the national GDP, are based on Susenas surveys of expenditure. 4. Expenditure data typically are more evenly distributed than income data. 5. Local water companies could improve their revenues through better use of user fees. However, the present system of transferring much of their cash surpluses to the local governments reduces the companies ability to use their own revenues to improve service and distorts their incentives to favor more borrowing (World Bank 1995a, Chapter 3). 6. The Spearman rank correlations coefficients were .429 (t = 2.38) and .328 (t = 1.74), including oil and gas and excluding oil and gas, respectively. 7. Oil production is expected to drop-off slowly over the medium-term, and the mix of production increasingly favors high-cost enhanced oil recovery fields, which remit lower revenues to the Government. LNG/LPG production rises over the medium-term, but yields less in Government revenues than oil production. Moreover, some of the new gas fields (Natuna for example) will probably be developed only very slowly. 8. See note 5. 122 Bibliography Bibliography Agrawal, N. 1995. "Indonesia: Labor Market Policies and International Competitiveness." 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Regional Perspectives on World Development Report 1995, Washington, D.C. 128 Statistical Annex INDONESIA COUNTRY ECONOMIC REPORT STATISTICAL ANNEX ' List of Tables Population and Employment 1.1 Population and Growth Rates by Province, 1930-1990 1.2 Distribution of Population by Age Group and Sex, 1961-1990 1.3 Employment by Main Industry, 1971-1990 1.4 Population Distribution by Province and Urban & Rural, 1980-1990 National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1983-1995 2.2 Gross Domestic Product by Industrial Origin at Constant Market Prices, 1983-1995 2.3 Expenditure on GDP at Current Market Prices, 1983-1995 2.4 Expenditure on GDP at Constant Market Prices, 1983-1995 2.5 Distribution of GDP at Current Market Prices, 1983-1995 2.6 Distribution of GDP at Constant Market Prices, 1983-1995 ]International Trade & Balance of Payments 3.1 Balance of Payments, 1983/84-1995/96 3.2 Non-oil Exports, 1984/85-1994/95 3.3 Value of Exports by Principal Country of Destination, 1983-1995 3.4 Value of Imports by Principal Country of Origin, 190-1995 External Debt & Capital Flows 4.1 Sumnary of External Debt Data, 1982-1994 4.2 External Public Debt Outstanding as of December 31, 1994 4.3 Service Payments, Commitinents, Disbursements and Outstanding Amounts of External Public Debt, 1980-2009 4.4 Development Assistance Flows, 1987-1992 Public Finance 5.1 Central Govermment Budget Summary, 1983/84-1996/97 5.2 Central Government Receipts, 1983/84-1996/97 5.3 Central Government Expenditures, 1983/84-1996/97 With the exception of the tables on External Debt, the Statistical Annex is a compilation of official data from Government sources. In some instances, these data may differ from data in the main text due to different Bank definitions and methodologies in constructing the statistical series. Statistical Annex 129 5.4 Development Expenditures, 1983/84-1996/97 5.5 Development Expenditures by Sector, 1983/84-1996/97 5.6 Project Aid by Sector, 1983/84-1996/97 Monetary Statistics 6.1 Money Supply, 1982-1995 6.2 Changes in Factors Affecting Money Supply, 1982-1995 6.3 Consolidated Balance Sheet of the Monetary System, 1982-1995 6.4 Banking System Credits by Economic Sector, 1982-1995 6.5 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1984-1995 6.6 Investment Credits by Economic Sector, 1982-1995 6.7 Outstanding Bank Funds in Rupiah and Foreign Exchange by Group of Banks, 1982-1995 6.8 Interest Rates on Deposits at Commercial Banks, 1982-1995 Agricultural Statistics 7.1 Principal Agricultural Products by Subsectors, 1982-1994 7.2 Production of Major Crops by Type of Estate, 1984-1994 7.3 Rice-Area Harvested, Production and Yield, 1982-1994 7.4 Area Covered Under Rice Intensification Programs, 1982-1994 Industrial Statistics 8.1 Index of Manufacturing Production by Selected Industry Group, 1986-1995 8.2 Production of Minerals, 1984-1995 8.3 Crude Oil Production by Company, 1981-1995 8.4 Petroleum Product Supply and Demand, 1981-1995 8.5 Domestic Sales of Petroleum Products, 1981-1995 Prices 9.1 Consumer Price Index, 1979-1995 9.2 Indonesia Wholesale Price Index, 1983-1995 9.3 Domestic Prices of Petroleum Products,. 1984-1995 Investment Statistics 10.1 Approved Foreign Investment by Sector, 1981-1995 10.2 Approved Domestic Investment by Sector, 1981-1995 130 Statistical Anncx Table 1.1 INDONESIA COUNTRY ECONOMIC REPORT Poulbatln And Growlh Robs by Prominm. 19S0-1990 Region Population ('000) Avwae growth rate (% pAL) 1930 1961 h 1971 h 1980 1915 199 1930-61 196I-71 1971-80 1910-85 1985-90 JaIL78 an 76086 SL27 98 72A 1 L 19 la I& DIG J 811 2.973 4.579 6,503 7.8S5 S,m 4.3 4.4 4.0 3.9 0.8 West J.k 10.586 17.615 21624 27.454 34830 35.3-0 1.7 2.1 2.7 2.3 2.8 Cenal JEw 13.706 18,407 2L877 25.373 26.945 2S.519 1.0 1.7 1.7 1.2 LI Di Y rog wta 1559 2.241 2,489 2751 2,930 2,n5 1.2 1.1 1.1 13 -0.1 Ein JEw 15.056 2L823 25.517 29,189 31.262 32.490 1.2 1.6 1.5 1.4 U3 Stansta 8,2& 15.739 21G M&L7 32.603 Ao Li a 3.4 M 12 lunpung 361 1.66S 2.777 4,625 5.905 006 5.1 5.2 5.8 5.0 03 BerIgkLu 323 406 519 768 943 LISI 07 2.5 45 4.2 4.6 South Sundfra 1,37S Z773 3.441 4.630 5.370 6278 2.3 2.2 3.4 3.0 3.2 Fau 493 L235 L642 2169 2548 3.283 3.0 29 3.1 3.3 5.2 Jwnbi 245 744 L006 L446 L745 2016 3.6 3.1 4.1 3.8 2.9 Wst Sumatra 1.910 2.319 2793 3.407 3,698 4.001 0.6 1.9 2.2 1.7 LI NoMth Sula 2.542 4.f95 6.622 S.361 9.422 10,254 2.2 2.9 2.6 2.4 1.7 Aesh L003 1,629 Z009 Z611 Z972 3,417 1.6 2.1 3.0 Z6 28 Kal n 2.170 4.0 51 cm I.= 2l11 1 Z3 la 2.1 L Wedt K1Trw n 802 1,581 z2o 2486 2,819 3.237 22 2.5 2.3 2.5 Z8 Conlrg K amwfln 203 497 702 954 Lila L398 2.9 3.5 3.5 3.2 4.6 SouLh Klmnwen 836 1.473 L699 2.065 Z273 2,5S9 1.8 1.4 2.2 L9 2.7 Eint Kvimwntn 329 551 734 L218 L512 1.877 17 2.9 5.8 4.4 4.4 SUWW"&Z_1 7.079 8 a it 1JaJM U 5 1-7 19 2.2 Li I C1fal s8i_sl 390 693 914 1290 L511 L705 1.9 8 3.9 3.2 24 NoMi Su.iel 748 1.310 1.719 2,115 2313 2.480 1.8 .8 2.3 1. 1.4 Soulh _Sukw 2.657 4.517 5.181 Z062 6.610 6913 1.7 1.4 1.8 1.7 1.1 S1O _h 8SUIEd 436 559 714 942 L120 1351 08 2.5 3.1 3.5 3.8 OthwrIsnds 1.219 L UK IL071 IZl3 Ma6S LI lo- 2. LI adll L10I 1,783 120 2.470 2649 2779 1.6 1.7 1.7 1.4 1.0 Wet Musa Teggwa 1,016 1.808 203 2725 2Z995 3.371 1.9 .0 2.4 1.9 2.4 East Nus T rnggwa 1.344 L967 2295 2737 3.061 3.270 1.2 1.6 20 2.3 1.3 M"ku 579 790 1089 1,410 1,609 1.853 1.0 3.3 2.9 2 Z9 Jys 179 758 923 L174 1.371 L63t 4. 2.0 2.7 31 3.5 EMt Tlmor *.a 3J. M.A 555 631 750 m.S DA L.aZ 6 3.5 T a ta2 1=A 1487A490 16407 1248 LI ad 212 1. /a Inciudes ad)Jsbnent for the olublon of rudal Irian Jayv SoucK Canlral Wiesu of Stldece, Populdaion Cenu Reporls, 1961, 1971, 1980 and 19D0; Sletbica Y_wbood Of Indonsei, 1984: and SUPAS 1985. INDONESIA COUNTRY ECONOMIC REPORT :: DIstrbution of Population by Aue Group and Sex. 1961-19901 l 1961 1971 1980 1 955 1 990 Age Group M;ee Female Tot Male Female Totl Male Femal Tota Male Female Total Male Female Tatal 0-4 8.529 5.649 17.178 9,675 9,560 19.235 10,872 10.422 21,294 11.008 10,543 21,551 10,766 10,120 20.887 5-9 7.744 7.701 15.445 9.593 9,302 18,895 10.889 10,446 21,335 11.379 10,739 22.118 11,791 11,290 23.081 10-14 4.353 3.892 8245 7.406 6.75 14,281 9.179 8.525 17,704 10.783 10,113 20,896 10,998 10.438 21.437 15-19 3.865 3.905 7,770 5.627 5,779 11.406 7,552 7.806 15,358 8.335 8,232 16.567 9.553 9.367 18.920 20-24 3.480 4,373 7,853 3,627 4.461 8088 6.010 7,055 13.065 6.385 7.903 14,288 7.662 8,486 16.148 25-34 7.392 8610 16,002 7,722 9,226 16.948 9,685 9,920 19.605 12026 12.442 24,468 13.962 14,770 28,72 35-44 5,765 5.406 11,171 7.062 7,119 14,181 7,876 8.172 16.04 8,531 8,485 17,023 9,778 9,475 19.253 45-54 3.587 3.511 7,098 4.360 4,213 8&573 5.761 5.856 11.617 6,418 6.514 12,932 7,036 7,284 14,320 55-64 1.913 1.865 3,778 2.224 2.373 4,597 3.297 3,354 6.651 4.150 4,474 8.624 4,615 4,887 9,502 65+ 1.183 1.245 2.428 1.450 1,539 2,989 2.200 2.595 4,793 2,619 2.954 5.57 3.213 3,749 6.962 Not stad 60 57 117 7 8 15 11 9 20 4 3 7 3 5 8 TO7 47.S71 49.214 se mm WAl5 [J0s 73.352 74Bl15 147.490 !1.645 s2.402 164,047 !9.376 NW.s7 179L24A Incatit dibubcdo 0-4 17.8 17.6 17.7 16.5 15.8 16. 14.8 14.1 14.4 13.5 12.8 13.1 12.0 11-3 11.7 5-9 16.2 ISA 15.9 16.3 15.4 15.9 14.8 14.1 14.3 13.9 13.0 13.5 13.2 12.6 12.9 10-14 9.1 7.9 s3 12.6 11.4 12.0 12.5 11.5 12.0 13.2 123 12.7 125 11.6 12.0 15-19 S.1 7.9 8.0 9. 9.6 9.6 10.3 I.5 10.4 10.2 10.0 10.1 10.7 10.4 10.6 20-24 73 8.9 Sl1 6.2 7.4 68 5.2 9.5 89 7.s 9.6 87 s.6 9.4 9.0 25-34 15.4 17.5 16.5 13.1 153 14.2 13.2 13.4 133 14.7 15.1 14.9 15.6 164 16.0 35-44 12.0 11.0 11.3 12.0 II3. 11.9 10.7 11.0 10.9 10.5 103 10.4 1019 10.5 10.7 45-54 7.5 7.1 73 7.4 7.0 7.2 7.9 7.9 7.9 7.9 7.9 7.9 7.9 8.1 8.0 55-64 4.0 3.5 3.9 3.8 3.9 3.9 43 435 4.5 5.1 5.4 5.3 5.2 5.4 53 65. 2.5 2.5 2.5 2,5 2.5 2.5 3.0 3.5 3.2 3.2 3.6 3.4 3.6 4.2 3.9 Not sated 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOtl ag 0 Ice 1 0D. S a 100.0 10Q j0 jag jag jag jg a Ija jag iw. IOO Source: Cetalu Bureau of Sttl6et, Census Report, 1901. 1971, 19O0, and 1990; Intwecensa Popullion Survey. 1945. INDONESIA COUNTRY ECONOMIC REPORT Employment by Main IndustrY 1971-1990 /n 1971 1980 1962 19S5 1990 Main Industry million % million % million % million % million Agriculture, forestry, hunting & fishery 265 642 28.0 54. 31.6 54.7 34.1 54.6 35.5 50.1 Mining and quarrying 0.1 02 0.4 0.7 0.4 0.7 0.4 0.7 0.7 1.0 Manufacturing 2.7 65 4.4 85 6.0 10.4 5.8 9.3 8.2 11.6 Electricity, gas & water 0.0 0.1 0.1 02 0.1 0.1 0.1 0.1 0.1 0.1 Constructlon 0.7 16 16 3.1 2.2 3.7 2.1 3A4 2.8 4.0 Wholesale and retail trade & restaurants 43 103 66 12.9 8.6 148 9.4 15.0 10.6 15.0 Transportatlon, storage & communicatlons 1.0 23 1.5 2.9 I1 3.1 20 3.1 2.7 38 Finance, Insurance, reol estate & 0.1 02 02 0.4 0.1 02 03 0.4 05 0.7 business services Pubic services 4.1 10.0 7.7 15.1 7.1 123 83 133 9.7 13.7 Others 1.9 4.6 0.7 1.4 0.0 0.0 0.1 0.1 0.0 0.0 Total 413 100.0 2 100.0 573 100.0 625 100.0 708 l00 /a Refers to population 10 years of age and above who worked durdng the week previous to the census. Source: Central Bureau of Statistics, Statistcal Yearbook of Indonesia, 1975, 1982, 1985 and 1990 Census. 9.. Stanstical Annex . _ ~~~~~~~~~~~~~~~~~~~~1 33 Table 1.4 INDONESIA COUNTRY ECONOMIC REPORT Population Distribution by Province and Urban & Rural. 1980-1990 1980 1990 Growth Rates (9 pa.) Region Urban Rural Urban Rural Urban Rural Java 22,926.377 68.290.593 38.335,297 69.182,66 5.28 0.00 DKI Jakarta 6,071,748 408,906 8,222,515 0 3.08 0.00 West Java 5.770,868 21,678,972 12,208,176 23,170,307 7.78 0.67 Central Java 4,756.007 20,611,337 7,694,539 20,822,247 4.93 0.10 DI Yogyakarta 607,267 2,142,861 1,294,056 1,618,555 7.86 (2.77) East Java 5,720,487 23,448,517 8,916,011 23,571,557 4.54 0.05 Sumatera 5,481,489 22,514.439 9,293.747 27,128.739 5.42 1.88 Lampung 576,872 4,047,366 747,327 5,256,782 2.62 Z.65 Bengkulu 72,492 695,496 240,192 938,759 12.73 3.04 South Sumatra 1,267,009 3,360,710 1,839,492 4,438,453 3.80 2.82 Riau 588,212 1,575,684 1,047,454 2,233,592 5.94 3.55 Jambi 182,846 1,261,630 432,727 1,581,327 9.00 2.28 West Sumatra 433,120 2,973,012 807,983 3,190,694 6.43 0.71 North Sumatra 2,127,436 6,223.514 3,638,832 6,613,479 5.51 0.61 Aceh 233,501 2,377.027 539,740 2,875.653 8.74 1.92 Kalimantan 1,441,300 5.275.596 2,506,657 6,596,249 5.69 2.26 West Kalimantan 416,923 2,067,968 642,989 2,592,377 4.43 2.29 Central Kalimantan 98,257 855,919 245,249 1,150,612 9.58 3.00 South Kalimantan 440,901 1,622,326 702,950 1,893,697 4.78 1.56 East Kalimantan 485,219 729,383 915,469 959,563 6.55 2.78 Sulawesi 1.654,190 8.746,358 2.761.021 9,750.142 5.26 1.09 Central Sulawesi 115,472 1,169,056 281,134 1,422,196 9.31 1.98 North Sulawesi 354,607 1,760,215 564,795 1,913,151 4.76 0.84 South Sulawesi 1,096,075 4,963,489 1,685,443 5,295,146 4.40 0.65 Southeast Sulawesi 88,036 853,598 229,649 1,119,649 10.06 2.75 Other Islands 1,342,474 9.659,008 2.494,449 11,150.256 6.39 1.45 Bali 363.336 2,106,388 734,237 2,043,119 7.29 (0.30) West Nusa Tenggara 383,421 2,340,257 582,180 2,789,519 4.26 1.77 East Nusa Tenggara 205,457 2,531,531 372,242 2,895,677 6.12 1.35 Maluku 152,944 1,255,507 352,438 1,498,649 8.71 1.79 Irian Jaya 237,316 869,975 395,131 1,233,956 5.23 3.56 East Timor 0 555,350 58,221 689,336 0.00 2.18 T o t a I Indonesia 32.845.829 114.485.994 55.391.171 123.808052 Source: Central Bureau of Statistics INDONESIA COUNTRY ECONOMIC REPOFrT Gross Domstic Product by hidstdal Ddnn at Current Market Prices, 1983-1895 /a (Rp. billion) 1983 base 1993 base 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1993 1994 - 1995 " I. Aqrdculture. Uvestock. 27,764.7 20,419.7 22,512.9 24,8709 291162 34277.9 39,163.9 42,148.7 44,720.8 50,733.1 55,7455 58 6.4 6599A 78,556.8 Forestry and Rsherv a.Fafrnfoodcrops 11,125.9 12,691.8 13,860.2 15,084.9 17,5402 21,123.8 24,491.9 25,907.5 26,149.2 29,443.0 31,403.5 I 32,093.4 34,938.3 41,173.1 b.Non-foodcrops/b 2,6702 3,331.7 3,693.1 4,224.7 5,118.8 5,633.5 6,196.7 6,666.6 7,604.1 8,717.1 9,422.0 9,014.8 10,152.1 11,480.5 c. Livestock products 1,754.3 2,0-4.1 2,427.0 2,639.8 3,014.6 3,544.8 3,814.0 4,368.0 5,1262 6,040.7 7,025 68202.7 7,139.7 8205.1 d.Forestry 994.2 939.0 938.0 1,000.6 1246.8 1,448.3 1,634.7 1,854.6 2,018.0 2,179.6 2,541.4 6,267.6 7,388.5 8,136.4 e. shery 1,2201 1,373.1 1,594.6 1,921.1 2,1956 2527.5 3,02686 3,352.0 3,823.3 4,352.7 5,352.7 5,384.9 6,373.8 7,581.5 2. Miningr&Ouanyino 16,107.4 169376 13,570B 11,502.8 17266.8 17,161.8 21,8225 26.119.0 31,402B 29,9072 30749.6 31,4973 33,507.1 37,6312 a.Oil&naturalgas 15,103.0 15,916.7 12,583.8 10,501.8 15,979.4 15,524.7 19,283.0 21,7892 26,126.1 23,363.9 23,168.6 23,120.8 23,070.0 24,608.0 b.Oth.mining&quarrying 1,004.4 1,020.9 987.0 1,001.0 1287.4 1,637.1 2,539.5 4,329.8 5276.5 6,523.3 7,581.0 8,378.5 10,437.1 13,0232 3. Manufrtudnc 9,896.4 131129 15,503.4 17,184.7 21,150.4 26252.4 30,323.3 38,9102 47,665S 5,541.6 87,441. 73,583 88991.7 108.184.1 a.Refineryoil 358.9 1,012.7 1,863.7 1,915.4 1,819.7 2,025.9 2,148.1 3,575.0 3,806.5 4,321.8 5210.7 I 5,540.5 5,606.1 5,804.3 b.LNG ' 1,8712 2,706.7 2,423.7 1,968.5 2,097.3 2,948.2 3,298.9 3,714.6 4,714.4 4,383.6 4253.3 | 42S3.3 4584.0 4,549.9 c. Non-oiU&gasmlg. 7,856.3 9,393.5 11216.0 13,300.8 17233.4 21278.3 24,876.3 31,620.6 39,144.6 47,836.4 57,977.4 I 63,762.5 78,801.8 97,8069 4. Electrcity.oas&watr 3139. 3542 3959 647.1 7469 869.0 1,0083 1258.1 1,7502 2,1477 2,714.3 | 32 39128 4,8090 5. Constructon 4_5972 4,7568 5,301A 53137 8,0574 7,1692 8,8842 10,7485 12.902.1 15,3052 18,1399 225129 2fl,01.9 34338.9 6. Trade,Hotel& Restaumrnt 11,418.7 134_345 15,4118 17,121 21,048.3 24,3792 28,855a 32,999.7 36,953B 42,731S 49789.4 I 55297.8 62207 73,11262 a. FtaiLI&wholesae trade 9,810.5 11,371.4 12,9622 14235.3 17,581.2 20,388.5 24,441.0 27.711.7 30,769.8 35,645.3 41,496.1 44,604.8 49,397.3 58,088.9 b.Hotels&FRest. 1,6082 2,063.1 2,454.6 2,886.5 3,487.1 3,990.7 4,414.5 5288.0 8,184.0 7,086.2 8293.3 I 10,692.8 12,810.0 15,037.4 7. Transport & Communications 4,098.1 5,050.8 81003 6,406.9 7,442.8 8,139.7 93 10,9996 13,90.0 17.0993 20,7282 232489 26,9fl8.8 30201.7 a.Trensport 3,693.7 4,611.3 5,5385 5,769.7 8,638.8 7227.2 8280.1 9,893.5 12,327.4 15,1332 18,183.1 20,1012 23,048.4 25,186.8 b. Communications 404.4 439.5 561.8 637.2 803.8 912.5 1,025.4 1,306.1 1,580.8 1,966.1 2,545.1 3,147.7 3,940.2 5,015.1 8. BEanks&Financre 2A5fl 3,0582 3,4962 4,036. 4,795.1 5,322.4 8,866.7 8287.1 10,1575 12,499.7 15256.6 14,005.3 17,8175 212329 9. OrmershipdfDwellings/ 2.3555 2_5728 2,775.0 2,976 3,349.1 3,736.0 4,151.1 4,f90.8 5924.7 6,5959 7,610B6 9.,695.1 11239.0 11 A992 Rbal Esttab /c 10.OtiherServices 8,7123 10,187.8 11,923.7 12,621.9 13,814.3 14,7973 17,3 19235.5 22,0649 26233 33,842. 37,708.9 40S8. 47.440B a.Public 5,711.5 6,469.9 7,925.1 8,307.3 8,911.8 9,446.2 11,1742 12,801.4 14,621.8 17,309.4 22,458.0 22,458.1 22,754.9 26,5552 b.OtiherPrivate&Servfces/d 3,000.8 3,717.9 3,998.8 4,314.8 4,902.5 5,351.1 5,829.5 8,434.1 7,443.3 9,013.9 11,384.4 15250.8 17,783.6 20,885.8 Gross Domestc Products 77,6228 f9,fl65.1 96996.8 102,6682 124,189 142,104.9 167.184.7 195.5972 227.450.1 259,8845 302.017S| 329,775S 3792119 445.400B * Prelimlnaryfigures. * Very prenlmlnaryfigures. /a. In 1995, the Government released naional accounts series using a 1993 bas, based on an up-date of the 1990 Input-OutputTsble and refinedestirrates of some sub-sectors. /b. hcludes the fomier smalhoider and estate food crops under toe Nabonal Accounts wlth 1983 base. I. Using 1983 base. Iris me refers only to Owrnership of Dwellngs. Using the new base, 8 Includes teel Estates. /d. Includes BusLn SenIces, r3 Source: Central Bureau dcStatistics. INDONESIA COUNTRY ECONOMIC REPORT Gross Domestic Product by Industri l Orlain atConstant Market Prices, 1963-1995 /a (Rp. billion) 1983 base I 1993 base 1983 1984 1905 1986 1987 1988 1989 1990 1991 1992 19931 1993 1994 1995 t. Aarkculture,Lhvestck, 17,764.7 18,512.6 19,300.0 18,7S9.1 20.223.5 21,213.7 21.9180 22.356.9 22,714.8 ,24,225.5 24,569.3 | 58,983.4 59,287. 6.74 Forestbt and Fishery a. Farm foodcrops 11,125.9 11,680.2 11,985.6 12,286.8 12,415.4 12,974.0 13,488.7 13,558.2 13,484.2 14,526.7 14.3559 | 32,0934 31,405.3 32,804.9 b. Non-food crops /b 2,670.2 2,794.8 3,086.5 3,142.3 3,257.8 3,458 1 3,549.2 3,723.6 3,924.0 4,111.2 4,350.7 9,014.8 9,495.9 9.9358 c. Livestock productsb 1,754.3 1,890.1 2,036.5 2,063.7 2,110.8 2,211.7 2,243.7 2,327.7 2,468.3 2,664.5 2,813.5 6,202.7 6,451 4 6,719.8 d.Forestry 994.2 894.4 850.7 888.7 9679 1,0130 973.8 1,002.7 1,002.9 980.4 996.6 I 6,287.8 6,295.9 6,299.0 e. Fishery 1,220.1 1,253.1 1,3407 1,417.8 1,471.8 1,558.9 1,662.8 1,744.7 1,835.4 1,942.7 2,052.6 5,384.9 5,6389 5,878.1 2. Minka& Quarryka 16,107.4 17,120.1 15,480.4 1,308.8 16,365.5 1.892.8 16,883.8 17.531.7 19,317.0 18,957.7 19,3 I 31.497.3 33,261.6 35,145.3 a. Oil&natural gas 15,103.0 16,188.9 14,512.6 15,237.0 15,219.3 14,691.6 15,390.7 16,029.5 17,512.6 16,719.2 16,666.5 23,120.8 23,719.6 23,720.4 b. 0th. mining & quarrying 1,004.4 933.2 987.8 1,071.8 1,148.2 1,201.3 1,273.1 1,502.2 1,804.4 2,238.5 2,703.8 I 8,378.5 9,542 0 11.424 9 3. Manuhcturn1 9,898.4 12.078.6 13,430.6 14,678.1 18,235.3 18,182.3 19,855.7 22,336.9 24,5850 26,983.8 29.484.4 73,558.3 82,725.7 91,929.0 a. Refineryoll 358.9 625.8 786.8 927.2 937.7 981.2 990.0 1,094.2 1,136 7 1,202.3 1,186.8 5,540.5 5,624 6 5,629.4 b.LNG 1,871.2 2,790.2 2,918.5 2,922.8 3,233.2 3,594.5 3,685.1 4,093.1 4,433.1 4,662.7 4,753.3 I 4,253.3 4,7209 4,501.3 c. Non-oll & gas mfg. 7,866.3 8,663.0 9,745.5 10,828.1 12,064.4 13,808.8 15,180.6 17,149.6 19,015.2 21,098.6 23.544.3 63,782.5 72,380.2 81,798.3 4. ElectrieIty, gas 6 wter 313.9 324.0 360.9 429.8 494.6 548.9 815.6 725.7 842.8 926.2 1.022.3 I 3,290.2 3.707.4 4.2W.8 5. Construction 4,597.2 4,393.8 4,508.0 4,809.0 4,802.9 5.259.1 5,878.0 6,672.9 7,423.7 8.22386 9.222.51 22,512.9 25887 291.0.7 S. Trade, Hotel & Restaurent 11,410.7 11,811.0 12,398.6 13,398.5 14,356.2 15,856.8 17.338.1 . 19,578.2 21.009.1 22,850.1 55,297.8 59.3W.5 63,945.4 a. Retail&wholesaletrade 9,810.5 10,026.0 10,412.0 11,238.0 12,004.9 13,035.4 14,446 8 15,425.3 16,213.5 17,405.8 18,988.8 I 44,804.8 47,528.9 51,227 2 b.HoteLs & ResL 1,608.2 1,783.0 1,986.6 2,160.5 2,351.3 2,621.4 2,891.3 3,1433 3,362.7 3,603.3 3,881.3 I 10.692.8 11,821.6 12,718.2 7. Transport&Communicatins 4,098.1 4,443.1 4,487.0 4,668.5 4.938.5 5,211.5 5,811.5 6,367.8 8,89.4 7,554.9 8,302.2 23,248.9 25,035.8 27,147.8 a. Transport 3,693.7 4,008.1 4,031.8 4,178.2 4,393.7 4,626.0 5,151.3 5.596 4 6.002 7 6,601.3 7,192.1 20,101.2 21,225.9 22,562.4 b Communications 404.4 435.0 455.2 490.3 544.8 585.5 660.2 771.5 866.7 9538 1,110.1 3,147.7 3,809.9 4,585.4 I D. Banks &Flnance 2,358.6 26829.0 3020.3 3,483.1 3,659.3 3.752.2 4,290.7 4,893.8 5,535.1 8,255.7 7,069.6 14053 15,9446 10,184.5 9. Ownership ofDwelihas 2.355.5 2,411.5 2.480.9 2,545. 2,653.9 2,762.2 2,877.7 2,998.8 3,119.7 3249.3 3,411.1 9,695.1 10,086.8 10,043.0 Reel Estetes k i 10. Other Services 8,712.3 9,113.5 9.635.3 10,150.7 10,788.2 11,501.8 12.187.7 12,764.1 13,241.5 13.617.2 14.405.3 37,708.9 39,54.74 a. Public 5,711.5 5,998.7 8,455.1 6,862.1 7,368 1 7,932.1 6,396.9 8,783.3 9,052.1 9,320.0 9,508.8 I 22,458.1 22,752.0 23,045.9 b. Other Private &Services /d 3,000.8 3,118.8 3,180.2 3,298.8 3,422.1 3.5698 3,790.8 3,980.8 4,189.4 4,497.2 4,896.5 15,250.8 18,402.7 17,921.3 Gross Domestlc Producsb 77.6220 63.037.4 85,082.0 90o.05 94517.9 99.981.5 107.4306. 115.217.3 123.225,2 131,164.8 139.707.1 329.775,9 354,442.0 383,051.2 :Preliminary figures. _ :Very preliminary figures. A) /h ln 1995, the Governmentreleased nationalaccounts eries usinga 1993 base, based on an up-date of the 1990 1nput OutputTable and refined esUmates of some sub-sectors. /b. Includes the foriner smaliholder and esbtet food crops under the National Accounts wIth 1983 base. /c. Using 1983 base, this ine refers only to Ownership of Dwelings. Using the new base, ft includes Real Estates. /d. Includes Business Services. t . Source: Central Bureau of Statistics. 0% INDONESIA COUNTRY ECONOMIC REPORT ExiD.ndlture on GDP at Cufrereit Market Prices. 1983-1995 la (Sp. billion) 1 983 base _L993 base 198 1984 1985 1986 1987 1988 1989 199 1991 1992 1993 1993 1994 1995~ 1. Private consumption 47.063.0 54,066.5 57,201.4 63,355.3 71,988.9 81,045.3 88,752.3 106,312.3 125,035.8 135,880.3 158,342.0 183,530.5 213,256.5 249,369.7 2. Government consumption 8,077.3 9,121.5 10,893.1 11,328.7 11,763.5 12,755.8 15,697.6 17,572.6 20,784.6 24,731.3 29,756.7 29,756.7 31,014.0 36,575.6 3. Gross rixed investment 19,467.9 20,136.1 22,366.9 24,781.9 30,980.2 56,802.6 45,659.8 55,633.4 63,893.9 70.820.2 78,243.2 I 86,667.3 105,380.6 128,105.3 4. Changes in stock /c 2,793.5 3.406.4 4,836.7 4.243.0 8,165.8 8,006.9 13,171.0 15,071.5 16,847.8 22,404.9 28,286.3 j 22,908.2 24,587.5 41,350.0 /d S.Exports of goods and nonfactor services 19,847.0 22.999.3 21,533.9 20,009.9 29,874.3 34.665.6 42,505.0 51,953.1 62,263.8 76,384.4 85,454.3 I 81,296.2 96.847.0 6. Less: Import of goods and nonfactor services 19.625,9 19,844.7 19,835.2 21,036.2 27.955,8 31,173.4 38,601.0 50,945.7 61,375.7 70,336.6 78,064.7 78,383.0 91,873.8 Gross Domestic Product 77,62. 8 ,8. 96 96. 1062 124_816.9 142_104.8 167_.84.7 19~9. 22_5. 7.9 C 30,07 329,7l5.9 379!211.8 43590.6 Preliminary figures. Very preliminary rigures. /a. In 1995, the Government released national accounts series using a 199 base, based on an up-date of the 1990 Input-Oustput Table and refijned estimates o( some sub-sectors. lb. Includes the former smailbolder and estate food crops under the National Accotsnt.s with 1983 base. Ic, Residuals. -~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- 1983 Including nej e1port3 bssgoodseand sevices. l~~~fj INOONESIA COUNTRY ECONOIAC REPORT Exrendkture on GOP d Consant Mwrket Prick. 1983 - 1995 la (Rp. bilison) 1983 base 1lW3 base 1983 1984 1985 198 19U 7 98" 1989 1990 1991 1 992 1993 2993 b 1994 1995 Private consuuption 47.063.0 48,9421 49,448.0 50,530.0 52.200.4 54,225.0 56.475.7 62,053.2 66,54.0 68,484.5 72,476.2 183,530.5 194,185.2 206.321.8 Govenment corAumption 8,077.3 8,353.0 8.9I.2 9,241.3 9,225.7 9,924.3 10,965.3 11.317.3 12.112.7 12,819.0 12,829.7 I 29,756.7 30,442.6 31,476.0 Gran rued investment 19,467.9 18296.6 19.61SA 21,421.7 22,596.8 25,200.9 28,568.1 32.731.S 34.,67.2 36,589.3 38,671.2 86,667.3 98,589.0 111,281.8 Cbanget Instockc 2,793.5 4.451.9 6,U41.3 6,332.8 5,049.1 1,119.9 1,417.1 3,302J 1,999.4 2,314.2 3,403.7 3 22,908.2 27,95.6 33.976.1 /d Bspon of Soods and mosetdarservkees 19.,47.0 21,144.9 19,494.7 22.460.3 25,744.8 26,015.5 28,733.2 2U.862.8 .4,600.0 39,674.8 42,296.8 I 5,296.2 92.981.2 Lon: loupos of goods I ad nontsetor sm-vIes 19,625.9 15,11.2 19,109.1 19,905.6 20,29.0 16,504.2 18,722.9 23,0es.3 26,929.1 28,697.0 29,970.5 78,383.0 80,751.6 Ore. Domemtic Product 77,622.8 83037A4 85.081.9 "A40.5 94,5171 9*,9811.4 177.436.5 115.217.3 123.225.2 131.l844 139.707.1 I 329.775.9 354,442.0 383,651.2 Preliminary figures. Very preliuiuary fgures. /s In 1995. the Governm nt relessed natina secouna meries using a 1993 base, based on an up-dste of tbh 199 Input-Output T ble and redined estimates or so m sub-sectors. lb. Includes the former smallbolda and estate food cropes under lhe National Accounts with 1983 base. /e. Reidusas. 14. Ineluding net eports of goods and servics. Soeree: Cernl thes of Statistis. 00 IMNONESIA COUNTRY ECONOMIC REPORT Distribution of GDP at Current Market Prices, 1983-1995 /a (%) 1983 base 1993 base 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 j 1993 1994 1995* Economic sectors Agriculture, forestry, fishery and livestock 22.9 22.7 232 24.2 23.3 24.1 23.4 21.5 19.7 19.5 18.5 I 17.9 17.4 172 Mining&quarrying 20.8 18.8 14.0 11.2 13.8 12.1 13.1 13.4 13.8 11.5 102 j 9.6 8.8 8.4 Manulacturing 12.7 14.6 16.0 16.7 16.9 18.5 18.1 19.9 21.0 21.8 22.3 22.3 23.5 24.3 Electricity, gas and water 0.4 u.4 A.4 0.6 0.6 0.6 0.6 0.6 0.8 0.8 0.9 1.0 1.0 1.1 Construction 5.9 5.3 5.5 5.2 4.9 5.0 5.3 5.5 5.7 5.9 6.0 6.8 7.4 7.7 Transport & communications 5.3 5.6 6.3 6.2 6.0 5.7 5.6 5.6 6.1 6.6 6.9 7.0 7.1 6.8 Other services 32.0 32.5 34.7 35.8 34.5 33.9 33.9 33.4 33.0 33.9 Q .3 ( 35.4 34.8 34.5 Gross Domestic Podct 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1000 00 000 100.0 1.0 10.0 1.0 100.0 Expenditure categories Private consumption 60.6 60.2 59.0 61.7 57.7 57.0 53.1 54.4 55.0 52.3 52.4 j 55.7 56.2 54.8 Govemmentconsumption 10.4 10.1 11.2 11.0 9.4 9.0 9.4 9.0 9.1 9.5 9.9 9.0 8.2 8.0 Gross domestic investment 28.7 26.2 28.0 28.3 31.4 31.5 35.2 36.1 35.5 35.9 35.3 33.2 34.3 39.2 Net exports 0.3 3.5 1.8 -1.0 1.5 2.5 2.3 0.5 0.4 2.3 2.4 2.1 1.3 -2.0 Gross Domestic Product 100.00 .00.0 100.Q0 100.0 100.0 M100.0 100.0 I0. 09A j.._ 100.0 I 100.0 100.0 100.0 *: Preliminary figures. ** Very preliminary figures. /a. In 1995, the Govemment released national accounts series using a 1993 base, based on an up-date of the 1990 Input-Output Table and refined estmates of some sub-sectors. Source: Central Bureau of Statistics. iD3 INDONESIA COUNTRY ECONOiC REPORT Distrbution of GDP at Constant Market Prices. 1983 - 1995 /a (%) 1983 base 1993 base 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 I 1993 1994 ^ 1995* Economic Sectors I Agriculiture, forestry, fisheryandWvestock 22.9 22.3 22.7 22.0 21.4 21.2 20.4 19.4 18.4 18.5 17.6 I 17.9 16.7 16.1 Mining&quarrying 20.8 20.6 18.2 18.1 17.3 15.9 15.5 15.2 15.7 14.5 13.9 9.6 9.4 9.2 Manufacturing 12.7 14.5 15.8 16.3 17.2 18.2 18.5 19.4 20.0 20.6 21.1 | 22.3 23.3 24.0 Eectricity, gas and water 0.4 0.4 0.4 0.5 0.5 0.5 0.6 0.6 0.7 0.7 0.7 I 1.0 1.0 1.1 Constuction 5.9 5.3 5.3 5.1 5.1 5.3 5.5 5.8 6.0 6.3 6.6 I 6.8 7.3 7.6 Transport & communications 5.3 5.4 5.3 5.2 5.2 5.2 5.4 5.5 5.6 5.8 5.9 I 7.0 7.1 7.1 Other serces 32.0 ;1.S i2.3 32.8 33.3 33.7 34.2 34.0 33.7 33.8 34.2 35.4 35.1 34.9 Gross Domestic Product 1. 1. 100.0 100.0 10 10. 10 100.0 100.0 100.0 1002I 1_ LQ0 100.0 Expendbiur cateorles Privae consumption 60.6 58.9 58.1 56.1 55.2 54.2 52.6 53.9 54.0 52.2 51.9 j 55.7 54.8 53.9 Govemmentconsumption 10.4 10.1 10.6 10.3 9.8 9.9 10.2 9.8 9.8 9.8 9.2 I 9.0 8.6 8.2 Gross domestic investment 28.7 27.4 30.9 30.8 29.2 26.3 27.9 31.3 29.9 29.7 30.1 I 33.2 35.7 41.8 Net exports 0.3 3.6 0.5 2.8 5.8 9.5 9.3 5.0 6.2 8.4 8.8 I 2.1 0.9 -3.9 Gross Domestic Product 10 1,00.0 100.0 10.0 1.0 100.0 1000 100. 10 100. 100.0 1 100.0 12.20 100.0 ' :Preiminary figures. r*: Very preiimiary figures. /a In 1995, the Govemment released nationa accounts erie. using a 1993 base, baed on an up-date of the 1990 Input-Output Table and refined estimates of some sub-sectors. Source: Central Bureau of Statiscs. DONESA COUNTRY ECONOMIC REPORT Belo O Pamnnb. tSI3IS4 - tIuS (US$ mElon) 1983t84 1984/85 1985/86 1986/87 1987/88 198S/89 1989/90 1990/91 1991/92 1992M93 1993/94 1994/95 1995/96 /c 1. Netoieavortsa/ 6,016 5J45 4,004 1,426 2334 1535 2.311 2,82 2.15 1327 319 1.372 994 2. Net LNG ezio /a 1.355 1.971 2.119 1.15 1,426 1525 L60 3,128 2.404 2.1U 2,1 2.41i 2.230 3. Non-oi exports (net) -11522 -9784 -7955 -6635 -5466 -4919 -5510 -9751 -8914 -6076 -5474 -7275 -11167 Exports. fob 5,367 5,907 6,175 6.731 9,502 12,184 14.493 15380 19,00S 24.823 27,170 31.716 37,008 lImport.cif -14346 -12921 -11186 -10385 -11763 -13586 -16478 -21609 -24066 -26390 -25410 -30815 -38654 Servces (nonfreight) -2543 -2770 -2944 -2981 -3205 -3517 -3525 -3522 -3856 - 459 -7234 -8176 -9521 4. Currentaccolunt(+2+3l - jJ1968 -1832 , M ,,j7 -1859 -1599 -741 -4352 _ 2 __. -2940 l48 -7943 5. Official capital disburemenb 5,793 3.519 3.432 5,472 4,575 6.588 5516 5.006 5,0 5755 6.195 5,651 5,704 IGGI 4,255 3,189 2.751 3.978 4.368 5b603 4.698 4.929 5.292 5.s67 5.795 5.651 5.204 Special assutance 2.169 1,807 1.542 1.069 886 556 314 205 Programnaid 84 52 38 48 30 23 6 0 0 0 0 0 0 Project aid 4,171 3.137 2.713 3,930 4338 3.411 2,885 3.387 4,223 4,681 5.239 5.337 4999 ODA 1.902 1.442 1332 1.932 2,807 2,406 2300 2.766 3,165 3.078 3.697 3,662 3.500 Non-ODA 2,269 1,695 1.381 1998 1.531 1.005 585 621 1,058 1,603 1.542 1.675 1.499 Non-IGGI 1.538 330 681 1,494 207 985 818 77 308 188 400 0 500 Cashloan 0 0 0 0 0 0 0 0 0 0 0 0 0 6. Amortization -1010 -1292 -1644 -2129 -3049 -3763 -3686 -4082 -4182 -4840 -5132 -5546 -6052 7. Othercapital (net! 1,191 49 572 1232 1,709 -211 575 5,856 4,133 4.284 4,648 4,645 11,478 Direct investment 193 245 299 252 544 585 722 1424 1.531 1,705 1.971 2.566 5,652 Oil sector 1.a nIA n.a VIA n.a na. nIA n.a n.a n.a nMM n.a n.a Others 998 254 273 980 1165 -796 -147 4,432 2.602 2.579 2,677 2,079 5.826 8. Total (4 hrlouah 8) 1823 7 528 524 152 806 3.039 L122 2,771 1 .27 9. Errorsandomissions 247 -91 -498 -1262 57 -1432 -558 263 -218 -1199 -2044 -646 -1146 10. Monetarvymovements/b -2070 -667 -30 738 -1586 677 -248 -3302 -981 -1439 -727 -616 -2041 /a Gross exports less imports of goods and services of the oil and LNG sector respectively. /b A negative amount refers to an accumiation of asets. /c Prdiminary fiures. Source: BankIndonesia. INDONEUA COUNTRY ECONOMIC REPORT Non - oil Export,. 1SS4/85 - 13041S5 (USS mEIon) Vaue (US S moon) 198vs5 195/ 1987 1967168 195W89 1900/90 199W91 1991/92 1992I 199/94 199495 Awicuiral 2.495 5 2907 3.2 404 2.5 3.8 3 29 3LA 3s9 5.941 Rubbw 856 714 749 1,037 1.229 956 6u7 932 1054 1.054 3.546 Cde 56u 659 753 499 577 452 371 362 264 345 755 TOR 211 134 106 119 137 181 154 145 144 144 99 Pam al 95 170 114 214 313 279 284 - - - - Tobacco 44 55 72 47 43 44 72 65 79 71 57 PeppW 66 82 152 158 144 94 78 69 55 56 87 Cocoa - - - - - - - 120 203 182 218 Copra es 18 35 34 41 43 51 56 - - - - Tqloc 31 42 52 93 154 98 121 87 119 74 47 Ran 96 80 99 162 37 - - - - - - Hide 40 37 45 59 68 70 58 43 43 41 48 Olhw roodxsb 98 122 122 153 202 250 324 Arnb producb 219 274 390 488 839 781 1.076 1.076 1.266 1.476 1.653 d wtkh shlvmps 183 228 297 352 541 520 711 711 746 883 569 Ohw. 154 159 221 234 258 302 365 396 456 547 1.431 Minsel 775 799 719 1.112 1.556 15S5 1.441 1692 2209 209 2725 Tin 252 248 156 143 165 213 147 146 145 86 138 Coppw 132 133 144 186 238 321 447 528 719 744 925 Nickel 121 140 112 152 438 404 326 289 283 329 377 Akminum 208 223 201 245 301 267 202 159 199 166 257 Grwml 9 8 8 6 6 9 14 18 33 13 17 Gold 0 0 51 315 323 218 68 141 170 202 75 Cow 0 0 0 0 0 0 0 363 574 648 882 Cows 53 48 47 64 84 153 237 48 86 121 54 MujcOtM ed 26 2.812 3.105 5087 6585 9.351 10094 14.021 18.931 20.871 23049 Wood products 1.167 1.217 15386 Z461 2.84 3.454 3.414 3.700 4.330 6.141 5.263 Tadie 418 577 713 1.128 1.571 2.219 2,731 4.011 53876 5.851 5.717 HwxdNirt 116 187 30 67 184 250 357 489 605 589 983 Elcical app. 134 45 46 55 105 176 259 544 1.l1 1.290 1.951 Cemer 14 23 47 54 85 128 69 - - - - Fa'Nr 31 109 97 117 136 167 214 291 147 168 194 (D Ohws 757 655 586 1.204 1.620 2.958 3.051 4.986 6.873 6"U2 8.941 Tod Non-odl Exorts &A0 MU _,lj 1 1 _IL 15.3 19.I7 &24 7170 LZI1 Source: Bank Indonesia (based on PEB Export Declaratlon Form). INDONESIA COUNTRY ECONOMIC REPORT Value of Exports by Principal Country of Destination, 1983-1995 (USS million) Countries 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 b Asean 3476 2,487 1,982 LSI5 1.703 2079 2429 2,515 3,197 4,360 4,746 5704 4.871 Malaysia .58 98 77 82 94 184 220 253 342 488 586 738 802 Thailard 49 98 81 83 87 151 234 189 267 353 468 401 579 Philippines 242 166 199 108 71 87 149 161 168 181 285 365 479 Singapore 3.128 2.126 1.626 1,239 1.449 1.653 1,818 1.902 2.410 3,314 3,372 4.1.50 2.994 Brunei 0 0 0 2 3 4 8 11 10 25 35 50 18 Hongkornq 182 261 348 345 420 554 549 618 703 881 901 1,321 1.359 Japan 9_678 10353 8,594 6,644 7,393 8,018 9,321 10923 1767 10761 11.172 10,929 10.023 Other Asia 801 1,254 1475 1,170 1869 2415 2934 4,035 6.567 6-980 7,645 7.309 Africa 79 140 160 179 150 272 217 199 394 419 463 638 474 USA 4,267 4,505 4,040 2902 3,349 3,074 3.497 3,365 3-509 4,419 5.230 5,829 5266 Canada 28 46 46 60 94 101 108 139 172 289 304 322 306 Oter America 1015 1031 326 182 48 47 50 102 184 328 469 562 632 Australia 208 275 149 159 310 293 387 403 628 746 774 705 714 Other Oceania 264 236 81 83 43 31 59 84 39 53 78 67 122 EEC 953 1.036 1.113 1.340 L541 2,152 Z338 3028 3742 4843 _5295 ,825 ,273 United Kingdom 199 168 191 197 212 349 384 517 654 844 I.OOS 1.038 942 Netherlnds 289 332 392 453 493 646 681 723 838 1,100 1.086 1.324 1,105 West Germany 252 246 255 334 361 456 493 750 907 978 1,178 1,263 1.098 Belgium & LuxembLrg 33 63 45 91 109 177 173 210 258 401 366 409 435 France 53 49 71 93 102 164 209 286 386 495 500 426 4_1 Denmark 4 6 3 6 13 20 36 54 74 97 98 110 90 Ireland 1 4 2 2 7 17 22 35 43 46 40 37 29 Itly 120 167 152 152 175 221 234 276 382 583 615 661 633 Greece I 1 3 6 3 2 4 9 18 29 46 63 61 PartLgal 0 0 0 7 10 22 24 17 14 16 29 39 40 Spain 0 0 0 0 55 78 80 152 169 255 333 454 419 Soviet Union 50 59 78 52 82 38 100 81 40 70 125 91 10' Others in Eurae 145 206 194 174 133 144 171 183 229 231 288 417 363 Tobl 21.146 211SS 18 587 17136 19.219 22.159 2 29.142 33967 3623 40.053 36.814 /n As of Octkber 1995. . Souice Cenfral Bureau of Stdlsts. cn idOOtE:5 COUNlRY ECONOMIC REPORT Valu6 d Impob by Pdinoil County d ofi. 111tl3- 190 Coullrines 1983 1984 / 1985 19S6 1987 19SS 1989 1990 1991 1992 1993 1994 1995 /b Asean 3.915 1,948 962 1.121 1.244 1.305 1,765 2430 Z464 2,592 2604 2928 3,198 Malaysia 60 86 52 S0 139 276 369 326 407 523 517 579 647 Thes nd 209 55 48 72 75 96 210 1S3 278 345 235 407 654 PhilpiO4rw I8z Is 23 28 82 36 63 649 81 52 57 65 71 Singpore 3.465 1,791 839 969 947 896 1.122 1.272 1,699 1.670 1,793 1.877 1.S26 Brunei 0 0 0 1 0 1 2 0 0 1 1 0 1 H 9 n 965 86 53 94 104 133 179 273 232 229 247 241 230 J4StZ 3.193 3 X_ 2,644 3.128 5.596 36 3.767 5300 6.327 6,014 6.248 7734 7.779 Othw As', 2 0 2.338 I 727 1681 1.924 '2 3.203 4.633 45156 5.496 5.972 6.870 7.034 A_i_ 135 171 160 103 153 201 202 170 195 213 140 332 513 USA 4 2.60 1.721 1.483 1.415 1.736 2.218 2.520 3J97 3.U2 3255 3.594 3.A!9 Camd 16 19 19 214 303 274 11 407 354 459 410 497 676 Otlhw rAw ca 129 159 191 174 211 224 455 519 597 4u 625 735 890 Aws*ak 402 372 461 413 463 578 925 1.116 1.378 1.413 9 1 542 1701 Other Oe nia 72 78 69 1 80 96 9L 115 118 136 161 186 174 EEC 24 062 1.706 1.796 2.353 20 27575 4061 4.704 5 5.652 5827 5959 Unbd Kigdom 364 297 300 342 325 340 360 440 603 719 782 710 737 N _orib 257 266 213 I8 316 258 248 550 505 507 626 564 718 Wed Gwruny 741 820 677 719 a36 887 920 1.502 2.061 2.141 2.072 2.473 2Z266 Belgum &Lumwnbwg 124 102 101 *9 142 159 167 232 254 324 340 n2 336 Fra e 591 432 284 281 392 46w 406 643 544 816 851 786 918 Dernik 21 20 1s 26 26 22 31 61 49 124 158 106 a5 kreknd a a 9 4 6 6 a 74 13 23 21 22 35 Ihly 125 113 101 1I4 237 24 148 410 536 558 523 670 642 Gre 0e 3 4 0 0 2 3 3 6 5 I 12 26 38 Parkas 0 0 0 2 6 3 2 6 4 2 2 4 6 Spai 0 0 0 0 66 120 82 136 13J 178 262 174 178 Sovit Union 2 L 1 5 L 45 51 53 4 47 97 220 38- Ows in Euo 643 490 30 4355 51 494 611 764 899 969 1.517 L264 1.353 Tobi AM ILM 0j 10.719 IU70 gina am 2LIL4U la,m 2 7ns IlNI am9 c h Ske 1# 64. xcke Uhevked procesing d_ n ts oil scr lbAs cd Or',' 1M Sowco: Clral Bweeu Co SieIsc. 144 Statsuical Annex Table 4.1 INDONESIA COUNTRY ECONOMIC REPORT Summary of Exernal Debt Dafta 192-04 1162 1U93 1984 1US 1966 1967 1966 1966 19t0 1391 1992 1tt3 1i4 External debt data Dbbumed and otatarndain debt DOOD) Ib 18,318 21 493 222e9 2!77 32s2a 406a53 41200 4425 4aoe 5L122 53.N8 s74et as4a BilateralmuilrtaIral 10.113 11,750 12,142 14,979 18.473 24,655 26,355 26,133 33.031 37,602 3994 44203 46.73 Other/c 6,205 9,743 10.127 11.7U8 14,153 16.196 14.816 16.121 15,035 14,520 13.965 13,25 14,112 Total debt ourtsarndnan .cludina undlBbured (TDO) 32.008 35,333 36403 42734 50011 S0327 00193 2.916 ee235 72531 7299 77f 111411 BneWaVmutlbleral 19,328 20.483 21,435 25,275 29,296 37,134 38.799 41,210 47,28 53,211 4s.39 89,47 65,713 Other /o 12,682 14,850 14,916 17,459 20,713 23,192 21,394 21,706 21,029 19,320 16.351 16,204 18.62 Cornmmrnhts 7070 5667 4618 4 5j 4 104 5995 e220 7632 ee52 3! aA5 LXS La BaternVmultibthal 2,593 2,294 2,745 2,433 1,925 4,733 4,752 5.66 582.1 6323 8,189 4,m 5,0S Other /c 4,477 3,393 2,072 2,151 2,161 1.202 1,468 1.977 1,301 2L527 2676 3423 2,061 Gross dibursaments 3 951 4980 3 a Lo 3,573 4 239 5 440 6502 7044 5 0e9 7101 76NO i 7 407 BiateraVmuhilateral 1,505 1,734 1,932 1,625 1,900 3,656 4,196 4,276 3,97 8,105 5,013 4.4U4 4.786 Other ft 2,35a 3,248 1.95a 1,948 2338 1,765 2,307 2.768 1,007 1,997 2,964 2,66 2t723 et dbumernnta 2 847 368 2 290 1 229 1 617 2 033 2 0a0o 2I22 19 5 453 24 2 L t500 Bllateralrmulteteral 1,126 1,183 1,366 1,003 1,018 2,523 2,602 2.93 2,367 3,326 3,022 2,336 1.467 Other ft 1.721 2,508 924 225 601 (460) (812) (708) (1,68) (676) (26 (1,114) 112 Not resource transfer. 1t715 2486 961 (4181 (] 55 ( t4 54 (4551 ( L)g (2 t20 Bhaternsmultllastral 732 735 604 310 9f 1,449 1,502 1850 799 1,545 1.007 as (1,006) Othe /c 963 1,721 (143) (727) (5580 (1,688) (2,037) (2,000 (3,101) (2,013) (1.330) (2,119) (M) Pubic debt strf 3 2_34 2 524 3229 3 ,59 45.3 579 e 947 7 592 7 3n 2 759 M 9102 911 Amortbtton 1.104 1,291 1,S00 2,344 2,621 3,406 4,422 4,516 4,550 4,649 5.232 5,647 5913 1n t 1,132 1,233 1,629 1,645 2,072 2,272 2,525 2,778 2,620 2,920 3,086 3,255 3,406 Public debt seba 223a 2524 3229 39e 4e93 5 fa 47 7592 7371 75e9 f2 9 102 *316 BatWermutlsteral 663 n9o 1,127 1,314 1,604 2,206 2,603 2,72 3,173 3,56 4,006 4,395 575 Other /c 1,373 1,525 2,102 2,675 2,669 3,473 4,344 4,567 4,196 4,006 4,293 4,707 3564 Dl1bureement Indicato Unde4bureed det/TOO lb 43 39 39 37 38 3 32 30 30 26 n SkBtelmuilstarl 48 43 43 41 37 34 32 32 30 29 27 26 24 Othr /c 35 34 32 32 32 30 31 26 29 25 24 27 24 Grots exbunementa/comrstU 56 81 75 103 91 105 92 76 60 so 66 104 BltweVmutlteral 62 75 70 67 as 76 58 76 76 81 97 94 e1 Otherkc 53 96 95 91 107 149 157 140 79 79 103 76 135 Groes dburnementu/undisburaed dbt and comnitments /d 26 38 28 7 -29 37 1_ _ _ 41 31 42 Bateragnmuiltstral 14 16 15 13 15 21 24 23 20 23 25 22 22 Other t 25 38 25 25 27 22 29 37 15 27 41 31 42 Not dlebun mentslros debt. 72 74 59 34 36 37 32 3 10 35 34 17 21 BtatereVmultllstav 71 a 71 6 53 66 69 s9 so 65 so 52 31 Otwe /c 73 77 47 12 26 (27) (35) (26) (170) (44) (10) (43) 4 Net resoucetranatarearoas cdbs 43 49 t 7 f) I) 5) mI La (! m LS a as l utsramufleteral 48 42 42 19 5 40 3U 36 20 30 20 2 (21) Other kc 42 53 (7) (37) (24) (66) (8) (76) (2a3) (101) (46) (6 30 /a Data In the sector refer to pubic medlum and long term loans. Loans wkh a maturfty of tIes than one yer, creSds for LNG axpanslon, LPG and perayloen projet, and grnts are not hIncuded. lb End of Year. /c Suppiere creSs. loans from fInancial instiutlonst export credit, bond and natonailtaon only. /d Gross dtebursmnnts es a percentage of undebursed debt (TDO - DOD) at begInning 01 year plua commitments during the yer. Source IORD Debtor Reporting system, based on data provided by Bank Indones. Statistical Annex 145 Table 4.2 INDONESIA Page 1 of 2 COUNTRY ECONOMIC REPORT External Public Debt Outstanding as of December 31, 1994 (US$ '000) Type of creditor/ Debt outstanding Major reported creditor country Disbursed Undisbursed Total new commitments Jan 1 -Dec 31 1994 Suppliers' Credits Japan - 1,918,578 208,724 2,127,302 0 Korea, Republic of 399 399 0 Netherlands 0 21,030 21,030 0 Total suppliers' credits 1,918,977 229.754 2,148,731 0 Financial Institutions Austria 3,264 73,511 76,775 74,746 France 6,785 234,521 241,306 120,379 Hong Kong 938,473 928,571 1,867,044 500,000 Japan 1,465,150 890,570 2,355,720 31,510 Multiple Lenders 5,070,100 5,070,100 584,600 Singapore 20,052 20,052 0 United Kingdom 49,562 - 49,562 0 United States 0 160,000 160,000 0 Total financial institutions 7,553.386 2,287.173 9.840.55 1,311,235 Bonds United States 98,500 98,500 0 Total bonds 980500 Q 98,500 0 Nationalization Netherlands 86,681 86,681 0 Total nationalization 86,681 0 86,681 0 Multilateral Loans Asian Dev. Bank 6,141,645 3,921,517 10,063,162 938,513 EEC 4,081 4,081 0 IBRD 12,008,248 4,430,450 16,438,698 1,538,300 IDA 776,321 776,321 0 Intl. Fund Agr. Dev. (IFAD) 71,271 8,408 79,679 0 Nordic Invest. Bank 144,323 40,096 184,419 0 Total multilateral loans 19,145.889 8,400,471 27,546036 2,476.813 146 Staisdcal Annex Table 4.2 INDONEBA Page 2 of 2 COUNTRY ECONOMIC REPORT External Pubic Debt Oubrtmndina a of Docember 31. 1994 (UtS '000) Type of credlVor/ Debt outetanding M4or reported crditor country Disbursed Undlebursed Tall new commitmnt Jan 1 -Dec3 1 1994 Blidlal LoW. Austra l25.116 15,67 541,7U3 0 Austria ,343 - 6,343 0 Belgkum 95,4S4 38,305 134,290 5,993 Brund 1 00,000 100,000 0 Bulgarh 570 570 0 Canada 314,512 228,104 542,616 0 Chia 32,0Z2 12,034 44,066 0 Cmcholovakl 19,006 19,005 0 Denmak 57,606 4,859 62,605 0 Egypt, Arab Republic f 790 795 0 France 973,407 224,910 1,198,403 58,210 German Dem. Rep. 15,830 I5,6 0 Grmany, F-d.Rep.of 3,041.130 973,290 4,014,476 454,652 Hungary 4,741 4,741 0 India 1,571 - 1,571 0 iHWy 174,801 17,603 192,409 0 -Jpwi 20,936,545 5,619,950 26,556,495 1,978,456 Korea, Republic of 19,111 73,521 92,632 46,606 Kuwat 52,040 12,148 64,194 0 Nelrlanda 1,04Z,621 12,539 1,055,160 0 Now Zeand 599 5an 0 Norway 0 27,354 27,354 0 OSur 20,000 20,000 0 Pallkdan 1,935 1.935 0 Poland 2,060 26,805 0 Romwnla 3.025 3,825 0 Saudi Arabia 02,724 23,222 8,946 0 Spain 182,194 1056,06 287,850 100,000 Swlwland 31,890 - 31,89D 0 Unibtd Arab Emirske g06 895 0 United Kingdom 50.770 14,900 65,730 0 Unied S81_ 2,4,3826 173,097 2,60,0923 82,060 USSR 278.539 278,539 0 YugoelWNa 31,997 31,907 0 Tot biidra Iba 30509.200 7,577,S05 3817,011 2.720.476 Expot CrodiX AusLat 671.015 233,521 904,536 44,66 Belgium 11S0,113 120,811 309,024 131,05 Denmark 65,133 32,400 97,631 0 Finband 29,510 322 20,8S2 0 Fr 1,24,341 420,370 1,768,711 21,00 Gemany, Fed.Repof 62,512 2,979 85,4n1 0 Hong Kong 0 0 0 Japan 4,111 131,061 135,192 0 Neiwtlnds 252,354 67,58S 319,942 09,360 Norwny 0 0 0 Singapore 14,905 2,345 17,310 0 Spain 0 100,000 100,000 100,000 Sdan 92,854 - 92,354 0 Swltrland 315,705 321,039 63,794 253,324 United lKngdom 874,900 491,408 1,368,3U 73,130 Unied Sbbe 514,310 U,440 582,320 0 Total awort crodll 4.4U4.94 1.92.452 8.447.405 0U Total udarnal r ubil debt UlAL 1 2AI=aLM I4.335247 72113 Source: IBRD Debtor Reporting System, baed on date proiAded by Bank Indonela. PC00E41A COUNR ECCONOUC REPORTr Seivie PWameil. Commbmnub Dhwmamenh mand OoUndho A"mnmu of Eagmin Pubis Deb Debt oubtnding at Tranmaclra duing period Otr wh atnge end of period _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Disbused Icluing Commk- Dmbiuse- Service Paywent Cancel- Adjust- onV Undisbursed ren Onfts Principal Interet ToWi laons merit/a Acbiat 1960 15.027,314 24,509.975 4.277,373 2t550.505 939.494 823,811 1,763.305 118,261 1961 15,908,458 20.953.145 4,951,129 2.672.429 1.054,106 990,706 Z044,814 163,286 -1290566 1982 18.317.545 32007.959 7069.817 3.951.336 1.104,100 1,132,291 2,236,391 5.472 1963 21.493,904 35,297,509 5,66.679 4,979,024 1,289,872 1,233,096 2,622.98 197,606 -616455 1964 22.264.933 30,350.948 4.816.038 3,889.517 1.599.785 1,628,892 3,223,077 25.234 1965 26,701.715 42.766.087 4,037,815 3,552,669 2,344.003 1.642,728 3.986,731 514,815 4,638,142 1966 3O18,.897 50.072,359 4,104,406 4,238.493 2621.052 Z071,629 4,692,61 134.999 6,005,918 1967 52500,464 71,974.304 5.904,820 7,489,770 4,058,298 2,945,015 7,003,313 635,419 - 1938 5,095,420 73,067.80 0,220,257 8,194,882 5.206,383 3,344,623 8.641,00 511,210 700,923 1969 59.364,104 78.055,925 7,632369 9.110,916 5,872,339 3,336,528 9,706,867 307.264 3,515,277 1990 09.955,297 90.174.822 60.625039 10,063902 5,931,465 3,990,244 9,921,709 902o50 12301.182 1991 79,777,023 100,187,26 8.8192 11,0t5.118 6,864.787 4,596,485 11.481,242 W001.940 10.023,981 1902 U3.29,438 107,327.8 8,034,546 13,660.230 7,993,058 4,584,848 12,577,906 1,347,102 8,446,167 Im 80,477,06 109,676.66 8.200,261 6.26962 9,293.479 4.973.854 14,267,333 447.177 3.889,152 1994 96,499,594 1160,97,246 7,234,063 1241258 9,317,812 5,474,129 14,791,041 393,24 9,7s7,833 1996 91,785,489 104.467,603 - 6,240.850 10,974,905 4,155,897 15,130,862 1,544,568 -19 1996 65,305.986 93.635.162 - 4,873,028 10.332531 3,743.110 14,575,641 - - 199t7 81,091,165 s,766,439 - 3,133,935 7.8U,727 3,339.8u0 11,188,607 - 4 1998 75,532289 78,153,814 - 2,073.746 7,632.42 3,061,968 10,064,010 - 17 1990 9,1131,040 71.224,086 - 1,235,524 6,929.744 2785,090 9,714,.34 - 15 2000 65,353,399 66,026.018 - 713,44 5,196,133 2,453,905 7,650o38 - 66 2001 6,313,061 60,5906,37 - 395.1u8 5,435,528 Z152.437 7,587,965 - 145 2002 56.031.741 56,204.437 - 104.841 4,380,201 1.375.598 6.281.799 - 1 20D3 51,940.5986 52os.652 - 56.743 4.147.868 1643.023 5,790.911 - - 2004 48,097,209 48,202702 - 10,401 3,853,350 1,423,583 5.277,433 - - 2005 44.67682 44,678.173 - - 3,524,527 1,227,754 4,752,261 - 0 2005 41.315,682 41,421,171 - 3,257,000 1,052,632 4,309,632 -1 2007 3,.399,60U 38,505,176 - 2915,994 M,398 3.814.390 - 2006 35,731,248 35,836.731 - te,6.442 76,33 3.431.075 -2 2009 33,260,951 33,360,494 - 2480,25 641.752 3,092o47 -1 /a Thi column shows e amount d muiic hmbaknm in the amount oubtending Inclucing undlbursed from one yw to the nex The moat common causes of d kae wte chang.. In exchange rates and trasra f dobt from one category to mndhlr In hi thab L Sowcu: IBRD Dobtr Rporng Syn, basd on d proided by Bank Indo'ala - rs N DR mr l W..57-l2 (-m) 29W ~~~~~~~~~1906 29. 1990 1992 199 C2UM3N1 Comm. A au IC Comm fb D6b. le covai. lb DBW c am.lb Dih.I Chmam lb Diab. Ic Comm. lb D6bh. WIc Gro N Gaow NOWIM Grow M/ Grow NOMd Gra M NOWd Grow NWd ASTrRAUA 32.2 4.2 452 540 71.7 71.7 1062 53.1 53.1 62J 77.4 77.4 105.7 729 729 994 77.0 77D AIJSRIT A 17. 0.6 0.6 19.2 10.5 6.9 20.7 15.7 44 26.5 343 211 1241 493 36.1 149.5 121.6 104.5 3EW.LOU 7.1 5J 5. 11.9 133 6.2 10.7 10.7 10.7 65 6.5 (1.6) 65 42.4 37.6 65 6.2 23 CANADA 37. 43A.4 43D 5.9 433 40.1 51. 3.4 33.4 37.6 51.9 4U.4 14.1 45.4 42.7 37.7 40.1 338 FRANC 46.7 43.5 37.3 137.2 67.6 57.1 286,9 15.3 106.9 2097 136.0 1224 41.5 141.6 1265 77A. 1 26U CMANY 239D 1404 61J 151.4 1902 97.6 179.4 13U 52.4 265.2 211.4 99.0 621. 253. 1355 293U 261.4 1164 ITALY 3.9 19. 19.4 5.1 2.5 13 4I.4 21.2 175 0.5 113 9.5 150D 15.J 143 1309 13.5 12.5 JAPAN 1.3363 941.1 7073 1.701.0 1267 9649 1.45.2 1.407.1 1.1453 1.09 1.131.9 867J 1.5009 1382.5 1.065 1.5057 1.696.5 1,357 Nl MANE 1137 165. 140 254.6 165 I562 222.2 191.0 1613 202.6 2264 190.1 26 1505 139.4 13.2 56.1 5.0 NE7W ZEALAND 2.1 2.1 2.1 2.4 23 2.3 - 2.2 2.2 3.3 3.1 3.1 1.5 2.4 2.4 29 2.6 2.6 SPAIN - - - - - - - 0.1 - - 23.2 23.2 - 21.5 21.5 50.0 935 9.5 5Wfl0LM4D 16J 74 7A 5.3 254 254 7.0 214 214 19.6 194 194 534 13.5 13.7 23.5 29.7 29.7 U1l91~R1N 1U 33.3 14.5 10.4 35.6 21.7 17.2 45.2 15.2 14.5 317.0 264 224 1010 42.9 35.9 I10. 36.6 32.7 UNnuSlATM 124I2 96 36.0 79J 56D 22.0 64.4 97D 31.0 54.2 IOID 31.0 69.4 320 15.0 59.5 54.0 (D.0) DEMMKIR - 0.5 0.3 - 1.1 OA 3.4 125 11.1 0.6 5.7 4.9 O 3D 2.2 12.0 5.9 3.7 FD4IAND 1.7 1.8 I2. 59 3.3 3.3 O 5J3 5J5 3.9 2.7 2.7 1.7 3.1 3.1 1.9 1.5 I. DUtXAND 0.1 0.6 0.1 -0.0 - 0.0 0- 0.0 0.0 NORWAY 3.1 0.5 0.6 2.2 2.0 - 1.2 03 - 0.3 (0.2) 0.3 0.5 (0.2) 12.3 12.6 11.5 SWEDEN - - - - - - - - - - 0.1 0.1 0D 0.2 0.2 0.0 0.4 0.4 ARABCOUW'NI1 42.4 24.4 11.2 19.7 27.9 9.1 - 20.5 1.9 0.7 39.2 23.0 0.4 23. 9D 5.5 22.5 13D SUFIMIAL L27 1.56.2 IJ.16 2.611.0Z 25J l19 2.58 2.1992 1.70 2.71 2.LL2 1.51 2M 237aD 1.779.7 25D) 26 1.98,.5 ASDR 552 355.0 3212. 561.1 530a4 470.1 694.9 700.7 632.1 12049.6 775.1 667J 990.0 655.0 4461 0.0 556 453.0 C.B.C. 37.2 6.3 6.3 2.9 5.3 8.3 1.2 13.9 13.9 26.1 13.9 12.4 27.7 12.0 12.0 45.0 13.0 13.0 IBRD .415 23599 101 I0669 1.647.9 1219.2 2.007.4 1256.4 753.4 1N5652 957.3 43dA 1.5350 1.398D 7900 1.2563 1.003.4 326.6 IDA - 14.4 5.7 - I. (4J) - 1.1 (7.0) - - (11.2) - - 0.0 0.0 0.0 0.0 WAD 13.7 16.9 15. 0.3 12.2 10.5 1226 10.1 21.9 12.5 56 - 9.6 4A 0.0 9.6 4.4 U.N.AGENCI 50.2 44.9 44.9 47.2 40J 408 53.6 452 45.2 518 43.3 43.3 554 49.2 49.2 0D 55.4 584 UNDIP - 21.2 21.2 - 20.6 20.6 - 19.1 19.1 - 172 17D - 17.2 17.2 OD 19.0 19.0 UNrA - 5.1 5.1 - 3.7 3.7. - 5.2 5.2 - 4.3 43 - 6.7 6.7 0.0 5.J 55 UNceP - 10.5 10. - 11.9 11.9 - 11.3 11.3 - IO2 10 - . II3 02D 14.8 14.8 UNRVWA - - - - - - - - - - - - - - 0.0 O0 0.0 0.0 WW_ - 5.2 5.2 - 2.7 2.7 - 76 76 - 8.0 5.0 - 7.6 7.6 0.0 14.7 14.7 UNHCR - 2.9 2.9 - 1.7 1.7 - 2.0 2.0 - 4.0 4.0 - 6.4 64 0.0 4.1 4.1 OTEERMULIlATIERAL - 5J3 53 - 6.7 6.7 - 102 10 _ 5.4 5.4 - 9.3 9.3 0.0 8.0 8.0 ARAB AGeNCS - 0.2 (2.0) - 0.3 (1.4) - - (1.0) - - (2.0) - 1J .3 5.0 2.2 13.0 SUBTOTAL 2104.3 1.80219 1394. 16784 2247.7 IJ49. 2.757.1 2.0398 14557 2.714.4 15435 1.2637 2f9 2.1347 1312.3 13063 .1502 764 :2 zai~ ~~~sO II 441 3-312 4 M 5DL3G S11 9.0 3,19 5.42t.J l9 4. L 7 :J S-WA 7& DO 3,43 1 A) l 5 CA /a C1tmdwry em /b Cmmkin. . kc Dibrnta. /d Na odrape mau f dprndpnl. Source: OECD: YC.oV MchisI Diributioa of Ftancdal Plows to Dewlopizg Cunri2z For Spain. AsD.B. IBRD ad IDA: Dealor Report ing Syten World Buk. INMO#SE8A COUNTRY ECONOMIC REPORT Cmtal GovmT t btda66 Summtv. 1983184 -1A97 (Ap. bMUo) Actual DBdpt 19W164 19W5 1966 19667 1967/3 1989 19990o 199091 199U92 1992)93 199194 1994ff 19916 199697 1. Domestc revenues 14.433 15.90 19.253 16,141 20.85 23.W4 2t,747 39.546 41.5t5 47.453 52.2t 61,370 66.265 7825 2. Routine expenditure.s / V.412 9,429 11.952 13.559 17.4t2 20.739 24,331 29.995 5Q22f 34.031 38,79 43.1t0 47.241 56.114 3. Gowwrm wt Mvng ( -2t & 6f477 7.301 2jj 3.522 265 4.40 9.549 11.357 13.421 13.4I1 1819D 19.DS 22,09 4. DO-apf-d Opedb, 9.99 9.f92 I.73 6332 9,477 12,251 1354 19.453 21.764 24.135 25.661 29.16 30,704 34.55 5 . n 3-41 amQ nJ) £LUa amt m4mf Mm U2.E (17 1) fl1) L197) fl.7M flL414 Fkwhd bf 6.8 P.guad Ls 69 69 I.ff6 728 2,041 1,007 1.397 1.563 512 441 0 0 0 7. P m d 3AW 3.40B 3j0 3.795 5.430 7,950 &.422 85 A.M 10.204 9.931 10.96 11.759 12,414 S. Chep in blcm (- , _, 1 (4) (5) (1) (2) (2) (5) (4) (0) (2) (2) 1.09 (10) 0 (0) la kxludn det swice psyno . So9x: kilinery d Finmia. 1 t INDONESIA COUNTRY ECONOUIC W Cenkel Goyenunt Rac_6L 10134 - 10g7 (Rp. biUon) Actual Budeof 1983/U4 19t4/85 1985/86 1986/87 1987/U 19M8A9 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 Taxes on income 11.605 12.847 13.625 8.798 12,986 13.901 17,330 25.278 25.494 28.3a 29,315 33,381 34,438 40,105 Income tax 399 451 675 2.271 2.663 3,949 5,4U 6.755 9.580 11.913 15,273 18,350 19,239 23,708 Corporate tax /a 757 1,670 1.638 Corporate tax on oil /b 9,520 10.430 11,144 6,338 10.047 9,527 11,252 17,712 15.039 15.330 12,508 13.399 13,276 14,120 Witholding tax /b 628 IPEDA'property tax /c 132 157 368 190 275 424 590 811 875 1,101 1,534 1.632 J.923 2.277 Others /d 168 138 Taxes on domestic consumption 1,392 1.510 3_479 5,156 4719 6.187 7.589 9,624 11,452 13,455 15,127 17.390 21,492 27,2 Sales/vakje added tax 575 637 2.327 2,900 3.390 4,505 5,837 7,463 8,926 10.714 12.282 14.087 16,655 21,78 Excises 773 873 944 1,056 1.106 1,390 1,477 1,917 2,223 2,381 2.560 3.001 3,299 4.033 Other oil revenues / 0 0 0 3,030 0 0 0 0 0 0 0 0 1,475 828 Miscella8b ous evies 44 0 208 190 223 292 276 244 303 360 285 303 319 570 Taxes on international trade 916 66L 628 i.039 1,122 1,348 1759 230 2.152 2,661 2902 3.338 3,5U 3.611 Import duties 557 530 607 960 938 1.192 1,587 2.486 2.133 2.632 2,8U 3.218 3.543 3.451 Sale tkx on imports /f 255 241 Exporttax 104 9Y 51 79 184 156 172 44 19 ^ 14 120 44 160 Nontax receipts 520 687 1,492 L147 1977 1,569 2,062 2.115 2.487 2,993 4.936 7,260 6.491 7,268 Domestic revenue 14,433 15.906 19253 16,141 20,803 23.4 28,74 39.546 41595 4ff3 52,28 61.370 66,265 78203 DeVelopmertfunds 3,82 3,478 373 5,752 6,158 9j991 9,429 9,905 10.409 0,7L6 10.372 am 11.759 1414 Program aid 15 69 69 1,958 728 2.041 1,007 1,397 1,563 512 441 0 0 0 Projectaid/g 3.868 3,409 3.503 3,795 5,430 7.950 8,422 8,508 8.846 10,204 9,931 10.012 11,759 12,414 Total revenues 1831 19.384 22.825 21.893 26.961 32,995 315 51.994 58168 62.652 71,382 78.024 90.616 /a Since 1980/87 included in income tax. /b Since 1984/85, witholding tax eliminated as separate category and combined with income tax /c Since JanWary 1986, Ipeda replaced by land and building tax /d Classification changed to other tax (included in miscellaneous levies which consist of other taxes and stamp duty). he Oil subsidies shown as Goverrmorint expenditures from 1977/78 (see Table 5.3). /f Since 1984/85 classificabon changed to value-added tax and tax on luxuy goods. /g Includes commercial bank and suppliers' credits for development projects. Source: Ministry of Finance. Zt WO40ESIA COUNTRY EOOUC REPORT Cm"p Gwtlmmu E,nw.g. 166364 - 117 2 (Rp bEan) Actual B Dvdgt 1983/84 1984/15 1985/86 1986/7 1987/U 19889 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 P.runnel expncib zes 2.757 3.047 4,018 4,311 4,617 4.9 6,202 7,0S 103 LM9 11,214 13,069 L5.347 18.281 Jag.s and salri 1,996 2.207 3,073 3.330 3561 3.833 4.826 5.571 6,299 7.533 9.167 10.490 12,416 14,763 Rice allowance 346 407 402 406 451 Si1 53 640 922 Su 905 1.03 1,140 1.194 Food aIkLvanc 261 271 300 28 299 327 373 362 393 473 498 801 835 1,122 Ott3r 8 90 161 177 176 185 243 264 279 313 342 396 Sl1 710 Exbtrrul 66 72 82 110 130 135 171 198 209 259 302 344 44S 492 M.twial nwdidb r L!57 1.13 1.367 1,366 1329 1.492 1.702 tAW 2.373 2.870 3.042 4,297 4L745 6.589 Do mesbc 1.007 1,134 1,310 1.294 1.239 1,378 1,569 1,670 2.217 2.681 2.8" 4.071 4,457 6.258 Exbwral 50 49 58 73 90 114 133 160 ISS 189 194 225 2U 332 Subsidi to region la 1.547 1.53 2.469 2.650 2.,16 3.038 3,566 4.237 4.634 52U 4796 718 649 10.012 rion J.ya 42 0 0 0 0 0 0 0 0 0 0 0 0 0 Othw region 50LSOS I'm3 2,489 2,650 2816 3.038 3,566 4.237 4.,34 S.283 64796 7.1U 6,409 10,012 DebtsviLJy 103 2 777 3,323 5. 8.2 10.940 11.939 13.395 113 15I21 17.281 1.-422 18.215 20.227 drrm 30 39 20 0 39 78 149 230 251 275 121 204 319 291 Exlrnl 2.073 2,737 3.303 3.058 8.166 10.6Q3 11.790 13.145 13.183 14.942 17.167 18,216 17.896 19,936 Othrndturz w 948 540 754 174 515 271 923 4 1.484 1.19 459/d 204 524 1.805 Food ubsidy 0 0 0 29 0 0 0 0 - 0 0 0 0 0 omUAW* 92 507 374 0 0 0 0 0 - 692 0 0 0 0 Othw /b 20 33 38 145 515 271 923 3.4s3 - S03 4s9 204 524 1.005 RouPxdine emerlbes j,412 9.429 11.952 13539 17.482 20,739 24331 29.99 30.228 34.031 38.7 43.180 47.240 56114 De opr ixpdituresc 9.u9 9ss2 10.873 &332 9.477 12251 13834 19.452 21.764 24.135 25661 29. 30.7,4 34403 Toluwlndrzes AM I3L1 3931 21.891 9 2699 3Lzs 3A65 49450 51.502 saJ 64.460 7243 7MU24 -9U /a SW" 1984/85, th item Is sub- dividad into wago/sakry and non wags/snaby expunuiturc wthout idintlying regions /b This Nraws debt wvice ranshrs to PERTAMINA (1978/77 - Rp. 31.0 billion, 1977/78 - Rp. 864 billbn), PERTAMNA subsidy (1979/30 - Rp. 81.0 blbon) end expncit s on the ganerml-1 eion (1 97/77 - Rp. 37.0 billo. 1061/82 - Rp. 81.0 bilior 198/85 - Rp. 40.0 bNron). /c For ddois "a Tabls 5.4 and 5.5. /d Irnclucld oll tubmly. Soureo: Minstry f Fi r to INDONESIA COUNTRY ECONOMIC REPORT D.w oiment Ex.ndItdwes. I a3104 - I 6/0 9/ (Rp. billion) Actual Budmt 1983/84 1984/85 19S5/86 1986/87 1987/88 198/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1. DepartmenU 3.220 3.474 4.467 2.004 2.113 1.861 2.509 4.854 5.971 7 858 8.560 9.478 IQ910 12.722 2. GeneralINPRES oFonms 539 540 575 56S 656 714 706 1.058 L _0 1853 2.198 4.701 4.702 5.268 Subsidire to provinc 253 253 287 293 290 334 324 486 574 701 783 1.318 /b 1.277 1.424 Subsidies to kabupatens 194 195 189 18U 263 267 270 392 583 825 1.025 2.554 /c 2.525 2.905 Subsidies to vllages 92 93 99 86 102 112 112 181 250 327 390 829 /d 900 939 3. Sect"sal INPRES oproarams 771 824 754 721 451 429 536 1.282 1.838 Z296 2.535 869 S6 1.121 Primaryscboo 549 572 526 496 193 131 100 374 521 655 699 538 /. 499 595 Health 87 65 III 108 74 99 122 193 269 320 377 412 370 526 Markeu I1 26 4 12 3 3 3 3 2 2 4 0 0 0 Replantingftefores5ation 59 61 43 31 16 17 17 33 75 95 104 0 0 0 Roa CM .w. 70 75 164 I80 295 679 972 1.225 1.352 0 0 0 4. PBB 132 157 168 171 223 344 478 657 709 892 1.243 1.485 If 1.750 2.072 5. Irin Jayaand Eastrimor 5 4 z 7 _ 0 0 0 0 0 0 0 0 0 Toul(2-51 :Tranfer to loCI governmenu 1.448 1.526 1.503 1.461 1.334 1.486 1.720 2.998 3.953 L50 5.976 7.135 7.320 &461 6. Fertilizer subsidy 324 732 77 467 756 200 278 265 301 175 265 457 143 137 7. Governnt comatal oticajvtion(PMPl 592 336 412 86 336 125 141 323 470 150 126 205 50 55 8. Others 449 475 511 514 515 629 765 505 722 708 803 905 601 714 9. Development exmendituresinreserves - - - 2000 1500.0 Toal(Il - 81 6.032 6.543 7.370 45_37 5.054 4.301 5.413 1.944 12.919 lL2al. 15.730 L18.1 L.0 229 9. Pro*ect aid 3.86 3.409 3.503 3.795 423 7.950 8.422 8.508 8 846 10.204 9.931 10.983 11.759 11.759 TOW l/_ - 9 98 899 9952 873 8332 9.477 12.251 13.835 19452 21.764 24.135 25.661 29.163 30.784 3.8 ,;a. /a Ebduding project tid in Rupiab. 89 fo Induded subsidies aforestration and subsidies road development (provilces). Ic Induded submidies for rural bousing. subsidies to maket reconstruction and development, subsidies reforestration. subsidies for primary school reeonstruction. and subsidies road development (regencies):. /d Induded subsidies to backward villages. /e Induded subsidiea for preliminry sool recontruction (accomodated to subsidies to regencies). I 91 percent from toud land and building taxrevenues. Source: Minitry of Finance. Statistical Annex 153 Table 5.5 i~~~~~~t . . o FS § 8 S 25J§^J§§ §§' S a~~~~ -~~ ~ § [ I f g 0 > E § 5 i § C @ g 4 W W , 2 3~~~~~~~~~~~~~~~~~~~~I g t- R p ! 5 C n s i i 2 ' 2 4 "| S~ 2 ! 2' > i' g l'B p i X n ! Wii i g ! ! @ e BF a t R s B | i 4 ' | flI l i | sS R s dX ^ 4 fi w R zR i | ajIJJ ilill1' jX!I t0X, I! INDONESIA COUNTRY ECONOMIC REPORT Prolect Aid by Sctor. 1983184 - 1996/97 (Fp. billion) Actul Budget 1963/84 1964185 1985/86 1986/87 1987/88 1968/89 198990 199W91 1991/92 199Z193 1993/94 194/95 1995/96 1996197 Agculture and iTiption 155 472 180 237 576 1.067 1.345 1.513 1,763 2,169 t,801 1.205 1.805 1.549 Industqyand mmig 1.051 671 668 632 267 327 240 409 454 709 516 338 380 359 Electnc power 1.182 653 1.172 791 769 1.783 1.269 1.314 1.830 2.400 2.550 2.746 2.967 3.102 Tranpxrtation and tourism 889 601 688 729 845 1.424 2.174 1.976 1,507 1388 1,786 2.271 3.003 3.491 Manpowe and transmigration 45 76 36 123 62 98 83 91 83 52 52 146 137 75 Regonal development 7 1 8 25 4 45 121 155 240 22 122 266 425 238 Educadion 211 180 59 346 718 1.236 1.085 957 1,045 1,214 1.142 703 751 913 Population & Health 37 78 56 100 38 99 177 188 188 32 132 260 240 325 Housing and water supply 51 84 77 139 273 400 351 444 514 648 461 419 588 729 Genal public savica 152 255 186 257 3.50 382 566 471 567 728 629 664 722 802 Gevanmeat caoxtal participalion 45 160 203 185 168 213 419 100 116 235 180 0 0 0 Othen/a 42 179 171 231 355 855 594 890 539 616 560 995 941 831 Totalwoject aidh 3,867 3,409 3B 3.795 4,423 7,950 8,422 8W5 8,84 10.204 9,931 10012 11759 12.414 /a Since 1979/80 indudes na l rescua development and avronment. /b Includes commeria credita far deveopment propam/projects. Sotce: Ministry ofFinance. ElS Statistical Annex 155 Table 6.1 INDONESIA COUNTRY ECONOMIC REPORT Money SuppyI, 1982 - 1995 (Rp. billion) End of Total Currency Demand deposits Change over period Amount (%) Amount (%) Amount (%) 1982 .-7,121 2,934 41 4,187 59 635 10 1983 7,569 3,333 44 4,236 56 448 6 1984 8,581 3,712 43 4,869 57 1,012 13 1985 10,104 4,440 44 5,664 56 1,523 18 1986 11,677 5,338 46 6,339 54 1,573 16 1987 12,685 5,782 46 6,903 54 1,008 9 1988 14,392 6,246 43 8,146 57 1,707 13 1989 20,114 7,426 37 12,688 63 5,722 40 1990 23,819 9,094 38 14,725 62 3,705 18 1991 26,342 9,346 35 16,996 65 2,523 11 1992 28,779 11,478 40 17,301 60 2,437 9 1993 36,805 14,431 39 22,374 61 8,026 28 1994 45,374 18,634 41 26,740 59 8,569 23 1995 53,216 20,807 39 31,870 60 7,842 17 Source: Bank Indonesia. 156 Statistical Annex Table 6.2 INDONESIA COUNTRY ECONOMIC REPORT Chances in Factors Affectinu Money Supplv. 1982-1995 (Rp. billion) Public Sector Claims - ~ Net claims on official Total change in Net on entities Claims on Net Money Supply End of foreign Central & public business & other Amount Percentage period assets Government enterprises individuals items (%) 19S2 -1,237 129 689 2,260 -591 635 10 1983/a 1,180 -1,286 -42 2,183 815 448 6 1984 3,531 -3,359 190 3,646 882 1,012 13 1985 1,750 -214 511 3.333 -115 1,523 18 1986/b 1,870 469 252 4,547 -2496 1,573 16 1987 2,444 1,538 728 625 -4710 1,008 9 1988 -549 247 659 11,069 -3053 1,707 13 1989 409 -939 1,444 22.132 -2370 5,722 40 1990 -2171 -4113 -920 35.809 -2677 3.706 18 1991 7,499 -1355 104 20.263 -12083 2.522 11 1992 7013 -1291 492 15,257 -1475 2,438 9 1993 (934) 731 1505 30.230 -5383 8,026 28 1994 -4428 -4686 -485 37,845 1064 8,569 23 1995 7355 -7472 1435 47'374 (27) 7,842 17 /a Does not include revaluation adjustment to foreign exchange balances resulting from the rupiah devaluation of March 30, 1983. The adjustments amount to Rp. 1,962 billion in net foreign assets; Rp. 131 billion in net claims on Central government; Rp. 146 billion in claims on official entities and public enterprises: Rp. 106 billion in blocked account; Rp. 148 billion in claims on businesses and individuals; Rp. 620 billion in time and savings deposits; and Rp. 1,399 billion in net other items. lb Includes revaluation adjustment due to devaluation on September 12. 1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Consolidated Balance Sheet of the Monetary System. 1982-1995 (Rp. billion) Endofperiod 1982 1983/a 1984 19R5 1986/b 1987 1988 1989 1990 1991 1992 1993 1994 1995 Net facign assets 55 8,837 1_23h8 1419 159R9 18433 17,884 8,293 16,12i2 23.621 30634 2700 Z5,22 32_627 Donresticcredit 8846 9744 10.345 14,325 19323 26,729 39,802 62.131 93,118 110.285 126612 158,94 196 233,088 9aints onpublic sector Central goven1uent 4.1,193 -5,739 -9,098 -9319 -8798 -8366 -7036 -8309 -12202 -13581 -14873 -14142 -18R28 -26300 C(1intson officijl entifies and public enterprise 4,979 5,040 5,230 6,034 5,993 6,725 7,381 8,825 7,904 8,008 8,501 8,277 8,025 10,955 GCimimenn-hlkcked acount -252 -240 -116 -52 -81 -84 -66 -40 -24 0 0 0 0 0 Claims onpave en' lrat tex _and jndi idatk 8312 10 683 14,329 17 662 22 209 28,454 39,523 61655 97_440 115,858 132,984 1647 202,43 248,433 Loans 7.995 10,184 13,550 16,392 20,409 26,072 36,502 55,933 89,98 105,599 115,190 142,008 180.863 223,727 Otherclaims 317 499 779 1,270 1,800 2,382 3,021 5,722 7,472 10,259 17,794 22,791 21,569 24,706 Assets = liabilities 14,411 18,581 22,713 28,444 35,312 45,162 57,686 80,424 109,240 133,906 157,246 188,634 216,901 265,715 Iiiilpit dqxc,sits 300 242 218 268 402 424 684 632 1,048 966 890 1,699 1.540 1,779 Net otier items 3,036 3.676 4,558 5,291 7,651 11,277 15,688 21,087 23,562 33,881 37,303 41,733 40.,g19 41,298 Moneyandquasimone- 11.075 14,663 17937 23153 27.661 33.885 41998 58705 84630 99,059 119,053 145,20 174,512 222,618 Money 7,121 7.569 8,581 10,104 11,677 12,685 14,392 20,114 23,819 26,341 28,779 36,805 45,374 52,677 Currency 2,934 3,333 3,712 4,440 5,338 5,782 6,246 7,426 9,094 9,346 11,478 14,431 18,634 20,807 Demand deposits 4,187 4,236 4,869 5,664 6.339 6,903 8,146 12,688 14,725 16,995 17,301 22374 26,740 31,870 Quasinionev 3,954 7,094 9,356 13,049 15,984 21,20() 27,606 38,591 60,811 72,718 90,274 108,397 129,118 169,961 /a Includes changes resulting from the xchange rate adjustment of March 30, 1983 frm Rp. 702.50 to Rp. 970 per USS. jb liicluds changes rnsulting frnm the exchange rate adjustment on September 12,1986 fror Rp 1,134 to Rp 1,644 per USS. Souicee Rink Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Banking Sysftm Credits by Economic Sector. 1982-1995 /a (Rp. billion) Sectors 1982 1983 X! 1984 1985 1986 Ig 1987 1988 1989 1990 1991 1992 1993 jn 1994 1995 Agriculture 1.025 t,226 1.318 1,656 2,097 2.657 3.648 5,350 7,368 8, 10281 12057 13.860 1.2 In rupiah 1,025 1,226 1,318 1,656 2,097 2,631 3,610 5,281 7,176 7,979 9.173 10,368 12.026 13,661 In foreign exchange 0 0 0 0 0 26 38 69 192 486 1,108 1,689 1,834 1,864 Mining/b 1.472 806 384 258 394 381 144 591 615 743 762 777 799 913 In rupiah 1,472 806 384 258 394 371 124 456 570 614 605 416 359 434 In foreign exchange o 0 0 0 0 10 20 135 45 129 157 361 440 479 Manufacturing industry /c 3,923 5.207 6,667 7.592 9,005 10,912 14956 20,333 30,502 33,131 37.458 51.432 60,211 72,088 In rupiah 3,429 4,595 6,205 7.069 8,839 10,503 13,994 17,654 25,002 24,828 26,197 36,334 42,236 48.476 In foreign exchange 494 612 462 523 166 409 962 2,679 5,500 8,303 11,261 15,098 17.975 23,612 Trade /d 4,129 5,132 6,344 7.255 8399 1027 13,888 20,109 7 309 32,944 37,794 44.372 5422 In rupiah 4,009 4,781 6,299 7,214 8.329 10,065 13,682 19,342 27,267 28,842 28,100 31,470 36,840 43.608 In foreign exchange 120 351 45 41 70 182 206 767 2,470 4,207 4,844 6,324 7,532 10.616 Service rendering industrv /e 1867 2,277 3,169 4,183 4,4 5.460 7 382 10,424 1 7 20,066 25899 35,824 5086 66,584 In rupiah 1,860 2,253 3,088 4,047 4,130 5,151 6,917 9,600 14,913 16,683 21,979 30,167 42,453 57,432 In foreign exchange 7 24 81 136 215 309 465 824 2,954 3,383 3,920 5,657 8,353 9,152 Others 606 651 931 1213 23162 3.1 3721 1866 t 11,0 17371 15,574 12,387 18832 .7 In rupiah 606 651 929 1,210 2,156 3,143 3,667 1,709 11.197 16,326 14,653 12,374 18,824 25,265 In foreign exchange o 0 2 3 6 44 54 157 512 1,045 921 13 8 12 Total 13022 1599 18.813 22157 26,402 32.844 43739 5 97,798 112,825 122.918 150,271 188.880 234.611 In rupiah 12.401 14.312 18,223 21.454 25.945 31,864 41,994 54,042 86,125 95,272 100,707 121,129 152,738 188,876 In foreign exchange 621 987 590 703 457 980 1,745 4,631 11,673 17,553 22,211 29,142 36,142 45,735 /a Credits outstanding end of period. Includes investment credits, KIK and KMKP. Excludes interbank credits, credrts to central govemment and to nonresidents, and foreign exchange component of project aid. /b Includes credits to PERTAMINA for repayment of foreign borrowing. Since March 1979, credit in foreign exchange to PERTAMINA has been converted to rupiah credits. /c Processing of agricultural products is classified under manufacturing industry according to Intemational Standard M Industrial Classificaton (ISIC 1968). Starting 1980, credits for construction which were previously included in manufacturing industry are now included in service-rendering industry. - ::t. /d Includes credits for food procurement and hotel projects. /e Credits for electricity, gas and water supply are included in service-rendering industry sector. CD /f Includes foreign exchange revaluaton amounting to Rp. 251 billion. /g Includes revaluation adjustment due to the devaluation of September 12, 1986. /h As of 1993 includes Commercial Banks exs. Non-Bank Financial Institutons. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Banking Credits Outstandcna in Rupiah and Foreign Exchange by Group of Banks, 1984 - 1995 /a (Rp. billion) 1984 1985 1986 /b 1987 1988 1989 1990 1991 1992 1993 /f 1994 1995 Bank Indonesia directcredits/c 870 964 1.144 1,347 1.547 696 718 783 771 158 130 71 In rupiah 870 964 1,144 1,347 1,547 696 718 783 771 158 130 71 In foreign exchange 0 0 0 0 0 0 0 0 0 0 0 0 State commercial banks /d 13.345 15,374 17782 21.676 28 631 39.579 55,826 59,861 68.236 71.760 80,010 93,480 In rupiah 12,959 14,925 17,711 21,225 27,614 37,151 50,648 52,628 58,133 59,738 68,085 79,394 In foreign exchange 386, 449 ,i 451 1,017 2,428 5,178 7,233 10,103 11,805 11,925 14,086 National Private Banks/e 3,552 4,746 6.272 8423 11.910 20 216 34,975 44.452 45 15? 63,995 90,504 116,886 In rupiah 3,480 ,4,631 6,061 8,175 11,536 18,955 31,458 39,467 39,685 55,076 76,506 99,466 In foreign exchange 72 115 211 248 374 1,261 3,517 4,985 5,667 8,919 13,998 17,420 Foreign Banks 1,046 1.073 1.204 L406 1,913 3,115 6,177 8,512 9,330 14,733 18,366 24.245 Inrupiah 914 934 1,029 1,122 1,559 2,173 3,039 3,177 2,889 6,315 8,147 10,016 In foreign exchange 132 139 175 284 354 942 3,138 5,335 6,441 8,418 10,219 14,229 Total 18.813 ". 402 325 44.001 63.606 97.696 13608 1238689 150.429 900 L 2 In rupiah 18,223 21,454 25,945 31,869 42,256 58,975 85.863 96,055 101,478 121,287 152,868 188,947 In foreign exchange 590 703 457 983 1,745 4,631 11,833 17,553 22,211 29,142 36,142 45,735 /a Credits outstanding at end of period. Includes investment credits, KIK and KMP. Excludes interbank credits, credits to Central Government and to non-residents, and foreign exchange component of project aid. /b Includes revaluation adjustment due to devaluation on September 12, 1986. /c Excludes liquidity credits, includes credits to Pertamina for repayment for foreign borrowing. /d Includes state development bank and liquidity credits. /e Includes liquidity credits. National private banks refer to national private commercial banks and regional development banks. o_ /f As of 1993 includes Commercial Banks exs. Non-Bank Financial Institutions. CJ1 Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Investment Credits by Economic Sector, 1982-1995 /a (Rp. billion) End of period 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 IC 1992 1993 td 1994 199 5 Credits approved/b 2S0 s s s ssssss2.263 2 6 , 4 5 32,906 42.333 60,858 68,681 83,578 Ag riculture 467 734 8909 1,402 2,274 2,54 3,393 5,009 6,811 9,788 11,534 13,426 14,509 14,283 Mining 54 57 179 229 363 382 495 481 502 517 5245 880 576 650 Manufacturing industry 1,369 1,983 2Z,374 2,765 3,25 3 3,540 5,182 7,615 10,742 11,774 16,910 21,735 25,937 29,508 Trade 134 129 237 277 369 35 5 5 36 1,012 2,298 3,375 4,475 8,876 7,079 9,397 Service rendering industry 641 986 866 1,173 1,638 2,900 3,788 4.021 4,914 6,336 7.724 15,941 20,580 29,740 Others 14 11 44 52 69 53 106 125 1,183 1,116 1.165 0 0 0 Credits outstanding_/b 2,099 2,861 3,802 5,471 6 7s635 10,422 14,292 19,961 25,748 35,994 42,713 47,136 59,274 Agriculture 322 477 5 555 948 1,292 1,690 2,284 3,357 4,361 5,4 50 7,050 5,730 9,865 10,564 Mining 34 49 178 224 367 342 372 3 5 8 372 4 59 4 59 310 196 256 Manufacturing industry 1,095 1,635 2.102 2,781 3,098 3,5 67 4,817 6,424 8,866 10,484 15,416 17,37 1 19,516 23,159 Trade 120 '115 168 396 443 4 3 5 632 1,022 1,859 3,372 4,099 7,192 6,154 8,468 Service rendering industry 519 576 770 1,098 1,215 1,560 2,249 3,010 4,060 5,032 7,896 9,110 11,405 16,827 Others 9 9 29 24 71 41 68 121 443 951 1,074 0 0 0 /a Excludes investment credits from Bank Indonesia; includes State Development Bank and Local Development Banks. Data with the same classification prior to 1980 are not available. /b Excludes Small Scale Investment Credits, investment credrts to the Central Govemment and foreign exchange components of project aid. /c As of 1991 includes Small-scale Investment Credits. /d As of 1993 includes Commercial Banks exs. Non-Bank Financial Institutions. Source: Bank Indonesia. Cd3B INDONESIA COUNTRY ECONOMIC REPORT Outstandina Bank Funds In Rupiah and Foreian Exchange by Group of Banks, 1982-1995 la (Rp. billion) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Deposits State Banks 6,169 8,381 10,035 12.916 15,193 18,111 22,527 29.731 40.63S 41,812 52,600 61.684 64,283 75,920 Private Banks 1,284 2,119 3,020 4,550 5,435 8,040 11,167 19,655 33,951 43,143 51.079 67.542 88,926 117,451 Regional Development Banks 411 498 700 825 797 954 1,300 1.674 2,550 3,228 3,697 4,773 6,183 7,812 Foreign Banks 1,004 1,398 1,743 1,883 2.086 2,226 2,516 3.315 6,016 6,935 7,474 8,681 11,015 13.581 Total 8,868 12.396 15.498 20.L4 23.511 Z9,331 37.510 54,375 83.155 95.118 114.850 142,680 170 407 214.764 Share in Total Deposits State Banks 69.6 67.6 14.b 64.0 64.6 61.7 60.1 54.7 48.9 44.0 45.8 43.2 37.7 35.4 Private Banks 14.5 17.1 19.5 22.6 23.1 27.4 29.8 36.1 40.8 45.4 44.5 47.3 52.2 54.7 Regional Development Banks 4.6 4.0 4.5 4.1 3.4 3.3 3.5 3.1 3.1 3.4 3.2 3.3 3.6 3.6 Foreign Banks 11.3 11.3 11.2 9.3 8.9 7.6 6.7 6.1 7.2 7.3 6.5 6.1 6.3 6.3 Total looe. 100.0 ioo.o 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Annual Growth Rate in Deposits State Banks 2.2 35.9 19.7 28.7 17.6 19.2 24.4 32.0 36.7 2.9 25.8 17.3 4.2 18.1 Private Banks 40.0 65.0 42.5 50.7 19.5 47.9 38.9 76.0 72.7 27.1 18.4 32.2 31.7 32.1 Regional Development Banks 16.1 21.2 40.6 17.9 *3.4 19.7 36.3 28.8 52.3 26.6 14.5 29.1 29.5 26.3 Foreign Banks 27.2 39.2 24.7 8.0 10.8 6.7 13.0 31.8 81.5 15.3 7.8 16.1 26.9 23.3 Total 10.2 33.5 25j0 30.2 16.5 24.8 27.9 45.0 52.9 14.4 20.7 24.2 19.4 26.0 /a Total funds are the sum of demand, time and savings deposits. Figures differ from the monetary survey because these include Central Government accounts. Rural credit banks are excluded. Source Bank Indonesia. CD 0 lINDONESIA COUNTRY ECONOMIC REPORT Interest Rates on DwposNs at Commerchl Banks. 1982-1995 /a (% Pa) Time Deposits TABANAS TASKA Certifi- End of Demand Savings Savings rate of State Bank PrIvate National Bank la Period Deposits Deposits Deposits Deposits Less thlan 3 8 12 24 Less thran 3 6 12 2-4 )b/c /d le 3 mos 1 mos mos mos mos 3 mos /I mos mos mos mros 1982 1.8-3 6-15 9.0 12.5 7.7 8.8 8.0 9.0 12-15 16.9 17.1 18.5 19.3 16.8 19831g 1.8-3 12-15 9.0 15.4 14.4 14.8 13.1 17.5 12.5 18.7 17.4 16.8 19.7 19.3 1984 1 8-3 12-15 9.0 16.5 15.1 17.1 17.2 16.7 17.2 19.6 20.7 20.7 20.4 21.0 1985 1.8-3 12-15 90 14.5 13.4 14 6 16.0 17.9 18.3 14.6 15.9 17.8 19.9 21.3 1986 1.8-3 le-i. 3.0 14.0 13.3 14.2 14.7 15.2 16.0 14.8 15.5 16.2 17.3 20.1 1997 1.8-3 15.0 9.0 15.6 15.5 17.0 17.3 17.0 17.4 17.3 19.6 19.3 19.1 19.9 1988 1.8-3 15.0 9.0 15.9 15.8 18.1 18.4 19.7 18.9 20.2 2r0.. nr 9 '0.9 1999 n.a n.a n.a 16.3 15.1 16.2 17.2 18.7 18.8 17.0 19.0 19.9 19.7 20.5 1990 n.a n.a n.a 15.9 20.5 20.7 20.7 20.5 20.0 20.9 21.3 21.3 21.2 21.0 1991 9.9 n.a Mea 19.0 20.0 21.3 22.3 22.5 21.0 21.8 22.6 23.3 23.4 19.6 1992 7.2 n.a n.a 15.7 14 6 15.7 17.3 18.6 20.7 18.5 17.7 18.9 19.6 16.6 1993 5.3 n.a n.a 151 9 .3 9.3 12.3 13.5 15.9 11.3 12.8 14.0 14.5 16.5 1994 4.9 n.a n.a 15.1 11.2 10.6 12.4 11.9 13.5 15.4 15.4 14.8 14.1 17.9 1995 5.6 n.a n.& 17.5 15.2 14.9 16.1 15.4 14.6 17.3 17.0 17.8 17.1 15.7 /a Weighted avewage mate of Interest at selected banks. ib From Mtterh 1963, 3% for amountsaabove lp. 50 milion, 1.9% for Rp. 1 to 50 millon, and lndiviuallydetermilned for amountsikmsttanRp. I minion /c ITABANASI or 'Tebungan Pembangunan Naslonal' (National Development Savings) isan ordinary savings account sponsored by 'Bink Tabungan Negsma (Sotat Saving Bank) and offered by a8 steta owned and some prtvate national commerchi benke, and post offices. Until June 1. 1983: 15%tforamounts of Rp. 200,000 or less: 9% above HIp. 200,000. From June 1963: 15%torRp I miNion or less; 12% for mors tiin Fl. I mIllon. From July 1987 to Novsmbwr 19819: 15% torall d.nomlnations. Thteraltir left to banks' descretin. /d ITASKA, or 'Tabungan Asumansi Becjsngkm (insured Time Deposits) Is an ordinary tim. deposIt sponsored by 'Bank Tabungan Negasa and offerted by thse same Instilutions deserbed in (c) above. I. Mkooint ofmngeftot slx months tee. fl One montih time deposIs mate used as representative rate. A /g CeIling on time deposi Interest rate at sfate bankle removed on June 1, 1983. 12% legal minimum rate stauting In June 1983 for 24 moanthls State Bank time deposit. Source: BanklIndonesh. : .Oc INDONESIA COUNTRY ECONOMIC REPORT r ' Principal Agricultural Products by Subsectors, 1982-1994 ('000 tons) Product 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994/a Food crops Rice/b 22.837 35.302 38,134 39,033 39,726 40,078 41,676 44.726 45.179 44,689 48.240 48.181 46,641 Corn 3.235 5,087 5,288 4,330 5.920 5.155 6.652 6.193 6.734 6,256 7,995 6,460 6.869 Cassava 12,988 12,103 14,167 14,037 13,312 14.356 15.471 17,117 15,830 15,954 16,516 17.285 15,729 Sweet potato 1.676 2,213 2,156 2,161 2.091 2.013 2,159 2,224 1,971 2,039 2,171 2,088 1.845 Soya beans (shelled) 521 536 769 870 1.227 1,161 1,270 1.315 1.487 1,555 1,870 1.709 1.565 Groundnuts (shelled) 437 460 535 528 642 533 589 620 651 652 739 639 632 Fisheries Saltwater fish 1.490 1,682 1,713 1,822 1,923 2,017 2,170 2,272 2,370 2,505 2,692 2,886 3.056 Freshwater fish 524 533 548 573 607 653 711 765 793 807 851 909 962 Meat and dairV Meat 629 650 742 808 860 895 937 971 1.028 1,099 1,239 1,378 1,469 Eggs 297 319 355 370 432 452 443 456 484 510 572 573 580 Milk /c 117 143 179 192 220 235 265 338 346 360 367 388 389 Cash crops Rubber 900 1,007 1.033 1,055 1.109 1.130 1.176 1.209 1,275 1,284 1.399 1,476 1.499 Palm oil 884 979 1,147 1,243 1,350 1.506 1,800 1,965 2,413 2.658 3.266 3.421 4.094 CoconuUtcopra 1.718 1.604 1,750 1,920 2.114 2,075 2,139 2,208 2,332 2.337 2.455 2.606 2.631 Coffee 281 305 315 311 339 380 386 401 413 419 437 439 446 Tea 94 110 126 127 136 126 137 141 155 159 154 165 169 Cloves 32 41 49 42 55 58 61 55 66 84 73 67 69 Pepper 34 46 46 41 40 49 56 68 70 69 65 66 68 Tobacco 106 109 108 161 164 113 116 81 156 161 112 121 140 Cane sugar 1,627 1.628 1.810 1.899 1.894 2,176 1,918 2.108 2,119 2,253 2,307 2,330 2.352 Cotton /d 13 14 12 45 53 48 39,731 38,374 32.857 13.443 12.670 13,772 15,304 Forestry /e Teakwood 692 718 758 777 798 689 725 725 780 778 780 745 805 Other timber 13,236 24.180 27,716 24,277 27.403 28,255 28,485 24,409 25,312 23,892 28,267 26,848 21.284 H /a Preliminary figures. 5 /b Paddy production starting 1983. CD /c In million of liters. /d In tons. /e In '000 cubic meters. Source: Supplement to the President's Report to Parliament, August 16, 1995. 164 Statistical Annex Table 7.2 INDONESIA COUNTRY ECONOMIC REPORT Productlon of Malor Crops by Type of Estate. 184-1US4 ('000 tonls Product 1984 19S5 1986 19S7 1988 1989 1990 1991 1992 1993 1994/a Smallholders Rubber 704 720 763 795 839 853 913 919 1,030 1.102 1.118 Coconut/copra 1,737 1,905 2,098 2,055 2,117 2.193 2.313 2.317 2,426 2.558 2. Coffee 291 288 316 359 36Z 377 384 390 409 410 416 Cloves 48 41 53 57 59 53 64 82 70 6 67 Tea 24 30 31 25 26 25 31 32 32 37 3 Sugar 1,397 1,450 1,417 1,744 1,499 1,621 1.609 1,610 1,653 1855 1,10 Tobacco 104 156 159 110 113 77 152 157 110 119 137 Pepper 46 41 40 49 56 68 70 69 65 6 67 Cotton 12 45 53 48 40 38 33 13 13 14 15 Palm oll 0 0 0 0 0 0 0 0 0 0 0 Palm kernel 0 0 0 0 0 0 0 0 0 a Private estate. Rubber 121 124 150 135 143 141 145 146 163 166 170 Coconuttcopra 13 15 16 20 22 15 19 20 29 30 35 Coffee 9 10 10 8 10 11 13 13 11 12 13 Cloves 1 1 2 1 2 2 2 2 2 2 3 Tea 28 17 I1 21 23 26 29 30 281 33 34 Sugar 83 106 106 109 103 181 204 257 178 251 252 Tobacco 0 0 0 0 0 0 0 0 0 0 0 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 329 339 385 352 435 597 789 884 1.077 1370 1.410 Palm kernel 69 71 73 76 87 119 179 181 172 209 216 Government estates Rubber 208 211 196 200 1°4 215 217 219 205 20S 212 Coconut/copra 0 0 0 0 0 0 0 0 0 e 0 Coffee is 13 13 13 14 13 16 16 17 17 1S Cloves 0 0 0 0 0 0 0 0 0 0 Tea 84 80 87 80 98 90 C5 97 94 95 97 Sugar 330 343 371 323 316 306 306 386 476 394 410 Tobacco 4 5 5 3 3 4 4 4 2 2 3 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 0 0 0 Palm oil 81S 904 965 1.154 1,365 1,368 1.624 1,774 2,189 2.051 2.684 Palm kernel 178 187 193 243 273 274 325 370 318 393 s0o IaW Rubber 1,033 1,055 1.109 1.130 1.176 1,209 1,275 1.284 13 1.47 1.4" Coconut/copra 1.750 1,920 2,114 2,075 2,139 2.208 2.332 2.337 2.455 2.5SS 2.614 Coffee 315 311 339 380 386 401 413 419 437 439 446 Cloves 49 42 55 58 61 55 66 84 73 67 0 Tea 126 127 136 126 137 141 153 19 154 165 169 Sugar 1,810 1.899 1.894 2,176 1.918 2,108 2,119 2,253 2,307 23 2,352 Tobacco 108 161 164 113 116 81 156 161 112 121 140 Pepper 46 41 40 49 56 68 70 69 65 66 67 Cotton 12 45 53 48 40 39 33 14 13 14 15 Palm oil 1.147 1.243 1.350 1,506 1.800 1.965 2,413 2,658 3,266 3.421 404 Palm kernel 247 258 266 319 360 393 504 551 539 602 723 /s Prlirminary tigures. Source: Supplement to President's Report to Parliament. August 18, 10905. S&oisdcal Annex 165 Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Area Harvested. Production and Yield. 1982-1994 Area Average Paddy Rice Year harvested yield output output /a Growth ('000 ha) (tons/ha) ('000 tons) ('000 tons) (%) 1982 8,988 3.74 33,584 22,837 2.5 1983 9,162 3.85 35,302 24,006 5.1 1984 9,764 3.91 38,134 25,933 8.0 1985 9,902 3.97 39,033 26,542 2.3 1986 9,988 4.00 39,726 27.014 1.8 1987 9,923 4.04 40,078 27,253 0.9 1988 10,138 4.11 41,676 28,340 4.0 1989 10,531 4.25 44,726 29,072 2.6 1990 10,502 4.30 45,179 29,366 1.0 1991 10,282 4.35 44,689 29,048 -1.1 1992 11,103 4.34 48,240 31,356 7.9 1993 11,013 4.38 48,181 31,318 -0.1 1994 10,734 4.35 46,641 30,317 -3.2 /a Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and a facLor of 0.65 for the years 1989 and following. Source: Central Bureau of Statistics. 166 Statistical Annex Table 7.4 INDONESIA COUNTRY ECONOMIC REPORT Area Covered Under Rice Intensification Proarams. 1982-1994 ('000 ha) Year BIMAS INMAS Total Of which /a /b INSUS /c 1982 1,296 5.047 6,343 2,945 1983 1,308 5,387 6,695 3,477 1984 434 6,936 7,369 3,806 1985 200 7,461 7,661 4,100 1986 258 7,533 7,791 4,480 1987 n.a n.a 8,035 4.922 1988 n.a n.a 8,283 5,837 1989 n.a n.a 8,826 6,847 1990 n.a n.a 8,876 7,260 1991 n.a n.a 8,734 7,162 1992 n.a n.a 9,396 7,870 1993 n.a n.a 9,489 8,065 1994 n.a n.a 9,447 8,325 /a BIMAS - Bimbingan massal (Mass rice planting guidance program). /b INMAS = Intensifikasi massal (Mass intensification program). /c INSUS = Intensilikasi khusus (Special intensification program). Source: Supplement to the President's Report to Parliament, August 16, 1995. INDONESIA - COUNTRY ECONOMIC REPORT Index of Manufacturing Production by Selected Industry Group. 1986-1995 la (1983 - 100) Code of Industry Description/b 1986 1987 1988 1989 1990 1991 1992 1993 1994/c 1995/d Group 31121 Condensed and dried milk, creamery and processed butter, fresh and preserved cream (6) 87 5 94.0 123.3 122.5 142 2 154 1 160.6 215.6 132 3 159.4 31330 Mall liquor and mlt (5) 94.4 113 2 116.4 117 2 146.8 160 1 142 0 173.5 115 5 140.1 31420 Clove cigarettes (80) 147.4 1665 1777 196.2 226.4 165.5 1653 178.2 117.2 114.3 31430 Olher cigarettes (13) 788 l9 79.2 78.2 80.7 954 111.3 871 1180 1291 32111 Yarn and thread (53) 129.9 130.5 169.0 196.2 253.5 2737 313 1 312.0 1009 98.7 32112 Weaving mills (except jute weaving products (409) 130 7 144 3 172.9 187.6 216.9 215.0 238 2 236.3 104 1 105.3 32114 , Batik (65) 95.8 81.8 83.9 111.1 144 0 218.5 190 0 176.5 141.8 128.1 32130 Knitting mills (73) 219 2 233.3 239.8 312.8 347.2 449.2 332.0 324.4 155 1 134 5 32400 Footwear (32) 113.1 91.5 111.2 184.9 208.2 230.4 324.5 355.2 956 84.0 33113 Plywood (40) 139 3 192 7 242.1 266.2 256.7 273 7 295.7 288.0 104.5 107.3 34111 Paper manufacture (all kinds) (23) 159.2 159.7 242.0 251.5 298.1 292 2 429.8 459.2 97 2 112.3 35110 Basic chemicals (exceptfertilizer) (50) 119 0 156.4 139.0 152.9 174.0 189.5 151.8 178.1 88 7 83.4 35120 Fertilizer (10) 188.0 121 8 129 7 143.7 158.1 158.1 152.1 153.8 108.8 94.7 35210 Paint, varnish, and lacquers (25) 135 6 128.5 91.2 129.9 135.6 127.2 182 8 283.7 101.6 95.7 35232 Matches (8) 108 7 142 3 175.5 154 4 167.3 178 5 8fe.0 113.6 100 3 105.5 35510 Tyres and tubes (22) 109 5 79 2 109.7 141.2 157 4 205 6 223 8 220 2 89.8 73 4 36210 Glass and glass products (21) 178.0 149 3 124 6 145 2 163 3 254 6 236 8 265.8 118.6 144 2 38310 Cement (7) 144 4 150 9 149 8 198 1 206.4 217 9 244.9 300.7 134 4 149 9 37100 Basicironandsteelindustries(16) 1549 147.1 1674 199.0 259.1 476.5 427 1 552.8 1105 101 8 38130 Structural metal products (59) 110 2 118.7 125 7 180.8 224 4 190 9 210.4 202 3 168 0 155 0 38312 Drycell batteries (7) 123 9 115 5 158.8 179 1 192 6 158 7 174 1 190.8 104 5 116 4 38320 Radio, TVs. cassettes, other communication equipmentand apparatus (23) 90 6 86 9 118 1 153 9 180 8 114 7 1112 113 1 109 5 98 0 38430 Motor vehicles assembly and manufacture (23) 1147 1268 1158 132.5 2000 2129 1160 980 153.6 61 0 38440 Motor cycles and three wheel motor vehicles, assembly and manufacture (I1) 98 0 81 3 76 8 106.0 104 9 187 8 252 1 322 7 72.9 85 3 General Index 128 4 143.5 164 2 184 1 209.4 232 3 257.9 286.8 117 6 121 5 /a The annual figures shown here are calculated as the average of quarterly Indices lb Figures In brackets ( ) indicate the number of establishments covered In that group /c Starting In 1994. the base year Is 1993-100. /d Second querter 1995. Source Central Bureau of statistics. X r . I.- INDONESIA 00 COUNTRY ECONOMIC REPORT Production of Minerals. 1984 - 1995 Tin Copper ore Nickel Iron sand Natural Year Petroleum concentrate concentrate ore Bauxite Coal concentrate Gold /a Silver /a gas (mln bbls) ('000 tons) (kg) (kg) (mcf) 1984 516.5 232 1903 1,066.8 1,(X)32 1,4682 83.0 2247.1 38.584.7 1,521.5 1965 483.8 21.8 223.4 961.9 830.5 1,942.1 130.9 2,604.4 38,0752 1,580.0 1986 5072 24.0 2512 1,533.1 648.8 2,572.3 153.3 2,947.5 44,075.1 1,628.9 19S7 479.0 26.1 259.8 1,825.7 635.3 2,813.5 194.0 3,116.7 49,0462 1,732.1 1988 484.7 30.6 294.7 1,7332 505.8 4,094.6 202.7 3,877.0 57,603.0 1,846.9 1989 5142 31.3 331.5 2,020.9 862.3 9,246.7 142.7 4,624.5 63,5972 1,968.3 1990 533.6 30.4 398.6 2,217.4 1205.7 10,461.5 145.4 9,355.3 62,158.4 2,8282 1991 5812 30.4 656.5 2.300.3 1,406.1 14,143.0 1732 13.889.1 63,452.0 2,465.8 1992 550.7 282 906.7 2.511.6 803.5 23,120.5 287.8 37,986.0 65,117.9 2,586.3 1993 547.4 28.6 928.2 1,975.8 1,320.4 27,584.4 341.3 41,575.8 90285.4 2,663.9 1994 550.8 30.6 1,065.5 2,302.0 1,342.4 28,601.8 334.9 44,842.9 105,961.1 2,949.6 1995 /a 2712 152 671.9 1,037.7 355.3 16,3943 183.5 27,9192 125223.9 1,505.9 /a Jan-June 1995. Sourxc: Central Bureau of Statistics. PC j INDONESIA 5 COUNTRY ECONOMIC REPORT Crude Oil Production by Company, 1981-1995 2 (000 bbis) Production Average Contract of work sharing daily PERTAMINA LEMIGAS Caltex C & T Stanvac Subtotal contract Total output 1981 291o15 175 255 515 1.799 13,141 270,455 284.693 584.838 1,602 1982 27,375 195 175,928 1.422 13.214 190.564 270.055 488.189 1,338 1983 /a 26.947 233 191.307 1.411 11,766 204.484 286.384 518.048 1.419 1984 31,002 203 1,533 4.372 5.905 513,652 550,762 1,505 1985 30,071 170 . 1,358 5.130 6,488 453.190 489,919 1,342 1986 29,328 193 1,228 6,085 7,313 478,078 514.912 1,411 1987 26,775 210 - 1.236 8,354 9,590 475.854 512,429 1,404 1988 24.789 lb . 1.368 13.413 14,781 451.941 491,511 1,343 1989 25.567 /b 2.044 13,233 15,277 473.341 514,185 1.409 1990 24.483 fb - 1,972 1 017 12.559 496,664 533.706 1.462 1991 24.989 lb 1.462 8.845 10.307 545,937 581.233 1.592 1992 24.722 lb 1.401 8.1 36 9.537 516.409 550.668 1.505 1993 26.427 /b 1.327 S.304 6,631 517,567 550,625 1.509 1994 23,826 lb 5- - 27.410 551,236 1.510 1995 20,511 /b 526,084 546,595 1.498 /a Since May 1983. contract of work data have been consolidated. /b Since 1988. Lemigas data have been included in Pertamina. Source: Ministryof Mines and Energy, Directorate General Oil & Gas. PO w S! INDONESIA COUNTRY ECONOMIC REPORT Petroleum Product SuPPol and Demand, 1981 1995 (million bbIs) 1981 1982 10.43 1989 894 5 19 994 10' 1989 1989 1991 1i90 1992 1093 1994 8995 I P-od--sioz .1 -uJe s54 48 2 7 5180 3 589 * 9 51.9 *12 4 *915 514.2 53 37 55.) 55) 5 51 2 551 2 549 6 2 C d. i..po.- 37P0 22 0 25 7 342 32 1 277 J) 2 3 12 28 1 57 85 894 7)8 70 a8 67 8 3 S.b,.3lo2) 69218 5102 83 7 5850 522 . 542 6 5826 522 7 542 3 579.4 595 ) 60.)3 622 . 622 0 6 L44 4 C'.d.. po.l. 3bl * I. 47 3 2 3 54 6 29521 37 2 7919 276 6 291.5 294.7 33') 5 2s2 9 2z2 2 324 3)1 9 S cn.d. .v.i.bI._or rl..,.. . 13,4 2394 16 9 3 27 5 239) 4 2299 2152 2 5)7 246 1 253. 2907 294 5 Z 3z072 39 299 .) 31-A 9 Ck..S. . i. -d894,304 (.3..... . ) 447 6 7 21 5 197 27 1 .23 19 9 0 1 3.2 8d 9 19 7 1 3 23 12 7 12 4 7 R.l_.n 8. M L. 3id4 .. 31 s 1937 842. 184 89097 99 S 2175 233 ) 245 9 247 6 273 . 284. 3017 337.5 318)7 325 II R.li.." y.i.pI. 5' 32 02 131 133 1I') 139 13.9 14.3 16') 153 149 173 149 9 R.1." -po.,. 17 7885t 2 179zl 176 9 181.z 1" 7 2342 22Z) a 232 9 2337 259 5 269 8 2684 3226 2934 306 1 83 B.,-. f 8.fi..d r.3d0.43.1- * 121 49.9 39. 433 3 o 9 V7z 5512 62- 9 37 55.4 57a 5.0 661 522.0 628 784 -8 W8lr..id... 47.9 337 89) 5 49 9 32 1 34 9 42 453 8.06 429 833 539 83 A 474 513 12. t.k ., I80IAVTU)R, .3 2.3) 53 z a 16 1 1 5 2 274 1114 184. 15.8 127 123 S 2 15.4 26 9 13 A-i8.b f8. 8. -O .v.... . 83.9. 9 19.) 137 3 1371 8333 z 8 5 1394 189.3 15 4 169 1 178.3 209 7 212* 8 23 3 273.6 23.) 6 2277 1. P-od.-. i*p03 42 6 29 3 23 5 .) 2 7 5 * 1 I Z1 28.3 23 9 2 8 23) 896 3) 3 489 15 Tow.l .13. I.3*141 179 9 81 125 87 3 E23 142.8 8548 16898 1*24 199 6 225.6 2346 Z41 316 6 267 9 2'63 16 D.-I i. 156 ') 831 1 5 1573 538 553 1528 829 171.3 183 6 211 22506 M4.2 263 3 26 94 273)4 87 Cb.... i. .4. -3.15 239 413.8 A1 54 l 14.2 9 2.8 1 5333 7.5 22 3.3 Mi.i. 1 14 f M3i-.,8*- E.., y. 0l r3* G. 80.8l Oil , G3.. K4Q INDONESIA COUNTRY ECONOMIC REPORT I Domestic Sales of Petroleum Products. 1981-1995/a (000 bbla) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Aviation gas 110 103 83 73 66 63 56 60 60 59 58 54 51 50 51 Aviation turbo 4,869 4.899 3.686 4.374 4.442 3.806 4.199 4,445 4.286 4.607 4.889 5,315 6,039 10.188 10,969 Premium gasoline 392 238 247 523 738 1,024 1.431 1.838 2,451 1,047 hb hb lb lb hb Regular gasoline 25.648 25,709 24,380 24.909 25.206 27,083 29,W8 30,855 33,199 39,005 43.023 45.308 46,733 52.463 57.798 Kerosene 52,497 51.778 48.224 45,213 43.954 43.618 43.352 44,664 46,601 49,472 50,573 53.850 54,242 56,110 58,188 Motor diesel 44.737 48918 49.790 48.567 47.682 47,421 54.07S 59.143 64.508 72.950 80,837 92.061 104,460 100,730 106,755 Industrial diesel 9.391 9.311 9,978 10.285 10.329 8.855 8.119 8.809 9.SI 10,7_0 10.806 11.318 11.445 11,174 10.069 Fuel oil 17.587 19,341 21,149 23.625 22.863 18.004 19.054 18,097 I8,329 24,847 28,899 29,313 30.154 25,456 25.543 Total 155231 160297 157,537 1579 155.280 1 15954 167,911 178,949 202,707 219.08 237219 253,124 Z5, 171 269.373 /a Excluding lubricating oil and sImilar products. /b Discontinued. Source. Ministry of Mines and Energy, Directorate General Oil and Gas 00 172 Statistcal Annex Table 9.1 INDONESIA COUNTRY ECONOMIC REPORT Consumer Price Index, 1979 - 1995 /a /b (April 1977 - March 1978 = 100) End of Foodstuff Housing Clothing Others Total Change (%) /c 1979 141.1 140.9 168.2 137.7 143.1 21.8 /d 1980 165.6 168.7 190.8 159.1 167.6 16.0 1981 179.3 182.3 198.2 168.8 179.8 7.1 1982 192.7 209.6 205.0 189.3 197.9 9.7 1983 212.7 238.1 214.0 221.5 221.5 11.5 1984 226.4 270.0 220.6 246.5 241.6 8.8 1985 230.9 289.4 228.0 259.7 252.2 4.3 1986 263.9 302.9 250.4 275.0 275.3 9.2 1987 296.1 321.4 270.4 297.9 300.8 9.2 1988 320.1 335.4 280.0 307.4 317.6 5.6 1989 104.1 109.6 108.1 105.7 106.4 6.1 1990 111.5 123.9 113.4 118.6 117.0 9.9 1991 122.6 133.7 119.5 135.0 128.6 9.9 1992 130.2 140.0 128.3 139.7 135.1 5.0 1993 136.8 163.2 138.9 154.0 148.8 10.2 1994 157.0 178.6 147.5 161.7 163.2 9.7 1995 179.1 188.9 157.4 173.3 177.8 9.0 /a The consumer price index for Indonesia has been used commencing March 1979 to replace the Jakarta cost of living index. lb Starting 1989, using new base period (April 1988-March 1989 = 100). /c End-vear basis /d Percentage change of CPI for the period January through December 1979 using the rate of increase of the Jakarta cost of living index for period Januarv through March 1979. Source: Central Bureau of Statistics. INDONESIA COUNTRY ECONOMIC REPORT Indonesia Wholesale Price Index, 1983-1995 /a (1983 = 100) Sectors /b 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 /c Agriculture (44) 100 113 118 128 145 163 177 191 206 225 251 327 363 Mining & quarrying (6) 100 109 117 125 132 143 156 169 188 201 218 250 274 Manufacturing (140) 100 103 115 123 143 156 166 176 194 206 218 243 262 Imports (53) 100 113 119 129 158 164 178 191 201 208 211 219 236 Exports 138) 100 11 112 85 118 118 131 159 153 159 157 166 177 Excluding petroleum (34) 100 114 115 130 170 183 195 195 203 212 226 278 304 Petroleum (4) 300 112 113 73 103 99 112 148 139 143 137 133 140 General index (281) 10o 111 116 316 142 149 162 178 187 197 204 226 244 General index excluding exports (243) 100 11 117 127 149 160 173 185 199 210 221 249 267 General index excluding exports of petroleum (224) 300 110 116 125 146 161 372 182 198 211 227 237 270 /a This new index replaces the previous WPI based on 1975. Figures show the average for year. /b Figures within brackets '( )- indicate the number of items represented in that sector. /c November 1995. Source: Central Bureau of statistics. CD INDONESIA 4 k COUNTRY ECONOMIC REPORT Domestic Prices of Petroleum Products,1 984 - 1995 (Rp./liter) 1984 Ia 1985 lb 1986 1987 1988 1989 1990 Ic 1991 Id 1992 1993 le 1994 1995 Aviation gas 300 330 250 250 250 250 330 400 400 420 420 420 Aviation turbo 300 330 250 250 250 250 330 400 400 420 420 420 Premium gasoline 400 440 440 440 440 440 If If If If If If Regular gasoline 350 385 385 385 385 385 450 550 550 700 700 700 Kerosene 150 165 165 165 165 165 190 220 220 280 280 280 Motor diesel 220 242 200 200 200 200 245 300 300 380 380 380 Industrial diesel 200 220 200 200 200 200 235 285 285 360 360 360 Fuel oil 200 220 200 200 200 200 220 220 220 240 240 240 /a Price increased on January 12. /b Price increased on April 1, due to the application of 10% VAT. /c Price increased on May 25. /d Price increased on July 11. /e Price increased on January 8. /f Discontinued. Source: Ministry of Mines and Energy, Directorate General Oil and Gas. tL8 (Rp./liter)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~L. INDONESIA ' COUNTRY ECONOMIC REPORT rz Approved Foreign Investment by Sector. 1981-1995/a (USD ,nI1ion) Sector 1961 1982 1983 19S4 1985 1966 1987 1968 1969 1990 199 1992 1993 1994 1995 Agricultute 25 9 10 0 9 126 117 8 122 117 14 66 138 690 1C153 Forestry 315 32 7 0 0 0 S 26 4 20 1 138 22 0 0 FiSher LZ 3 Z1 0 11 4 _2 46 47 20 11 28 0 40 231 Minin_g_& quarrYg 2_9 0 0 0 0 0 0 0 116 0 2312 0 0 0 Manufacturins 834 1U20 2,615 1002 687 537 852 3.8 4.Z46 5.822 3,970 5,669 3.423 18.739 30.441 Food 41 6 83 77 6 34 54 231 223 99 362 213 141 1.235 1,332 Textiles & leather 139 26 12 1 7 9 118 213 581 1.094 532 591 419 396 471 Wood & wood products 124 5 13 0 0 32 45 104 106 218 62 34 50 68 263 Paper & paper products 49 0 722 0 25 47 109 1.506 211 730 822 686 202 5.120 2,540 Chemicals & rubber 236 317 183 96 338 294 209 1,544 2.512 1,991 923 2,342 1,171 7,743 19,368 Nonmetallic minerals 20 57 50 0 3 0 23S 30 184 125 133 84! 98 632 289 Basic metals aS 3 836 609 65 39 7 61 106 82S 197 47 186 2,082 292 Metal products 141 706 716 210 244 82 57 129 292 460 8S6 863 1,114 1,45 2258 Others 0 0 1 9 0 0 3 10 30 281 62 52 42 40 3,628 Construction 49 11 44 17 122 65 42 2 16 77 26 41 97 77 206 Trade & hotels 0 17 78 84 2 0 396 405 98 874 4f019 919 1088 430 1,0Z9 Wholesale trade 0 0 0 0 0 0 0 0 0 0 0 0 693 87 31 Hotels 0 37 78 84 0 0 196 405 96 874 4,019 919 394 344 999 Transport & co_munications 0 0 0 4 0 70 213 3 5 603 367 14 85 145 5.539 Real estate and business service I_ 204 108 0 29 25 20 117 181 902 570 1t136 3292 3,604 1,314 Total 1091 p 9 '02 ]J07 859 826 1L457 !AL 4.719 8.750 8.7778 1J4 23S724 39 9l 5 la Intended Capital Investment Amount represents original approvals plus expansions minus cancellations Source Investment Coordinating Board (BKPM) CI - ,J INDONESIA COUNTRY ECONOMIC REPORT Approved Domestic Investment by Sector, 1961-199S5 a (Rp billion) Sector 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Aqric ulture_jisheries and livestock 60 62 681 277 899 1.879 2,885 2698 3,418 6442 3.468 1,95Z, 7L140 L21 Forestry 175 93 149 19 37 21 60 487 252 593 310 534 258 Z62 1476 Mining 13 52 578 8 38 89 290 I1I 94 155 182 236 69 112 205 Manufacturing 1306 1419 3792 1332 1.632 1.842 S18 9,747 12,931 39.8S0 27.624 19.079 24,7 31.93 43962 Textiles 195 110 104 127 97 263 1,289 2,309 3,563 12,561 3,646 2,546 3,539 5.518 7,177 Chemicals 193 205 766 272 928 773 2,047 3,039 4,062 7.894 8,425 3,299 7,689 5,150 8,740 Electrical goods 0 0 0 0 0 0 0 0 0 0 0 0 5 12 620 Other manufacturing 918 1,104 Z.922 933 607 806 2.183 4,399 5,307 19,395 15.553 13,235 1Z,804 21,253 27,425 Construction 8 16 195 67 270 74 So 31 146 87 275 215 187 731 848 Hotels 54 76 255 214 312 17 139 537 1,265 4,703 385 3.115 3,01 4342 3.792 Real estate 5 74 204 31 267 169 174 846 936 1,783 2633 536 3_049 3,336 4_659 Others /b 70 157 1151 1 296 325 569 460 551 2.898 1.785 3,675 5,965 5_434 6,290 To1til 1,691 1949 7.005 1.949 3,750 4417 10,265 14,91!6 1 96511 41078 29,342 3 53,289 69853 /a Figures refer to intended capital investments, and represent original approvals plus approved expansion minus cancellations. lb Includes transportation sector. Source: Investment Coordinating Board. CD _oa MAP SECTION IBRD 76570 _a. ,,TFRAILAND , - , .D Bnd. Ah t (V- - > - -PHIUPINES.. INDONESIA \BRUNE[. / ' ' / - ; . ; . - ' @ NATiONAL CAPtAL ) 7 / ; I v / - '- IINCE BOUNDAAES x, 9NGAPORE g \---4 /-< ' 7 ' -. - l NTUNAiONAI BOUNDWAES MALAYSIA5 - ~ SJNGAPO RE ' - 'S U MAT T _ sBna 1 n <~ - < - w_ S7 K A t I M A N d A N @ ~XO s , ~ - . - \(. NrRT7 -_ _M A N:- lo (D 10 Zg _e .\st a 1\ g 5 - _ t> ---'/ 18''F { -- -- -- 'N D.ILLIAKAlIA t ~ k _v-'S '" - kwff.. - 21 KR..W A. 'a M*.n 4 J A Y A 7 LGEMNJGUWV ' 6 r SUMATERA RrA, -c/ ' SUIJAATA N - -t | 1_ 7. 2 SULALAUWAES oUi $tAUAWES SJTAN Wh(' SULAWETJ TU4GGW Th.~hWSt KMJMAN^TANAMDR^T-Ut Jm fs se= f INDIAN OCEAN 27 KALUJ TASJ 3. -3 S - - -Ali SR z o. 1 '2 NUSA TRNOOAM MW ~~~~~~~~~~~~~~~~~~~~~~~ ~~~ a- 24~USRAI / 'NSUAU 15A401 ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~DECEBR19 . - i | | _ ! .' 113 | _ E _ | i l , - I lI : _l I 1111 1 1 l _ i _ | | | [ I | IMAGING _ _ | | - - _ * Eteport No : 15383 INI) s * F Type: ER s s I _ , _ _ . _