Report No. 1 6433-IND Indonesia Sustaining High Growth with Equity May 30, 1997 Country Department III East Asia and Pacific Region um Document of thie World Bank CURRENCY EQUIVALENTS Before November 15, 1978, US$1.00 = Rp.415 Annual Average: 1979 US$1.00 = Rp.623 1980 US$1.00 = Rp.627 1981 US$1.00 = Rp.632 1982 US$1.00 = Rp.661 1983 US$1.00 = Rp.909 a 1984 US$1.00 = Rp.1,026 1985 US$1.00 = Rp.1,111 1986 US$1.00 = Rp.1,283 b 1987 US$1.00 = Rp.1,644 1988 US$1.00 = Rp.1,686 1989 US$1.00 = Rp.1,770 1990 US$1.00 = Rp.1,843 1991 US$1.00 = Rp.1,950 1992 US$1.00 = Rp.2,030 1993 US$1.00 = Rp.2,079 1994 US$1.00 = Rp.2,160 1995 US$1.00 = Rp.2,249 1996 US$1.00 = Rp.2,340 FISCAL YEAR Govermnent - April 1 to March 31 Bank Indonesia - April 1 to March 31 a On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp.703 to US$1.00 = Rp.970. b On September 12, 1986 the Rupiah was devalued from US$1.00 = Rp.1,134 to US$1.00 = Rp.1,644. Vice President: Mr. Jean-Michel Severino Actg. Director:'Mr. Richard A. Calkins Division Chief: Mr. Peter R. Scherer Staff Member: Mr. Lloyd Kenward MAIN ABBREVIATIONS, ACRONYMS AND DEFINITIONS APEC Asia Pacific Economic Cooperative ASEAN Association of Southeast Asian Nations BAKN State Civil Service Agency BAPEPAM Agency for Capital Market Supervision BAPPEDA Regional Development Planning Board BAPPENAS National Development Planning Board BKPM Investment Coordinating Board BNI Bank Negara Indonesia BOT Build, Operate and Transfer BPD Regional Developement Bank BPN National Land Agency BPR Rural Credit Bank BPS Central Bureau of Statistics BULOG State Logistical Agency BUMN State-Owned Company CGI Consultative Group on Indonesia COLT Commercial Offshore Loan Team (also see PKLN) CPI Consumer Price Index DATI I Provincial Level Government DATI II Local Level Government DGAC Director General of Air Communications DGLT Director General of Land Transport DIP List of Project Contents DOD Debt Outstanding and Disbursed ETAM Quarterly Automatic Adjustment (for PLN Tariffs) FDI Foreign Direct Investment GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GENCOs PLN Generating Companies (also see PJB) GER Gross Enrollment Rate GOI Government of Indonesia IDT Block grant program for left-behind villages IHH Forest Concession Fee IMF International Monetary Fund INPRES Instruction of the President IPP Independent Power Producer JABOTABEK Jakarta, Bogor, Tangerang, Bekasi Area JAMSOSTEK Social Security System KABUPATEN Regency KEPPRES Decision of the President KOTAMADYA Urban Municipalities KSO Joint Operating Scheme KUD Local Cooperative KV Kilovolt KwH Kilowatt Hour LNG Liquid Natural Gas LPG Liquid Natural Gas M2 Broadly-defined Money Supply Ml Narrowly-defined Money Supply MLT Medium- and Long-Term MOC Ministry of Communications MOEC Ministry of Education and Culture MOF Ministry of Finance MOHA Ministry of Home Affairs MORA Ministry of Religious Affairs NGO Non-Governmental Organization PDAM Regional State Water Company PJB PLN Power Generating Companies (also see GENCOs) PKLN Debt Ceiling (also see COLT) PLN State Electricity Company PMA Foreign Investment Approach PMDN Domestic Investment Approach PPA Power Purchase Agreement PREMIX High Octone Gasoline PTP Publicly-Owned Plantation RDA Regional Development Account 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) SMK Vocational/Technical Schools SUPAS Intercensus Survey SUSENAS Household Survey VAT Value Added tax WHO World Health Organization WTO World Trade Organization INDONESIA SUSTAINING HIGH GROWTH WITH EQUITY CONTENTS Executive Summary Bahasa Indonesia Translation .....vii Executive Summary ........................................... xxi 1. Macroeconomic Developments and Policies: Managing Success and Reducing Risk ...................................... 1 A. Overview ........................................... 1 B. Domestic Economic Developments .. 1 B. 1 Real Output and Expenditure .1 B.2 Inflation ........................................ 5 B.3 Labor Markets. 6 C. External Economic Developments.. 9 C.1 Balance of Payments. 9 C.2 External Debt and Reserves .13 C.3 Exchange Rates .16 D. Macro Policies: Fiscal Policy ........... ................... 17 E. Macro Policies: Monetary Policy .......... .................. 19 F. The Outlook for Macro Polices ............................. 24 G. The Short-Term Outlook and Donor Assistance ...... .............. 28 2. High Growth With Equity Into the 21st Century ...... ............... 35 A. Overview ........ ................................... 35 B. Indonesia in 2005 .37 C. Lessons of Success in East Asia .41 C. 1 The Large, High Performing, East Asian Economies ............ 41 This report was prepared by a core team of Lloyd Kenward (Task Manager), James Hanson and Lloyd McKay. Key inputs were provided by Nisha Agrawal, Howard Barnum, James Douglas, Edward Dotson, Jorge Garcia-Garcia, Teresa Genta-Fons, David Hawes, Stephen Howes, Frida Johansen, Alain Locussol, John Newman, Haneen Sayed, Vincent Turbat and Joris Van der Ven. Magda Adriani, Basilius Bengoteku, and Edison Hulu provided research support, while Jessica Ardinoto, Inneke Herawati, Christina Setiadi and Endy Swastari were responsible for document processing. Contents C.2 Indonesia's Own Experience ........................... 48 D. Meeting New Challenges to High Growth with Equity ....... ........ 49 E. Improved Government and Institutions: A Fifth Factor in Growth ........ 51 E. 1 Greater Reliance on the Private Sector ...... . . . . . . . . . . . . . . . 52 E.2 The Development Budget ............................. 56 3. Human Resource Development-Foundations for the Future . .63 A. Introduction .63 B. Education: Options for a Transition to Quality ..63 B. 1 Brief Review of Successes in Education .64 B.2 Sectoral Priorities and Constraints .66 B.3 Enhancing Quality: More Difficult than Increasing Quantity .66 B.4 Priorities & Constraints: Achieving Universal Basic Education .68 B.5 Priorities & Constraints: Overcoming Institutional Weaknesses .70 B.6 Priorities & Constraints: Refocusing the Role of Government in Post-Basic Education .70 B.7 Policy Options .71 Addressing the Institutional Problem .71 Policies for Enhancing Quality and Achieving Universal Basic Education .73 Policies to Refocus Government's Role in Post-Basic Education .74 B.8 Financial Implications .75 C. Health: Transitions and Challenges ..78 C.I Expenditure Trends .79 C.2 Looking Ahead: Spending .83 C.3 Looking Ahead: Policies .83 4. Building "Hard" Infrastructure: A Look at Key Sectors . .91 A. Overview .91 B. Cross-Sectoral Policy Issues .91 C. Power ..93 C 1. Overview ....................................... 93 C2. Pricing Issues .94 C3. Capacity Issues .96 C4. Institutional Issues .97 C5. Energy Diversification .98 D. Urban Infrastructure .98 DI. Accelerating Delivery of Better Urban Services .101 Contents iii E. Transportation .104 E1. Roads .105 E2. Trains and Boats and Planes .106 5. "Soft" Infrastructure to Sustain Rapid Growth with Equity . .111 A. Summary and Overview .111 B. Completing Deregulation of International Trade ..112 B. 1 Customs Tariffs .112 B.2 Non-Tariff Import Barriers: Licensing and Local Content Regulations .114 B.3 Export Restrictions .117 C. Further Domestic Deregulation .118 D. Managing Natural Resources .122 E. Strengthening Financial Institutions ..125 E. 1 Improving Banking Institutions .126 E.2 Non-Bank Financial Institutions .129 F. Improving Governance to Reduce Costs ..131 F. 1 The Importance of Good Governance .131 F.2 The Legal System: A Key Institution .135 F.3 Improving Institutions and Governance .137 Bibliography ............................................... 141 TABLES IN TEXT 1.1 Real Growth in Output. 2 1.2 Labor Market Trends. 7 1.3 Unemployment Rates in Urban and Rural Areas, 1971-1995 ............ 7 1.4 Balance of Payments .11 1.5 Export Growth ........................................ 13 1.6 Import Growth .14 1.7 Indonesia: Central Government Fiscal Operations .20 1.8 Sources of Reserve Money Expansion .22 1.9 Indonesia: Developments in Money and Credit .23 1.10 Medium-Term Outlook .29 1.11 Saving-Investment Balances .30 1.12 Sources and Uses of External Financing .31 2.1 Economic Indicators 1990 to 2005. 37 2.2 Indonesia: Development Expenditures by Sector: 1989/90-1997/98 ....... 57 iv Contents 3.1 Junior Secondary Enrollment Rates in Selected East Asian Countries ..... . 68 3.2 Average Household Expenditures per Student in West Java ..... . . . . . . . 69 3.3 Estimated Costs of Specific Investments for Quality Improvement ..... . . . 76 3.4 Indonesia: The Structure of Health Expenditures ...... . . . . . . . . . . . . . 79 3.5 Government Expenditure on Health by Function ...... . . . . . . . . . . . . . 80 3.6 Government Health Expenditures by Line Item ...... . . . . . . . . . . . . . 82 3.7 Projections of Health Expenditures Under Alternative Scenarios ..... . . . . 84 4.1 Indonesia: Estimated Public Urban Infrastructure Spending ..... . . . . . . 99 5.1 Schedule of Customs Tariff Changes (ad valorem rates). ..... . . . . . . . . 113 5.2 Distribution of HS Tariff Codes by Rate (%). ...... . . . . . . . . . . . . . . 114 FIGUR1E IN TEXT 1.1 Approvals of Foreign Investment by Sector ....... . . . . . . . . . . . . . . . 4 1.2 Approvals of Domestic Investment by Sector .5..... . . . . . . . . . . . . . . . S 1.3 Consumer Price Index 12-month % Change ....... . . . . . . . . . . . . . . . 6 1.4 Exchange Rate Indicators ................................. 17 1.5 Rupiah Exchange Rate: Spot Rate and Intervention Bands ..... . . . . . . . . 18 1.6 Interest Rates ........................................ 21 1.7 Covered Diffential ..................................... 21 1.8 Broad Money Multiplier . . . . . . . . . . ...... . . . . . . . . . . . . . . . . . . 22 1.9 Credit Development at Deposit Money Banks ...... . . . . . . . . . . . . . . . 25 2.1 High Performers Are High Investors .......................... 43 2.2 The High Performers Increased Schooling Rapidly in the Labor Force .... . 43 2.3 High Performers Are High Importers, As Well As Exporters ..... . . . . . . 46 2.4 Sources of Growth in GDP per Worker ....... . . . . . . . . . . . . . . . . . 49 3.1 Indonesia Gross Enrollment Rates, 1971-95 ....... . . . . . . . . . . . . . . . 65 3.2 Budgetary Imbalance for Education Investments: Before Setting Priorities . .. 77 3.3 Budgetary Imbalance for Education Investments: After Setting Priorities . . . . 77 3.4 Indonesia: Health Performance Indicators ....................... 80 4.1 Average Electricity Tariffs in East Asia, 1993-1996 . . . . .. . . . . . . . . . . . 95 BOXES IN TEXT 1.1 The Property Market .................................... 3 1.2 Measuring Unemployment in Indonesia; Sources and Issues in Interpretation. 8 1.3 The Cost of Delay in Building Institutions for Improved Labor Relations: The Case of Korea .10 1.4 Reserve Requirements as an Instrument of Monetary Policy in Indonesia .................................... 24 1.5 Traditional Culture Parallels Macro Stability ...... . . . . . . . . . . . . . . . 26 1.6 The Interim Committee Declaration on Partnership for Sustainable Global Growth .27 Contents v 2.1 Jabotabek: Keeping an Engine of Growth Running Smoothly ..... . . . . . 40 2.2 Brazil: From Miracle to Instability .......................... 44 2.3 Successful Approaches to Labor Markets . ...................... 45 2.4 Korea's Interventions in the 1970s ......................... . . 47 2.5 The Privatization Process in Indonesia: An Update ...... . . . . . . . . . . 53 2.6 Improving Transparency and Competition in the Sales of Concessions and Assets 54 2.7 An External Debt Strategy for Indonesia in the 21st Century ..... . . . . . 59 3.1 Evidence on Quality of Education ....... . . . . . . . . . . . . . . . . . . . . 67 3.2 Equity and the Provision of Health Services. ...... . . . . . . . . . . . . . 81 4.1 Gainsharing: An Innovative Approach to a Difficult Problem ..... . . . . 102 4.2 The Case of Urban Water Supply .......................... . 103 4.3 The Urban Transport Sub-Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 4.4 Regional Dimensions of Transportation; Inland Waterways and Ferries . . . . 108 5.1 Trade Policy Indicators for Selected Countries ...... . . . . . . . . . . . . . 115 5.2 Key Non-Tariff Import Barriers ............................ . 116 5.3 Import Ban on Vessels Replaced by Unclear Licensing and Local Content Guidelines ...................... . 117 5.4 Key Export Barriers ......... .. . .. . .. . . .. . .. . .. . . .. . .. . 118 5.5 Commodity Specific Retribution Tax (Retribusi)- an Inefficient and Distortionary "Tax" .......... . . . . . . . . . . . . . . . 120 5.6 Impediments to Intra-Regional Trade: The Case of Livestock ..... . . . . . 121 5.7 Public Ownership and Regulations Can Have Perverse Effects . .. .. ..... 123 5.8 Forestry: Illustrating the Importance of "Soft" Infrastructure ..... . . . . . 124 5.9 Recent Institutional Developments in Banking .. . . . . . . . . . . . . . . . . . . 127 5.10 Update on Banks' Classified Assets ....... . . . . . . . . . . . . . . . . . . 128 5.11 Capital Market Developments .................... ....... .. . 130 5.12 Consensus Regarding the Importance of Good Governance ..... . . . . . . 132 5.13 Trade Credit in the Village ........ . . . . . .. . . . . . . . . . . . . . .. . 133 5.14 "Good Governance" and Cultural Norms . ...... . . . . . . . . . . . . . . . . 134 5.15 The Company Law, Law No. 1/1995 ....... . . . . . . . . . . . . . . . . . . 136 5.16 Global Developments in Corporate Governance: Implications for Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138 vi Contents Ringkasan Eksekutif vii RINGKASAN EKSEKUTIF A. Kebijaksanaan Ekonomi-Makro dalam negara-negara Asia Timur mungkin saja Mengelola Keberhasilan dan Risiko merembet ke Indonesia. Faktor-faktor yang mengandung risiko antara lain, arus modal 1. Kinerja Umum. Berdasarkan berbagai masuk yang berbalik secara mendadak, risiko indikator makro, perekonomian Indonesia yang semakin besar akibat peningkatan hutang belakangan ini menunjukkan kinerja yang luar negeri Indonesia yang cukup besar, serta sangat baik. PDB meningkat sebesar 7,8% semakin pekanya arus modal global terhadap dalam tahun 1996 dan tingkat inflasi turun perubahan pada berbagai indikator ekonomi. menjadi 6,47%. Investasi langsung dalam negeri dan luar negeri semakin marak. Surplus 4. Kombinasi Keterpaduan fiskal yang cukup besar berhasil dipertahankan Kebiaksanaan Fiskal dan Moneter akan dan meskipun berbunga tinggi percepatan Membantu Perbaikan Kinerja. Keterpaduan pembayaran hutang luar negeri pemerintah kebijakan fiskal dan moneter yang diterapkan terus dilaksanakan. Cadangan devisa resmi saat ini turut menyumbang terhadap naik sebesar $4 milyar selama 1996/97. penyelesaian sebagian masalah diatas. Kebijakan fiskal tetap dijalankan penuh 2. Kendati prestasi yang dicapai cukup tanggung-jawab, sekalipunmenjelangpemilihan meyakinkan, namun perekonomian Indonesia umum. Akan tetapi, pendapatan minyak bumi masih menghadapi berbagai resiko. Di dalam yang lebih tinggi pada tahun fiskal 1996/97 negeri, inflasi dasar (core inflation) masih belum sepenuhnya aman walaupun meningkat cukup tinggi dan harga berbagai komoditas surplus anggaran, sehingga pengeluaran non- yang diatur pemerintah dalam beberapa waktu budgeter (off-budget) hampir tidak mengalami tidak mengalami kenaikan. Deregulasi telah kontraksi. Secara keseluruhan, dampak kehilangan momentumnya. Sektor perbankan kebijakan fiskal hampir identik dengan tahun masih tetap relatif lemah berdasarkan standar fiskal 1995/96, kendati terdapat penerimaan internasional dan konsentrasi di sektor properti minyak bumi yang jauh lebih besar. Instrumen kembali meningkat pesat. utama yang digunakan untuk mengatasi suhu ekonomi (overheating) pada tahun 1996/97 3. Di bidang luar negeri, defisit transaksi ialah suku bunga riil. Dengan meningkatnya berjalan semakin besar, kendati harga ekspor kepercayaan masyarakat, terutama setelah bulan minyak Indonesia di pasar dunia tinggi; Juli, suku bunga tersebut telah menarik arus pertumbuhan ekspor non migas melambat; dan modal masuk yang besar, yang cenderung hutang luar negeri swasta meningkat pesat. mengapresiasi nilai riil rupiah, dan mengurangi Sarnpai tingkat tertentu, perkembangan sektor daya saing Indonesia di luar negeri. luar negeri ini mencerminkan tingginya investasi asing dan kasus khusus lainnya 5. Dengan sedikit penurunan suku bunga (seperti misalnya: penyempurnaan metodologi dan sekaligus perimbangan dengan kebijakan statistik; peningkatan pergerakan nilai kurs fiskal yang lebih ketat lagi, akan mengurangi berbagai mata uang; dan harga komoditas apresiasi, seraya mempertahankan stabilitas ekspor primer yang rendah sekalipun mungkin makro. Instrumen untuk melaksanakan bersifat sementara). Di masa datang, kondisi kebijaksanaan ini juga akan bermanfaat bagi transaksi berjalan akan semakin memburuk, tujuan nasional lainnya, seperti, memperbaiki dan berbagai masalah yang dihadapi oleh metode penilaian dan menaikkan pajak properti viii Ringkasan Eksekutqf (terutama terhadap pemukiman mewah) dari seyogyanya disertai oleh nilai tukar dan pasar tarif yang saat ini berlaku, yakni 0,1% dari uang harus diperkenankan untuk melakukan nilai objek pajak. Hal ini akan mengurangi penyesuaian, dan insentif yang diberikan harus boom di sektor properti, mendukung cuktip kuat. desentralisasi dan mengurangi tekanan prasarana perkotaan. serta memperbaiki 7. Men in gkatkan I n s e n t i f. pemerataan dengan memajaki pemilik properti. Kebijaksanaan deregu lasi mendukung Menaikkan luran Hasil Hutan (IHH) akan pertumbuhan pesat dari kegiatan yang berbasis memberikan kompensasi terhadap pengurasan padat karya telah melamban, dan untuk sumber daya alam dan mendorong perbaikan berbagai bidang tertentu bahkan telah berbalik penanganan hasil hutan yang lebih arah. Telah terjadi kemunduran penjadwalan berkesinambungan. Harga bahan bakar yang penurunan tarif. Masih banyak agenda lebih tinggi untuk menghapuskan subsidi fiskal deregulasi yang belum rampung, seperti akan memperbaiki pemerataan dengan regulasi domestik terus mengurangi efisiensi mengurangi subsidi yang saat ini hanya dan memperbanyak pemerataan antar-pulau. dinikmati oleh 2 juta pemilik mobil, atau Besarnya kenaikan upah minimum yang cukup mereka sekitar 1% dari peniduduk Indoniesia. besar pada tahun-tahun terakhir mengurangi Menaikkan tarif listrik-dan penyesuaian penciptaan lapangan kerja dan ekspor barang struktur tarif-akan niemperbaiki kondisi padat-karya. Kurangnya transparansi dan keuangan PLN dan mengurangi subsidi silang persaingan telah merugikan kinerja berbagai yang tidak efisien; hal ini juga akan sektor seperti prasarana dan pengembangan memudahkan swastanisasi dan mendorong sumberdaya alam. Intervensi ud hoc (yang peningkatan produksi listrik di luar Jawa. semakin meningkat) dan berbagai praktek Selain itu, masih ada peluang untuk menekan lainnya yang semakin disoroti dunia. Apabila pengeluar-an anggaran pembangunaii di sektor momentum deregulasi tidak dipulihkan, telekomunikasi dan pembangkit listrik, dan Indonesia menghaciapi risiko melambannya lebih mendorong peran swasta di kedua-dua pertunmbuhan dan menbul-uknya pemerataan, sektor tersebut. yang meLupakan ciri khas di kebanyakan negara berkembang (bagian E). 6. Memantapkan Daya Tahan Ekonoini. Daya tahan ekonomi yang lebih baik juga akan 8. Pentingnya Bantuan Ltiar Negeri. memperkuat kinerja dan mengurangi resiko Prestasi perekonomian Indonesia pada tahun- yang dihadapi oleh perekonomian. Melebarnya tahun terakhir telah menarik arus masuk modal batas intervensi atas nilai tikar rupiah swasta yang besar. Prestasi ini, anatara lain merupakan alat peredam pasar yang telah teruji mencerminkan keberhasilan strategi padatahun 1996. Pengarmhnon-ekonomidapat pembangunan yang secara eksplisit diredam, perubahan nilai tukar yang relatif mengandalkan sektor swasta seperti yang kecil, tanpa kehilangan cadangan bank sentral, disarankan oleh pihak donor. Meski demikian dan efek yang sangat minimal terhadap jumlah artis dana dari donor hanya dua-puluh perekonomian domestik. Di masa lalu, persen dari dana yang masuk secara kebijakan moneter juga telah bereaksi cepat keselumrhan. Pembiayaan proyek oleh swasta terhadap goncangan dengan menaikkan suku pada umumnya hanya mampu untuk beberapa bunga apabila pelarian modal ke luar negeri sektor prasarana saja. Pihak donor tetap mulai terjadi. Meningkatkan cadangan devisa merupakan satu-sattinya sumber pembiayaan juga banyak berguna. Namun pengalaman yang stabil, bersifat jangka panjang disertai berbagai negara menunjukkan bahwa junilah dengan duknliigan bantuani teknis dan penilaian cadangan yang besar saja tidak cukIup; proyek yang relatif cermat. Lagi pula, Ringkasan Eksekutff ix persyaratan perolehan dana CGI * Perbaikan institusi dan lembaga, termasuk memperpanjang rata-rata jatuh-tempo pinjaman pemerintah. serta meringankan profil kewajiban membayar kembali. 11. Pengalaman di Asia Timur dan di tempat lainnya menunjukkan bahwa bila kinerja 9. Memperhatikan faktor-faktor diatas, lima faktor utama ini menurun, maka dan juga memperhatikan besarnya minat sektor pertumbuhan akan melamban, efisiensi swasta di Indonesia saat ini, sangat disarankan menurun, dan pemerataan memburuk. total komitmen CGI agar besarnya bantuan CGI Misalnya, di Korea dan Indonesia, investasi, tahun 1997 sama seperti pada tahun tabungan dan pertumbuhan sangat rendah sebelumnya. Untuk masa-masa mendatang, hingga saat stabilitas ekonomi-makro pembiayaan swasta yang relatif memadai dipulihkan sekitar akhir tahun 1960-an. Di mempunyai implikasi penting pada bantuan dari Korea pada paruh kedua tahun 1970-an, donor untuk Indonesia. Terutama, peranan intervensi yang memprioritaskan industri padat- swasta menekankan betapa pentingnya bagi modal dan berteknologi tinggi menghasilkan para donor untuk meningkatkan nlutu dan pertumbuhan produktivitas yang rendah dan efektivitas bantuan mereka. ketimpangan yang meningkat. Hal yang sama terjadi di Brazil, yang menerapkan proteksi B. Kesinambungan Pertumbuilian Tinggi yang tinggi, ketidakstabilan ekonomi-makro, dan Memperbaiki Peinerataan dan memprioritaskan pendidikan tinggi-dan bukan pada pengembangan sumber daya 10. Lima Faktor Utama dalam manusia secara luas-turut memperburuk Mempertahankan Pertiimbtihan Tinggi dan kinerja dan ketimpangan pada tahun 1980-an. Memperbaiki Pemerataan. Memahami Dengan demikian, untuk kasus Indonesia pengalaman di sekitar wilayah ini, banyak kelima faktor tersebut diatas memberi analis sepakat bahwa lima hal mendasar yang sumbangan besar dalam mempertahankan menentukan pertumbuhan tinggi dengan terhadap pertumbuhan ekonomi yang tinggi dan pemerataan di Asia Timur ialah: perbaikan pemerataan di masa datang. * Dasar-dasar ekonomi-makro yang sehat, 12. Tentu saja, masa depan bisa berbeda termasuk penyesuaian yang cepat untuk dari masa lalu; tantangan-tantangan baru bisa meredam terhadap goncangan; mengancam kemampuan Indonesia untuk tumbuh pesat dan memperbaiki pemerataan. * Tingginya Investasi dan tabungan dalam Tantangan-tantangan tersebut termasuk: negeri, yang mencerminkan dasar-dasar globalisasi, langkanya ketrampilan, penduduk ekonomi-makro yang sehat dan tingginya berusia lanjut, pengur-asan sumberdaya alam, tingkat tabungan pemerintah; perusakan lingkungan, dan kurangnya prasarana uintuk memelihara pertu mbuhan * Kuatnya pengembangan sumber daya pesat, terutama di daerah-daerah perkotaan. manusia yang kuat yang mendorong Dalam banyak hal, menghadapi tantangan- naiknya upah, berkurangnya laju tantangan itu akan bergantung pada pertumbuhan penduduk dan perbaikan penyempurnaan pelaksanaan kelima faktor kedudukan wanita; diatas, yang telah bermanfaat bagi Asia Timur dan Indonesia. Misalnya, globalisasi berarti * Lebih besarnya perhatian terhadap bahwa lebih banyak negara yang akan bersaing persaingan internasional dan berkurangnya untuk menguasai pasar dan investor asing, dan campurtangan terhadap pasar dibandingkan arus modal akan semakin peka terhadap "kabar dengan kebanyakan negara lain. dan, burukk". Fondasi ekonomi-makro yang sehat, x Ringkaxan Eksekutif penyesuaian cepat terhadap goncangan dan mengandalkan aturan main yang transparan dan pengembalian momentum deregulasi masih bersaing untuk memastikan pelayanan jasa belum mampu membantu menghadapi dengan harga wajar (misalnya, di bidang tantangan-tantangan tersebut diatas (bagian A pembangkit tenaga listrik, telekomunikasi, dan dan bagian E). Perbaikan sumberdaya manusia jalan-jalan tol). Pada bidang di mana minat akan sangat menentukan bagi peningkatan swasta terbatas, pemerintah dapat menyusun ketrampilan, bagi kenaikan penghasilan buruh, kembali cara pelaksanaannya dan menaikkan dan memenuhi kebutuhan penduduk Indonesia aanggaran supaya pelayanan semakin baik berusia lanjut atas jasa pelayanan kesehatan (misalnya, menyempurnakan pelayanan yang lebih baik (Lihat bagian C). Akan tetapi pendidikan dan kesehatan; bagian C). tantangan itu juga menyiratkan adanya peluang. Kebutuhan prasarana fisik semakin besar, Komitmen Indonesia didunia international terutama di daerah perkotaan (bagian D). seperti memantapkan suatu perekonomian yang Tetapi mempertimbangkan tersedianya sumber lebih dapat diperkirakan, terbuka dan bersaing, dana diperlukan, dan konsisten dengan dan memberikan lebih banyak kepastian bagi kebijakan fiskal yang lebih ketat. Contohnya: investor-investor yang potensial. Penduduk penerimaan dari swastanisasi dan pembayaran berusia lanjut juga berarti lebih banyak dari konsesi; perpajakan yang lebih baik tabungan, apabila dapat dirancang skemna (mnisalnya pajak properti yang lebih tinggi dan pensiun yang cukup baik. penilaian yang lebih baik); dan penghapusan subsidi baik secara eksplisit maupun secara 13. Membangun Kelembagaan. implisit (penentuan harga masukan di bidang Perbaikan kelembagaan, terutama untuk industri, konsumsi minyak tanah dan pupuk). mengelola hubungan pemerintah-swasta, sangat Di samping itu, pemberian wewenang untuk menentukan dalam mengatasi tantangan- pembelanjaan, pengenaan pajak dan tantangan baru terhadap pertumbuhan tinggi tanggungjawab kepada pemerintah daerah diiringi dengan pemerataan tinggi. Dalam dalam pengadaan barang-barang publik yang artian pemberian insentif, Pemerintah dapat lebih responsif terhadap kebutuhan lokal. mendorong ekonomi kearah yang lebih efisien dan lebih merata. Hal ini bukan saja 15. Skenario Perttiinbuhan Tinggi dan memperbaharui momentum terhadap deregulasi Perbaikan Pemerataan. Penekanan terhadap perdagangan, tetapi juga menerapkan peraturan kelima faktor seperti disebutkan di atas, akan yang lebih transparan dan kompetitif dalam mempertahankan pertumbuhan pendapatan berusaha, konsesi di bidang prasarana (bagian masyarakat dan penciptaan lapangan kerja, D), sumberdaya alam (bagian E), dan termasuk juga pertumbuhan di Kawasan Timur mengatasi kendala-kendala perdagangan Indonesia. Hal ini nantinya akan mengurangi domestik (bagian E). Lebih luas lagi, kepincangan pendapatan yang timbul karena keinginan untuk menciptakan pemerintahan dan perilaku mencari keLintungan berlebihan (rent- sistim hukum yang lebih baik akan mendorong seeking) dan alokasi kekayaan yang tidak penurunan ekonomi biaya tinggi dan transparan dan bersaing. Seandainya Indonesia penciptakan iklim kepastian dalam pemnanfaatan mengalami pertumbuhan rata-rata 7,5% per sumberdaya masyarakat. tahun sampai tahun 2005, maka PDB per kapita akan menjadi lebih dua kali lipat (lebih dari 14. Penyempurnaan manajemen kerjasama $2300). Indonesia akan termasuk salah satu antara publik-swasta termasuk peninjauan dari 20 ekonomi terbesar di dunia. Sejalan kembali pemanfaatan pengeluaran pemerintah. dengan kecenderungan di seluruh dunia, Bila minat swasta meningkat, maka peran pertumbuhan Indonesia akan berbasis pemerintah dapat dikurangi, dengan perkotaan. Produksi barang primer akan terus Ringkasan Eksekutif xi menurun sebagai proporsi PDB, dan sekitar 18. Pertumbuhan yang lamban kelihatannya separuh dari jumiah 220 juta penduduk mencerminkan ketidak-inginan pergeseran Indonesia akan tinggal di wilayah perkotaan, alokasi sumberdaya ke arah yang lebih padat- dibandingkan dengan kurang dari sepertiganya modal dan pemaksaaan substitusi impor seperti pada tahun 1990. lnvestasi perkotaan dan model yang dianut oleh sejumiah negara di aktivitas lingkungan akan lebih mendorong masa lalu. Dalam kasus ini, program peranan Jabotabek sebagai motor pertumbuhan pemerataan tidak akan tercapai, karena hasil yang kuat. Dengan jumlah pendududuk sekitar dari pertumbuhan ekonomi akan jatuh pada 25-30 juta, Jabotabek akan merupakan sebagai segelintir manusia dengan hak istimewa yang salah satu wilayah metropolitan terbesar di terlibat dalam industri yang diproteksi atau dunia. Melanjutkan kecenderungan yang mempunyai akses terhadap dukungan pertumbuhan dewasa ini, penghasilan buruh Pemerintah. Dampak dari ketidaktepatan akan naik hampir sama cepatnya dengan PDB alokasi sumberdaya seperti itu akan menaikkan per kapita, dan hal ini tentu akan diikuti biaya dan mengurangi daya saing di berbagai dengan pertumbuhan ekonomi di wilayah luar sektor ekonomi, terutama untuk daerah-daerah pulau Jawa. di luar Jawa. Lambannya pertumbuhan permintaan tenagakerja akan memperlambat 16. Rezim perdagangan dan investasi yang laju penyerapan tenaga kerja sektor formal dan tidak diskriminatif, bersamaan dengan mengurangi pemercepatan kenaikan gaji rata- peningkatan sumber daya manusia dan modal rata. Melihat pengalaman negara lain, upaya- fisik, akan memacu ekspor. Sebagai upaya untuk menyalurkan sumberdaya konsekuensi dari kebijakan ini, Indonesia akan keuangan ke perusahaan-perusahaan yang tidak naik setingkat dengan menghasilkan barang kompetitif dan berbiaya tinggi, dapat ekspor dengan nilai-tambah lebih tinggi, meningkatkan ketidakstabilan dalam sistem kejenjang yang saat ini didudutki Thailand dan keuangan dan bahkan menyebabkan pembayar Malaysia. Tumbuhnya modal manusia dan pajak enggan melaksanakan kewajibannya. barang modal serta ketrampilan bisnis-dan bukannya proteksi yang menyebabkan C. Mengatasi Tantangan Sumberdaya inefisiensi-akan dapat mendukung Maiiisia pertumbuhan teknologi dan kegiatan prodLuksi padat-modal. 19. Sektor swasta dan pemerintah sepakat bahwa peningkatan pengembangan sumberdaya 17. Skenario Pertumbtuhan 5%. manusia sangat penting artinya bagi Sebaliknya, pergeseran kebijaksanaan yang pembangunan Indonesia. Pelayanan yang dapat menurunkan produktivitas nasional, akan efektif atas jasa-jasa sumberdaya manusia memperlamban pertumbuhan ekonomi sampai penting artinya bagi program pengurangan sepertiganya, yaitu sekitar 5% per tahuLn. kemiskinan dan pembangunan regional. Pertumbuhan yang jauh lebih rendah daripada Misalnya, pelayanan kesehatan dasar ini untuk jangka panjang tampaknya tidak merupakan sarana yang sangat efektif untuk mungkin; mengingat pertumbuhan yang terjadi menyebarkan manfaat pembangunan sampai dewasa ini. Namun, pertumbuhan 5% per kepada kelompok termiskin dalam masyarakat. tahun tidaklah menggembirakan. Dengan Pendidikan juga mermpakan salah satu jalur pertumbuhan sebesar itu sampai dengan tahun penyelamatan terbaik dari kemiskinan, karena 2005, pendapatan per kapita akan lebih rendah peningkatan pendidikan secara mendasar akan 20% dibandingkan pertumbuhan 7,5% per menaikkan pendapatan buLuh. tahun, yang berarti dana yang tersedia untik program-program sosial akan berkurang. xii Ringkasan Eksekutif 20. Program Lintas Sektoral Perbaikan menyentuh orang miskin, dan masalah-masalah Pelayanan Pendidikan dan Kesehatan. pada tingkat dasar berkembang terus ke atas Pertama, meningkatkan pelayanan dasar baik melalui sistem yang ada. Unsur-unsur penting kualitas maupun kuantitas, terutama untuk di sini yaitu mencakup peningkatan pola daerah miskin dan daerah terpencil. Kedua, pengajaran dan alokasi guru. Lagi pula, diperlukan lebih banyak pembiayaan, akan hambatan-hambatan perlu diatasi untuk tetapi upaya menambah dana saja tidak cukup; penambahan waktu belajar di ruang kelas bagi disertai dengan perubahan penting dalam kelas I dan 2, dikoordinir dengan program kelembagaan dan kebijakan, bahkan lebih penyediaan makanan di sekolah untuk penting lagi bagi tercapainya pembelanjaan meningkatkan rentang waktu perhatian dan yang efektif. Misalnya, pelatihan guru akan memperbaiki pemerataan. cenderung sia-sia tanpa adanya reformasi dalam pengaturan kelembagaan untuk penempatan dan 23. Program-programpemerintah mengenai tanggungjawab guru. Ketiga, sektor publik pendidikan dasar 9-tahun memberi harapan perlu meninjau sasaran pelayanan, ke arah akan peningkatan kualitas pendidikan di masa pelayanan pokok bagi kelompok miskin dan depan. Namun untuk itu sangat diperlukan menghindari pelayanan yang mampu disediakan sumberdaya yang jauh lebih banyak, dan pihak swasta. Keempat, salah satu alat yang bahkan nenbuittuhkan peran sektor swasta yang cukup handal adalah desentralisasi semakin besar. Untuk membatasi biaya dan tanggungjawab yang lebih besar lagi ke tingkat memnaksiimalkan pemerataan, pilihan pemerintahan yang lebih rendah, didukung oleh kebijaksanaan pendidikan dipastikan dapat perubahan dalam pengaturan fiskal dan menjangkau daerah-daerah miskin dan kelembagaan secara seimbang baik wewenang terpencil, dan menghindari ketidak-efisienan. dalam menyelenggarakan sendiri matipun Selain itu, sangat diperlukan upaya untuk tanggungjawab. mengulrangi jumiah siswa putus-sekolah pada tingkat dasar. 21. Pendidikan. Kemajuan Indonesia di bidang pendidikan hanya tertandingi oleh 24. Kelemnahan kelembagaan dapat beberapa negara saja. Akan tetapi, sejak dikur angi dengan mnengalihkan lebih banyak pertengahan 1980-an, laju prestasinya tanggLingjawab dan per-tanggungjawaban kepada melamban. Yang sangat mnengkhawatirkan tingkat pemerintahan yang lebih rendah, dan adalah kualitas pendidikan yang tidak berubah mendefinisikan secara tegas peran dari badan atau cenderung menurun. Hal ini dapat dilihat pemerintah pusat. Beberapa prinsip pemerintah dari menurunnya jumiah pendaftaran murid yang sudah dilaksanakan untuk tingkat sekolah lanjutan tingkat pertama pada akhir pendidikan tinggi, dapat diterapkan pada tahun 1980-an, yang menimbulkan keraguan tingkat pendidikan dasar. mengenai pencapaian tahap perkembangan selanjutnya. Pada tingkat sekolah lanjutan, 25. Dalamn jenjang pendidikan menengah, pertumbuhan partisipasi pihak swasta perlu pemerintah merencanakan untuk meninjau mendapat respon pemerintah yang lebih kembali peranannya. Peran swasta diharapkan mendalam lagi. akan menjadi semakin penting, dan prinsip- prinsip "paradigma baru" Pemerintah dirancang 22. Peningkatan mutu yang bernas untuk memanfaatkan perkembangan ini. merupakan prioritas utama, terutama pada Pemerintah perlu melaksanakan rencana- tingkat pendidikan dasar. Sekolah dasar rencana tersebut dengan tegas. Di sekolah mendidik mayoritas penduduk. Sekolah- kejurtian dan sekolah teknik, Pemerintah juga sekolah itu merupakan sarana terbaik dalam perli memberi peluang kepada sektor swasta, Ringkasan Eksekutif xiii dan meningkatkan perannya sendiri sebagai 29. Pelayanan kesehatan oleh swasta dapat sumber informasi/peraturan, mengurangi biaya berperan lebih besar dengan didukung oleh program-programnya. kebijakan-kebijakan pemerintah yang disempurnakan. Permintaan akan pelayanan ini 26. Sejumiah perbaikan-perbaikan tersebut akan terus tumbuh pesat sebagai akibat dari memerlukan biaya yang mahal. Akan tetapi- naiknya penghasilan rumahtangga dan arus dengan keberlanjutan pertumbuhan ekonomi urbanisasi. Pemerintah perlu memprakarsai yang tinggi-perbaik- kebijakan-kebijakan untuk mendukung an akan terjangkau melalui upaya prioritas dan pelayanan bermutu tinggi oleh swasta; pentahapan kegiatan. Seandainya pertumbuhan dukuingan keuangan pemerintah sebaiknya ekonomi mengalami penurunan yang cukup minimal, karena pengguna jasa ini marnpu besar, maka program ini akan dijadikan sebagai membayar sendiri. Desentralisasi yang terus prioritas tinggi yang diberikan pada dilanjutkan (misalnya, mencakip keputusan pengeluaran sektor pendidikan. perencanaan dan kepegawaian) juga diperlukan untuik meningkatkan efektivitas dan mutu 27. Kesehatan. PertumbuLhan ekonomi pembelanjaan sektor pemerintah. yang pesat, banyaknya penduduk lanjut usia, Tanggungjawab yang jelas dan insentif yang dan kebijakan-kebijakan baru pemerintah, lebih kuat diperlukan untuk semaksimal mengakibatkan meningkatnya permintaan akan mungkin memanfaatkan wewenang yang lebih pemeliharaan kesehatan. pembiayaan kesehatan, luas di daerah yang lebih luas dan fasilitas pengeluaran dan pelayanan jasa. Pada pengambilan keputtisan manajemen yang lebih umumnya, kebijakan-kebijakan sektoral telah besar. bergerak ke arah yang benar, akan tetapi kebijakan-kebijakan itu perlu diperkuat dan D. Membanigun Prasarana Fisik dipercepat. Untuk itu sangat diperlukan inovasi dalam keuangan sektor publik dan 30. Prasarania fisik yang lebih baik insentif, serta perbaikan mutu jasa pelayanan merupakan kunci lainnya bagi masa depan sektor publik mauptin sektor swasta. Indoniesia. Ada tiga bidang yang terpenting, adalah pembangkit listrik, prasarana perkotaan 28. Prioritas utama perlu diberikan pada (pengadaan air dan penyaluran imbah, drainase pelayanan pengobatan dasar kepada orang dan pengelolaan limbah padat), dan miskin. Dalam kasus umumnya, jasa publik transportasi. merupakan sarana utama pelayanan kesehatan masyarakat dalam waktu yang akan datang. 31. Masalai-inasalah Lintas Sektoral. Pengeluaran pemerintah unttik pelayanan- Mengandalkan lebih banyak lagi pada sektor pelayanan dasar sebagai persentase PDB periu swasta akan memberikan banyak keuntungan. ditingkatkan. Akan tetapi, seperti halnya Namun keLintungan tersebut tergantung pada dalam banyak sektor lain, peningkatan penerapan kerangka yang transparan dan pengeluaran saja tidak akan cukup. Perubahan kompetitif untuk penjualan aset dan konsesi. kelembagaan sangat diperlukan untuk mencapai Kegagalan dalam menangani masalah ini pengelolaan secara umum dan penyelenggaraan mengandung risiko biaya-tinggi (misalnya, pelayanan yang lebih baik; untuk meningkatkan dalam pembangkit tenaga listrik dan jalan tol). insentif dan ketrampilan para profesional Potensi kenaikan biaya akan sulit diserap, dan kesehatan di sektor publik, dan pelayanan yang akan memperlamban pertumbuhan serta lebih berkualitas di Puskesmas-Ptiskesmas. niengu -angi daya saing internasional. xiv Ringkasan Eksekutif Pengalaman di seluruh dunia menyimpulkan Kemudian rincian perumusan dan pelaksanaan bahwa tidak adanya transparansi, kurangnya kebijakan dapat diserahkan kepada pemerintah persaingan, tidak-adilnya transaksi, dan pilih- daerah. Otonomi keuangan yang lebih besar kasih (favortism), akan mengurangi manfaat akan dapat membantu kemampuan pemerintah bagi masyarakat, serta mengancam proses daerah untuk menyampaikan pelayanan. Hibah swastanisasi, dan bahkan menggerogoti proses- dan pinjaman yang lebih besar akan membantu, proses reformasi pada umumnya. akan tetapi kuncinya ialah dasar penerimaan berkelanjutan yang lebih besar melalui pajak properti yang lebih tinggi, peningkatatn 32. Re-regulasi tampak meningkat, penerimaan daerah dan biaya penggunaan terutama di bidang transportasi. Berbagai fasilitas. Undang-Undang baru tentang Pajak keluhan timbul berkaitan dengan keterlambatan dan penerimaan daerah merupakan langkah di pelabuhan pada pelayanan bea cukai, bahkan baik ke arah itu. terjadi sebelum penyerahan jasa pemeriksaan pra-pengapalan. Ada saran untuk menyalurkan 35. Sektor Pembangkit Tenaga Listik: semua muatan luar negeri melalui Batam. Tarif; Kelebihan Kapasitas Pembangkit Mulai ada tekanan untuk melakukan re-regulasi Listrik; dan Pengelolaan Partisipasi Swasta. pelayaran, dan pembatasan impor kapal yang Sejak tahun 1980-an, PLN telah meraih diperlunak pada pertengahan 1996 telah sejumlah keberhasilan. Penjualan meningkat berbalik dengan cepat. dengan 14-15% per tahun, mutu pelayanan telah diperbaiki, dan listrik desa telah tersebar 33. Kelemahan kelembagaan pada luas. Kapasitas pembangkit tenaga swasta perencanaan strategik, sumberdaya manusia, dalam jumlah besar (sama dengan kapasitas pengadaan dan pembuatan kontrak merupakan PLN sendiri) akan mulai beroperasi beberapa masalah yang umum ditemui. Di bidang tahun lagi, dan saat ini sedang berlangsung perencanaan strategik, lembaga-lembaga persiapan untuk swastanisasi parsial. PLN Pemerintah RI telah memperagakan bahwa tidak lagi merupakan badan usaha yang merugi, mereka efektif dalam hal proyek-proyek walaupun keterlambatan dalam penyesuaian tambahan (incremental), akan tetapi lemah tarif belum lama ini mengurangi kesehatan dalam perencanaan jangka panjang dan keuangannya. perencanaan investasi, khususnya yang mempunyai implikasi lintas-sektoral. Masalah- 36. Perkembangan sektor ini, ditambah isu masalah ini kebanyakan disebabkan oleh yang dalam struktur tarif, menimbulkan fragmentasi kelembagaan antara wewenang sejumlah masalah yang mendesak. Kenaikan pemerintah dan badan-badan pemerintahan, tarif diperlukan semata-mata untuk memulihkan yang seringkali mempunyai mandat yang profitabilitas PLN pada tingkat yang wajar, tumpang-tindih dan tanggung jawab yang untuk menghindari krisis likuiditas dan injeksi kurang jelas. dana baru dari publik serta menghindari pinjaman, dan mempersiapkan dalam rangka 34. Desentralisasi wewenang yang lebih swastanisasi PLN. Mekanisme penyesuaian besar kepada pemerintah daerah atau kepada tarif secara mutlak perlu diperbaharui, agar badan-badan pemerintahan, diiringi oleh dapat menutup biaya. Kebijakan tarif semakin lebih besar peran sektor swasta, kebijaksanaan yang seragam secara nasional dalam peningkatan pelayanan jasa. Dalam menaikkan biaya listrik bagi pemakai jaringan kebanyakan hal, pemerintah pusat perlu untuk Jawa-Bali untuk mensubsidi silang pemakai lebih memusatkan perhatian pada penetapan listrik di luar pulau Jawa. Subsidi pemerintah kerangka kebijakan, paket anggaran, standar untuk tujuan nasional ini jelas akan penilaian hasil dan petunjuk pelaksanaan. Ringkasan Eksekutif xv meningkatkan daya saing Indonesia, membantu pembangunan pembangkit tenaga listrik baru swastanisasi dan memberikan insentif yang sebaiknya ditunda, untuk menghemat dana lebih besar pembangkit tenaga listrik di luar pembangunan. Dengan deregulasi gas alam pulau Jawa. memungkinkan mempercepat penyediaan bahan bakar yang bersih lingkungan, menghemat 37. Kapasitas pembangkit tenaga sudah penggunaan cadangan minyak, dan untuk jauh melebihi beban puncak jaringan Jawa-Bali pembangkit tenaga listrik. Dilihat dari dan faktor muatan kapasitas (capacity load kelebihan kapasitas yang ada, listrik tenaga factor) telah menurun. Keadaan ini antara lain nuklir pada saat ini tidak diperlukan, dan mencerminkan kekurangan investasi di bidang mungkin dalam jangka panjang, dan karena transmisi dan distribusi, yang menyebabkan mengandung ketidakpastian dan bahaya pada pemadaman listrik total dan pemadaman listrik lingkungan yang ditimbulkannya. Pada pihak sebagian (brown-oult) sehingga banyak lain, peningkatan anggaran pemerintah pada konsumen terpaksa memilih pembangkit tenaga transmisi dan distribusi akan membuahkan sendiri. Pembangkit "Super-Crash Progrum" banyak keuntungan. Upaya dalam kegiatan ini PLN hampir selesai, namun biayanya akan dapat dilakukan dengan melibatkan parsipasi tinggi selama kontrak pengadaan gas belum pihak swasta. dinegosiasikan. Kapasitas swasta dalam jumlah besar segera akan beroperasi, kebanyakan 39. Jasa prasarana perkotaan semakin tidak unsolicited, dan melibatkan negosiasi perjanjian memadai. Pembelanjaan pemerintah di bidang take-or-pay dengan harga di atas tarif rata-rata ini terus menulun dibawah target. Dengan PLN saat ini. Akibatnya, kenaikan tarif akan tingkat uLbanisasi yang tinggi, kemacetan lalu diperlukan untuk menutup biaya kapasitas dan lintas dan masalah-masalah lingkungan hidup, mungkin akan peuii mengurangi sebagian mendorong naiknya biaya dan mnenghambat kapasitas PLN yang relatif murah demi untuk pertumbuhan. Semnentara itu, pengadaan menampung kontrak-kontrak swasta. pelayanan jasa perkotaan yang memadai adalah mutlak diperlukan untuk terus mengurangi 38. Mengelola Kerjasamna Pemerintahi- kemiskinan. Masalah dalam pengadaan air Swasta. Dengan memnperhitungkan proyek- bersih di perkotaan juga merupakan masalah proyek yang sudah disetujui belakangan ini dan sangat menonjol ditemui. Indonesia masih yang sedang dalam tahap negosiasi, kenaikan tertinggal jauh dibanding negara-negara lain kapasitas tenaga listrik diperkirakan akan yang setara tingkat ekonominya, dan beresiko memenuhi permintaan hingga tahun 2006. menghadapi isU-isu kesehatan, terutama Dengan demikiar. kapasitas pembangkit baru kesehatan bagi pendudtik miskin. baik oleh pemerintah maupun swasta, sebaiknya dibatasi. Kerjasama dengan 40. Pembiayaan yang lebih banyak perusahaan swasta perlu memnpertimbangkan merupakan prioritas untuk menghindari resiko kelebihan kapasitas. Setiap proyek baru masalah prasarana perkotaan. Akan tetapi, sebaiknya dipersiapkan dengan cermat, untuk seperti di kebanyakan sektor lainnya, uang memaksimalisasi efisiensi, baik dilihat dari yang lebih banyak saja tidak cukup; kebijakan kebutuhan bahan kabar maupun perimintaan yang lebih baik dan pengaturan kelembagaan jaringan, dan proyek baru tersebut harislah yang diperbaiki juga diperlukan. Desentralisasi transparan, melaIlui prosedur tender yang digabung dengan peningkatan sumberdaya bersaing sejalan dengan pelaksanaan (pajak properti yang lebih tinggi, tarif pengumuman pemnerintah baru-baru ini. konsumen dan hibah) akan menyediakan Pengeluaran pemerintah untuk pemnbangkit padanan biaya dan nianfaat yang lebih baik dan tenaga listrik sebaiknya dikurangi, penyampaian pelayanan yang lebih baik. xvi Ringkasan Eksekut#f Sebagaimana telah disebut, Undang-Undang 43. Untuk pembangunan jalan perkotaan baru mengenai Pajak dan Pendapatan Daerah khususnya konstruksi dan pengoperasian jalan merupakan awal baik ke arah ini. Dengan tol yang memerlukan jasa pelayanan swasta, sumber penerimaan berkelanjutan yang lebih sangat perlu dilakukan proses tender yang tinggi, maka tiap pemerintah daerah akan transparan dan bersaing. Seperti halnya di mampu memperoleh pinjaman untuk sektor lain, peran sektor swasta dapat lebih pembelanjaan barang modal. besar, jika proses kontrak dan konsesi dapat diperbaiki. Langkah penting lainnya adalah 41. Pengadaan yang lebih bersaing, dengan kebijakan penentuan harga yang lebih baik, insentif untuk penghematan biaya, akan misalnya penentuan harga untuk mengurangi menghemat dana. Perusahaan-perusahaan Air kemacetan dan penetapan biaya parkir yang Minum Daerah perlu dikonsolidasi atau lebih tinggi di kota-kota besar untuk menutup dikelompokkan ke dalam suatu konsorsium seluruh biaya pemeliharaan dan pengoperasian untuk mencapai skala ekonomis dan untuk jalan. Pelaksanaan penghapusan bertahap menyempurnakan pengelolaan sumber waduk pemakaian bensin yang mengandung timah di air. Kenaikan tarif dan pengurangan kerumitan seluruh Indonesia akan memperbaiki tarif akan membantu perusahaan dalam kesejahteraan dan mengurangi biaya kesehatan. pengadaan air dan menghilangkan non- Deregulasi lebih lanjut untuk pelayanan transparansi yang menaikkan harga pemakaian transportasi bus umum juga akam sangat air oleh konsumen. Kerugian akibat dari membantu. Akhirnya, pengelolaan lalu-lintas penagihan dan kebocoran air perlu diperbaiki yang disempurnakan dan pemusatan investasi perusahaan dapat menyediakan sumberdaya pemerintah untuk mengatasi hambatan yang lebih besar dan melayani lebih banyak paling gawat akan membantu mengurangi biaya konsumen. Partisipasi swasta dalam bidang ini kemacetan dan polusi. perlu dapat ditingkatkan, walaupun manfaatnya hanya akan dinikmati masyarakat apabila 44. Untuk jalan-jalan antar kota, pengusahaannya melalui kerangka usaha yang pemecahannya lebih konvensional, yaitu: bersaing dan transparan. pendanaan lebih banyak; memperluas peran sektor swasta secara lebih transparan; dan 42. Transportasi. Sampai saat ini, total kapasitas penyerapan kelembagaan yang lebih kapasitas transportasi telah mengimbangi baik, terutama tender yang lebih bersaing dan permintaan yang meningkat, walaupun integrasi pelayanan jasa (misalnya, jaringan kemacetan lalu lintas mulai menimbulkan jalan tol dan bukan tol dan jasa pelayanan masalah di daerah-daerah yang telah mengalami kereta-api yang bersaing). Di bidang pertumbuhan ekonomi pesat. Biaya di sektor perkereta-apian, yang mempunyai masa depan pengangkutan terus didorong oleh pengadaan cerah mengingat kepadatan penduduk di Jawa, yang tidak bersaing dan tidak transparan oleh pemerintah telah melancarkan suatu program Badan Usaha Milik Negara dan oleh reformasi, yang memerlukan pelaksanaan yang keterlambatan pembayaran kepada kontraktor kuat. Usulan-usulan yang tidak diminta (yang mereka imbangi dengan menaikkan (unsolited) dari pihak-pihak yang mempunyai penawaran). Biaya-biaya juga terdorong naik koneksi baik jangan sampai menggagalkan oleh peraturan tentang pengadaan yang rencana pelaksanaan. Untuk transportasi laut, mencegah pemakaian pemasok dengan biaya yang masih menjadi keprihatinan adalah re- rendah dan oleh sejumlah tarif resmi dan tidak regulasi dan hambatan birokrasi; pemantauan resmi-yang dibebankan dalam perpindahan cermat akan keberhasilan sistem bea cukai yang barang. baru memerlukan perhatian khusus. Fasilitas Ringkasan Eksekutif xvii dan peraturan pelabuhan, di samping peraturan sebaiknya disesuaikan dengan jadwal yang pelayaran dan pembatasan impor kapal, sudah direncanakan, dan memang, terlihat cenderung menaikkan biaya pelayaran antar- tanda-tanda menggembirakan mengenai hal ini pulau, dengan demikian memperlambat proses yang diharapkan akan diumumkan sekitar integrasi nasional dan membatasi prospek pertengahan tahun 1997. Apabila pelaksanaan pembangunan di luar Jawa. pemotongan tarif sudah sesuai dengan jadwal, langkah selanjutnya adalah mempersiapkan E. Membangun Prasarana Non Fisik pelaksanaan pemotongan tarif sampai tahun 2003-tanpa menyerah terhadap tekanan untuk 45. Kelanjutan perbaikan prasarana non- penangguhan selektif atau pengecualian-hal ini fisik (yaitu kebijaksanaan dan kelembagaan akan mempunyai arti penting bagi persaingan dalam bidang lingkungan) adalah mutlak dunia internasional dan kepastian investor. diperlukan dalam persaingan internasional, pertumbuhan pesat dan pemerataan yang 48. Kelanjutan agenda deregulasi meningkat. Perhatian akan prasarana lunak ini perdagangan yang belum rampung juga akan antara lain mencakup: kerangka insentif yang membantu memperbaiki daya saing dan mendorong persaingan antara para produsen; pendapatan. Misalnya, masih ada pembatasan perjanjian kerjasama dan konsesi yang kuantitatif yang cuktip berarti terhadap impor, transparan; dan masalah-masalah kinerja termasuk sejumlah produk pertanian. Cukup pemerintah serta sistem huktim. Selain itu, banyak jenis ekspor non-migas yang dikenakan dalam peraturan perdagangan internasional dan berupa pajak atau pembatasan. Bila hal domestik, ketidakpastian iklim uisaha dan tersebut dihapuskan, ekspor non-migas dan kerangka hukum, serta intervensi ud hoc oleh efisiensi akan lebih terpacu. Harga yang lebih pemerintah, bertentangan dengan efisiensi, rendah bagi sejumlah produk pertanian, seperti persaingan internasional dan pemerataan. gula dan gandum, akan menyediakan masukan (input) yang lebih murah bagi agro-industri dan 46. Memulihkan Momentium Deregiilasi meningkatkan upah riil dan pemerataan. Di Perdagangan Internasional. Tampaknya samping itu, pengurangan tarif terhadap produk besarnya perhatian menarik kebijakan Mobil kendaraan, bahan kimia, produk-produk logam Nasional sangat erat kaitannya dengan dan komoditi pertanian akan meningkatkan deregulasi di bidang perdagangan internasional efisiensi dan pertumbuhan produktivitas. yang diumumkan pada tahun 1996. Di Akhirnya, pemajakan barang yang digunakan antaranya, yang paling penting adalah Paket oleh konsumen berpenghasilan tinggi-seperti Tarif bulan Juni. Juga pada tahun yang sama, mobil atau barang yang dari segi sosial kurang ada kelonggaran impor kedelai, kapal diinginkan, seperti alkohol, akan lebih efektif penangkap ikan bekas, dan sembilan kode tarif jika pajak ditingkatkan, bukan tarif. Tujuan lainnya. Sayangnya telah terjadi penyimpangan sosial lainnya juga merupakan hal yang tidak dalam pelaksanaan sebagian kebijakan ini. kalah pentingnya jika barang itu diproduksi di Misalnya, sekitar 800 di antara pemotongan dalamn negeri. tarif yang diumUrmkan tidak dilaksanakan sesuai rencana. Demikian pula beberapa bLIlan setelah 49. Memacu Deiegulasi Domestik. pengumuman pembatasan impor kapal nelayan Meskipun berbagai upaya telah dilakukan, bekas, regulasi kandungan lokal yang tinggi namun masih kurang besar hasil yang dicapai diberlakukan. akibat pembatasan perdagangan, tarif dan pungutan di pasaran domestik. Usaha untuk 47. Untuk dapat memanfaat momentum memperbaiki masalah rumit ini dapat dimulai yang ada, pelaksanaan penurunan tarif melalui menghapus pembatasan perdagangan xviii Ringkasan Eksekutif antar-pulau, yang cenderung menurunkan harga dibandingkan dengan pinjaman total kredit; ekspordi kawasan Indonesia yang lebih miskin. beberapa bank telah memperbaiki Demikian pula, retribuvi pajak dan pembatasan manajemennya; dan sumber baru (misalnya, perdagangan pertanian mengakibatkan harga- reksa dana atau open-ended mutualfunds) juga harga yang diterima oleh petani menjadi lebih semakin terbuka pilihan dipasar modal semakin rendah dan harga konsumen menjadi lebih besar persaingan pada sektor moneter. tinggi, yang mengurangi penghasilan riil para Meskipun demikian, berdasarkan standar baku petani dan di luar pulau Jawa. internasional sektor keuangan Indonesia masih relatif lemah, yang menambah biaya perantara 50. Mengelola sumberdaya alam keuangan. Ada kekhawatiran bahwa sistem Pemerintah menghadapi sejumlah tantangan. keuangan, yang ada sekarang ini tidak Ancaman kekurangan, kerusakan sumberdaya berfungsi sebagai alat peredam yang memadai alam, seperti minyak bumi, hutan dan air. dikala terjadi goncangan ekonomi-makro. Perusakan lingkungan hidup telah menjadi masalah. Pemerintah juga bertanggungjawab 52. Berdasarkan perbaikan yang dicapai untuk memastikan bahwa masyarakat pada belakangan ini, berbagai strategi baik dapat umumnya, termasuk generasi-generasi yang membantu mengatasi kelemahan sistem akan datang-bukan segelintir manusia keuangan. Di pihak Bank Indonesia, pribadi-memperoleh manfaat dari pengawasan yang lebih ketat sangatdiperlukan, sumberdaya-sumberdaya milik bangsa ini. termasuk batasan-batasan dalam rangka Pemerintah telah memberi respon dengan intervensi Bank Indonesia terhadap bank-bank sejumiah kebijakan, antara lain pelelangan yang (misalnya, untuk dukungan likuiditas berjangka cukup transparan bagi konsesi dalam hal pendek dan untuk mempermudah merger, minyak bumi, hingga pajak dan iulan pengambilalihan, dan penutupan). Bagi bank- (royalties) sebesar kurang lebih 10% dalam hal bank pemerintah, diperlukan dukungan politik kehutanan dan pertambangan, kebijakan yang tingkat tinggi untuk membantu penagihan cukup liberal di bidang sumberdaya air, kredit-kredit bermasalah, maupun sanksi yang pembentukan suatu badan perliiduingan lebih efektif terhadap kreditur bermasalah. Iingkungan hidup yang menggunakan beragam Akhirnya, satu-satunya penyelesaian nyata ialah instrumen untuk memperbaiki lingkungan swastanisasi total bank pemerintah; swastanisasi hidup. Walaupun telah ada banyak kemajuan, sebagian sudah merupakan langkah maju, masih diperlukan upaya lebih lanjut untuk namum tidak dapat diharapkan banyak menghadapi tantangan pengelolaan sumberdaya perbaikan yang berarti. Langkah-langkah alam. Upaya itu mencakup antara lain, sementara lain mungkin akan diperlukan untuk perbaikan hak-hak properti (misalnya, hak atas meningkatkan pengelolaan dan kinerja bank- tanah), pelelangan lebih transparan dan bank pemerintah, misalnya, tutup, merger dan bersaing bagi konsesi sumberdaya alam, iuran penciutan, mungkin digabung dengan lebih tinggi (misalnya, IHH), dan performance "penguraian" dan penjualan sejumiah kegiatan. bond untuk melindungi lingkungan hidup dalam konsesi kehutanan. 53. Bagi bank-bank swasta, diperlukan ketegasan hukum (misalnya, sangsi otomatis 51. Memperkuat Lembaga-Lembaga keuangan bagi bank yang kekurangan Ketiangan. Kemajuan telah dicapai dalam persyaratan dan pemberian pinjaman berlebihan memperkuat sistem keuangan selama beberapa kepada pihak-pihak tertentu, dsb). Bank yang tahun terakhir ini. Misalnya, sejurmlah bank tidak memniliki cuktip modal (setelah telah dapat meningkatkan modal mereka; diperhitingkan kredit-kredit bermasalah) harus jumiah aset bermasalah yang terus menuLiun dituttip sebelum mengalami kebangkrutan. Ringkasan Eksekutif xix Peningkatan kewajiban modal bagi bank-bank birokrasi" dan "mentaati kontrak". Faktor- non-devisa akan dipaksakan melalui faktor seperti ini meningkatkan ketidakpastian konsolidasi. Konsolidasi langsung dapat dan risiko. Pelaku-pelaku bisnis itu cenderung dipermudah melalui peningkatan modal baru, memilih menggunakan koneksi dari pada baik asing maupun domestik, maupun membeli mengutamakan effisiensi. Mereka bank non-devisa domestik yang sedang membengkakkan biaya. Perbuatan mereka itu mengalami masalah. menimbulkan sikap sinis dan persepsi tidak jujur. Dan mereka mempersulit diri dalam 54. Kerangka hukum. Pemerintah melakukan bisnis yang benar. Persepsi ini menyadari masalah-masalah yang ditimbulkan belim menghambat pertumbuhan investasi akibat rendahnya kredibilitas dan prediktabilitas asing selama tahun-tahun terakhir. Namun sistem hukum sebagai sarana untuk demikian, agar dapat mengimbangi negara- penyelesaian sengketa-termasuk masalah negara sukses lainnya, dan untuk memperbaiki dalam melindungi mereka yang kurang citra bisnis, Indonesia cepat atau lambat perlu beruntung-dan reformasi sedang dalamn mengatasi masalah. persiapan. Prioritas untuk upaya reformasi antara lain: i) memberdayakan komitmen 56. Negara-negara lain telah menemukan nasional terhadap aturan hukum dan sistem beberapa pemecahan parsial, misalnya: peradilan yang efektif dan independen; ii) lembaga peradilan independen; struktur reformasi kelembagaan, seperti sistem penggajian pegawai negeri yang memberi penyaringan yang disempurnakan, badan-badan imbalan berdasarkan prestasi dan kejujuran; akreditasi dan standar-standar profesional bagi hukuman yang setimpal terhadap tenaga hukum p r o f e s i o n a l; iii) penyelewengan; reformasi kebijakan untuk memodernisasikan undang-undang, dengan membatasi kewenangan pejabat pemerintah; partisipasi luas dari pihak-pihak yang berminat; menguL-angi tanggung jawab bagi mereka yang dan iv) meningkatkan sumberdaya manusia. menyalahgunakan; dan cepat mengambil tindakan terhadap mereka yang berprestasi 55. Persoalan "Governance". Hasil rendah atau yang menyalahgunakan kekuasaan. survai diantara pelaku bisnis mencerminkan Pengalaman Bank Dunia menganjurkan bahwa bahwa Indonesia memperoleh angka yang pemerintahan yang lebih baik meningkatkan cukup tinggi untuk kriteria seperti "kecilnya kinerja pemerintahan bergantung pada resiko pengambil-alihan tanpa kompensasi". dukungan luas dan komitmen pada semua Namun demikian, stirvai yang sama secara tingkat-baik dalamn kepemimpinan maaupun konsisten menempatkan Indonesia dalam tindakan. peringkat yang r endah unltuk "kelambanan xs Ringkasan Eksekutif Executive Summary Xxi Executive Summary A. Macroeconomic Policies for Managing fiscal and monetary policy contributes to some Success and Risk of these problems. Fiscal policy continues to be run responsibly, even in the run-up to 1. Overall Performance. On the basis of elections. However, the higher oil earnings in broad macro indicators, Indonesia's economy FY1996/97 were not fully sterilized by an has performed very well recently. GDP increased fiscal surplus and (net) off-budget increased by 7.8% in 1996 and inflation spending looks a bit less contractionary. dropped to 6.6%. Local and foreign direct Overall, the impact of fiscal policy was investment have been increasingly buoyant. A virtually identical to FY1995/96, despite sizable fiscal surplus was maintained and large significantly higher oil revenues. The main prepayments of high-interest, public external instrument used to limit overheating in 1996/97 debt have continued. Official international was real interest rates. With improved reserves rose by $4 billion during 1996/97. confidence, especially after July, these rates attracted large inflows, which tended to 2. Despite this strong performance, appreciate the rupiah in real terms, and reduce significant risks remain. Domestically, core external competitiveness. inflation is still high and key administered prices have not been increased in some time. 5. Allowing interest rates to fall somewhat Deregulation has lost momentum. The banking further and concurrently offsetting this with sector remains relatively weak by international still tighter fiscal policy would reduce the standards, and its exposure to the property appreciation, while maintaining macro stability. sector is again on the rise. Instruments to carry out this approach would also serve other national objectives, for 3. Externally, the current account deficit example, improving assessments and raising widened, despite high international prices for the property tax rate (especially for luxury Indonesia's oil exports; non-oil exports slowed urban residences) from its current 0. 1% of noticeably; and private external debt is assessed values. This would dampen the increasing rapidly. To some extent, these property sector boom, support decentralization external developments reflect higher foreign and urban infrastructure, and improve equity investment and some special circumstances by taxing property owners. Raising forestry (e.g., improved statistical methodology; large royalty (IHH) rates further would help cross-currency movements; and lower compensate the nation for depletion of its commodity prices that may be temporary). resources and encourage more sustainable Looking ahead, the current account is likely to forestry practices. Higher fuel prices to worsen further next year, and problems in eliminate the fiscal subsidy would improve other East Asian economies could spillover into equity by reducing the subsidy that now goes to Indonesia. These factors, inter alia, risk a the 2 million or so car-owners, who comprise reversal of capital inflows, a risk that is about 1 % of the nation's population. Raising magnified by Indonesia's large external debt power tariffs-and adjusting their structure- and the increasing sensitivity of global capital would improve PLN's finances and reduce flows to changes in indicators. inefficient cross subsidies; it would also make privatization easier and encourage power 4. A Better Mix of Fiscal and Monetary production in the outer islands. Moreover, Policies Would Help. The current mix of substantial room remains in the development xxii Executive Summary budget for cutting back spending on 8. The Importance of Foreign telecommunications and power generation and Assistance. Indonesia's strong economic relying more on the strong private interest in performance in recent years has attracted large these sectors. private capital inflows. In part, this reflects the success of an explicit, private sector-led 6. Improving Economic Cushions. development strategy that has been supported Better economic shock absorbers would also by the donor community. But donor flows still enhance performance and reduce risk to the represent one-quarter of gross flows. Private economy. The wider buy-sell band of the project financing is generally available only for rupiah is a market-based shock absorber that a few infrastructure sectors. The donor served Indonesia well in 1996. Non-economic community continues to provide virtually the shocks were absorbed with only small, only source of stable, long-term financing with transitory exchange rate movements, no central relatively strong project appraisals and bank loss of reserves, and minimal effect on technical assistance. Moreover, the terms of the domestic economy. In the past, monetary the CGI funds strengthen the average maturity policy also has responded quickly to shocks by of debt and the debt service profile. allowing interest rates to rise when outflows begin; continued responsiveness would provide 9. Bearing in mind these factors, as well an important, additional cushion. Maintenance as the strong private sector interest in Indonesia of higher foreign exchange reserves also would at the moment, total 1997 CGI commitments be helpful. But evidence from many countries similar to last year's would be very supportive. suggests that even large reserves are not Looking further ahead, the relative abundance enough; exchange and financial markets need of private financing has important implications to be allowed to adjust, and the incentive for Indonesia's aid donor community. In regime needs to be strong. particular, it underscores the importance of donors' increasing the quality and effectiveness 7. Strengthening Incentives. The strong their aid. deregulation that supported rapid, labor-based growth has slowed, and even reversed in some B. Sustaining High Growth with Equity areas. There has been slippage in scheduled tariff cuts. Little progress has been made on 10. Five Key Factors in Maintaining the unfinished deregulation agenda and High Growth With Equity. Looking at domestic regulations continue to hurt efficiency experience around the region, many analysts and inter-island equity. The large minimum agree that five common factors were critical in wage increases of recent years could dampen East Asia's high growth with equity: job creation and labor-intensive exports. The lack of transparency and competition have hurt * Sound macroeconomic fundamentals, performance in sectors such as infrastructure including rapid adjustment to shocks; and natural resource development. Ad hoc interventions (which are on the rise) and other * High investment and domestic saving, common local practices are coming under which reflected sound macroeconomic increasing global scrutiny. Unless momentum fundamentals and high public saving is restored to deregulation, Indonesia risks rates; slower growth and deteriorating equity, which characterizes many developing countries * Strong human resource development (Section E). that led to higher wages, lower population growth and improvement in Executive Summary xxiii the status of women; to shocks and renewed momentum in deregulation will go a long way to meet these * More attention to international challenges (Sections A and E). Improved competitiveness and less interference with human resource development will be critical to markets than most countries. And, improving skills, raising labor incomes and meeting the demands of Indonesia's aging * Improved institutions, including population for better health services (See government. Section C). But the challenges also represent opportunities. Indonesia's sound international 11. Experience in East Asia and elsewhere commitments lock-in a more predictable, open, suggests that when performance declines in competitive economy and provide more these areas, growth slows, efficiency drops, certainty for potential investors. The aging and equity deteriorates. For example, in Korea population will also mean more savings, if a and Indonesia, investment, savings and growth sound public pension scheme can be designed. were low until macroeconomic stability was restored around the end of the 1960s. In 13. Stronger Institutions. Improved Korea in the latter half of the 1 970s institutions, especially to manage the interventions to favor capital-intensive, public/private interaction, will also be critical technological-advanced industry were to meeting the new challenges to high growth associated with low productivity growth and with equity. In terms of the incentive increased inequity. Similarly, in Brazil, high framework, the Government could push the protection, macroeconomic instability, and economy towards more efficient, equitable emphasis on higher education-instead of solutions. This would mean not only renewing broad-based human resource development- the momentum on trade deregulation, but contributed to poor performance and inequity implementing more transparent, competitive in the 1980s. Thus, Indonesia's continued, arrangements for sales and concessions in strong emphasis on these five factors would infrastructure (Section D) and natural resources contribute greatly to high growth with equity in (Section E), and reducing internal trade the future. barriers (Section E). More broadly, it means a commitment to better governance and an 12. Of course, the future may differ from improved legal system, that would reduce the the past; new challenges could threaten cost of doing business and ensure the benefits Indonesia's ability to grow rapidly and increase of public resources are equitably shared among equity. These challenges include: all Indonesians, including future generations. globalization; scarcity of skills; an aging population; natural resource depletion; 14. Improved management of the environmental degradation; and lack of public/private interface also will entail infrastructure to maintain rapid growth, realignment of government spending. Where especially in urban areas. In many cases, private interest is strong, government could cut meeting these challenges will depend on back, relying instead on a transparent, improved implementation of the five factors competitive framework to ensure delivery of that have served East Asia and Indonesia well. good services at reasonable prices (for For example, globalization means that more example, in power generation, telecoms, and countries are competing for markets and toll roads). In areas of limited private interest, foreign investors, and that capital flows are government can realign its approach and increasingly sensitive to "bad news". Sound increase spending to deliver better services. macroeconomic fundamentals, quick adjustment (e.g., upgrading basic education and health xxiv Executive Sunmmary services; Section C). Physical infrastructural policies, Indonesia would move up the ladder needs will be very large, especially in urban of higher-value-added exports, onto the rungs areas (Section D). But the financial resources now occupied by Thailand and Malaysia. The are available, and they are consistent with growth of (human and physical) capital and tighter fiscal policy. For instance: privatization business skills--not protection of inefficiencies-- revenues and returns from concessions; better will lead to natural growth of technology- and taxation (e.g. higher property taxes and better capital-intensive production. assessments); and the elimination of explicit and implicit subsidies (input-pricing in 17. A 5% Growth Scenario. In contrast, industry, petroleum consumption, and shifts in policy could lower national fertilizer). In addition, delegation of more productivity, and slow growth by a third, to spending, tax authority, and accountability to 5% per year. Much lower than this for an sub-nationial governments would make the extended period seems unlikely, owing to the provision of (local) public goods more momentum of growth at present. Nonetheless, responsive to local needs. 5 % p.a. growth would be disappointing. By the year 2005, income per capita would be some 15. A High Growth with Equity 20% less than under the 7.5% p.a. scenario, Scenario. Emphasis on the five factors, noted with proportionately less resources available above, would maintain rapid growth in incomes for social programs. and jobs, including in the Eastern Islands. It would also reduce inequalities arising from 18. Such slower growth would most likely rent-seeking behavior and non-transparent, non- reflect an undesirable shift toward the more competitive allocations of assets. If Indonesia capital-intensive, forced import-substitution were to average 7.5% p.a. growth through model followed by many countries in the past. 2005, GDP per capita would more than double In that case, equity would suffer, as the in US dollars (to over $2300). The country benefits of growth would go to those privileged would become one of the world's 20 largest few who are involved with the protected economies. In line with world-wide and industries or have access to Government Indonesian trends, growth would be urban- support. The costs of such resource based. Primary production would continue to misallocation would raise costs and reduce decline as a proportion of GDP and about half competitiveness in the rest of the economy, of Indonesia's 220 million population would notably off-Java. Slower growth in labor live in urban areas, compared to less than a demand would slow formal sector employment third in 1990. Urban investments and growth and reduce average wage increases. environmental actions would sustain greater Judging from other countries' experience, Jabotabek's role as a strong engine of growth. attempts to channel financial resources to With population of 25-30 million, it would be uncompetitive, high-cost firms could heighten one of the largest metropolitan areas in the instability in the financial system and even lead world. Continuing current trends, labor to taxpayer supported bailouts. incomes would rise about as fast as per capita GDP and the outer islands' growth would be C. Meeting the Human Resource strong. Challenge 16. A non-discriminatory trade and 19. The private sector and Government investment regime, in conjunction with agree that increased human resource increases in human and physical capital, would development is critical to Indonesia's boost exports. As a consequence of these development. Effective delivery of basic Executive Summary Xv human resource services is important for upwards throughout the system. Important poverty alleviation and regional development. elements here include improved teaching and For example, basic health services are a very teacher allocation. Also, hurdles must be effective means of spreading the benefits of overcome to increase time in the classroom for development to the poorest of society. grades I and 2, coordinated with a school Education is one of the best escape-routes from feeding program to increase attention spans and poverty, as broad-based increases in education improve equity. raise labor incomes. 23. Government's plans for 9-year 20. Cross-Sectoral Themes in Improving universal basic education offer promise for Education and Health. First, basic services improving quality. However, significantly need higher quality as well as increased more resources will be needed, even allowing quantity, especially to the poor and remote for a strong private sector role. To limit costs regions. Second, more financing is needed, and maximize equity, a premium will be placed but more resources alone will not suffice; on options that ensure affordability, reach the significant changes in institutions and policies poor and isolated regions, and ensure that are even more important, to make spending existing inefficiencies are not replicated. effective. For example, teacher training will Moreover, a prerequisite is a reduction in be largely wasted without reforms in the drop-outs at the primary level. institutional arrangements for the allocation and accountability of teachers. Third, the public 24. Institutional weakness could be reduced sector needs to re-focus, towards basic services by devolution of more responsibility and for the poor and away from those services that accountability to lower level governments, and can be provided by the private sector. Fourth, by tightly defining the remaining role of central one promising instrument appears to be further agencies. Several of the Government's decentralization of responsibility to lower levels principles that are being implemented for of government, supported by changes in fiscal higher education, could be applied to basic and institutional arrangements that balance education. autonomy with accountability. 25. In post-basic education, the 21. Education. Indonesia's progress in Government has plans for refocussing its role. education has been matched by few countries. The private sector is expected to become However, since the mid-1980s, improvement increasingly important, and the Government's has slowed. Of particular concern has been the "new paradigm" principles are designed to take stable-if not declining-quality of education. advantage of this development. The Also, junior secondary enrollments declined in Government needs to firmly implement these the late 1980s, which has raised doubts about plans. In vocational and technical schools, it achieving the next phase of expansion. At the also needs to make room for the private sector, post-basic level, the rapid rise of the private upgrade its informational/regulatory role, and sector calls for a refocusing of the role of the reduce the cost of its own programs. state. 26. These many improvements will be 22. Significant quality up-grading is a high expensive. However-with continued strong priority, particularly at the primary level. economic growth-they are affordable with Primary schools educate the vast majority. some prioritization and phasing of activities. They are the best means to reach the poor, and Should economic growth slow appreciably, problems at the primary level are transmitted affordability depends upon high priority being xxvi Executive Summary assigned to educational spending. most important areas are power, urban infrastructure (water supply & sewerage, 27. Health. Rapid growth, an aging drainage and solid waste management), and population, and new government policies are transport. changing demands for health care, health financing, expenditures and service delivery. In 31. Cross-Sectoral Themes. Greater general, sectoral policies are moving in the reliance on the private sector would pay right direction, but they need to be dividends, but the gains depend on establishing strengthened and accelerated. Further transparent, competitive frameworks for the innovation in public sector finance and sale of assets and concessions, and for the incentives, and improved quality of both public sectors themselves. Failure to address this and private sector services, are needed. issue risks high-cost infrastructure (e.g., in power generation and toll-roads). The 28. A top priority should be improved potential rise in costs would be difficult to basic medical services to the poor. In the absorb; it would slow growth and reduce majority of cases, public services will be the international competitiveness. Worldwide only option for some time to come. experience suggests that non-transparency, lack Government spending on basic services needs of competition, unfair dealing and favoritism to increase as a percentage of GDP. But, as reduce the benefits to the public; they can also with many other sectors, increased spending undermine privatization and other reform will not be enough. Institutional change is processes. needed to achieve better public sector management and organization of services; to 32. Reregulation is increasing, notably in improve the incentives and skills of public transport. Complaints have arisen concerning sector health professionals; and to deliver port delays even before the handover of pre- better quality services in puskesmas. shipment inspection to the local (post-shipment) customs service. Proposals have been made to 29. Private health care, with support from channel all foreign cargo through Batam. improved government policies, can play a Pressure is developing for reregulation of larger role. The demand for this service will shipping and the easing of restrictions on vessel continue to grow rapidly as household incomes imports in mid-1996 was effectively reversed and urbanization expand. The Government quickly. needs to initiate policies to support high quality private services; public financial support should 33. Institutional weaknesses in strategic be minimal, as these will be self-financing. planning, human resources, procurement and Continued decentralization (e.g., to encompass contracting is another common theme. On planning and personnel decisions) is also strategic planning, GOI institutions have needed to increase the effectiveness and quality demonstrated that they are effective at of public sector spending. Clear incremental projects. But their effectiveness is responsibilities and stronger incentives are lower with longer-term, strategic investments, needed to make the most of increased authority especially those with cross-sectoral of district and facility management decision- implications. These problems are largely making. attributable to institutional fragmentation of authority across government levels and D. Building "Hard" Infrastructure agencies, which often have overlapping mandates and unclear accountability. 30. Better physical infrastructure is another key to Indonesia's future. Three of the 34. Decentralization of more authority to Executive Summary Axvii sub-national governments or to agencies, along more power generation in the outer islands. with greater reliance on the private sector, offer promise of improved service delivery. In 37. Generation capacity already is well in most cases, the central government needs to excess of peak load in the Java-Bali grid and focus more on setting policy frameworks, the capacity load factor has declined. These budget envelopes, best-practice standards and developments partly reflect lagging implementation guidelines. The details of transmission & distribution investment, which policy formulation and implementation would is also largely responsible for the outages and then be left to sub-national governments. "brown-outs" that lead many large users to opt Greater financial autonomy would help these for self-generation. PLN's "Super Crash government's ability to deliver services. Program" plants will be nearing completion, Larger block grants and loans would help, but but their costs will be high until gas supply the key is a larger sustainable revenue base contracts are negotiated. Large private through higher property taxes, increased local capacity also is coming on line, most of which fees and user charges. The new Law on Local was unsolicited and involves negotiated take-or- Taxes and Fees is a good step in this direction. pay agreements at prices above PLN's current average tariff. Consequently, additional tariff 35. The Power Sector: Tariffs; increases will be needed to cover the costs of Overcapacity in Generation; and Managing the capacity and it may be necessary to back- Private Participation. Since the 1980s, PLN down some of PLN's relatively low-cost (the public power company) has had many capacity to accommodate the private contracts. successes. Sales have increased by 14-15% p.a., service quality has improved, and village 38. Managing the Public/Private electrification has spread widely. Large private Interface. The projected increases in generation capacity (roughly equal to PLN's generation capacity would meet anticipated own capacity) is coming on-line over the next demand through 2006, only taking into account several years, and preparations are underway projects currently approved or under for partial privatization. PLN is no longer a negotiation. In this situation, new generation loss-making entity, although recent lags in capacity, public or private, should be limited. adjusting tariffs are reducing its financial Contracts with private plants should entail their viability. bearing more of the risk of overcapacity. Any new projects should be carefully prepared, to 36. These developments, plus on-going maximize their efficiency in terms of fuels and issues of the tariff structure, are raising a grid demands, and they should be subjected to number of pressing issues. Tariff increases are transparent, competitive bidding procedures needed simply to restore PLN's profitability to through implementation of the Government's reasonable levels, to avoid liquidity crises and recent announcements. Public spending on new injections of public funds and borrowings, generation should be reduced, and new plants and to prepare PLN for privatization. The be postponed, thereby saving development automatic tariff adjustment mechanism also budget funds. Natural gas deregulation would needs overhaul, to better cover costs. The make this clean fuel available, save dwindling uniform national tariff policy raises power oil reserves, and allow plants to be built with costs for users of the Java-Bali grid to cross- less lead time. In the context of this excess subsidize power in the outer islands; a clear capacity, nuclear power is not needed at this public subsidy for this national goal would time, particularly given long lead times, increase Indonesia's competitiveness, help corresponding uncertainties and environmental privatization, and provide better incentives for risks. By contrast, increased public spending xxviii Executive Summary on transmission and distribution would pay more transparent, competitive framework. large dividends. Efforts also could be made to involve private participation in these areas. 42. Transportation. To date, overall transport capacity has kept pace with increasing 39. Urban infrastructure services are demand, although bottlenecks and traffic increasingly inadequate. Public spending in congestion are becoming problems in areas that this area has consistently fallen well short of have experienced rapid economic growth. targets. With rapid urbanization, congestion Costs in the transport sector continue to be and environmental problems are pushing up pushed up by non-competitive, non-transparent costs and hindering growth. In addition, an procurement by state entities and by late adequate supply of urban services is vital to payments to contractors (which they offset by further reductions in poverty. In urban water raising bids). Costs also are raised by supply, such problems are particular acute. regulations on procurement that prevent use of Indonesia is well behind comparator countries low cost suppliers and by various fees-legal and risks to health could become an issue, an illegal-that are charged for movement of particularly among the poor. goods. 40. More financing is a priority to avoid 43. For urban roads, the top priority is a urban infrastructure bottlenecks. But, as in transparent, competitive bidding process for most other sectors, more money is not enough; private services, notably for toll road better policies and improved institutional construction and operation. As in other arrangements are also needed. Decentralization sectors, there are wide possibilities for combined with increased resources (higher improving service through an expanded private property taxes, user fees, and bloc grants) sector role, if the processes for contracts and would provide a better match of costs and concessions can be improved. Another benefits and a better delivery of services. As important step would be better pricing policies, mentioned, the new Law on Local Taxes and for example, congestion pricing and higher Fees represents a good start in this direction. parking fees in the larger cities and user With higher, sustainable revenue sources, charges to cover the full cost of road municipalities would be able to borrow for maintenance and operations. Implementation capital expenditures. of the phase-out of leaded gas throughout the country would improve welfare and reduce 41. More competitive procurement, with health costs. More deregulation of bus service incentives for cost saving, would save funds. would also be helpful. Finally, improved The water companies need to be consolidated traffic management and focussing public or grouped into consortia to achieve economies investments to relieve the most critical of scale and to improve management of water bottlenecks would contribute to reducing the basin resources. Tariff increases and a costs of congestion and pollution. reduction in tariff complexity would help to provide resources for the companies and to 44. For inter-urban roads, the solutions are remove the non-transparencies that raise costs more conventional: more funding; an to users. Billing, collection, and high water expanded, transparent role for the private losses could be improved substantially, again sector; and better institutional absorptive providing greater resources while serving more capacity, notably more competitive bidding and consumers. In all these areas, private integration of services (e.g., the toll and non- participation could be increased, but significant toll arterial road network and competing rail benefits to the public would come only from a services). In railroads, which have a bright Executive Summary xxix future because of Java's high population implemented on schedule. Likewise, within a density, the Government has embarked on a few months of lifting the ban on imports of program of reforms, which needs strong used fishing vessels, costly local content execution. Unsolicited proposals from well- regulations were effectively put in place. connected parties should not be allowed to de- rail implementation. For maritime transport, 47. To restore momentum, the tariff cuts important concerns are reregulation and need to catch-up with their announced schedule bureaucratic obstructionism; careful monitoring and, indeed, there were encouraging signs in of the success of the new customs system is of this regard just before mid-1997. Once the special concern in this regard. Port facilities announced cuts are back on-schedule, next and regulations, as well as shipping regulations steps will entail implementation of announced and restrictions on vessel imports, tend to raise cuts through 2003-without succumbing to costs of inter-island shipping, thereby slowing pressures for selective delays or exemptions, national integration and limiting prospects of which will be important for international off-Java development. competitiveness and investor certainty. E. Building "Soft" Infrastructure 48. Progress on the unfinished trade deregulation agenda would also help to 45. Continued improvement of soft improve competitiveness and income. For infrastructure (the policy and institutional example, there are still significant quantitative environment) is critical to international controls on imports, including many competitiveness, rapid growth and improved agricultural products. A large number of non- equity. This concern for soft infrastructure oil exports are subject to some form of tax or includes: an incentive framework that restriction. Lifting these would boost non-oil encourages competition among producers; a exports and efficiency. Lower prices of some competitive, transparent framework for agricultural products, such as sugar and wheat, government contracts and concessions; and would provide cheaper inputs for agro-industry issues of performance of the government and and increase real wages and equity. In the legal system. International and domestic addition, reducing protection on sectors such as trade regulations, uncertainties related to the vehicles, chemicals, metal products and business environment and the legal framework, agricultural commodities would encourage and ad hoc government interventions work efficiency and productivity growth. Finally, against efficiency, international taxation of goods used by high income competitiveness, and equity. consumers-such as cars-or socially undesirable goods like alcohol, would be more 46. Re-establishing Momentum in effective if taxes, rather than tariffs were used. Deregulation of International Trade. Despite The social goals are of no less importance if attention attracted by the National Car policy, the good is produced locally. significant announcements of deregulation in international trade were made in 1996. Of 49. Making Progress on Domestic these, the most important was the June tariff Deregulation. Despite efforts, only modest package. Also in 1996, controls were eased on improvements have been made in the complex imports of soybean cake, used fishing vessels, web of domestic restrictions, fees and levies. and nine other tariff codes. Unfortunately, Disentangling this web could usefully begin there has been slippage in implementation of with lifting restrictions on intra-island trade, some of these measures. For example, about which often reduce prices of exports from the 800 of the announced tariff cut were not poorer regions of Indonesia. Similarly, xxx Executive Sumnnary retnibusi taxes and restrictions on agricultural continuing concern that the financial system, in trade result in lower farmgate prices and higher its present state, would not act as an adequate consumer costs, which reduce real incomes of shock absorber in the event of some the farmers and in the outer islands. macroeconomic shock. 50. Managing natural resources presents 52. Building on recent improvements, a many challenges to the Government. Depletion different strategy would help to address the has become a threat in areas like oil, forestry, financial system's weaknesses. On the side of and water. Environmental degradation has Bank Indonesia, stricter supervision is needed, become a problem. Government also is including a series well-defined thresholds for responsible for ensuring that the public at progressive intervention by Bank Indonesia in large, including future generations-not a few weak banks (e.g., for temporary liquidity private individuals-benefits from public support and to facilitate mergers, takeovers and ownership of the nation's resources. The closures). For the state banks, high-level Government has responded with a variety of political support is needed to assist with policies, ranging from fairly transparent collection of their bad debts, as well as more auctioning of concessions in the case of oil, to effective sanctions against bad debtors. moderate taxes and royalties in the case of Ultimately, the only real solution will be full forestry and mining, to a largely hands-off privatization of the state banks; partial policy for water resources, to setting up of an privatization is a step forward, but-on it's environmental protection agency that uses a own-is unlikely to lead to significantly variety of instruments to improve the improved performance. Other, interim environment. Although progress has been measures are likely to be necessary to improve made, further efforts are needed to meet the state banks' corporate governance and challenges of managing natural reserves. performance, e.g., closures, mergers and These include, improvements of property rights downsizing, perhaps in conjunction with (for example, land titling), more transparent, "unbundling" and sale of some activities. competitive auctioning of natural resource concessions, higher royalties (for example, 53. For the private banks, stricter IHH), and performance bonds to protect the enforcement is needed of key prudential environment in forestry concessions. regulations (for instance, automatic, stricter penalties for under-capitalization and excessive 51. Strengthening Financial Institutions. loans to related parties, etc.). Banks that do Progress has been made in strengthening the not maintain sufficient capital (after adequate financial system during the past year or so. provisioning for bad debts) should be closed- For instance, many banks have significantly down before insolvency occurs. A sizable, increased their capital; reported classified phased increase in capital requirements for assets continue to decline in relation to total non-foreign exchange banks would force credits; management has changed at several consolidation. Spontaneous consolidation banks; and important new products (e.g., open- would be facilitated by clarification of the ended mutual funds) have entered the markets. circumstances under which new capital, foreign Also, the open capital market continues to add and domestic, can buy into troubled domestic significantly to the competitive nature of the non-foreign exchange banks. sector. Nevertheless, by international standards Indonesia's financial sector remains 54. The Legal Framework. The relatively weak, which contributes to the high Government recognizes the problems created cost of financial intermediation. There is by the legal system's low credibility and Executive Summary x'xi predictability as a means of dispute of unfairness. And they make it difficult to do resolution-including the problems in legitimate business. To be sure, these protecting the underprivileged-and reform perceptions have not impeded growth or efforts are underway. Priorities for the reform foreign investment in recent years. effort include: i) strengthening national Nonetheless, to keep pace with other successful commitment to the rule of law and an effective, countries, and to improve its image in this independent judicial system; ii) institutional regard, Indonesia will need to address this reform, such as improved screening, issue sooner or later. accreditation boards and professional standards for legal professionals. iii) modernizing laws, 56. Other countries have found some with widespread participation of interested partial solutions, for instance: an independent parties; and iv) strengthened human resources. judiciary; a civil service pay structure that rewards merit and honest effort; credible 55. Governance Issues. In surveys of penalties for malfeasance; policy reforms to businessmen, Indonesia gets high marks for reduce the discretionary authority of criteria such as little "risk of expropriation with government officials; and greater accountability no compensation". However, the same surveys for poor performance or abuse of power. The consistently rank Indonesia low on World Bank's international experience suggests "bureaucratic delays" and "contract that improved governance will depend on enforceability". Such factors increase widespread local support and commitment-at uncertainty and risk. They favor the well- all levels-both in terms of leadership and connected over the efficient. They inflate actions. costs. They engender cynicism and perceptions 1 MACROECONOMIC DEVELOPMENTS AND POLICIES: MANAGING SUCCESS AND REDUCING RISK A. Overview external competitiveness. This problem could be reduced by easing monetary policy while 1.1 On the basis of broad macro economic concurrently compensating with tighter fiscal indicators, the Indonesian economy is currently policy to keep the pace of economic expansion performing very well. Real growth continues under control. Second, several of the options strong; overall inflation is down; external for raising fiscal revenues would be of confidence is high; foreign direct investment is assistance in achieving other important robust; the external current account continues objectives (e.g., improved equity and human to be financeable; the external value of the resource development, decentralization, rupiah has been little changed in almost a year; regional development, and stronger institutions; and international reserves are up sharply. Chapters 2-5). Third, strengthening many Continued sound macro policies have played an other policies (for instance, deregulation important role in achieving these results. policy, debt management, wage policy, and financial regulation) would support this 1.2 More careful scrutiny of the data gives process. reason for pause. Core inflation remains high; certain administered price adjustments are 1.4 The remainder of this Chapter begins being delayed; private external debt is with a review of economic developments increasing rapidly; the growth of non-oil (domestic and external developments in exports has declined markedly; and high Sections B and C, respectively). These international oil prices have been masking Sections identify the sources of some of the weakness in the current account. Also, adverse risks in the present economic situation, and developments in neighbouring countries could look at possibilities for reducing the riskiness spillover into Indonesia; there is increasing of the current environment. After examining dependence upon volatile capital flows; some details specifically related to fiscal common local practices are coming under (Section D) and monetary policy (Section E), increasing international scrutiny; and financial the overall outlook for policies is summarized markets continue to assign high risk to rupiah- in the Section F. The Chapter ends with a denominated assets. In the meantime, time- brief review of the short-term outlook, tested policies (such as deregulation) are losing including comments on donor assistance their edge, while the quality of (Section G). growth-including fairness-remains a concern for the great majority of the nation. B. Domestic Economic Developments 1.3 This Chapter looks at some of these B.1 Real Output and Expenditure issues from a macroeconomic perspective. Three basic points emerge. First, overall 1.5 Real output increased by 7.8% in 1996, demand management is sound, but the mix of a moderate slowdown from 8.2% in 1995. fiscal and monetary policies is contributing to The driving force behind the on-going robust several of the problems noted above. In growth continues to be the private, urban particular, reliance upon monetary policy to economy (that is, GDP excluding oil & gas, maintain macro stability has attracted capital agriculture and public administration; see inflows that have tended to appreciate the Table 1. 1). This sector, which now represents currency. This has contributed to reduced more than two-thirds of the economy, has been 2 Chapter I expanding at double-digit rates for almost a production expanded robustly. In tertiary decade. industry, private services continued to increase rapidly, driven by strong growth in financial 1.6 Among the industrial components of services, the hotel and restaurant category, and GDP, construction slowed in 1996 as new services, such as franchising; all reflect evidenced, for example, by lower growth of the strong external interest (e.g., tourism and cement consumption and by credit extended for business travel) in Indonesia at the present. property development (Section E). (Further discussion of the financial services Manufacturing also slowed, reflecting weaker industry is provided in Chapter 5.) growth in several non-oil exports (Section C) and a decline in auto sales. 1.8 Several factors appear to account for the lower growth in GDP. The growth of non- 1.7 Among the primary sectors, agriculture oil exports declined (Section C), and the growth declined-despite another good stimulative impact of the 1995 tax cuts was harvest-compared to the unusually high rate wearing-off. Also, uncertainty occasioned by of expansion recorded in 1995. In the mining the development of a national car may have sector, the level of Oil & Gas production caused auto sales to drop early in the year. In recovered in 1996. The LPG industry had a addition, market signals probably contributed to new refinery (Sumbagut) come on-stream as a temporary slowdown in property development well as major expansion at an existing (Arar) (Box 1.1). Monetary policy also played a role; refinery. Oil production continues essentially increased capital requirements and continued flat. Non-oil & Gas mining (especially copper high real interest rates helped to slow lending, and coal) slowed appreciably from the rapid supported by Bank Indonesia's "moral suasion" pace of the past several years, although gold (Section E). Table 1.1: Real Growth in Output (1993 prices, change in % per annum) Share in 1995 1988-91 1991-94 1995 1996 GDP 100.0 9.0 7.3 8.2 7.8 Agriculture 16.1 3.6 2.8 4.2 1.9 Oil & Gas 8.7 6.7 0.8 -1.4 0.9 Public Admin. 6.0 4.5 2.1 1.3 1.1 Other 69.2 12.0 10.3 11.3 10.7 of which: Manufacturing 21.3 12.0 12.6 13.0 12.0 Construction 7.6 15.0 13.9 12.9 12.4 Utilities 1.1 13.7 10.8 15.5 12.6 Macroeconomic Developments and Policies: Managing Success and Reducing Risk 3 Box 1.1: The Property Market The property market in and around Jakarta has been booming for several years (Box 1.2 in World Bank 1995a). The extended nature of the boom has raised concerns of sustainability. There is a risk that a reversal could hit Indonesia's still-weak banking sector (Chapter 5), and be the trigger for an economic downturn. Occupancy rates are already on the decline in key parts of the property market,' and much more capacity is projected to come on-stream in the next few years. Rental rates in prime locations are under downward pressure, leaving them little changed in real terms over the course of the past half decade or so. Market Indicators for Prime Office Space Market Indicators for Rental Apartments 700 t00% 8 100% 600 90% 7 90% E 5 6 80% S00 80% 8 5 70% 400 70%' F 50%/ Z~~ 4 - 60'%t 1 300 I 60% i 3a% 20 - so%,C X0 tFeb_XUXt 0 X X I s o g X X X g g o 24 Potential supply | Potential supply ___ Confirmed supply _Confirmned supply Occupancv rate Ocpnyrv Source: PT. Procon Indah. Research Dept. Source: P.T. Procon .ndah, Research Dept Implications for Policy. To keep this boom under control, the central bank has kept lending rates high, stepped-up supervision of banks' exposure to the property sector, and strengthened tmoral suasion" (Section E). For its part, the Ministry of Finance has introduced taxes (and recently raised the rate) on transfers of land and building titles, and on luxury residences. Also, the Government has stopped issuing new land licenses for housing projects in the greater Jakarta area. Nonetheless, credit extended to this sector has picked-up since mid-1996, and banks' exposures continue to increase. Other measures could be taken to reduce risks, as has been done elsewhere in the region (Malaysia, Singapore, Hong Kong and the Philippines). For example, the Government could also increase property taxes of one form or another, preferably by a substantial margin. Two other steps would also be helpful in this context: i) initiate stronger actions (Chapter 5) to strengthen the banking sector; and ii) reiterate at every opportunity that responsibility for private sector debts will not be assumed by the public sector in the event of a downturn. I There are no official data on occupancy rates for the property market. These data are available courtesy of the Research Department of P.T. Procon Indah, property consultants and analysts based in Jakarta. 4 Chapter 1 1.9 On the expenditure side of the national 1.44 and 1.45 of World Bank, 1996). The accounts, growth of consumer demand average size of projects has fallen markedly in declined, especially consumer durables. For 1996, to around $30 million compared with example, motor vehicle sales were down 15% over $50 million in the past two years. There compared with an increase of 18% in 1995. were only 3 very large projects approved Among the other categories of expenditure, through 1996, versus 11 in 1995 and 6 in exports also slowed (Section C, below), while 1994. As indicated in Figure 1.1, there was a investment spending continued very strong. good distribution of projects among economic sectors, and their export intensity seems 1.10 Future Investment Indicators. roughly unchanged (after allowance for the Foreign (PMA) investment approvals petro-chemical projects noted above). By -excluding chemicals-continued to rise in major country of origin, more investment is 1996, by 10% in US dollars (by 26% in being made by Japan, Singapore and Korea, number of projects). The 1995 data for the whereas the value of approvals originating in chemicals sector were inflated by some large the United States and the United Kingdom is petro-chemical projects that were known to down. have dim prospects for implementation (paras Figure 1.1: Approvals of Foreign Investment by Sector $ 39.9 40 -40 35 Secondary 35 30- Tertiary $ 29.9 ~~~~~~~~~~30 o 25 - Chemical 25 . m 10 11"1 i lilil l l l § r/ | | ~~Other |1 20 2 0 l c~~99 (Avg. 94 959 0 0 10. $ 9.0 ~~~~~~~~~Other 10 5 0- 0 90-93 (Avg.) 94 95 96 Sources: BKPM. 1.11 Domestic (PMDN) investment Water (460%); and Housing (85%). Of these, approvals also expanded robustly in 1996, by Pulp & Paper and Food are heavily export- almost 40% in real terms (Figure 1.2). Export oriented. Among industries not doing well in intensity surged; the number of projects was up 1996, the value of approvals for Fisheries, about 5%; and the average size was up nearly Wood Products and Textiles are all down about 40%. Expansion was especially strong in 50% while Forestry attracted virtually no new Plantations (up more than 120%); Pulp and projects in 1996, compared with almost Rp. 1.5 Paper (110%); Food (165 %); Electricity & trillion in 1995. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 5 Figure 1.2: Approvals of Domestic Investment by Sector 120 - 120 m Secondary 100.7 100 . F7Tertiary 100 /Chemicals s 80 - Primary 69.9 h I 111 80 80~ ~ ~ ~ ~~~~~~~~~~~0 60 -53.3 60 o~~~~~~~~~~~~~~~~~~~~~~ o 42.4 l2 40 - 40 E |l a e _ l l l 1 1 / ~~~~~~~ther 20- . 20 0 0 90-93 (Avg.) 94 95 96 Sources: BKPM. 1.12 Investment approvals are only a leading came down significantly during 1996, and it indicator of economic activity; real activity dropping further in the early months of 1997 depends upon investment realizations (Box 1.2 (Figure 1.3). In December 1996, the 12-month in World Bank, 1996a). Historically, only increase was 6.6% compared with 9% a year about 40-50% of approvals are ever realized earlier. (On this measure, inflation is slightly and, in the next few years, this percentage is higher than on the measure normally used by likely to be lower owing to the petro-chemical the Indonesian authorities. They use the sum projects mentioned earlier. Sustaining high of monthly increases, which excludes levels of investment approvals and realizations compounding. On this basis the increase was will entail several inter-related steps that are 6.5% during 1996.) discussed elsewhere in this Report: maintaining macroeconomic stability; further deregulation, 1.14 Several characteristics of this decline particularly as regards non-tariff barriers and suggest that it may be temporary. First, food domestic restrictions (Chapter 5); introducing prices were the major factor accounting for the a more transparent framework for private decline; they slowed sharply from more than provision of infrastructure (Chapters 2 and 4); 14% during 1995 to 6% during 1996. Second, and addressing economic issues related to overall inflation is being held down by governance (Chapter 5). electricity and domestic fuel prices, which are overdue for a price adjustment (Section D and B.2 Inflation Chapter 4). And third, the core rate of inflation (i.e., excluding food and energy) 1.13 Consumer Prices. Inflation as actually rose during 1996 (Figure 1.3), owing measured by the overall consumer price index, 6 Chapter I Figurel.3: Consumer Price Index 12-month % Change 20 20 16 -16 12 -12 8 - 8 4 TotalICPI 4 0 Food 0 C,n 11 , le , 1 L , n co in part to an increase in administered prices of during the 1990s, the population growth rate transportation fares in April. has declined to 1.3%, and the working age population growth rate to 2. 1 %. In the Outer B.3 Labor Markets Islands, the demographic transition has been slower: the corresponding rates are 2. 1 % and 1.15 Update on Labor Markets. Issues in 3.0%. this sector were discussed in detail in Chapter 3 of World Bank, 1996a. This Section 1.17 On employment, three trends have been provides an update of recent developments important during the 1990s (Table 1.2). First, together with some policy implications. there has been an absolute decline in employment in agriculture, which is often 1.16 Labor Supply and Demand. interpreted as an important indicator of labor Indonesia has begun to experience major market tightening. Second, employment in the changes in the factors underlying labor supply. services sector has rebounded in the 1990s. Most importantly, the rate of growth of And third, there has been relatively slow population-and population of working growth of manufacturing employment in the age-has slowed markedly since the 1970s 1990s. Within manufacturing, the slower (Table 1.2). Nevertheless, the growth rate of growth reflects a change in the composition of the labor force has increased, reflecting an output and investment away from the more increase in estimated participation by women in labor-intensive industries-especially the the work force. Regionally, there are sharp textile, clothing and footwear industries differences in the rates of labor supply growth -towards more capital-intensive industries between Java and the Outer Islands. On Java, (chemicals and non-metallic minerals). This Macroeconomic Developments and Policies: Managing Success and Reducing Risk 7 trend seems likely to continue as evidenced by number of sectors; and second, Government the pattern of recent investment approvals (see intervention rose, especially to increase (and preceding sub-section). enforce) minimum wages. The higher real wages primarily reflect the labor market Table 1.2: Labor Market Trends tightening and transitions mentioned above. (% change, at annual rates) This said, it is likely that in certain regions and certain industries, the minimum wage hikes have contributed to the rapid rise in average 1971 -80 1980-90 1990-95 wages. Total Pop. 2.3 1.9 1.7 1.20 Between 1989-95, minimum wages on Working Age Pop. 2.8 2.5 2.4 average tripled in nominal terms and doubled Employment: 3.0 3.2 2.2 in real terms. In 1996, they effectively Of which: increased by another 30% in a manner that led Agriculture 1.2 2.1 -0.6 i Manufacturing 4.7 5.6 4.1 to confusion in implementation.' Labor- Trade 4.9 4.6 5.3 intensive sectors were particularly hard hit by Transport 4.9 5.8 5.4 this hike and the trade Associations for various Services 6.3 2.7 4.9 manufacturing sectors-shoes, textiles, toys, wooden panels, and so forth-appealed for Source: BPS. delays and exemptions. In the end, the Ministry exempted 215 companies from the 1.18 While the trend of unemployment is minimum wage regulations in 1996. However, difficult to determine (Box 1.2), all data the circumstances contributed to greater labor sources provide a fairly consistent picture of unrest-some 800 labor disputes were reported the structure of unemployment. in the Greater Jakarta area alone, many of Unemployment rates in Indonesia are higher, them caused by the refusal of factory on average, for the young, the educated, management to implement the new minimum females and workers off-Java, especially in wage regulations. The number of labor strikes Sumatra and Sulawesi. Overall, this structure and demonstrations increased by 22% between of unemployment has remained remarkably 1995 and 1996, partly due to the minimum stable over time. Nevertheless, during the wage issue. mid-1990s, there has been a rise in unemployment rates among primary and lower 1.21 In early 1997, the Government secondary graduates aged 15-24 years, announced a 10% increase in (average especially among the females. It is precisely unweighted) minimum wages. In the heavily this group that would have been drawn into the industrialized areas of West Java, the increase labor market by the prospect of higher wages was only slightly higher, 10 1/2%. By recent in the manufacturing industries. It is also historical standards (see above) this is likely to be most affected by the slow-down of moderate; in itself, this increase should be growth in investment and employment in the approximately off-set by productivity increases labor-intensive sectors, as discussed above.' and inflation. However, this year's announcement seems to have extended 1.19 Wages. Two major shifts occurred in minimum wages to daily casual workers, which the 1990s. First, real wages began to rise in a were previously a safety-valve for some companies. 8 Chapter I Box 1.2: Measuring Unemployment in Indonesia; Sources and Issues in Interpretation In mid-1996, new survey data (SUPAS) indicated an unemployment rate for 1995 that was significantly higher than previous estimates (Table A). This triggered concern in some quarters that there had been a sharp rise in unemployment and that special "employment-generating" initiatives were needed to alleviate the situation. For others, the survey results were difficult to believe because they would have implied that the unemployment rate had tripled between 1990 and 1995, a period of rapid economic growth. The evidence (see below) favors this latter, skeptical view; subsequent data (SAKERNAS and SUSENAS, 1996) confirm that SUPAS is a statistical aberration. There are four sources of unemployment statistics in Indonesia: i) SAKERNAS, the National Labor Force Survey conducted annually with a sample size of about 65,000; ii) SUSENAS, the National Socio-Economic Survey of Households conducted annually with a sample size of about 200,000; iii) the Population Census, done every 10 years at the beginning of a decade (with a 5% sample taken of more detailed data, including labor force statistics); and iv) SUPAS, the Intercensus Survey, done every 10 years at the mid-point of a decade with a sample of 200,000. Each produces different estimates of unemployment (Table A). There are several good reasons why these surveys produce different estimates of Table A: Unemployment Rates from Alternative Sources unemployment. First, as noted, the sample (in % of labor forces) size is different for each survey. Second, there are differences in training and quality of surveyors. For example, SAKERNAS and SAKERNAS SUSENAS CENSUS SUPAS SUSENAS generally use trained statisticians or employees of the National Bureau of Statistics; the Census and SUPAS often rely 1986 2.6 on temporary workers (who are trained for 1987 2.6 the task and let go after the task is 1988 2.8 completed). Third, there are differences in 1989 2.8 the timing of the Surveys (SAKERNAS is 1990 2.5 3.2 undertaken in August; the Census and SUPAS 1991 2.6 in September/October; and SUSENAS In 1992 2.6 4.6 January/February). This is important because 1993 2.8 4.6 evidence indicates that unemployment in 199 4.45. 7.2 Indonesia is largely transitional in nature, 1996 49 5. 1 consisting primarily of school-leavers who are 1996_4_9_ _ _ _ looking for their first job. More importantly, some of the surveys have asked significantly different questions regarding both labor force participation and unemployment. The Census and the early years of SAKERNAS ask a tightly focussed question that implies a narrow definition of unemployment (Table B). This yields unemployment rates that are appreciably lower than the more general question asked by the other sources. Table B: Survey Questions Asked of Those Looking for Work Data Source and Years 1. Did you look for work last week? 1990 Population Census; 1986-93 SAKERNAS 2. Are you looking for work? 1995 SUPAS, 1992-96 SUSENAS, 1994,96 SAKERNAS continued .... Macroeconomic Developments and Policies: Managing Success and Reducing Risk 9 continuation Which is more reliable? Despite its relatively small size, SAKERNAS has much to recommend it. It is a narrowly focussed survey, with only 20 questions, all of which concern labor market statistics. Of these 20 questions, 6 are devoted to determining, probing and confirming the unemployment status of the respondent. By contrast, the other three surveys are much longer (e.g., SUSENAS records expenditures on more than 300 items, but only 1 question concerns unemployment); none probe any further. Its clear from the above that data from different sources are not comparable. To examine trends, it is important to look at data from the same source over time. For many years, SAKERNAS provided this, with a known break in 1994 (when the question changed; see Table B). It is unfortunate that SAKERNAS was not undertaken in 1995, a SUPAS year, as this would have provided a base for comparability. Policy Implications. The high estimate of the unemployment rate implied by the 1995 SUPAS is not consistent with other recent estimates of unemployment nor other indicators of economic activity. In addition, the implied jump in the unemployment rate in 1995 results from lack of comparability with other sources. Subsequent data confirm that it is a statistical abnormality. This is not to imply that Indonesian policymakers do not need to worry about unemployment. It is well understood that if economic growth--especially in the formal sector--were to slow significantly for an extended period, open unemployment would become a serious social problem. But this should not be confused with quirks of data and changing methodologies in collecting data. 1.22 Labor Markets Policies. The most Account Deficit were Dampened by Higher effective policies for generating more jobs Oil Prices. The current account deficit would be further deregulation of labor-intensive increased to $8.1 billion (3.5 % of GDP) in industries as well as industries that provide 1996/97, as unexpectedly high oil and gas inputs into labor-intensive industries (Chapter prices offset half of a rise of $2.3 billion in the 3 of World Bank 1996a). In the short-term, non-oil deficit (Table 1.4). Oil and gas exports rises in the real minimum wage should be rose to $12.6 billion, reflecting high limited to productivity increases, especially in international prices. However, the non-oil & the labor-intensive sectors, as Indonesia is gas current account deficit widened from $10.5 likely to need low-skilled labor intensive billion in 1995/96 to $12.8 billion in 1996/97. manufacturing jobs for some time (Chapter 3). The trade surplus fell by $400 million, to Over the medium-term, direct government $1.4 billion in 1996/97 as higher oil prices intervention needs to be replaced by a better were offset by weaker prices for other export means for giving workers a stronger voice in commodities and slower growth of non-oil wage and employment negotiations (Box 1.3 exports (paras 1.25 to 1.27). Net factor and World Bank, 1996a, Chapter 3). payments increased by $700 million as continued growth in tourism receipts was C. External Economic Developments insufficient to offset high profit remittances and continued large interest payments. C.1 Balance of Payments 1.24 A net capital account surplus financed 1.23 Pressures for a Larger Current the $8.1 billion current account deficit plus a 10 Chapter 1 Box 1.3: The Costs of Delay in Building Institutions for Improved Labor Relations: The Case of Korea International experience in developing and developed countries alike suggests that--after a certain level of development is reached--countries need to put in place a modem system of industrial relations. Failure to do so at a relatively early stage can lead to serious costs later on. The Republic of Korea is an example of this experience. After years of tight government control, the -number of strikes in Korea began to increase enormously in 1987 at great cost to the economy. Disappointingly low growth in 1989 was attributed to appreciation of the currency and to large wage increases, workplace stoppages, and labor productivity declines attributable to labor strife. The surge in workforce militancy after 1987 pushed up labor costs much faster than competitors' (Table A). Despite relatively low income per capita, by 1990 labor costs in Korean manufacturing had risen to the point where they were virtually identical to Singapore and Taiwan, China and much higher than Hong Kong. Table A: Hourly Compensation Costs in Manufacturing (US dollars) Year USA Japan Rep. of Korea Hong Kong Singapore Taiwan, China 1986 13.25 9.31 1.34 1.88 2.23 1.73 1987 13.52 10.83 1.65 2.09 2.31 2.26 1988 13.91 12.80 2.39 2.40 2.67 2.82 1989 14.31 12.63 3.29 2.79 3.15 3.53 1990 14.77 12.64 3.82 3.20 3.78 3.95 The cost of these wage increases far outstripped productivity increases leading to a dramatic increase in unit labor costs. Korea's performance in the late 1980s compares unfavorably with its two most important competitors, Japan and Taiwan, China (Table B). Table B: Unit Labor Costs in Manufacturing (1986 = 100) Year Nominal Wages Labour Productivity Unit Labour Costs Korea Japan Taiwan, Korea Japan Taiwan, Korea Japan Taiwan, China China China 1987 112 103 110 103 109 111 109 94 100 1988 134 104 122 110 116 116 121 90 105 1989 167 110 140 110 121 127 151 91 110 1990 201 115 159 120 125 138 168 92 115 Source: "Involving Workers in East Asia's Growth: Regional Perspectives on World Development Report 1995," The World Bank 1996. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 11 $3.9 billion increase in reserves. Foreign billion, up from $4.4 billion in 1995/96. direct investnent (FDI) in projects rose to $6.5 Official reserves rose to $20 billion (equivalent billion (though about 70% of this is estimated to 4.7 months of merchandise imports). to be private sector borrowing). Debt prepayments, combined with modest 1.25 Merchandise Trade. Non-oil & gas disbursements, have resulted in negative net export growth and import growth both fell external borrowing by the central government quite sharply from the relatively high rates of ($-0.7 billion). Portfolio inflows (of 1994/95 and 1995/96. On the basis of Bank $3.1 billion) plus Net Other Capital (the Indonesia's Balance of Payments data, import residual; also $3.1 billion), amounted to $6.2 Table 1.4: Balance of Payments (US$ billion) 1992-93 1993-94 1994-95 1995-96 1996-97 Merchandise Exports (FOB) 35.3 36.5 42.6 47.8 52.2 Oil & Gas Exports 10.5 9.3 10.5 10.6 12.6 Non-Oil & Gas Exports 24.8 27.2 32.2 37.1 39.6 Merchandise Imports (CIF) -30.2 -32.3 -38.8 -46.0 -50.8 Oil & Gas Imports -3.8 -4.8 -4.0 -4.3 4.8 Non-oil & Gas Imports -26.4 -28.1 -34.8 -41.7 -46.0 Trade Balance 5.1 4.2 3.8 1.8 1.4 Interest Payments (M<) -3.8 -4.1 -4.3 -4.9 -5.3 Transfers and Other Services -3.9 -3.0 -3.8 -3.9 -4.2 Net Services and Transfers -7.7 -7.1 -8.1 -8.8 -9.5 Current Account Balance -2.6 -2.9 -4.3 -7.0 -8.1 Oil & Gas Account 4.2 2.6 4.0 3.5 4.7 Non-Oil & Gas Account -6.8 -5.5 -8.2 -10.5 -12.8 Capital Account Balance 7.4 3.2 4.9 9.6 12.0 Net Disbursements of Public M< Debt 1.8 1.4 0.1 -0.2 -0.7 Disbursements 7.1 7.0 5.7 5.7 5.4 Amortization b -5.3 -5.6 -5.5 -5.9 -6.1 Foreign Direct Investment 1.7 2.0 2.6 5.4 6.5 Portfolio Investment a n.a. n.a. 2.3 3.3 3.1 Net Other Capital (residual) 3.9 -0.2 0.1 1.1 3.1 Change in Official Reserves (- = increase) -4.8 -0.3 -0.6 -2.7 -3.9 Memo Items: Current Account Balance/GDP -1.8 -1.8 -1.9 -3.3 -3.5 M< Debt Service b/Exports (GNFS) 29.1 31.6 28.2 30.0 31.1 Terms of Trade (1993=100) 101.0 100.0 104.9 106.5 108.4c Official Reserves - (US$ billion) 12.0 12.7 13.3 16.0 19.9 - Months of Imports 4.8 4.7 4.2 4.3 4.7 a Includes sales of public asset being privatized offshore. b Includes prepayments. The improvement in oil prices in 1996 was partly offset by a decline in the non-oil terms of trade. Source: Bank Indonesia, Biro Pusat Statistik, and World Bank staff estimates. 12 Chapter 1 growth slowed from 18.6% to 10.4%, while 1996.4 The growth of intermediate good non-oil & gas export growth slowed from imports, which account for about 70% of 15.2% to 6.6%, when measured in US dollars. imports, fell to 2.3 %,5 to some extent This slowdown is not unique to Indonesia, but reflecting demand management policies. has been common throughout much of East Consumer good imports continued to grow Asia. In Indonesia's case, it stems from a rapidly, but they are still a relatively small number of factors, including weaker prices for share of total imports (10%). Passenger copper, other minerals, coffee, seafood and vehicle imports (part of consumer goods) rose vegetable oil. On average Indonesia's non-oil sharply, partly reflecting the national car export prices fell by almost 4% in 1996/97; policy. Imports of machinery and equipment volumes rose by a respectable 10.5%. Wage grew 13%. This is consistent with the rise in pressure, loss of momentum for deregulation FDI and is not necessarily a matter of concern. and a real appreciation of the Rupiah, may Much of growth in capital good imports is due have weakened export growth. to FDI in the free trade zones and hence is export oriented and would not occur without 1.26 On the basis of BPS data, non-oil concurrent FDI financing. export growth in dollars was 9.0% in 1996 (down from 15.1 % in 1995) while oil & gas 1.28 The Widening Current Account exports rose by 9.7% (Table 1.5)3. The Deficit and Economic Policy. Indonesia's volume of oil & gas exports continued its widening deficit increases the risks of a sudden decline of recent years, but this was more shift in volatile foreign finance. However, this than offset by higher prices. Among non-oil risk is lessened by the extent to which the exports, the most rapidly growing categories current account deficit is investment induced, were electrical goods (which experienced a rise rather than consumption driven. So far in growth to 28% versus a fall in much of Indonesia's widening deficit seems largely to Southeast Asia), plastic and plastic products, reflect increased investment, especially FDI. vegetable oil, processed food, "other The increase in the current account deficit over manufactured goods", and copper. These items the past two years is roughly the same as the alone accounted for 75% of the total increase increase in FDI. With much of the imports in non-oil exports. Plywood exports increased accompanied by FDI financing, and with by 4% due to a price recovery that more than investors motivated in part by projects' offset a decline of about 4% in volume. international competitiveness, potential Textile, clothing and footwear exports all adjustment problems are reduced. grew slowly, at 5-7%. Seafood suffered a decrease due to a fall in the price and quantity 1.29 Containing the risks will involve, first, of shrimp exports following infestations in keeping the current account deficit within some "farms". Three items stand out in terms reasonable limits by using tighter of consistently strong export growth in each of macroeconomic policy to offset and dampen the last three years-mining (copper and coal), any boom in private spending. This will electrical goods, and "other manufactured automatically free-up goods for export and goods". This growth is broadening the export contain imports to roughly the increase in base and reducing reliance on oil & gas, forest- exports plus foreign direct investment. based goods, and textiles, footwear and Second, use of shock absorbers (e.g., a wider clothing. exchange rate band and adroit monetary policy) will dampen volatile flows. Third, a different 1.27 BPS data indicate a very sharp drop in mix of macroeconomic policy-less reliance on import growth, from 27% in 1995 to 6% in high interest rates, more reliance on tight fiscal Macroeconomic Developments and Policies.- Managing Success and Reducing Risk 13 Table 1.5: Export Growth Sector/Commodity Growth (% in $s) 1996 Exports 1994 1995 1996 ($ billion) Oil & Gas Exports -0.5 8.0 9.7 11.7 Non-oil & Gas 12.1 15.1 9.0 38.1 Mining 23.6 48.8 11.6 3.1 o/w: Copper 23.5 79.3 13.7 1.7 Coal 27.6 26.1 8.5 1.1 Agriculture 22.7 2.5 0.9 2.9 o/w: Seafood 8.3 6.0 -1.0 1.4 Manufacturing 10.3 14.1 9.5 32.1 Plywood -12.0 -6.9 3.9 3.6 Pulp & other wood products 16.6 27.9 0.1 2.0 Gold & mineral products 53.5 6.3 5.1 2.3 Chemicals (incl. fertilizer) 27.1 50.2 -0.6 0.8 Plastic & plastic products 8.7 85.6 27.7 0.6 Paper & paper products 34.7 22.0 -5.6 1.0 Rubber products 30.9 57.5 1.6 2.2 Vegetable oil 60.3 -7.4 32.5 1.4 Processed food 10.1 0.7 17.5 1.0 Garments -8.1 5.0 5.5 3.6 Other textiles -3.7 9.0 5.7 2.9 Footwear 13.7 8.8 6.8 2.1 Furniture 17.0 10.2 10.0 0.9 Electrical goods & computers 40.6 19.1 28.4 4.0 Other manufacturing 7.4 24.1 29.0 3.7 Source: Biro Pusat Statistik. policy-would cut back on volatile capital C.2 External Debt and Reserves inflows and tend to reduce the related real exchange rate appreciation that discourages 1.30 At end-1995, Indonesia's total external exports and encourages imports. Fourth, debt stood at $107.8 billion, up from $96.5 exports-and general competitiveness-would billion a year earlier. Of this amount, roughly benefit from more deregulation and cuts in 60% was public & publically guaranteed "invisible costs" (Chapter 5). Such (medium- and long-term debt). On the basis of deregulation would ensure that investments are preliminary indicators, total debt increased by forced to produce internationally competitive about $2 billion during 1996. Favorable products and thereby generate foreign exchange valuation effects (due to cross-country directly or indirectly. Finally, to ensure that exchange rate movements) reduced the stock of investors and foreign capital inflows are not public debt by about $4 billion. When excessively encouraged by lack of downside combined with negative net disbursement due risk, the Government needs to reiterate its to prepayments, this lead to a sharp drop of policy of not taking over private debts, and to some $5 billion in public debt, but this was continue to avoid debt guarantees (explicit or more-than-fully offset by an expansion in implicit), and bailouts of bad debts in the private debt by about $7 billion. financial system. 14 Chapter 1 Table 1.6: Import Growth Sector/Commodity Growth (% in $s) 1996 Imports 1994 1995 1996 ($ billion) Total Imports 12.9 27.1 5.6 42.9 Consumer Goods 20.2 52.2 21.3 3.7 Food and Beverages 77.6 99.8 40.3 1.6 Passenger vehicles 3.8 26.0 30.5 1.2 Other durables 14.3 34.5 -3.4 0.8 Other -24.0 94.3 -38.1 0.1 Intermediate Goods 15.6 28.1 2.3 29.6 Food and Beverages 22.1 38.7 26.6 2.1 Raw Materials 13.6 29.3 -2.9 16.8 Fuels and Lubricants 12.7 25.4 19.4 2.6 Parts and Accessories 19.9 24.2 3.7 8.1 Capital Goods 3.7 17.3 11.0 9.7 Machinery and Equipment -0.5 20.5 13.2 9.0 Other 58.5 -9.0 -12.8 0.6 Source: Biro Pusat Statistik. 1.31 These movements during 1996 (roughly one-third debt to the World Bank; the highlight two important trends in Indonesia's rest to the Asian Development Bank), or more external debt in recent years. First, the great than 5% of total outstanding public debt. With bulk of the increase is accounted for by these prepayments, debt with interest rates over private, non-guaranteed debt, which has 9% has been eliminated. This is a major increased by about $17 billion over the last 2 accomplishment. years. Several factors are behind this rapid growth in private debt. First, rapid 1.33 After prepaying $460 million in investment-led growth of the private sector February (from privatization receipts), the generates a large demand for private credit. Government delivered on its commitment in the Second, strong external confidence in Indonesia FY1996/97 Budget Speech to use budgetary has made large amounts of off-shore funding surpluses for debt prepayment. It prepaid available at relatively low interest rates. And some $570 million in official debt that carried third, continued high domestic interest rates interest rates of 9% or more in May and have pushed more creditworthy borrowers off- another $540 million in October. In mid- shore. December, the Government announced that the proceeds of privatization of an additional 1.32 The second important trend in external 4.15 % of PT Telkom would be used to prepay debt is low net disbursements of public debt. further debt and an additional $533 million was Net disbursements of public debt have been on prepaid in the first quarter of 1997. the decline for several years, and have been negative (including prepayments) since 1.34 Debt Ceilings. To assist with external 1994/95. The Government continues to prepay debt management, Indonesia maintains certain large amounts of its foreign debt, and the pace quantitative restrictions on foreign borrowings. of prepayment increased with $1.6 billion These ceilings (referred to as PKLN or the prepaid in 1996/97. This brings total debt pre- COLT in English), which were originally payment since late 1994 to some $3.2 billion introduced in October 1991 to improve Macroeconomic Developments and Policies: Managing Success and Reducing Risk 15 management of commercial public debt,6 billion, which is well within range considering expired in March 1996. In FY1996/97, they possibilities for privatization and desirable were replaced by ceilings only on foreign fiscal surpluses. Third, GOI could begin using borrowings by state and private banks and by budget surpluses and proceeds from state-owned companies; the ceiling on private privatization to cover unfunded pension companies-which was only indicative-was liabilities, which are large (Chapter 5 and eliminated.7 Leechor). Some aid donors are considering waiving prepayment penalties, as the Asian 1.35 Near the end of March 1997, Bank Development Bank has already done. Indonesia further tightened short-term external borrowing by banks. Banks were required to 1.37 Dealing with Private Capital Flows. limit short-term (two years or less) offshore Policies to deal with private debt flows are borrowings, to a maximum of 30% of their different from those for public debt. They are capital (the limit on the Net Open Position more indirect, mainly involving the remains at 25% of capital and the ceilings maintenance of macroeconomic stability and noted above remain in place). In addition, narrowing of the scope of public activities to banks are to report their annual off-shore make room for the private sector. Indonesia borrowing plans to Bank Indonesia, and to has been following these policies. extend at least 80% of their off-shore loans Macroeconomic stability has been maintained. (except short-term bilateral loans of up to $20 Debt "headroom" was created by prepayments million) as export credits (which are defined out of portfolio inflows from offshore fairly broadly). The ruling also provided for privatizations. And any fluctuations in certain fines: 0.5% of new debt, if banks fail confidence among the holders of shares in to report plans to borrow; 0.01 % of a bank's offshore markets will primarily affect stock total offshore debt if that bank fails to report its prices, not Indonesia's balance of payments. schedule to enter foreign financial markets; More importantly, Indonesia's local shock and, for banks' borrowings exceeding 30% of absorbers-stock market prices and the wider their capital, 0.5% of that excess.8 These buy/sell exchange rate band (see the next regulations are primarily intended to reduce subsection)-reduce the incentives for banks' offshore borrowings and reduce destabilizing "hot money" flows. Beyond this, financial sector risk. They will, of course, other policies would also be of assistance. For direct borrowing off-shore, and raise instance, economic policies can act as a brake borrowing costs for customers that cannot go on special sectors (such as property off-shore (primarily small- and medium-sized development; Box 1.1). Stronger local capital businesses). markets would ease the pace of off-shore borrowing. Moreover, as mentioned above, the 1.36 Public Debt Management. The Government needs to reiterate at every Government appears to have public debt under opportunity that debt of the private sector will firm control. Its policies of debt prepayment not become a liability of the public sector in have achieved impressive results to date, and the event of default. there are indications of more prepayments to come. Three options might be considered to 1.38 Official Reserves. Indonesia maintains strengthen this program (also see Box 2.7). large stocks of international reserves, which is First, a specific line item might be added to the desirable. At end-1996/97, these amounted to annual Budget for debt prepayment. Second, almost $20 billion (equivalent to 4.7 months of a explicit target might be announced for debt total imports; Table 1.4), up from $16 billion prepayment over REPELITA VII, say $15 a year earlier. In addition to official 16 Chapter I transactions (for example, on account of sales during 1996 the spot value of the rupiah of oil or servicing of foreign debt), Bank depreciated by only 3 1/4%. This depreciation Indonesia accumulates official reserves by is among the smallest in many years, and half buying (or selling) foreign exchange on the occurred during the final 2 months of the year spot market for one hour (from 2 to 3 PM) when Bank Indonesia speeded-up the pace of each working day, if sales or purchases are depreciation of the bands (Figure 1.5 and needed to keep the spot rate of the rupiah para. 1.42). within its pre-determined exchange rate band (see following sub-section). During 1996, 1.41 Under the current system of exchange there were large spot purchases in June and in rate management, the rupiah is allowed to the final three months of the year. For the fluctuate within an intervention band first time in many years, Bank Indonesia was (Figure 1.5) whose mid-point is set on a daily not called upon to sell foreign exchange in basis by the Central Bank. The upper/lower defense of the value of the rupiah at any time edges of the intervention band define the rates during 1996. at which Bank Indonesia is prepared to intervene to sell/buy US dollars. Since 1992, 1.39 In addition to its official reserves, Bank the Central Bank has widened the intervention Indonesia holds other net foreign assets band in stepwise fashion, to give more room (estimated at approximately $5 billion) and for price fluctuations to absorb shocks. maintains large (roughly $2 billion at end- 1996) revolving stand-bys. The stand-bys can 1.42 The band was widened twice during be activated at short notice without adding to 1996 (Figure 1.5). In mid-June, it was debt outstanding or debt service (as long as widened from 66 to 118 rupiah, and in mid- they remain undrawn). As liquidity backup, September to 192 rupiah, which is equivalent Bank Indonesia also maintains repurchase to approximately 8 % of the value of the agreements with several other central banks in rupiah. On both these occasions (and the the region; in April, these agreements were previous, end-1995 widening), the bands were extended to include Japan.9 widened slightly asymmetrically to allow a bit more room on the weaker side of the band. It C.3 Exchange Rates should also be noted that there was a perceptibly faster pace of depreciation of the 1.40 Since 1986, the Indonesian band in the final months of the year; during the Government has followed a policy of roughly final two months of the year the mid-point of maintaining the real effective exchange rate of the intervention band depreciated by 7 1/2% at the rupiah (Figure 1.4).'° During 1996, the an annual rate versus 6% during the first 10 real value of the rupiah rose almost 5% and it months. surged again in early 1997. These increases are largely accounted for by third currency 1.43 As can be seen from Figure 1.5, the movements-for example, the appreciation of wider band was very effective in absorbing the US$ dollar versus the Japanese yen, the sizable, temporary shocks during 1996. Most deutsche mark and the Korean won. However, notably, nervousness in early July regarding a further part stems from market pressures that the health of the Republic's President and the strengthened the rupiah versus the US dollar social disturbances of late July were easily within the wider buy/sell band (see below); absorbed without loss of reserves. The ease Macroeconomic Developments and Policies: Managing Success and Reducing Risk 17 Figure 1.4: Exchange Rate Indicators (Jan 1986 - Feb 1997) Index Yen/$ 180 205 160. 140. e/ 120 - Real Effective Rate ) 143 100 80 86 87 88 89 90 91 92 93 94 95 96 97 1) January 1990=100, break in series at end-1991. Source: IMF. with which the markets shrugged-off these estimated to be in small surplus, as measured developments is also indicative of the strength on an IMF/World Bank basis (Table 1.7). of external confidence in Indonesia in 1996. This overall fiscal position (that is, including estimated net off-budget spending) is virtually 1.44 Indonesia's current band is much wider unchanged from the previous year. At first than in the past (Figure 1.5). However, some glance, this may seem surprising considering other countries maintain even wider bands. the high level of international oil prices (an For instance, Colombia maintains a band of average of nearly $21/bbl versus less than 14%; Chile's is 25 % (widened from 20% in $17.50/bbl in 1995/96). However, almost half January 1997); and most countries in the EMS of the revenues from high international oil maintain 30% bands. prices were eaten-up by subsidies to maintain domestic prices at relatively low levels." In 1.45 International experience underscores addition, off-budget spending was a bit less the importance of putting-in-place an contractionary, perhaps reflecting the run-up to adequately-wide band prior to the onset of any national elections. crisis. By way of recent regional examples in this regard, the Korean won, which floats 1.47 On the revenue side, the main relatively freely, dropped in value by almost characteristic of this outturn is oil & gas 9% (relative to the US dollar) during 1996, revenues that are some Rp.6 trillion above without creating any apparent difficulties for budget, owing to much higher-than-budgeted the economy. By contrast, the Thai baht, international oil prices. A substantial which is managed within a very tight band, proportion of this seems to have been saved was under pressure for much of 1996. (especially in the early months of 1997), which is reflected in a build-up of government D. Macro Policies: Fiscal Policy deposits in the financial system (see "domestic financing" in Table 1.7). Total non-oil tax 1.46 The Outturn for FY1996/97. The revenues were approximately in line with overall fiscal position for FY1996/97 is budgeted amounts; income tax exceeded 18 Chapter I Figure 1.5: Rupiah Exchange Rate: Spot Rate and Intervention Bands Rupleh USS (Daly, August 1996 - April 1997) 2U. 21o0 2550 Upper I ntervnto bon 25 2200 2SOo IMld-rate,- F-sca Y&v End | I 2400 Rumo,s Of dul FIM 2400 devMmVion \ -Spot Rato A7Now Yo*rk_; Lower Intervention 221s0 5 - \ Rumon~~~~~~~~~~~~2 dihane bond Rumors of 2250 Jawin b&nk Juh4 to$&"w requkmntw -2200 . 2200 Sour'.DBank Indonemea. budgeted amounts while sales tax and import down a tight Budget for FY1997/98. The duties were less than expected. Non-tax Budget (measured on an IMF/World Bank revenues were below-budget, owing to the basis) was projected to be in small deficit (less relatively low level of domestic oil prices that than 1/4% of GDP) compared with virtual eliminated the surplus on oil & gas operations balance in the previous year's Budget (footnote 11). (Table 1.7). However, the revenue targets (set in relation to the Budget of the previous year) 1.48 On expenditures, current and capital were very conservative and total spending was spending were approximately on-budget, apart budgeted to grow in line with revenues, both from (unbudgeted) payments to Pertamina for expanding a little slower than nominal GDP. domestic pricing subsidies (see footnote 12). Net off-budget operations (as measured by total 1.50 According to the Budget, total revenues official financing that is not accounted for by for FY1997/98 would decline in relation to on-budget revenues and spending) looks less GDP. This reflects a projected slowdown in contractionary than last year; as mentioned this Oil & Gas revenues, which were set on the may reflect the run-up to elections. There is basis of international oil prices of $16.5/bbl. also debt prepayment of some $1.6 billion, Non-oil taxes were budgeted to remain constant which is counted as (negative) financing in relative to GDP, while non-tax revenues IMF/World Bank format.'2 dropped-off a little due to sharply lower profits on domestic fuel sales and returns on public 1.49 The Budget for FY1997/98. In enterprises. No new revenue measures were January of 1997, the Government brought announced in the Budget. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 19 1.51 Current expenditures are budgeted to equity. Improved tax administration will be a decline slightly in relation to GDP. There key in this regard, and the newly passed laws were external interest savings stemming from on Non-Tax Revenues and Tax Courts are debt prepayments (Section C) and favorable important steps towards this goal (also see third currency movements (Section C). These Section F). Among the priorities, the most savings were largely offset by continued rapid important steps concern non-budgetary, quasi- increases in (foreign and domestic) materials public revenues and expenditures which are expenditures.'3 Personnel expenditures, believed to be very large in Indonesia.'4 For which stayed constant in relation to GDP, purposes of transparency, accountability and appear to include an allowance for a modest budgetary discipline, more of these should be real increase in general civil service salaries. brought on-Budget,'5 as envisaged in As was the case in the previous year, the exact legislation passed by Parliament in early 1997. size of the general pay increase for the civil Two prominent examples are monies gathered service was left to be discussed with under re-forestation fees and the now- Parliament. compulsory 2 % surcharge on high income earners for poverty alleviation. Restructuring 1.52 On-budget capital spending declined a of some expenditures would also be important. little relative to GDP (Table 1.7). According to On the side of current spending, real increases the Budget, priority was to be accorded to, in personnel spending should go to re- inter alia, poverty alleviation programs, structuring civil service salaries, rather than regional allocations (INPRES), and various increasing the size of the civil service and health programs; education received mid-range "wage creep" (for development spending, see priority. Somewhat lower priority was given Chapter 2). to power generation and to telecommunications, both of which are E. Macro Policies: Monetary Policy benefitting from large private investment. More details concerning the development 1.55 Increased globalization of financial expenditures are included in Chapter 2. flows (Chapter 2) has important implications for economic policy-making in Indonesia. One 1.53 Fiscal Policy Issues. The Budget for of the most important is the reduced 1997/98 is striking evidence of Indonesia's effectiveness of monetary policy in influencing continuing commitment to macroeconomic real developments (e.g., Box 1.3 in World stability, even in an election year. In the Bank, 1996a) under fixed exchange rate course of the year, strong implementation will regimes. Concerns in this regard appear to be be important, supplemented by strict control one consideration behind the authorities' move over off-Budget spending. In addition, certain towards more flexible exchange rate follow-up policies will also be important. For arrangements. However, when the spot example, "windfall" revenues-such as those exchange rate is at one edge of the intervention accruing from further privatizations or higher- band (Section C), the economy is effectively than-expected international oil prices-could be operating under a "fixed regime". For the time used to prepay more external public debt. If being, the authorities appear to set interest such revenues are spent, they could increase rates roughly in line with (risk-adjusted) inflation and imports. international rates. Instruments are: changes in reserve money, which are geared to targeting 1.54 Looking further ahead, the foundation interest rates; moral suasion; statutory reserve of fiscal policy should be generation of more requirements; and regulatory policy. Moral revenues by means that increase efficiency and suasion and regulatory policy are sometimes 20 Chapter I Table 1.7: Indonesia: Central Government Fiscal Operationsa) (Rp.trillions) 1994/95 1995/96 1996/97 1997/98 Budget Estimate Budget Revenue & Grant 60.1 69.0 78.2 83.6 88.1 Oil & LNG taxes 13.4 14.8 14.1 19.9 14.9 Non-oil taxes 40.7 48.4 56.0 55.8 64.7 Non-tax revenues 5.5 5.2 7.6 7.3 7.9 Grantsb) 0.5 0.5 0.6 0.6 0.6 Current E3X:nditure 35.3 43.6 48.3 51.7 55.3 External Interest 6.5 6.9 7.8 7.7 7.5 Subsidies') 0.5 0.2 0.1 1.8 0.1 Other, of which:d) 28.4 36.5h) 40.3 42.2 47.7 Personnel') 19.8 23.2 27.8 27.3 32.2 Capital Expenditure (on-budget) 25.3 26.()P 30.2 28.9 34.0 Total Budget Expenditure 60.6 69.6 78.5 80.6 89.4 Overall Budget Balance -0.5 -0.5 -0.3 3.0 -1.3 Estimated Off-Budget (net)f -1.7 -4.3 ... -2.1 ... Overall Fiscal Balance 1.3 3.8 -0.3 5.1 -1.3 Financing External (net) -0.7 -0. 1 -0.3 -2.3 0.7 Disbursements 11.6 13.0 11.8 12.1 12.4 Amortization 12.3 13.1 12.1 14.4 11.7 Domestic (net financial drawdown) -2.3 -5.5 0.5 -4.1 0.6 Exceptional: privatization receipts 1.7 1.8 0.0 1.4 0.0 (as % of GDP) Revenue & Grants 15.0 14.7 14.4 15.2 13.8 Current Expenditures 8.8 9.3 8.9 9.4 8.7 Capital Expenditure (on-budget) 6.3 5.5 5.5 5.3 5.3 Overall Fiscal Balance (incl. off-budget) 0.3 0.8 -0.0 0.9 -0.2 Memo item: Oil prices ($/bbl)g) 16.6 17.3 16.5 20.8 16.5 a) This table presents Central Government fiscal accounts in the format of the IMF's Government Financial Statistics, which differs from Government of Indonesia's Budget format, presented in the Annex. b) Estimated grant component of external financing. c) Includes fertilizer and petroleum subsidies. d) Includes estimated spending of a current nature classified as development expenditure in the Government's Budget (defence expenditure, operations and maintenance expenditure). e) Central Government'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 (external plus domestic), less estimated on-budget capital spending. ) 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. Source: Ministry of Finance, Bank Indonesia, and World Bank staff estimates. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 21 used to influence the timing of interest rate changed, probably reflecting banks' attempts to changes, the growth of aggregate credit, and maintain margins in the face of higher reserve the composition of credit (for example, lending requirements, to be effective in April 1997 to the property sector). (Box 1.4). Despite this stability in domestic and foreign rates, the covered differential (i.e., 1.56 Interest Rate Developments. Off- the interest rate spread less the forward swap shore rates and rupiah-denominated interest premium)16 displayed considerable volatility rates were little changed during most of 1996 (Figure 1.7), owing to marked fluctuations in (Figure 1.6). Beginning around the end of the swap premium. In late 1996, confidence November, deposit rates at many banks came was on the rise, which reduced swap costs and down some 50-100 basis points, as Bank widened the covered differential (Figure 1.7). Indonesia eased rates on its monetary This accounts for the strong capital inflows instruments. But lending rates were little during this period. a) Figure 1.6: Interest rates (% p.a.) Figure 1.7: Covered differential (% p.a.) 24 - 5 21 Lending: for working capital 4 18 ~41\ 1 12 0\~ Orih 2 - 6 --------- 0~~~~~~~~~~~~~~ J M S J M S J M S J M S J U JM JM S J M S 93 94 95 96 93 94 95 96 a) Rupiah deposit rate less SIBOR less swap la 3-month. premium (all 3-month maturity). Source: Bank Indonesia. Source: Bank Indonesia. 1.57 Reserve Money. Policy towards 1.58 The sources of expansion of reserve reserve money was run tight during most of money illustrate the conduct of monetary policy 1996 (Table 1.8). Higher commercial bank during 1996 (Table 1.8). The main factor reserve requirements led to a sharp rise in the exerting an expansionary influence on reserve demand for reserve money in February 1996 money was external in origin (i.e., Bank (which was a tightening of policy, despite the Indonesia's purchases of foreign exchange), resulting jump in reserve money; see Box 1.4). especially during October through December, After the increase in reserve requirements took when the exchange rate was crawling along the hold, expansion in reserve money was quite stronger edge of the intervention band and restrained. During the last 9 months of the Bank Indonesia was buying large amounts of year, reserve money rose by 14 1/2% at annual foreign exchange (Figure 1.5). Liquidity rates, and almost two-thirds occurred in credits (which are low-cost credits from the December when Bank Indonesia eased interest central bank for special programs) were also rates. This compares with 16 3/4% during expansionary during 1996, continuing the 1995. pattern begun in 1995. During 1996, the bulk 22 Chapter I of additional credits were extended to Bulog, in which had been highly contractionary in the part for financing of flour. Their on-going two previous years, were only mildly expansion during the past two years is a contractionary during 1996 as a whole. Late marked departure from previous years and a in the year (and in early 1997) when oil prices source of concern. To offset these were relatively high, government deposits were expansionary factors, Bank Indonesia made more contractionary; effectively, government active use of its money market instruments saving of its oil revenues automatically (SBIs and SBPUs). Government deposits, sterilized increases in net foreign assets. Table 1.8: Sources of Reserve Money Expansion (Rp. trillions during the indicated period) 1994 1995 1996 1996 (Mar-Dec) External Factors -1.5 5.2 17.1 12.3 plus: Policy Factors 8.6 0.2 -8.7 -9.3 Claims on government -3.1 -6.9 -1.4 -2.1 Liquidity credits 0.9 3.9 3.5 2.9 Money market instruments 10.8 3.7 -10.8 -10.1 plus: Other -2.6 -2.2 0.3 0.4 equals: Reserve Money 4.6 3.7 8.6 3.4 (Growth rate, % per year) (25.9) (16.7) (33.1) (14.4) Source: Bank Indonesia. Fie1.8: Broad Money Multiplier rose by almost 30% during 1996, up (Jan. 1988 - Feb. 1997) moderately from the previous year (Table 1.9). This acceleration occurred despite the relatively 13 - restrained growth in reserve money, mentioned 12 - above. Consequently, the growth of broadly- 11- M2/Currency outside banks defined money supply (M2) continues to 10- outpace reserve money by a considerable margin, indicating a continuing rise in the g , I s money multiplier (apart from the once-only 8 I drop in the M2-multiplier in February, when 7 - a I reserve requirements increased; Box 1.4 and 6 M2saseMoney Figure 1.8). Relatively rapid growth in M2 rt occurred in all major components of quasi- money (that is, foreign currency deposits, and 4 rupiah time and savings deposits). 3- . ., . 88 89 90 91 92 93 94 95 96 97 1.60 Shifts in the money multiplier"7 (Figure 1. 8) are an on-going source of frustration for monetary policy. Policy-makers see themselves as maintaining reasonable 1.59 Monetary Aggregates & Credit control over the growth of reserve money, and Developments. Broadly-defined money supply an adequate spread between domestic interest Macroeconomic Developments and Policies: Managing Success and Reducing Risk 23 rates with foreign rates. Nevertheless, the seems to be one objective of increasing growth of overall money supply (and credit) commercial bank reserve requirements remains higher than desired, thereby (Box 1.4). However, this is awkward with an potentially fueling excessively rapid open capital account like Indonesia's, as long economic growth and inflation. In addition, as the spot exchange rate is at one edge of the these shifts are not easily explained by intervention band (Box 1.4 and World Bank conventional factors (such as rising interest 1996a, Box 1.3). These complications argue rates, financial innovation or increased in favor of increased reliance upon fiscal financial intermediation). Trying to regain policy, and on setting conservative targets for more control over this key economic variable reserve money and credit expansion. Table 1.9: Indonesia: Developments in Money and Credit (change over year earlier, trillions of Rp.) 1993 1994 1995 1996 Net Foreign Assets -0.9 -4.4 7.4 18.0 Net Domestic Assets 32.5 32.7 41.3 53.7 Lending to Business 30.2 37.8 47.4 56.4 Other Assets (net) -5.4 1.1 -0.6 -5.7 Broad Money (M2) 26.1 29.3 48.1 66.0 Narrow Money (MI) 8.0 8.6 7.3 11.4 Quasi-money 18.1 20.7 40.8 54.6 Memo Items: (% change) Reserve money 19.5 25.8 16.7 33.1 Broad Money 22.0 20.2 27.6 29.6 Narrow Money (Ml) 27.9 23.3 16.1 21.6 Quasi-money 20.1 19.1 31.6 32.1 Lending to Private Sector 22.7 23.2 23.6 21.7 Source: Bank Indonesia. 1.61 On the asset side of the monetary expansion of credit was especially rapid for accounts, credit expanded by around 22%, Services (35%) and Trade (25%); Agriculture down a little from previous years, but still well and Manufacturing were the slowest-growing above Bank Indonesia's target of 17 1/4%."8 sectors, expanding by 15% and 10%, The main factors accounting for this credit respectively. slowdown are: i) Bank Indonesia's higher capital requirements for foreign exchange 1.62 Looking at the Property Sector banks; ii) slower growth in lending by state (Box 1.1),20 which constitutes almost one- banks, probably accounted for by only a few of quarter of total bank credit, banks' exposure to them and, perhaps, iii) Bank Indonesia's higher this sector continues to rise. After a marked reserve requirements. Bank Indonesia also slowdown during 1995, the pace of expansion attempted to strengthen moral suasion during of lending to the property sector began to pick- 1996,'9 but it does not appear to have been a up again in 1996 (although it remains moderate significant factor. Among the major sectors, by recent standards; see Figure 1.9). The 24 Chapter I Box 1.4: Reserve Requirements as an Instrument of Monetary Policy In Indonesia In February 1996, Bank Indonesia (BI) re-activated reserve requirements as an instrument of monetary policy. This instrument was last changed in 1988, when it dropped sharply from an effective rate of about 8% to 2% as part of the October 1988 de-regulation package. There were three components to the 1996 change. First, required reserves (that is, the amount of cash held by commercial banks or the amount of their deposits in the central bank) were raised from 2 to 3% of deposit liabilities. Second, the definition was changed so as to exclude cash held by the banks. Third, the frequency of the calculation was changed from a weekly average to a daily basis, and BI (not the commercial banks) makes the calculation (using data submitted to BI within 6 days versus 2 weeks previously). In September 1996, Bank Indonesia announced another increase in reserve requirements. On this occasion they were raised to 5%, effective mid-April 1997. According to official announcements, eight months of lead-time was needed to give banks adequate advance notice and to avoid complications stemming from seasonal instability in the demand for reserve money in early 1997 (reflecting the occurrence of the New Years, Idul Fitri, and fiscal year-end within 3 months). What are the implications of these changes? Conventional economic analysis treats reserve requirements like a tax on banks, acting as a wedge between deposit and lending rates. An increase in reserve requirements widens the wedge; whether lending or deposit rates adjust more, depends upon the relative degree of competitiveness in these two markets. In Indonesia's highly open economy, the adjustment will tend to fall on side of lending rates, because of the highly competitive nature of funds mobilization. What is likely to happen in the wake of further increases in reserve requirements? Higher reserve requirements will lower the money multiplier (the ratio of money supply to reseve money). If certain regulatory constraints (PKLN and the Net Open Position) are not binding, banks will borrow off- shore to meet the higher reserve requirements, as happened in February 1996 (see Figure 1.5) or Bank Indonesia will buy (sell) SBPUs (SBIs); deposit rates will be essentially unchanged; lending rates will rise for those bank customers who cannot go off-shore; and banks' profitability will tend to fall. Bank Indonesia has also said that the smaller money multiplier could slow the growth of money supply. Source: Bank Indonesia. pick-up in growth is attributable to loans for stability (Box 1.5). The more immediate construction and real estate development; objective of monetary and fiscal polices is to mortgages, the least risky component, reduce the risk in Indonesia's medium-term continues to decelerate. outlook. This has become more complicated in the past year or so, owing to the surge in F. The Outlook for Macro Policies external confidence, which was reflected in strong capital inflows in 1996. In the near- 1.63 Macroeconomic policy's main term, these have put upward pressure on the contribution to economic development is rupiah, thereby frustrating GOI's attempts to the continued maintenance of macroeconomic use the exchange rate to improve external Macroeconomic Developments and Policies: Managing Success and Reducing Risk 25 competitiveness. As recent developments in Figure 1.9: Credt Development Thailand indicate, a turnaround in these flows at Deposit Money Banks could exert pressure on the economy. v % chane) 1.64 The Government could react to these capital inflows in essentially two ways (see also so Box 1.6): i) by further widening the exchange rate band; or ii) by changing the mix of 40 economic policies. Widening the band has benefits (Section C). But in the present 30 TotIa c df external environment, it also tends to undermine Indonesia's international 2 competitiveness which, as mentioned, is a Excluding property matter of concern for the Government. This 10 outcome can be avoided by exercising the second option, namely by easing monetary __...____...____.. policy, which would reduce capital inflows, in M 94 S94 M95 S 95 M96 S96 conjunction with tight fiscal policy, which will sOuce: Bank lndonrala. keep the economy from overheating, by limiting any rise in aggregate demand. During most of 1996, the authorities followed the first indicates that monetary policy is capable of approach, then eased interest rates late in reacting forcefully and quickly in such the year, just before the tight Budget for circumstances. But, it would be less FY1997/98 was brought down. Bank risky-and more effective-if fiscal policy Indonesia followed-up, by reducing interest were to take the lead role. To this end, it rates on short-term SBIs in early 1997, would be helpful to have ready at hand a apparently making the most of favorable package of fast-acting fiscal measures. Some market reaction to the tight Budget for specific, fast-acting measures-which generally 1997/98. have beneficial secondary effects-could include: 1.65 There will likely be considerable room to continue this approach in 1997. On the side 1) Raising property taxes on urban of monetary policy, it will require opportunistic properties, especially luxury residences reductions in key interest rates, guided by (which would permit a reduction in lasting declines in the swap premium when the central government transfers to lower exchange rate is under pressure. It would level governments). The current property also be helpful to combine this with rising tax rate in among the lowest in the world, reserve and capital requirements at commercial measured as a percentage of assessed banks, which would keep a cap on lending. In value. As secondary effects, this would some circumstances, moral suasion might be a assist with decentralization by increasing useful adjunct. the autonomy of local governments; it would also assist with keeping the 1.66 In addition, macro policies need to be property boom under control. prepared for two, slightly different eventualities. First, in the event of over- ii) Increasing domestic fuel prices-so as to heating, policies may need to be tightened eliminate the subsidy in the budget. A quickly. Experience of the past decade major beneficiary of current subsidies is 26 Chapter I Box 1.5: Traditional Culture Parallels Macro Stability "Macroeconomic instability is like the evil witch Rangda in the traditional Balinese Barong dance. It cannot be permanently defeated. It can only be held down by vigilance and good behavior." Anonymous, 21/11/96 the 2 million or so car-owners (probably characterized by extensive capital flight. In less than 1 % of all residents), including this case, the first line of defense is a relatively businesses and expatriates who are wide exchange rate band, backed by a large concentrated in Jakarta. This subsidy is stock of official international reserves. Beyond particularly inappropriate for users of this, financial policies would need to Premix (high octane gasoline), who tighten-significantly and probably quickly-in must certainly be at the upper end of a manner that convinces investors that financial Indonesia's income distribution. stability will be maintained. This is likely to entail a three-part combination of monetary iii) Increasing power tariffs, as proposed by action and fiscal measures to restore stability, PLN. Current levels are unsustainable, supported by a strong deregulation package to and they threaten PLN's privatization reverse expectations and sustain growth. It prospects and its access to multilateral would be helpful if the key fiscal and loans (Chapter 4). deregulation components could be on-the-shelf, ready for use on short notice. iv) Reversing the present trend towards wider tax exemptions. Tax holidays, 1.68 As detailed elsewhere in the Report, selected automobile exemptions,2' many other policies have a role to play in exemptions for shipping agents and port reducing risk in the outlook (Box 1.6). For services, and elimination of the exit tax example, privatization and deregulation to ASEAN countries all represent policy-especially as concerns agricultural significant tax losses. commodities-would increase the capacity of markets to absorb shocks. On minimum v) Increasing forestry royalties, including wages, real increases need to be kept in line for environmental reasons. Currently, with productivity increases. Over the longer- statutory rates are low and collections term, better policies are needed to give are far lower. workers a stronger voice in representing their own interests. Similarly, prudent debt vi) Making more goods subject to luxury management gives public policy more room for taxes. And, maneuver, while more effective regulation, for example of the banking system, could vii) Bringing more off-Budget spending on- significantly reduce other vulnerabilities Budget (para 1.54). (Chapter 5). Also in the banking sector, this period of strong external sentiment is an 1.67 The second eventuality concerns the outstanding opportunity to address other issues likelihood of some shock-external or that have been delayed in the past due to fears domestic, economic or non-economic of capital flight-for instance, banking secrecy, -triggering a sudden loss of confidence that is money laundering and closing insolvent banks. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 27 Box 1.6: The Interim Committee Declaration on Partnership for Sustainable Global Growth On September 29, 1996, the so-called Interim Committee (representing the governing body of the International Monetary Fund) issued a strategic declaration that significantly broadened that group's previous statements on economic policies. The declaration attached particular importance to the following eleven points, which the Managing Director of the International Monetary Fund has referred to as "The Eleven Commandments": Stressing that sound monetary, fiscal, and structural policies are complementary and mutually reinforcing: steady application of.consistent policies over the medium term is required to establish the conditions for sustained noninflationary growth and job creation, which are essential for social cohesion. * Implementing sound macroeconomic policies and avoiding large imbalances are essential to promote financial and exchange rate stability and avoid significant misalignments among currencies. * Creating a favorable environment for private savings. * Consolidating the success in bringing inflation down and building on the hard-won credibility of monetary policy. * Maintaining the impetus of trade liberalization, resisting protectionist pressures, and upholding the multilateral trading system. * Encouraging current account convertibility and careful progress toward increased freedom of capital movements through efforts to promote stability and financial soundness. * Achieving budget balance and strengthened fiscal discipline in a multi-year framework. Continued fiscal imbalances and excessive public indebtedness, and the upward pressures they put on global real interest rates, are threats to financial stability and durable growth. It is essential to enhance the transparency of fiscal policy by persevering with efforts to reduce off-budget transactions and quasi- fiscal deficits. * Improving the quality and composition of fiscal adjustment, by reducing unproductive spending while ensuring adequate basic investment in infrastructure. Because the sustainability of economic growth depends on development of human resources, it is essential to improve education and training; to reform public pension and health system to ensure their long-term viability and enable the provisions of effective health care; and to alleviate poverty and provide well-targeted and affordable social safety nets. * Tackling structural reforms more boldly, including through labor and product market reforms, with a view to increasing employment and reducing other distortions that impede the efficient allocation of resources, so as to make our economies more dynamic and resilient to adverse developments. * Promoting good government in all its aspects, including by ensuring the rule of law, improving the efficiency and accountability of the public sector, and tackling corruption, as essential elements of a framework within which economies can prosper. * Ensuring the soundness of banking systems through strong prudential regulation and supervision, improved coordination, better assessment of credit risk, stringent capital requirements, timely disclosure of banks' financial conditions, action to prevent money laundering, and improved management of banks. 28 Chapter 1 G. The Short-Term Outlook and Donor overall import growth to be quite modest at Assistance about 7 % although non-oil sector imports grow at about 13%. Much of the projected increase 1.69 Economic Prospects. Indonesia is in the current account deficit for the years experiencing an increase in investment that is 1997/98 to 2000/01 is expected to be induced projected to keep annual growth between 7.5 % and financed by an increase in foreign direct and 8% and to temporarily widen the current investment. account deficit for the next few years (Table 1.10). This investment expansion is 1.72 Projected growth of GDP and non-oil resulting from a combination of rapidly rising exports, together with the prepayment of domestic investment and continued expansion $3.2 billion in high interest public debt since of foreign direct investment. As has been the late 1994 and third-currency movements, are case in recent years, the main source of growth projected to result in a continuing fall in the is projected to be the non-oil & gas, non- debt service ratio in the next few years agriculture sectors (about 9% p.a.). Oil & gas (Table 1.10). M< debt service in relation sector output is projected to remain relatively to exports was 31 % in 1996/97 and is flat, and agricultural sector output will increase projected to fall to about 25 % within five relatively slowly (about 3% p. a.). years. It should be noted that prepayment of $1.6 billion accounted for 3.1 percentage 1.70 As oil prices fall back to about $17 per points of the 1996/97 debt service ratio (DSR). barrel, and investment remains high, import The underlying DSR was this much less and growth will increase the current account deficit the projected fall over the next few years is (Table 1.10). In 1997/98, these developments partly due to this prepayment. There is seem likely to translate into a current account projected to be a sharp change in the deficit of about $10.1 billion (4.0% of GDP). composition of debt and debt service payments The current account deficit is likely to remain over the coming years, with all the increase in close to 4% of GDP for the following two debt being private debt. Public debt is years (i.e., between $11.5 and $12.2 billion) projected to continue to decline. before beginning to fall as a percentage of GDP around the turn of the decade, as 1.73 The savings and investment balances investments mature. Non-oil & gas export summarized in Table 1.11 reflect the increase growth is projected to be 12.8-13.8%, well in private investment and the associated above the relatively low level of 6.6% in temporary rise in foreign savings (the financing 1996/97, but less than the 15-18% p.a. in the of the current account). Central government two previous years. Part of the lower non-oil investment is projected to rise slightly relative & gas export growth in 1996/97 was due to to GDP, beginning in the next 5-year plan low prices (para 1.25). Export growth is (Chapters 2-4), and financed by a comensurate expected to rebound as the non-oil terms of rise in central government savings. The trade stabilize and export-oriented projects take projected rise in total investment as a share of hold. GDP is initially financed by a rise in foreign savings. Only after foreign savings level off 1.71 Import growth is projected to remain and begin to fall as a share of GDP (i.e., 1998- above GDP growth, but not to reach the 99 and beyond) is private savings projected to unsustainable rates of 1994 and 1995. In rise to provide this funding. 1997/98, oil sector imports are projected to decline sharply as prices drop-off and domestic 1.74 These projections are subject to sources substitute for imports. This will allow familiar risks. First, oil and other commodity Macroeconomic Developments and Policies: Managing Success and Reducing Risk 29 Table 1.10: Medium-Term Outlook Estimated Projected 1996-97 1997-98 1998-99 2000-01 National Accounts (%) Real GDP 7.8 7.8 7.8 7.8 Non-Oil & Gas GDP 8.1 8.2 8.2 8.2 Investment (GDFI) 10.0 10.4 10.6 7.8 Balance of Payments ($ billion) Merchandise Exports (FOB) 52.2 53.8 59.4 74.3 Non-Oil & Gas Exports 39.6 44.6 50.7 65.7 Merchandise Imports (cif) -50.8 -54.2 -60.7 -75.2 M< Interest Payments -5.3 -5.9 -6.4 -7.7 Current Account Balance -8.1 -10.1 -11.5 -12.6 Gross Reserves (months Merch. imports) 4.7 5.0 4.9 4.8 Export Real Growth Rate (Merch.FOB)(%) 8.2 6.7 9.3 9.6 Import Real Growth Rate (Merch.CIF)(%) 10.3 6.9 9.9 8.7 Non-Oil & Gas Export Growth in $ (%) 6.6 12.8 13.6 13.8 Non-Oil & Gas Import Growth in $(%) 10.4 13.0 12.1 11.5 Net Public M< Borrowing -0.7 -0.3 -0.2 -0.2 Foreign Direct Investment 6.5 6.7 7.6 9.5 Debt Indicators (M< Debt) DOD ($ billion) 86.9 94.0 102.6 119.8 o.w. Public 58.5 58.2 58.4 58.6 Debt Service/Exports (%) 31.1 30.0 26.3 24.2 o.w. Public 14.6 13.8 11.2 9.1 Memo Items: Official Reserves ($billion) 19.9 22.2 24.5 29.8 Oil Price ($/bbl, average OPEC Price) 20.5 17.0 16.7 16.5 Non-Oil Terms of Trade (1994=100) 97.7 97.7 97.3 97.0 Current Account Balance/GDP (%) -3.5 -4.0 -4.1 -3.7 a End of period Stocks. Source: Central Bureau of Statistics, Bank Indonesia and World Bank staff estimates. prices are volatile and could be lower than public savings (Section F) and restored projected. Second, there is a possibility that momentum to deregulation (Chapter 5)-would widening current account deficits could weaken resolve the situation. external confidence in Indonesia. Third, uncertainty concerning the outlook for 1.75 The Continuing Need for Foreign deregulation could reduce foreign investment, Assistance. Although the private sector has or raise the cost of doing business in Indonesia provided a growing share of Indonesia's to uncompetitive levels. In all these cases, external financing needs in recent years Indonesia's traditional responses-increased (Table 1.12), official foreign assistance will 30 Chapter I continue to be important for several reasons. 1.76 In view of these considerations and First, it represents virtually the only source of bearing in mind the availability of private stable, long-term funding for public finance, a level of commitments from the CGI investments that are not attractive to the private roughly similar to last year would be very sector. These include education, public health, supportive. These considerations also point and most infrastructure, especially in the Outer towards a need for the donor community to Islands. Second, official assistance often improve the relevance and effectiveness of its comes with strong project appraisal and assistance. preparation as well as technical assistance. Third, private finance is only available in a few 1.77 The priorities for assistance remain infrastructure sectors. Fourth, there is risk similar to those identified at last year's CGI involved in relying too heavily on private meetings. These include: human resource finance for public investments, as highlighted, development; poverty alleviation; for example, by the Mexican crisis. Finally, environmental improvement; infrastructure the long-term nature and risk diversification development (especially those areas not of associated with official assistance improves the interest to the private sector); and balanced structure of debt and the debt service profile, regional development. thus reducing exposure to the risk of sudden shifts in private capital flows. Table 1.11: Saving-Investment Balances (% of GDP at current prices) 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 Gross Investment 30.3 31.3 32.0 32.7 33.5 33.5 Gross National Savings 28.4 28.0 28.5 28.7 29.4 29.6 Savings-Investment Gap -1.9 -3.3 -3.5 -4.0 -4.1 -3.9 Central Government (on budget) Investment 6.3 5.5 5.3 5.3 5.5 5.6 Savings ' 6.4 5.6 5.7 5.5 5.6 5.8 Savings-Investment Gap 0.1 0.1 0.4 0.2 0.1 0.2 Private Sector and Public Enterprises Investment 24.0 25.8 26.7 27.4 28.0 27.9 Savings 22.0 22.4 22.8 23.2 23.8 23.8 Savings-Investment Gap -2.0 -3.4 -3.9 -4.2 -4.2 -4.1 There was a change in the classification of some Government expenditures between 1994/95 and 1995/96 which has contributed to a shift in investment and savings. Source: Central Bureau of Statistics, Bank Indonesia and World Bank staff estimates. Macroeconomic Developments and Policies: Managing Success and Reducing Risk 31 Table 1.12: Sources and Uses of External Financing ($ billion) 1995-96 1996-97 1997-98 1998-99 1999-00 Uses of Financing 15.6 18.1 18.3 18.8 19.4 Current Account Deficit 7.0 8.1 10.1 11.5 12.2 (o.w. MLT interest payments) 4.9 5.3 5.9 6.4 7.0 Principal Repayments 5.9 6.1 5.9 5.0 4.8 Increase in Official Reserves 2.7 3.9 2.3 2.3 2.4 Sources of Financing 15.6 18.1 18.3 19.0 19.4 Foreign Direct Investment (Net) 5.4 6.5 6.7 7.6 8.5 Other Private Capital (Net) 4.5 6.2 6.0 6.0 5.9 Public MLT Capital 5.7 5.4 5.6 5.2 5.0 CGI Assistance 3.7 3.5 3.6 3.5 3.5 Other 2.0 1.9 2.0 1.7 1.5 Source: Bank Indonesia and World Bank staff estimates. 32 Chapter I Endnotes 1. Unemployment in Indonesia is largely transitional in nature and contains a high percentage of first-time job seekers searching for a job. Of particular note is the relatively high duration of search, typically about 10 months. Studies indicate that the length of search of university graduates is related to the quality of their institution and the field of discipline that they study. REDECON (1994) finds that graduates from the more prestigious universities and from technical faculties find jobs much faster than others. The study also found that more females suffer from long-term unemployment because they attend lower quality institutions and enroll in less-marketable fields of study than their male counterparts. 2. The 1996 increase came in two parts. There was an official increase of about 10 1/2% in the average daily wage, which was reasonable. However, there was a second, hidden provision that regular (as opposed to daily or casual) workers be paid on the basis of a 30-day month, compared with the previous convention based on a 6-day week. Effectively, this boosted the minimum wage by a further 15-20%. 3. BPS data indicate higher growth in non-oil and gas exports in 1996 (and lower growth in 1995) than BI data, largely due to differences in methodology (BI allocates all exports to the date on the shipping document irrespective of when the data is processed). As a result, BI records some exports in 1995 that BPS records in 1996. 4. Part of the reason Bank Indonesia's growth in imports in 1996/97 (10%) is larger than BPS's figure for 1996 is the estimates made by BI to include rapidly increasing imports into free trade areas. 5. This partly reflects the slowdown in parts for automobile production. 6. See Table 1.5 in World Bank (1996a). 7. For FY1996/97, state banks and state-owned companies were subject to ceilings of $500 million and $800 million, respectively. For their part, private banks were subject to a collective ceiling of $1 billion; supervisory authority was delegated to Bank Indonesia, which spread the overall ceiling among some 80 banks, based upon a formula that takes into account, inter alia, each bank's outstanding borrowings and capital. 8. The definition of "off-shore borrowing" was clarified to include any funds borrowed from non-residents in any currency (in principle, including CDs, which looks difficult to enforce). 9. Under these agreements, monetary authorities of a signing country may obtain liquidity assistance from other monetary authorities to overcome attacks in foreign exchange markets, through sales of holdings of U.S. govemment securities to partners with a promise to buy them back later. 10. As noted in last year's Report, measures of the real effective exchange rate are sensitive to the choice of country weights and prices/costs (for example, consumer prices, wholesale prices or unit labor costs). The IMF measure (shown in Figure 1.4) uses trade weights (with an allowance for third country effects) and consumer prices. These weights, which were revised during 1996, are: Japan (26%); European countries (30%); USA (14%); other Asian (21%); and Others (9%). The revisions, just mentioned, reduce the weight of the yen from 37% to 26%. Nevertheless, movements in the yen/dollar rate continue to have a substantial effect on this measure of Indonesia's real effective exchange rate. If a different index were calculated using a significantly smaller weight for the yen (and a correspondingly larger weight for the US dollar), it would indicate a substantial real appreciation in the 1990s. Likewise, an index using unit labor costs (which are not available in Indonesia) would probably show a significant appreciation, owing to the rapid increases in real wages in Indonesia in the I990s (see Section B). Macroeconomic Developments and Policies: Managing Success and Reducing Risk 33 11. The mechanics of this are roughly as follows. As international oil prices rise in the face of constant domestic retail prices, non-tax revenues accruing from domestic sales of petroleum products (which were budgeted at Rp 800 billion) decline, reaching zero at approximately US$18/bbl. At higher international prices (and continued constant domestic prices), budgetary transfers must be paid to Pertamina as re- imbursement for domestic operations. These transfers are recorded as a current expenditure in the budgetary accounts. It should be noted that the timing of these re-imbursements to Pertamina is somewhat uncertain. 12. In principle, payments of some $1110 million were paid from the budget surplus of 1995/96; effectively, Government deposits were drawndown, then rebuilt by the high oil revenues. Since the oil revenues were in foreign exchange, there was no impact on international reserves. In addition, in December the Government privatized an additional 4.15% of PT Telkom, and prepaid another $530 million of foreign debt (see Section D). There were also some payments carried over from the previous year. 13. These are accounted-for in part by rapid growth in self-financing (Swadana) by some government departments (especially Health and Education), which are being brought on-Budget. These have a counterpart in non-tax revenues. 14. Very limited data exist on this issue. Those that are available (see Table 1.7), measure only net flows of (what is probably) a relatively small portion of the total. 15. Members of Parliament have called for an accounting of off-Budget non-tax revenues, including items such as: reforestation funds and the 2% surcharge on high-incomes (see main text); 1% of certain telecommunications revenues to be paid to Tourism, Post and Telecommunications; a levy of $3.50 imposed by the Ministry of Tourism, Post and Telecommunications on each sale of a handphone; a levy of $20 on every laborer working overseas; a $200 mandatory training fee for laborers wanting to work overseas; and a levy on television ownership in the name of TVRI. 16. The swap premium is a sensitive financial indicator of exchange rate risk. It is the amount (measured in % per annum) that must be paid to guarantee purchase of foreign exchange at a specified rate at some specific date in the future. In Indonesia, most transactions are at a short maturity, with an estimated 80% of transactions for less than a week; of these, most are overnight. Trading at the 3-month rate maturity is sometimes thin, but indicative rates are available back to early 1993. It should be noted that, on occasion, BI has intervened in this market, for example, during the Mexico exchange rate crisis. 17. The rise in the money multiplier after 1988 is generally attributed to financial deregulation, which led to significantly wider financial intermediation. Not surprisingly, it flattened-out in the early 1990s after the main market penetrations had been made. The immediate difficulty is with the steep climb since early 1995, apart from the once-only identifiable drop directly attributable to increased reserve requirements in February 1996. 18. In early 1997, Bank Indonesia announced new targets for 1997. In total, the growth target would be roughly unchanged from 1996. 19. For example, Bank Indonesia required each bank to submit budgets for approval; Bank Indonesia then met with banks early in the year reducing significantly most of the banks' lending targets. The final targets for 1996 were around 15 % for the state comnmercial banks; 20-25 % for big and medium-sized banks (the sole exception being Bank Duta which was granted 30% because of its negative growth from 1991 to 1994); and a ceiling of 30% for small banks. Nevertheless, credit extended by private foreign exchange banks expanded by around 30%. 34 Chapter 1 20. These data are known to be very rough, they cut across standard sectoral definitions, and they may well underestimate the extent of banks' exposure because many additional loans that are extended through Groups' finance companies, which are still excluded. On the other hand, these loans are not uniformly risky. For example, roughly one-third are mortgages, which have experienced a relatively low level of write-offs historically. The most risky would be loans for property development (which also constitute about one-third of the total), as developers might be encountering cash flow problems due to slower-than- expected property sales. The remaining one-third is categorized as loans for construction. 21. For example, the exemption from luxury tax for the national car and certain other autos that achieve 60% local content, is roughly estimated to cost $1/4 billion per year. High Growth With Equity Into the 21st Century 35 2 HIGH GROWTH WITH EQUITY INTO THE 21ST CENTURY A. Overview interactions and shifts in the Development Budget away from areas of private interest. 2.1 By 2005, Indonesia's GDP per capita will exceed $2300 (in current prices) at present These factors have been critical to East Asian growth rates. Nearly half of Indonesia's 220 economies' strong performance, according to million people will live in urban areas, up from many analysts. about 31 % in 1990. Wages would increase approximately as fast as per capita income, and 2.3 Indonesia is a prime example of these outer-island growth would be rapid, if current factors' importance. Until macroeconomic trends continue. But, if policy were to stability was restored around 1970, low deteriorate, then growth could slow to 5 % per growth, investrnent and savings were the rule. annum. This would mean only $1850 per Growth of basic education was a major factor capita GDP in 2005, about 20% less than with in economic expansion, higher wages and 7.5% growth. With such a slowdown, growth reductions in poverty. When oil prices fell in of wages and outer-island incomes could slow the 1980s, quick adjustment and deregulation, even more. The lower GDP also would mean supported by bilateral and multilateral lending, significantly fewer resources to address social shifted resources into internationally issues. competitive sectors. Correspondingly, Indonesia's recent growth was more rapid than 2.2 Policies in five areas would sustain can be accounted-for by increased physical and high growth and contribute to equity: human capital; significant growth in total factor productivity also occurred. The broad- * Macroeconomic stability; based, labor-using growth strategy, coupled with human resource development, has * High investment and saving rates, which increased labor incomes sharply, especially for are linked to macroeconomic stability; females. * Human resource development, with full 2.4 Indonesia's further emphasis on these female participation; factors will support sustained high growth and improved equity into the 21st century. * Efficient resource allocation, through a Attention to these factors is especially deregulated incentive framework that important given the new challenges Indonesia forces efficiency and international faces, including: globalization; educational competitiveness; and quality; an aging population; natural resource depletion; environmental problems; and * Improved government and institutions, infrastructure to maintain the urban "engine of including improvements in the legal system growth". and business practices, realignment of public spending toward more transparent, 2.5 Indonesia's deregulation of trade and competitive management of public/private finance have already helped meet the challenge 36 Chapter 2 of globalization, by forcing higher productivity maintain rapid growth in wage incomes and and internationally competitiveness. Continued jobs, including in the Eastern Islands. high saving and investment rates, educational Transparent, competitive frameworks for upgrading, and restoring momentum to privatization and low protection, would ensure deregulation and completing the unfinished that all Indonesians benefit from greater private deregulation agenda will increase productivity sector participation, through good sales prices further. Indonesia's international commitments for concessions and public assets and through in the ASEAN, the APEC and the WTO will low prices for better quality services. help in this regard. 2.9 As a result of these policies, Indonesia 2.6 Improved government and institutions would move up the ladder of higher-value- will play a major role- in meeting the new added exports, onto the rungs now occupied by challenges. Of great importance will be Thailand and Malaysia. Growth of human and realignment of government's role, focussing physical capital and business and less on production, more on institutions and entrepreneurial skills would naturally lead to regulatory functions, e.g. improvements in the more technology- and capital-intensive output, legal system, upgrading of subnational without the high costs, inefficiencies and governments and state enterprises, and setting inequities involved in protection from up clear competitive, regulatory frameworks. competition. Greater reliance on the private sector, fostered by such frameworks for private participation, 2.10 In contrast to this scenario, worldwide will help provide resources and better meet experience suggests that macro-instability, users' needs. Realistic pricing policies for failures in human resource development and resources, such as petroleum, gas, power and slow or reversed deregulation tend to reduce forestry would yield large benefits in terms of growth and competitiveness. In such cases, the revenues, efficiency and equity. benefits of growth have tended to accrue to those in the protected sectors or with access to 2.7 Such a realignment would allow the government, and equity declines. Attempts to Government to focus and increase Development support uncompetitive, high-cost firms by Spending on areas like basic human resource channeling funds to them has often led to development and urban infrastructure, where financial instability. private interest is low. Institutional improvement, as well as more funds, will be 2.11 This Chapter discusses these issues as critical in these areas. In many cases a follows: Section A describes Indonesia in combination of decentralization, improved 2005, if it continues its recent record. Section institutions and imaginative reliance on the B examines the policies that Indonesia will private sector could reduce costs and make need to follow to continue its high growth with spending more responsive to user needs. equity, based on the lessons of success in East Institutional development of a secure, more Asia, including Indonesia's own history. fully-funded pension system for the aging Section C identifies some of the new challenges population would raise savings while providing that Indonesia will face in the 21 st century and contributors with reasonable retirement outlines policies to help to meet them. Section incomes. D discusses the key issue of improved government and institutions, including 2.8 Equity would also benefit from these managing the public/private sector interaction measures. Continuation of rapid, labor-based and realignment of the Budget. Details are growth through human resource development followed-up in subsequent Chapters. and external and internal deregulation would High Growth With Equity Into the 21st Century 37 B. Indonesia in 2005 * Dependence on primary production would continue to decline; 2.12 Indonesia's average GDP growth was 6.6% per annum in 1965-95, ranking in the top * Exports will rise to about 28% of GDP; five large, developing countries. Growth also exceeded 6% per annum in each of the last * External debt indicators would improve three ten-year periods, a sustained growth markedly; record matched by only four other large economies and rare among all countries * Population would reach nearly 220 million; (Easterly, et. al.). In the first half of the 1990s, Indonesia's average growth increased to * Half the population would live in urban 8% per annum. Recognizing Indonesia's areas; and, higher potential, President Soeharto raised the REPELITA VI growth target to 7.1 % in * Greater Jakarta's population would reach August 1995. 25-30 million, making it one of the largest metropolitan areas in the world. 2.13 What would Indonesia look like, if, say, 7.5% per annum growth could be 2.14 Output Trends. Within GDP, the role sustained through 2005? The highlights are: of primary products will continue to decline. This is a well established growth pattern - GDP per capita would more than double in worldwide. It reflects low income elasticities current prices, to over $2300; of demand, demand for more value added to primary products from outside the sector (e.g., - Indonesia would become one of the packaging, convenience, and quality) and world's 20 largest economies; technical progress in production. Agriculture Table 2.1: Economic Indicators 1990 to 2005 (1993 prices, Rps., %, and $billion current prices) 1990 1995 2005 GDP (Rps. trillion 1993 prices) 263.3 383.1 791.0 Percent in: Agriculture 20.2 16.1 10.3 Mining & Quarrying 10.1 9.3 7.9 Oil & Gas Mining 8.3 6.2 2.7 Industry 27.3 32.6 39.3 Oil & Gas Mfg. 3.3 2.5 2.7 Non-oil/Gas Mfg. 17.3 21.3 25.6 Elec., Water, Gas, Const. 6.7 8.7 11.0 Services 42.4 42.1 42.5 Memo Items: Non-oil GDP (Rps. trillion 1993 prices) 232.7 350.3 748.5 Non-oil GDP as % of GDP 88.4 91.3 94.6 Exports (US$ billion current price) 25.4 45.5 130.0 Oil & Gas 11.1 10.5 10.0 Non-oil Exports 14.3 35.0 120.0 38 Chapter 2 will continue to shift away from rice, toward reduce pollution and, by substituting for diesel, more higher value-added foods, as, for slow depletion of oil fields. example, has occurred in Thailand already. Per capita demand for rice is already stagnant 2.17 Manufacturing will continue growing among most Indonesian income groups. Rice faster than GDP, with an export base. Its exports would either require much higher growth will depend on continued investment, world (relative) prices of rice or large human resource development, and foreign subsidies. At the same time, a sound base investors who bring capital, technology, exists for efficient production of many managerial skills and access to markets. foodstuffs, if institutional problems such as Electricity, gas, and construction will need to land titling, transport restrictions, storage grow even faster, if infrastructure needs are to arrangements, etc., can be overcome. Lifting be met. Finally, Service sectors are likely to restrictions on exports and inter-island trade, grow about as fast as GDP.' plus shifts in agricultural research and extension to non-rice crops, would improve 2.18 Non-oil exports would rise at least 13% national efficiency and benefit Eastern per year, under the scenario of (a) continued Indonesia (Chapter 5 and World Bank 1996b). rapid growth in manufactures based on exports and (b) growing mineral exports. Increased 2.15 Forestry suffers from overcutting gas exports will more than offset the projected according to government figures. Unless fall in oil exports. Total exports would rise overcutting is reduced, output in this sector is about 180%. With tight macroeconomic policy likely to fall permanently. Even with a shift to restraining current account deficits and external more sustainable forestry development, output debt growth, the ratios of debt and debt service is likely to fall for some years while forests to exports would fall sharply. regenerate (see Chapter 5). The projected development of pulp and paper, based on 2.19 Demographics. Population growth is managed plantations, is unlikely to offset this projected to decline to about 1.4% per annum decline in the next few years. for 1995-2005. Its continuing decline, together with longer school attendance, will slow labor 2.16 Mining prospect are good. Numerous force growth. Longer life expectancies will exporters will come on-stream soon, reflecting increase the average age of the population. By improvements in the incentive framework since 2005, the proportion of retirees relative to the the 1980s. Oil output is projected to decline work force will be rising, which means a sound gradually, reflecting exhaustion of existing pension system will be needed soon. fields and the high cost of developing new ones (see World Bank 1994a). But LNG and LPG 2.20 Population distribution among the main will continue to grow, based on development of island groups will not change much. Java-Bali proven finds and continued high external population is likely to decline from 61.5% of demand for clean fuels. Growth can be the total in 1990 to 59.2% in 2005, Sumatra to spurred by focussing development on lowest increase slightly, from 20.2% to 20.6%, and cost fields, whereas emphasis on development the Eastern Islands to rise from 18.2% to of high-cost new fields would raise investment 20.2%. Differences in the three areas' requirements, and slow growth of output, "natural" rate of increase are the main exports and national productivity. Natural gas determinant of this projection; net migration is for domestic use has potential if a more assumed to remain small relative to natural attractive framework can be set up for rates of growth, even in the Eastern Islands investors (see Box 2.9 in World Bank 1996a). (World Bank 1994a). Greater use of this fuel domestically would High Growth With Equity Into the 21st Century 39 2.21 Urbanization. A majority of resources for urban infrastructure, but also on Indonesians will live in urban areas by 2005, improved institutions (Box 2.1 and Chapter 4.) compared to only 31 % in 1990. This rise will occur even if urban population growth slows 2.25 Resolving environmental issues will be from the current 5 % per annum, which is critical to sustaining high growth, particularly among the highest rates in East Asia (World in the cities, and to ensuring that Indonesians Bank 1993c). enjoy a quality of life commensurate with their higher incomes. Ensuring safe water, 2.22 Jabotabek's population is projected to management of increasingly scarce water, and rise from 17.1 million in 19902 to 25-30 dealing with air pollution will become more million population (almost one-quarter of and more important issues, from a cost, as well Java's population), even allowing for some as a quality of life issue. Taking action on slowing of its growth rate. As a result, industrial pollution now, rather than cleaning Jabotabek would become the second or third up later, is necessary because nearly 80% of largest metropolitan area in the world. More the potential pollutants will come from than half of Jabotabek's population would factories not yet built, and because cleaning up continue to live outside DKI Jakarta. The investments is far cheaper than retro-fitting concentration of population, and economic "dirty" factories (World Bank 1994c, 1995a, activity, in and around Jakarta is high and 1996a). (Henderson, Kuncoro and Nasution). In many large countries, e.g. China, India, Brazil, there 2.26 Equity Issues. Continuation of past is a smaller proportionate gap between the trends will increase real wages about as fast as largest city and the next larger cities. per capita income growth; administrative attempts to speed up wage growth could well 2.23 Much of Indonesia's urbanization has slow employment and lead to a widening gap come, and will continue to come, from urban between formal and informal labor markets expansion into areas previously defined as (see Section C and World Bank 1996a). The rural, rather than in-migration, as shown in Eastern Islands would benefit from continued Box 2.1 for Jabotabek.3 This pattern fast growth (World Bank 1996a and Manning), probably reflects, among other things, lack of plus domestic deregulation that would raise the land titling at the urban fringes. Substantial prices received for their products (Chapter 5), back-and-forth, rural-urban movements also and from the reorientation of the development occur within a given year in response to budget. With these policies demand for labor changes in employment opportunities. These would grow rapidly (Manning) in the Eastern patterns represent a challenge-to avoid urban Islands sprawl-and an opportunity-to provide infrastructure and organization without the 2.27 A Slower Growth Scenario. Slower constraints of an already developed area. economic growth is certainly possible. Indeed, a "regression to the average" is a common 2.24 Reaching 7.5% growth will depend tendency among developing countries (Easterly increasingly on rapid growth in and around et. al.), often coming from a weakening of Indonesia's cities. This is a worldwide pattern. policy. The stable growth of over 6% per Thus, maintaining rapid GDP growth will annum in East Asia for the last three ten-year depend on making Jabotabek, Surabaya, periods is very unusual. Medan, Ujung Pandang, etc. "work", as well as creating an efficient network of secondary 2.28 For example, suppose Indonesia's cities. This in turn will depend on more current 7.5-8% per annum growth rate declined 40 Chapter 2 Box 2.1: Jabotabek: Keeping an Engine of Growth Running Smoothly Jabotabek was a major engine of Indonesia's recent growth, accounting for an estimated 25% of the non- agricultural GDP growth between 1983 and 1993. Population grew over 4% per year (including incorporation of formerly rural areas). Jabotabek's growth reflected deregulation of the financial sector and of labor-intensive industry. Firms located in Jabotabek to be near a major domestic market that also had good international access. Industrial growth of Jabotabek also was stimulated by the expanded intra-Jabotabek road network (Henderson, Kuncoro and Nasution). This allowed firms to set up outside DKI Jakarta but retain access to the city and world markets. A slow-down of the Jabotabek engine of growth would make it harder to maintain a 7.5% per annum GDP growth rate. Increasing congestion is one threat to Jabotabek's growth. Increased traffic is already congesting roads and the port. Vehicle registrations have been increasing rapidly and national exports/imports are projected to increase by about 120% in volume by 2005. The new ring road and other private toll roads will help reduce road congestion, and the new private port will ease physical bottlenecks to trade. But more public funds also are needed for improving the rest of Jabotabek's road network. In Jakarta, improvements can be realized by de-bottlenecking investments. But possibilities are limited-road area represents a smaller fraction of city area than Bangkok, and is much below the generally recognized 20 % standard. Hence better traffic management, congestion taxes, and mass transit will be needed to move goods and people. In addition, investment in "Botabek" road expansion, intra-city links within Jabotabek, and an inter-city network would encourage decentralization and keep the engine going. Meeting Jabotabek's environmental needs also will be critical to sustaining its growth. In particular, increased provision of piped water, which currently reaches only 10-20% of the population, and sewerage treatment will be critical. Dependence on well water is leading to salinization of the aquifer and to land subsidence, which contributes to floods. Dependence on septic tanks and weak management of waste disposal is increasingly contaminating well water (World Bank 1 994a, 1994c). Increased atmospheric pollution is raising health costs (World Bank 1994a, 1 994c)-strong implementation of the Presidential announcement to phase out leaded gasoline, improvements in two-cycle engines, and greater reliance on clean natural gas for power would help limit the growth of pollution. The Spread of Urbanization in JABOTABEK, 1980 to 2010 .. .o-N 4 I --atettF ,.,,*,.V, X L U 1980: 11.9 million ~~ ...-~~~~ 1990: 17.1 million 2010. 30.0 million C.&.g-phy by P.W Mfidgly EA3RS High Growth With Equity Into the 21st Century 41 to 5% per annum. Such a drop could easily C. Lessons of Success in East Asia come from a drop in productivity such as occurred in other East Asian countries when C.1 The Large, High Performing, East policy shifted (Box 2.4), and as is now being Asian Economies predicted for Thailand. Although a higher rate than most large developing countries have been 2.32 What lessons can Indonesia learn about able to achieve, it would be much less than the sustaining high growth with equity from the REPELITA VI target. What difference would remarkable record of growth and reduction of this fall make? poverty in East Asia (Hong Kong, Indonesia, the Republic of Korea (henceforth Korea), 2.29 A 5% per annum average GDP growth Malaysia, Singapore, Thailand and Taiwan, for 1995-2005, would mean a GDP per capita China).4 Many analyses broadly agree that of about $1850 (in current prices) in 2005. four interrelated factors were critical to these This is a substantial improvement compared to countries' rapid growth with equity: 1995's $1023, but it is about $450 (20%) less per capita than the baseline outcome. * Macroeconomic Stability; 2.30 Slower growth would mean lower * High Investment and Saving rates; demand for labor, and slower improvement in wages and jobs. This would be especially true * Human Resource Development, with strong if the growth slowdown reflected misallocation female participation; and of resources to overly capital-intensive industries (World Bank 1994a and 1996a). * Efficient Resource Allocation, more in line Slower growth also would mean less reduction with market signals and international in poverty and regional disparity (see World competitiveness than other developing Bank 1996a and Garcia-Garcia for the links countries, which produced high export, and between regional and national growth). Failure import, growth. to reduce internal trade barriers would miss an opportunity to improve regional equity; 2.33 The East Asian economies are attempts at investments to compensate for generally near the top of developing countries regional disparities, without reducing internal in these four areas. When their performance in trade barriers, are likely to reduce the these areas weakened, growth and equity productivity of scarce capital. In addition, tended to suffer. Of course, the countries' slower growth would mean fewer resources to growth paths and policies were not identical, as tackle these inequities through human resource discussed below in more detail for the five development and transfers. larger, high-performing East Asian economies (henceforth, HighPerformers): Korea; Taiwan, 2.31 What policies are necessary to China, Malaysia; Thailand; and Indonesia.5 encourage a 7.5 % growth rate with the corresponding increase in labor incomes, 2.34 Sound Macro Fundamentals. Low to reduced poverty and increased regional and moderate inflation, high public saving, small personal equity, rather than a 5% rate? What government deficits, and realistic exchange and new challenges will Indonesia need to meet in interest rates-are generally considered to have order to continue its current high growth rate? been major factors in the HighPerformers' The next two sections examine these questions rapid growth and high investment rates (see based on the experience of the large, high Stiglitz, for example). Macroeconomic performance East Asian Economies, including stability also contributed to equity; it limited Indonesia's own experience. 42 Chapter 2 the "inflation tax on money" which hits the capital have been a third major pillar of rapid poor hardest, and it helped to create a growth with equity in the HighPerformers. favorable investment climate that led to growth School enrollment rates rose sharply in of labor demand. HighPerformers after World War II, and have continued high (World Bank 1993b, p. 45-46, 2.35 The HighPerformers also adjusted Rodrick). As a result, education levels in the quicker to macroeconomic shocks than other HighPerformers' labor force rose more sharply groups of countries, in most cases. In some than elsewhere between 1960 and 1980 periods, HighPerformers' current account (Figure 2.2). Increased educational attainments deficits did worsen and external debts grew added the equivalent of about 1 % per annum to rapidly. But rapid export growth, and quicker labor force growth in Indonesia, Korea and changes in policy than in other developing Taiwan, China (Dasgupta, Hanson and Hulu; countries brought a fast resumption of growth Young, 1995). The HighPerformers had much (World Bank 1993b, Little et.al.). higher public, and private, spending on primary and secondary education than other 2.36 Macroeconomic stability in these countries. (World Bank 1993b, p. 199-200). countries is not a matter of culture or luck. In some periods, for example in Korea, and 2.39 More education reduced poverty as Indonesia in the first half of the 1960s, it was well as raising human capital. Families were lacking. In these periods, investment/saving raised out of poverty as better educated rates were below 10% and growth was low. workers found jobs under the labor-based, outward-oriented development strategy (see 2.37 High Investment and Saving. below). Females benefitted particularly from Average investment rates of the High these developments. The gap between female Performers exceed most of the larger and male enrollment levels has closed much developing countries' (over 20 million faster in East Asia than South Asia and Africa population), except the former Communist (Barro and Lee). Moreover, growing job states' (see Figure 2.1 for 1965-1994).6 opportunities allowed a rapid shift of females Investment and saving tended to rise in the from informal, rural work to formal sector HighPerformers, as confidence developed in employment (see World Bank 1996a and the fundamentals and growth process, Dasgupta, Hanson and Hulu for Indonesia). generating what McKinnon called "a virtuous circle".7 Over time, the HighPerformers' 2.40 The demographic transition occurred higher-than-average domestic savings rates, sooner (and quicker) in the HighPerformers including higher-than-average public savings than elsewhere in the developing world, rates, financed much of their high investment particularly in terms of lower fertility rates. (World Bank 1993b, pp. 203-210; Corbo and This was part of a second virtuous circle Schmidt-Hebbel; Stiglitz and Uy). Their high (World Bank 1993b); improved female savings allowed them to rely less on foreign education and job opportunities contributed to saving (have smaller average current account lower fertility, and lower fertility meant more deficits), on average, than most large resources per pupil from the same amount of developing countries.8 However, in recent public spending for education. Moreover, the years, Indonesia, Malaysia and Thailand have sharp demographic transition and increased job been among the largest recipients of foreign opportunities raised the ratio of the working direct investment and portfolio capital. population to children and retirees. This (relative) increase in workers implied a higher 2.38 Human Resource Development GDP per person. Makes a Difference. Improvements in human High Growth With Equity Into the 21st Century 43 Figure 2.1: Hlgh Performers Are High Investors 46 hvw munDP(%) 46 Aver#p, 191651996 40 _ 4D 3 * HighPetfa*rnse other LLg. CountM 20 20 26 26 20 20 15. Is 10 10 _:Ne llons! Ft,ic SsM, Of. Figure 2.2: The High Performers Increased Schooling Rapidly In the Labor Force Avwe Yorn Sohoodg l Pop. mui 25 y,. old 7 T Increase 12-1960, HlghPtr me 7 Incease 196196, * E O°ther Large Counh _ n Aveage yer of sahoolhtg hin 1960 * HghPerfonnm * _ *~~ nl*SE 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 3 3 2 2 S e d L I 44 Chapter 2 2.41 Efficient Allocation of Resources is the 1960s and 1970s slowed sharply when the Important. In the HighPerformers, 25-50% of debt crisis and oil price rises exposed the per capita GDP growth depended on increased internationally uncompetitive investrnents that efficiency in using resources and technology; it had been made (as well as problems of macro cannot be accounted for by the accumulation of stability and human resource development; see human and physical capital.9"0 Former Box 2.2 and Fig. 2.2). Thus, differences in communist countries had higher rates of growth per capita between HighPerformers and accumulation of physical capital than the other developing economies also reflect HighPerformers, but their growth rates were differences in the efficiency of using resources much lower. Brazil's "miraculous" growth in and technology, between and within sectors. Box 2.2: Brazil: From Mirade to imtabilty The Brazilian "Miracle" as it was known at the time, lasted from about 1957 to 1977. Estimated GDP growth averaged over 7% p.a. in this period. With inflation also averaging over 30% p.a., Brazil was often cited as a counter-example to the importance of macroeconomic stability for growth. To some extent, inflation's distortionary effects were reduced by indexing (inflationary adjustment of the principal of government and housing debt, instituted after 1964) and a "crawling" exchange rate (regularly adjusting the exchange rate for inflation with a crawling peg after 1968). However, the "Miracle" ended in the mid-1970s. Since then, lower, more volatile growth has prevailed. The oil price shocks and the debt crisis exposed the unsustainability of Brazil's growth strategy (which other Latin American countries also had followed to a greater or lesser degree in this period). First, investment rates in Brazil were less than in the HighPerformers. Saving rates were even less, so investment was more dependent on foreign capital inflows, particularly in the 1970s. Macroeconomic instability probably contributed to outflows of Brazilian private saving (although less than in other Latin American countries) and to the need for a major public sector role in investment and external borrowing to finance it. Second, Brazil's improvement in education was by far the lowest among the large developing countries in 1960-80. In part this reflected low rates of spending and emphasis on higher level education. These policies not only tended to slow growth, they contributed little to improving equity. Third, Brazil's resource allocation followed an inefficient, forced import substitution model. Protection and large subsidies increasingly shifted scarce resources into high-cost, capital-intensive, uncompetitive sectors such as airplanes, computer technology, and gasohol. (This also over-stated the GDP growth, as the import substituting industries were included without adjusting for their higher prices compared to imports of the same goods.) Productivity growth in Brazil's protected import substitution manufacturing was actually less than in the economy as a whole (Elias cited in Young, 1995). As an indicator of Brazil's attempt to produce everything, whatever the cost, exports plus imports of goods and non-factor services averaged less than 20% of GDP. The use of much of the investment in industries that generated little employment combined with the limited increase in human capital to produce one of the most unequal income distributions in the world. With the mid-1994 introduction of the Real Plan, macroeconomic stability returned to Brazil. The import substitution model is being dismantled with the elimination of quantitative restrictions and lowering of tariffs. Productivity growth has been substantial since 1992. With privatization and reduction of the state monopolies in infrastructure, further productivity gains are possible. See Coes and works cited there. High Growth With Equity Into the 21st Century 45 2.42 The importance of aggregate resource elsewhere. It also tends to worsen equity, by allocation is often overlooked. If resources are generating incomes for those who are best able kept in internationally uncompetitive sectors or to negotiate protection, not the most efficient firms by protection or subsidies, then growth producers. suffers. The resources could be used more effectively elsewhere. Shifting the resources to 2.45 The HighPerformers paid more the more efficient sector will raise growth by attention to international competitiveness of producing more output, and exports or efficient investments and market-based signals than import substitutes. other developing countries. For example, in labor markets they did not attempt to push up 2.43 One example is agriculture. In Korea, wages artificially (see Box 2.3). In the the shift out of traditional agriculture was financial sector, average real interest rates on accompanied by a high rate of total factor deposits were slightly positive and had a small productivity growth in the economy as a variance, while in most other developing whole; this slowed as the transition was largely countries real rates were either very negative completed (Kim and Park). In Indonesia, rapid or had large variances (largely associated with growth of total factor productivity accompanied variations in inflation) that raised risks to the shift of females from unpaid rural work to holders of savings deposits and money."1 formal sector employment that accompanied the HighPerformers did use subsidized, directed deregulation at the end of the 1980s/early credit during part of this period, in particular 1990s (Dasgupta, Hanson and Hulu). High in Korea toward exporters and certain protection of traditional agriculture tends to industries"2 (See, for example Stiglitz and Uy keep more resources in agriculture than and works cited there). The interest rate necessary. It also raises the price of food, subsidies seem to have been smaller than in which hits low income families. most other regions (World Bank 1993b pp. 285, 309). However, non-performing loans to 2.44 Similarly, high protection of industry the subsidized sectors have been a continuing or parts of industry reduces GDP. The problem since the mid-1980s, as has been the availability of protection attracts capital and case in many countries. skilled labor that could be used more efficiently Box 23: Successful Approaches to Ldbor Marlets "In East Asia, more than elsewhere, governments resisted the temptation to intervene in the labor market to counter outcomes unpalatable in the short run or to particular groups.... A relatively high level of efficiency in the allocation of labor was achieved by allowing wages and employment to be determined largely by the interaction of those supplying and those demanding labor services, rather than by government legislation, public sector leadership, or union pressure. In East Asia, wages were pulled up by increases in the demand for labor, whereas elsewhere there was a greater tendency for wages to be pushed up artificially." Source: World Bank 1993b, p. 266. 46 Chapter 2 2.46 Resource allocation in the High export subsidies that initially were used to Performers was more export-oriented (and less offset the anti-export bias of protection) as distorted by protection from imports) than in export-led growth took hold."3 This allowed most developing countries (World Bank 1993b the countries to benefit from specialization in pp. 295-300, Thomas and Wong, Ranis). This the goods they were best at producing, and use was particularly true as the HighPerformers export sales of these goods as a more efficient shifted to outward-oriented growth and way to "produce" imports. The result has been deregulated. Maintenance of realistic exchange that the HighPerformers' exports have grown rates was one key factor (World Bank 1993b, more than most large countries' (as a share of pp. 125-127). Also, all five economies GDP), but so have their imports (Figure 2.3). generally lowered protection (and reduced FPguN 2.3: Hih Pwklomwa Ar Hlgh Impoun, a well a Expors 250 m O n _ I ._0 -20 .- 2.47 HighPerformers' government China. However, to some extent it simply interventions were largely "market friendly" offset the import protection that existed initially (World Bank 1991), and "complemented (Nam, World Bank 1993b, pp. 295-300). The markets" (Stiglitz). Macroeconomic stability, subsidies were fairly uniform for all exporters a friendly investment climate and a (Krueger, 1997), including some arrangements commitment to education prevailed. Milder for indirect exporters. Institutions financial repression than in other countries was (Government and Industry Councils) enforced the rule (partly reflecting the HighPerformers competition for the subsidies in terms of relatively low inflation). performance (World Bank 1994b pp. 11, 93- 102). In Korea, "Exporters eligible to receive 2.48 Export promotion was an obvious support were limited to those whose past year's intervention, particularly in Korea and Taiwan, exports exceeded a target amount. To get High Growth With Equity Into the 21st Century 47 Box 2.4: Korea's Interventions in the 1970s In the 1970s, the Korean Government increased its economic interventions sharply, reacting to numerous pressures. In 1972, the Government cut the debt burden of firms to the curb market and banks. However, "[this policyl raised social equity issues, as the wealth of depositors in the curb market and banks was transferred to the corporate sector, especially large finns. The fact that there was no profit sharing agreement in return for the wealth transfer created discontent among the public" (Kim et.al., p. 193). In 1973, the Korean Government intensified its promotion of Heavy and Chemical Industries (HCI). Even this program's objective was increased exports not import substitution, as there was recognition that the domestic market would have been too small to achieve economies of scale. The policy was implemented through subsidized credit and tax incentives, protection, entry restrictions and direct involvement in industrial decisions. Credit was the most important. The Government guaranteed foreign loans to business and external debt shot up, to become the third largest among developing countries by 1979. A National Industrial Fund was set up to channel a substantial part of domestic credit into the HCI and their power and gas suppliers. High costs characterized the rapid industrial development under the HCI policy. Exports of the HCI did reach the target of more than 50 % of exports, but later than originally planned, when the yen appreciated and world markets recovered from the second oil price shock. Many have commented favorably on the role of the policy in Korea's transformation (for example, Amsden, Wade). However, HCI was costly in terms of investment and apparently reduced national productivity. GDP growth rates did remain roughly constant between 1967-72 and 1973-79, but annual growth fell sharply in 1980-82. To maintain growth, the investment rate rose about 25% after 1973, implying a corresponding fall in investment productivity. Average (total factor) productivity actually declined in manufacturing in 1975-80 (Young, 1995). No doubt other factors contributed to these developments, but it is generally recognized that substantial excess capacity was created. More micro analyses also suggest that Korea's industrial policy may have slowed growth (Yoo, cited in Krueger p. 24), or at best wasn't a major drag (Stern et.al., cited in Kim and Leipziger p. 25). Total factor productivity in the supported industries seems to have grown slowly (World Bank 1993b pp. 306 and 310 and Lee cited in Rodrick p. 33.), and these estimates may well overstate productivity by neglecting the increases in price (cost) related to the initial import substitution. Increased inequality in Korea during the 1970s (Leipziger et.al., p. 10) accompanied the interventions. The intervention policy also hampered financial development. In particular, the demonstrated willingness of the Government to help firms had two negative effects: i) firms were encouraged to take excessive risks; and, ii) financial sector development was hindered by the overhang of low return loans, the reduced incentives to screen projects and the continued Government intervention (Nam et.al., p. 143; Leipziger p. 24; World Bank 1993b. p. 309), problems that continue to exist today. When growth slowed sharply after 1979, the Government reduced emphasis on HCI and turned to deregulation to speed growth (Namn, p. 158). more privileges, exporters had to work hard to 2.49 When the HighPerformers intervened in compete with other exporters and foreign resource allocation substantially, the results businesses" (Kim et.al. p. 186). However, were generally unfavorable. The most well the failure of such policies in many other documented cases are Korea (see Box 2.4) and countries, and the limits on such policies under Taiwan, China. In Taiwan, China, government current international rules, suggest they support seems to have been negatively related probably would be less successful today. to productivity growth in the subsectors of 48 Chapter 2 manufacturing (Yang), Studies of Korea in the account, which dates from 1970, has provided 1970s, when substantial interventions took strong discipline on macroeconomic policy. place, generally conclude that rapid expansion of industry and private business were fostered, 2.52 Investment rates have steadily but at the cost of higher savings and increased, so that in the 1990s, Indonesia has investment, slower productivity growth, one of the world's highest investment rates. financial development and worsening income The open capital account has encouraged distribution. Similarly, efforts by Thailand to capital inflows. But domestic saving also has selectively target potential export growth over grown, so that Indonesia continues to finance the past decade appear to have been ineffective about 90% of its investment domestically. -other exports grew at least as fast as those targeted (James). The financial sector was 2.53 Human resource development has been saddled with low return investments and a major objective of the government, with a interventions that are hindering its development major increase in adult literacy and even today. Outside East Asia, Brazil's achievement of universal primary education. protected industrial sector seems to have had Female enrollment rates have steadily risen as less factor productivity growth than the rest of a percentage of male rates (Chapter 3). the economy (Elias cited in Young, 1995). 2.54 Indonesia kept the excesses of the C.2 Indonesia's Own Experience 1970s oil boom under much better control than other countries. When the boom ended, 2.50 The details of Indonesia's experience as Indonesia made the quickest adjustment to the one of the HighPerformers strongly support the drop in oil revenues of all the major oil importance of macroeconomic stability, high exporters (Gelb et. al.), cushioned by investment and saving, human resource borrowing from bilateral and multilateral development and market-based, internationally institutions. Current account deficits and competitive, resource allocation. 4 In the inflation were quickly brought back to 1950s and 1960s, Indonesia's macroeconomic moderate levels. Financial sector deregulation instability and state-led, import substitution from 1983 onward, and especially after 1987, strategy led to low levels of saving, investment promoted the growth of financial intermediation and growth. In the mid-1960s, Indonesia was and cuts in intermediation costs (Kenward). poorer than India. Spending on human resource development was protected from budget cuts better than in most 2.51 Since the late 1960s, Indonesia has developing economies (Dasgupta et. al.). been characterized by macroeconomic stability. Inflation has averaged around 12%, and has 2.55 Deregulation at the end of the 1980s been in single digits for the past decade. increased efficiency and incentives for Excesses of public expenditure have been exporters. Cuts in protection forced producers limited by the 1968 balanced budget regulation to become more competitive internationally. By and, in the early 1990s, by saving oil windfalls the mid-1990s, the Government had eliminated in the Development Budget Reserve (CAP). most non-tariff barriers outside agriculture and Current account deficits have generally been cut the unweighted average tariff rate to 13 % kept financeable. External debt now exceeds (Chapter 5), making Indonesia one of the $110 billion but rapid export growth, close HighPerformers' economies most open to government monitoring and donor assistance external competition. Moreover, changes in have kept it manageable. The open capital foreign investment regulations in 1994 also High Growth With Equity Into the 21st Century 49 made the economy one of the least 1980s has brought a major improvement in discriminatory in the region toward external resource allocation to internationally investment, leading to some $90 billion of competitive sectors. This has been reflected in approved FDI projects in 1994-96. a sharp improvement in the total factor productivity of the Indonesian economy: 2.56 In sum, Indonesia's economic policies whereas before the mid-1980s nearly all of have supported a growth rate averaging over Indonesian growth in per capita GDP was 6% for the last 30 years, a record that ranks in explicable by increases in capital and human the top 10% of developing economies. Per capital, afterwards about 40% was explicable capita GDP now exceeds $1000, over 3 times by improvements in the productivity of India's. The shift in policies since the mid- resources (Figure 2.4). 5 Figure 2.4: Sources of Growth In GDP per worker (Average growth rate per year) Growth per 5- worker= 470 Increased Productivty 3- Growth per worker - 1.83 Increased Capital per worker 4 4 Increased Humcn Capita l > perworker 1978485 1985-94 2.57 Thebroad-based, labor-oriented growth in all provinces of the country since 1980, strategy, backed by the strong record in human although substantial differences remain between resource development, has brought one of the the Eastern Islands and Java. (For an extended sharpest reductions in poverty in the analysis, see World Bank 1996a, Chapters 3 developing world. In the last few years, real and 4, World Bank 1994a, Chapter 5 and wages have grown about as fast as per capita Manning.) GDP, continuing the long run trend (World Bank 1996a, pp. 70-71) Females have D. Meeting New Challenges to High benefitted from the strategy, which provided Growth with Equity them with rapidly growing, paid employment in the formal sector, that allowed them to 2.58 Indonesia's growth has strong switch out of unpaid work in the rural sector. momentum. Increased emphasis on the four Off-Java, growth has also been high, among factors in the HighPerformers' success-Macro the highest in the developing world. Social Stability; High Investment and Saving; Human sector indicators such as infant mortality, Resource Development; and Market-based, fertility, and school enrollments have improved Outward-oriented Resource Allocation-will go 50 Chapter 2 a long way towards sustaining high growth Indonesian producers. In addition, Indonesia with equity. However, structural issues could has undertaken international commitments to a impede that process, including i) exhaustion of deregulated economy in the context of WTO, the gains from first round deregulation; ii) loss APEC and ASEAN. The Government has of deregulation momentum, iii) globalization; appropriately broadened these commitments to iv) educational quality; iv) an aging population; include all trading partners, in order to ensure v) depletion of natural resources and access to least-cost suppliers. Meeting these environment problems; and vi) infrastructure commitments will ensure that Indonesia shortfalls, especially urban infrastructure. maintains a deregulated, efficient economy. 2.59 Restoring Deregulation Momentum. 2.63 Quality Human Resource Some of the gains from past deregulation Development. Both government and business packages, especially those related to recognize that improving the quality of the deregulation of foreign investment, will labor force is a critical factor in sustaining high continue to maintain high growth. However, growth and rapid improvement in labor the gains in output from resource reallocation, incomes, especially in the more competitive are gradually being exhausted. Further international economy. The Government has deregulation would give another upward push done well in increasing literacy and to growth and increase labor demand and real universalizing access to primary education. wages (Chapter 5). However, continued growth in real labor incomes will depend on quality (as well as 2.60 Globalization Means Tougher quantity) improvements in education, training, International Competition. Other developing and health services (Chapter 3). countries are adopting the open economy model that has proved so successful in East Asia. 2.64 An Aging Population. An aging They are all searching for foreign markets population and slower labor force growth are more intensively. They are all seeking foreign inevitable outcomes of current population investment. Indonesia will face increasingly trends. In addition, health improvements and tough competition in globalized markets. better diets are leading to longer life spans. Meanwhile, labor force growth is slowing 2.61 In the final analysis, Indonesia is most because of lower population growth and likely to keep up with the competition by increases in the average years of schooling. relying on those instruments that have already served it well: (i) macroeconomic stability, 2.65 These developments have three major (ii) a deregulated economy with equal implications. First, slower labor force growth incentives/low protection and no discrimination and faster inactive population growth will tend against foreign investment, and (iii) rapid to slow growth of GDP per capita, unless physical and human capital growth. Aside offset by education and investment. Second, from providing this framework, the public an older population will demand more health sector's role in production will involve services than a younger population. Meeting provision of key infrastructure in areas of low these demands efficiently will depend on major private sector interest and some help to widen health sector improvements, including greater dissemination of information about technology, reliance on the private sector (Chapter 3). 2.62 Globalization Also Provides 2.66 Third, reasonable retirement incomes Opportunities. Global and regional trade will be needed for the aging population. Their treaties will open up bigger markets to efficient provision represents both a challenge and an High Growth With Equity Into the 21st Century 51 opportunity. The opportunity arises because an natural resources under the constitution. aging population initially means larger working Where the framework has been unclear and age cohorts with high savings potential. An potential rates of return are low (for example, efficient financial sector and pension system oil in the 1950s and mining in 1974-85, when will encourage their saving and thereby no contracts of work were issued to foreign generate additional domestic funding for mining companies), development of the investment. "Fully-funded" pension resource has been limited. On the other hand, institutions, in which individuals contribute to where the framework does not consider all an individual account and their savings are three issues, there tends to be over-exploitation invested in productive assets, have contributed of the resource, and the benefits accrue to to high saving/investment rates in Singapore special interests, not the public (for example, and Malaysia (Stiglitz and Uy) and Chile. The in forestry; see Chapter 5). major issue for Indonesia is setting up a system that provides good returns and is not just a new 2.69 Ensuring Adequate Infrastructure. directed credit scheme that would only be a tax Infrastructure limitations could hinder growth on labor (Leechor and Chapter 5). Use of and reduce Indonesia's attractiveness to privatization proceeds and budget surpluses to investors. The potential problem may be fund public pension liabilities could help this greatest in urban areas. Lack of water, process. sewerage treatment, electricity and inter- and intra-urban transport will raise costs of 2.67 Sustainable Natural Resource pollution, health care, congestion, distribution Development. Indonesia's resource base and power inputs. In Jabotabek, these (particularly oil and forestry) is being depleted, problems threaten the source of nearly one- which could slow export growth. Increased quarter of recent non-agricultural growth. gas exports could well offset most of the Surabaya and other large metropolitan areas decline in oil exports. However, competition suffer from similar problems (Chapter 4). is growing for Indonesia's LPG/LNG exports and strong growth will depend on focussing E. Improved Government and Institutions: development on low cost fields. Forestry- A Fifth Factor in Growth based exports have declined in volume terms in the last few years. Government estimates of 2.70 Better public sector management and cutting exceed its estimates of sustainable institutions will be a critical, fifth factor in yields, leading to projected further declines in sustaining high growth with equity and meeting exports early in the next century. Imports of new challenges in the 21st century. Specific logs are already needed for profitable operation areas in which improvements could be made of some mills. Minerals exports, from mines include: already under construction, will offset some of the slowdown of other resource-based exports, * laws and the judicial system (Chapter 5); but further growth will depend on new concessions, and how they are handled. * greater reliance on clear transparent rules; 2.68 The central issue in these resource- * greater reliance on the private sector, based products is a framework that a) provides through the set-up and institutional for efficient development of the resource, b) a implementation of clear, competitive reasonable, predictable rate of return for the frameworks that would encourage private investor, and c) a reasonable share of the participation and privatization while proceeds for the state, which is the owner of ensuring that the public receives maximum benefits from private participation; 52 Chapter 2 * integration of private and public investment ventures in various parts of the industry) and more effectively, through public planning power generation (private production for sale (for example, the intra-urban transport to a public distributor), as is the case network, water basin management and worldwide. But private participation has also power generation, transmission & grown in toll roads, water, and ports, although distribution); and, construction has been slow getting underway (see Box 2.5). * concentration and increased effectiveness of public spending in areas of limited 2.74 Greater reliance on the private sector, private sector interest (for example, water both privatized services and private provision & sanitation, inter-urban roads, drainage of services would provide three major benefits: control and sanitation) through realignment of the Development Budget, improved * Increased revenues (for the government public management and institutions, and and/or the enterprise) from sales, which decentralization of revenues and spending can be used for investment or public debt to sub-national governments with increased prepayment; accountability and capacity at all levels. * Private sector investments reduce the need E.1 Greater Reliance on the Private Sector for public investments, freeing development resources for social uses; and, 2.71 Greater reliance on the private sector could improve Indonesia's growth prospects * Increased efficiency, that is, better service and delivery of service to consumers. at lower cost. Although progress has been great in some areas, improvements in the framework and its 2.75 To date, substantial benefits have been institutional implementation could reap large generated along these lines. The domestic benefits. portion of PT Telkom's listings has raised about $1.4 billion in new capital. This is 2.72 Despite some improvement, state roughly equal to the total Development Budgets firms' performance, in terms of rates of return, for Telecommunications & Postal Services in remains poorer than the private sector firms, 1994/95-1997/98. In addition, PT Telkom on average."6 Many public firms show losses expects to receive about Rp.l trillion per year or require conversion of Government loans to from its joint operating schemes. BNI equity. Service provision often is poor, increased its capital 25% with its share particularly in infrastructure areas such as offering. Moreover, the Indosat and Telkom water supply. listings on international markets, plus the recent private placement of Telkom shares, 2.73 Private sector interest in developing raised about $2.1 billion that was used to country infrastructure has grown substantially prepay high interest rate debt, saving in recent years. Indonesia has increasingly substantially on interest payments.'7 Private taken advantage of that development by turning investors will install about 40% of the planned from the traditional public sector approach for increase in lines during REPELITA VI. It is infrastructure to greater private provision of still too early to measure the efficiency gains infrastructure, a process that has speeded-up that have occurred, but the experience recently (Chapter 4). The greatest advances worldwide has been highly positive (Box 2.8 in have occurred in telecoms (full privatization, World Bank, 1996). partial privatization and privately managed joint High Growth With Equity Into the 21st Century 53 Box 2.5: The Privatization Process in Indonesia: An Update In power generation, 21 power purchase agreements have been concluded as of early 1997, and an additional 22 are in various stages of negotiation, with a total capacity roughly equal to PLN's current capacity. The value of these investments is estimated at over $20 billion. The contracts involve no tax concessions or direct Government guarantee. The Government has split the on-Java generating facilities of the state power company (PLN) into two companies, with a view to partial privatization (Chapter 4). In1993, a second franchise for long-distance telephone service was given to a private, well-connected finn, Satelindo; which in turn sold 25 % of its equity to Deutsche Telekom for $586 million in 1994. In 1995, PT Telkom formed joint operating schemes with five partners, selected through competitive arrangements, to manage the phone system in areas outside Jakarta and Surabaya. In addition, PT Telkom and PT Indosat were partially privatized (20 % in 1995 and 35 % in 1994, respectively) through stock markets. An additional 4.15% of PT Telkom was sold through private placement in late 1996. Private participation has grown in other areas as well. Private toll roads covering 531km are in operation, 162km are under construction, and contracts for another 1021km are in various stages of negotiation. A bulk water concession has been signed for Surabaya, after many years, and the Jakarta water company (PAM Jaya) signed a memorandum of understanding to negotiate a 25 year concession with two well-connected groups in October 1995. Another well-connected private firm has begun construction of the long-delayed new Jakarta port. And, outside infrastructure, PT Tambang Timah and Bank Negara Indonesia (BNI) sold parts of their equity in the stock market (35% in 1995 and 25% in 1996, respectively). The Government has also expressed interest in partially privatizing, inter alia, Krakatau Steel, Garuda, and additional state banks. The publicly owned plantations were consolidated in early 1996 to help with the process of divestiture. Sources: World Bank 1994a Chapter 3 and World Bank 1995a Chapter 2, Section E 2.76 Important Remaining Issues. Despite management and regulation and more focussed the substantial progress to date, some issues direct provision of services. This realignment remain. For example, perceptions of non- would involve: transparency, lack of competition, unfair dealing and favoritism will need to be (a) Provision of a transparent, competitive addressed as the privatization program is framework for sale of concessions and implemented. In addition, with regard to assets (Box 2.6); institutional mechanisms for pricing outputs and inputs (Chapter 4), some "framework" (b) Maintaining sectoral frameworks that are issues also remain, such as subsidies in competitive, including clear, sustainable industry, mining, fertilizer and steel pricing policies; and production. In the power sector, concerns remain about harmonizing the interaction (d) Focussing the remaining public provision between public and private sector in order to of goods and services in sectors/areas avoid and/or to cope with excess power where private interest is limited (such as generation capacity (Chapter 4). urban infrastructure, basic education, and some infrastructure in the Eastern Islands). 2.77 Increases in these benefits would come from Government realignment toward increased 54 Chapter 2 2.78 A clear, competitive framework for 2.79 Alternative Forms of Privatization. privatization and for granting concessions (Box One approach is privatization through financial 2.6) would encourage additional investment and markets, which tends to be transparent. The greater benefits from increased private main issues are competitive choice of the participation. Such a framework would ensure marketing services, and pricing of the initial that the nation maximizes the receipts from offering and allocation of shares.'8 Financial sales of its assets and that user needs are met at markets require transparent audited accounts the least cost. Improved management along and meeting this requirement often provides these lines will potentially benefit private some benefits. However, partial privatization participation and ownership, which in turn will through financial markets may not do much to increase efficiency and reduce prices, and improve corporate governance (see Section E monopoly rents. of Chapter 5 and Boxes 5.15 and 5.16). Box 2.6: Improving Transparency and Competition in the Sales of Concessions and Assets Maximum returns to the nation from the sale of concessions or assets could be ensured by an institutional process with the following characteristics: (a) Pre-qualified potential bidders based on prior experience and performance. (b) Clear definition, up-front, of the scope/conditions of the concession or sale of assets, including clear, comprehensive information on the contractual arrangements and any provisions that might mitigate the risk of the investor. Specifications that are unclear, or generate risk, will lower the price received by the nation. (c) Well-defined bidding variables (preferably only one), such as the cost of service/price of the asset. (d) Choosing lowest cost bid for the service or the highest price for the asset. (e) Prompt public announcement of the winning bid. (f) Clear institutional arrangements to deal with unsolicited bids and to resolve disputes. Without such clarity and competition, complaints will always arise regarding favoritism and low returns to the nation at the expense of the recipients of the concession or asset. "Negotiations", especially over unsolicited proposals, face this problem, and also have proved to take an extended period. A transparent competitive framework would ensure that the Government receives the maximum from its asset and concession sales. The Government is developing a KEPPRES to regulate the sale of concessions which incorporates many of these points. 2.80 An alternative approach is competitive However, a major issue is ensuring a sale of ownership or concessions or reasonably competitive sale-failure to do so management rights. This is likely to yield would leave the Government open to charges smaller up-front cash returns and may increase of favoritism. economic concentration. But it also may improve management more than partial 2.81 Sectoral frameworks that are privatization through financial markets. transparent and competitive will also increase High Growth With Equity Into the 21st Century 55 the benefits to the country from privatization. framework, or one that mimics competition, Transparent sectoral frameworks, in particular will encourage private sector participation to the pricing arrangements, increase private cut costs, provide better service and improve sector interest. The ease of setting-up a technology, thereby benefitting society. transparent framework for power generation, Deregulation has given many tradeable goods through take-or-pay contracts, explains the sectors a fair degree of competition. This large interest in that sector. When the means that the Government can divest quickly framework is not transparent or lacks its many directly productive enterprises in these credibility, then the risks will lead private sectors. Competition will ensure a low price providers to charge high prices for services/pay and good quality to buyers from these firms, low prices for the concession, reflecting their otherwise the supplier will go out of business. risk. An important institutional issue in setting However, avoidance of special protection, up sectoral frameworks is to separate the subsidized inputs, or below-market credits are regulatory agency from any remaining public important to prevent the new private operators presence in the sector, to reduce potential from benefitting at the expense of the nation. conflicts of interest. To maintain the gains from privatization of these firms, the Government will need to press 2.82 The Costs of Guarantees. To ahead on deregulation. substitute partially for non-credible, unclear frameworks, government guarantees may be 2.84 For infrastructure, which is not requested. The guarantee is a way to bind the tradeable and often involves some degree of Government to the framework conditions. But, " natu r a Imonopoly ", Government guarantees have costs. They represent a improvements in the regulatory framework hidden cost on society, which becomes explicit would pay large dividends. In many cases, if the framework is not maintained for any "unbundling "-splitting-up or hiving-off reason. Moreover, guarantees may themselves activities of the public sector firms-will raise issues about credibility, typically if one provide a good regulatory framework. firm receives a guarantee, then all seek them. "Unbundling" often creates sub-sectors that are Poorly specified guarantees also may reduce competitive or need only a few well-chosen incentives for private sector performance. In regulations to ensure competition. Such sectors particular, they may reduce the benefits of are then attractive to investors, while efficiency private risk-taking that is part of the efficiency is ensured. Examples include power of the market. For example, the take-or-pay generation, cellular phone service, and gas type contract can easily lead to over-capacity, generation, as well as many services that can which would be less likely to evolve if private be bought from the private sector such as participants were risking a lack of demand for printing, janitors, maintenance, etc. In other their product. Indonesia has revised its new cases, competition from substitutes-for power purchase agreements to reduce this example between various modes of problem.'9 Finally, to the extent private transport-can provide competition. In these sector debt is guaranteed, it counts as public cases, privatization and private participation debt and uses up scarce public borrowing can also move ahead. capacity, nullifying one of the benefits of private participation. 2.85 Where "natural monopoly" elements remain-for example, water supply, power and 2.83 Encouraging Competition to gas transmission-a more complex regulatory Generate Benefits from Private framework will be needed to mimic Participation. A competitive sectoral competition. A key element here is 56 Chapter 2 independence of the regulatory agency from Budget (that is, a decline relative to GDP). any remaining public producers in the sector. Agriculture and "Other" spending has declined In both competitive and "natural monopoly" as a share of the Budget and relative to GDP. sectors, avoidance of subsidized inputs, or below-market credits are important to 2.89 Spending for Regional Development maximize benefits to the nation, rather than to has increasingly been through sub-national the new owners. governments and taken the form of bloc grants, which have replaced directed transfers, (e.g., E.2 The Development Budget for schools and rural roads). The share of actual power expenditures has increased 2.86 The Development Budget is a key steadily, notably in 1995/96 when about Rp.1 instrument in the Government's management of trillion more was spent than budgeted. In the infrastructure investment. DevelopmentBudget Budgets for 1996/97 and 1997/98, the share of spending represents the Central Government's power spending was reduced, but the state investment spending, either directly carried out power company (PT PLN Persero), has by the Central Government or through transfers directly borrowed about Rp.2 trillion (equal to to sub-national governments and public 25 % of the Energy spending in the enterprises, which carry out the investments,20 Development Budget) in the last two fiscal The Development Budget is financed by years. Spending for Telecoms increased Central Government saving and external sharply in REPELITA VI, although it was cut borrowing. In addition to the Government slightly in nominal terms in the 1997/98 Budget, public enterprises fund investments out Budget. Education spending has declined of their own savings; borrowing in the cases of slightly as a share of the Development Budget some public enterprises (Perseros); and between REPELITA V and REPELITA VI, recently capital issues in the case of partially notably in 1995/96, when spending was privatized firms.21 substantially below budgeted levels. 2.87 Development spending has grown little 2.90 With projected real GDP growth of in real terms and declined relative to GDP in 7.5 %, the Development Budget will more than REPELITA V and REPELITA VI (the double in real terms over the next decade, even previous and current 5 year development if it only grows at the same rate as GDP. This plans).22 The Development Budget has might suggest that substantial funds would be declined to about 6.5% of GDP in 1996/97, available for infrastructure and human resource from 7.7% in 1989/90. And, since 1992/93, development. However, World Bank estimates development expenditures have grown slower suggest that infrastructure investment needs to than routine expenditure. This pattern of increase by at least one percentage point of expenditures means that Government revenues, GDP (World Bank 1992a, World Bank 1995a, including revenues from depletion of national World Bank, East Asia Vice Presidency). resources, are increasingly funding current Spending on human resources also may need to spending, rather than investment.23 increase relative to GDP in the short run (Chapter 3). 2.88 Within Development Budget expenditures, the shares of infrastructure 2.91 The Government has three ways to spending for Regional Development, Energy fund its higher capital spending needs: and Telecommunication have risen the most compared to REPELITA V (see Table 2.2). * increase revenues or borrowing; Human Resource Development and Roads have remained roughly constant as a share of the Table 2.2: Indonesia: Development Expenditures by Sector: 1989I91-1997198 (Rp. billions and percentage) Budget Average Sector 1989/90 1990191 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 89/90-93/94 94/95-97/98 Total (Excl. Dev. Reserve) Rp. Billions 13,834 17,452 20,264 24,135 25,661 29,163 29,812 34,503 38,928 A. Agriculture, Forestry, Irrigation and Water 15 13 13 13 12 10 9 10 11 13 10 Resources Al. Agriculture and Forestry 11 9 9 9 7 4 3 4 4 9 4 A2. Irrigation 4 4 5 5 5 3 3 4 4 4 4 A3. Water Resources n.a. n.a. n.a. n.a. n.a. 3 3 3 3 n.a. 3 B. Human Resources Development 13 14 14 15 is 13 12 14 16 14 14 B.l Health 2 3 3 3 3 3 3 3 4 3 3 B.2 Education 10 10 10 12 11 10 9 11 11 11 10 B.3 Manpower 1 0 0 1 1 0 1 1 1 0 1 C. Physical Infrastructure 32 31 30 31 33 35 38 34 31 31 34 C.1 Road 10 13 12 12 12 13 12 12 12 12 12 C.2 Energy 10 10 11 13 13 13 15 12 11 11 13 C.3 OtherTransport 10 7 6 6 7 6 7 7 6 7 7 C.4 Post & Teleconmmunications 2 1 1 1 1 3 3 3 2 1 3 D. Regional Development and Transmigration 11 14 15 15 17 19 20 19 18 15 19 E. Others (Excluding Development Reserve) 30 28 27 25 24 23 21 22 24 27 23 E.l Social Policy 5 5 5 6 5 4 5 6 7 5 6 Population and Family Planning I 1 1 1 1 1 1 1 2 1 1 Social Welfare-Others 0 0 0 0 0 0 0 1 2 0 1 Housing and Settlement 4 4 4 4 3 3 4 4 4 4 44 E.2 Environment and Spatial Planning 3 3 2 2 2 2 1 2 2 2 2 E.3 Mining, Industry, Trade, Science and Technology 13 10 11 9 8 8 6 5 5 10 6 Mining 0 1 1 1 1 0 0 0 0 1 0 Industry 3 3 3 2 1 2 1 1 2 2 2 Trade 8 3 5 3 4 5 2 1 1 5 2 Science and Technology 2 3 2 2 2 2 2 2 2 2 2 E.4 All Others 8 9 9 9 9 8 9 10 10 9 9 Culure, Youth, Sports ete. I I I 1 2 1 1 1 1 1 1 Religion 0 0 0 0 0 0 0 1 1 0 0 Government Apparatus, Security & Others 7 8 7 7 7 7 8 8 8 7 7 Memo Items Development Exp. as % of GDP 7.7 8.3 8.1 8.5 7.8 7.6 6.6 6.6 6.5 8.1 6.8 F. Development Reserve Rp. Billions 2,000 1,500 58 Chapter 2 * switch spending from the Routine (current) realignment of Government to more planning to the Development Budget; or and regulatory roles, the Government could correspondingly consider revamping the civil * rely more on the private sector and service, reducing the numbers in line with the revenues from privatization and switch new needs and increasing pay along with spending within the Development Budget. increased responsibility. Such an approach also would yield substantial savings on civil 2.92 Increases in revenues seem possible service training, by permitting direct hires from through changes that would also improve the labor market in line with skills that are efficiency and equity (Chapter 1). Indonesia's needed. A revamping of civil service pay, ratio of government revenues to GDP (14%, of responsibilities and accountability, along with which one-fifth accrues from oil) is among the a better match between employees skills and lowest in the region. Non-oil tax revenues functions, also would benefit the public have been increasing much faster than non-oil, enterprises, particularly as they are privatized. non-agricultural GDP in the last 5 years. However, at some point non-oil revenue 2.95 Decentralization offers possibilities of growth will have to decline closer to GDP improving the effectiveness of public spending. growth, unless changes are also made in the When public service providers are "closer" to tax system. users, accountability can increase, with a corresponding increase in efficiency and 2.93 New measures could increase revenues service quality (Chapters 3 and 4). However, substantially, while improving equity and decentralization is not a panacea, it must be efficiency (Chapter 1). Further improvements done carefully to reap the benefits. in tax administration, focussed on high income Decentralization yields benefits by capturing taxpayers, also are possible. Large additional "externalities" and, through greater public borrowing, or guarantees of private accountability, matching users demands with debt, would be undesirable, because of the still costs as is done in private businesses. To reap large external debt (see Box 2.7). these benefits, the decentralized entities must pay for the services through a self-generated 2.94 Room exists for a shift from Routine to revenues, otherwise they will tend to demand Development Spending in the Budget, but large excess services. Hence, raising property tax shifts will probably depend on institutional rates and improving property assessments will reform of the civil service. Civil service pay be an important element in a successful is low in real terms, and very little sustainable decentralization. Personnel in decentralized benefit is likely to be achieved from further entities also may need upgrading, to meet user depressing real civil service salaries. With a demands more effectively. High Growth With Equity Into the 21st Century 59 Box 2.7: An External Debt Strategy For Indonesia in the 21st Century Reducing the external debt and debt burden, and the risks that they create, has been a national goal for some time. Continued tight macroeconomic management will automatically contribute to that goal by limiting the size of the current account deficit that needs to be financed by borrowing. Greater reliance on tight fiscal policy to limit overheating, rather than tight money, also will reduce the growth of external debt, by lowering the public sector borrowing requirement and by avoiding the high interest rates that tend to attract volatile short-term capital inflows and encourage offshore borrowing (Chapter 1). Rising expenditures can be financed by raising revenues equitably and efficiently (Chapter 1). In addition, the Government could: * Set-up a program to continue retiring high-interest public debt through privatization and budget surpluses. This will reduce the debt burden, appropriately balance the sale of government equity with a reduction in the public debt that originally financed it, and to make room for rising private sector borrowing. * Set-up a strong, fully-funded pension system to increase the supply of domestic financing. Government could help this process by generating additional revenues to fund the conversion of the public pension system from a pay-as-you-go to a fully-funded set-up. Workers' contributions could then be diverted to personal retirement accounts with the additional revenues used to top-up the contributions to an actuarially safe level and to pay pensions of existing retirees (see Chapter 5 and Leechor). * Continue to distinguish sharply between public debt, and private debt which the Government appropriately takes no obligation to repay. This also would continue the policy of no guarantees for private debt. Even without guarantees, a large volume of foreign funds has become available for certain infrastructure (See Box 2.5). Guarantees run the risk of encouraging even more borrowing. * Continue to limit risk to the financial system by limiting its offshore borrowing. * Estimate the magnitude of the Government's contingent liabilities, such as power purchase agreements. Even with reductions in net external borrowing, Indonesia will need to continue substantial gross borrowing to finance its rollovers of debt and prudent increases in international reserves. To minimize the cost and potential volatility of such borrowing/debt, Indonesia could: * Continue to rely on concessional finance as much as possible. The amount of concessional finance is likely to decline, at least in relative terms, reflecting tight aid budgets and Indonesia's success. Indonesia will need to program replacement of these funds, in terms of higher domestic revenues. In the meantime, reliance on concessional finance to the maximum possible extent will limit the cost and maintain the long maturity structure of Indonesia's debt. Concessional finance also typically involves project related analysis that increases the social productivity of the project. * Continue to diversify the currency composition of the debt, and to match, at least partially, currency composition of debt with international reserves, in order to limit the volatility in the debt and debt service burden from cross-currency movements. * Continue to refrain from using complicated derivatives to hedge public debt positions, until the Government is certain that its management systems will provide a clear indication of costs and potential risks; otherwise it runs the risk of substantial losses, such as the well- publicized losses that have hit public entities, banks, and firms in the last few years. 60 Chapter 2 Endnotes 1. World wide experience suggests that growth of services is difficult to estimate, particularly in real terms. Often it is measured by inputs, rather than output. Another problem is measurement of growth in the real value of owner occupied housing. In Indonesia, the estimated growth of this sector was 5.3 % p.a. in 1990- 1995. 2. This figure reflects the urban areas in DKI Jakarta, Bogor, Tangerang and Bekasi. The figure for contiguous urban areas would be less, say 10-15 million. 3. An attempt at tracking urban growth 1980-90 in Bandung and Jabotabek suggests slow population growth in the original urban core, with most of the growth occurring on the fringes (World Bank 1994a, p. 123). 4. East Asia's strong performance has sparked numerous analyses. See for example, Fishlow et al, Ito and Krueger, Krugman, Stiglitz, Stiglitz and Uy, World Bank 1993b, Petri, Thomas and Wong, Ranis, and Young, 1994 and 1995. See also studies by Wade; Frank, Kwang, and Westphal; and Pack and Westphal. 5. See World Bank 1993b and works cited there for an extended discussion. Hong Kong and Singapore are usually included in the High Performing Asian Economies but, as entrepot, industrial cities, their experience is probably most relevant to large cities. Japan was a notable East Asian success but by most standards it would classify as an industrialized country throughout this century. 6. The comparison refers to the countries for which investment data are available for most of the period. Indonesia ranks 16th, (14th excluding the former communist countries). However, from 1970-94, Indonesia ranks 8th (6th). As is well known, Indonesian inventory investment is very high. This appears to reflect underestimates of national consumption, derived from the national survey. The investment estimates used in this report are based on an assumed rate of inventory investment equal to 2.5% of GDP. 7. Statistically, savings rates tended to follow growth rates in the HighPerformers (World Bank 1993b, pp. 242- 245), which is consistent with this view: increased macroeconomic stability and improved resource allocation led to an increase in growth, which together contributed to further increases in growth. Investment rates and growth tended to move together, suggesting capital inflows helped to start the process. (See Nam p. 175-76 and World Bank, 1979 for support for this view in the case of Korea.) 8. This is in line with the results of Corbo and Schmidt-Hebbel that suggest higher public saving tends to raise national saving rates and reduce current account deficits. The HighPerformers' external financing strategies ranged from Korea's reliance on external borrowing, with limited foreign direct investment, to Malaysia's greater reliance on foreign direct investment with corresponding lesser use of external borrowing, particularly since 1985. Thailand and Indonesia have been among the top 10 developing country recipients of foreign direct investment in recent years, but also are among the top 10 developing country debtors. Indonesia, Korea, Malaysia and Thailand have all received large portfolio and equity inflows in recent years. 9. Economists define the portion of growth that cannot be accounted for by increases in capital, labor or human capital as "total factor productivity growth". This "unexplained" residual is a mixture of improvements in the economic efficiency with which resources are used across and within sectors and technical progress. Young 1995, and World Bank 1993b pp 50-69 especially pp. 64-65 suggest that 65-85% of GDP growth in the HighPerformers can be explained by investment in physical capital and human resource development. The exact figure depends on the period, country and methodology. Easterly (pp. 269, 272) and the World Bank (1993b) use Barro's cross-sectional factor approach to explaining growth and yield similar results for the unexplained residual. Rodrick finds a smaller residual, using a smaller sample of countries and includes the initial distribution of income or land, which acts like a dummy variable for East Asia. High Growth With Equity Into the 21st Century 61 10. Some recent analyses (Krugman, Young 1994, 1995) have re-emphasized the major role that human and physical capital has played in raising per capita GDP in East Asia (and changes in participation/formal sector employment). Correspondingly, these analyses emphasize the need to continue such accumulation. Another element of these analyses, that growth in East Asia, being based largely on physical and human capital accumulation, would slow down, has drawn great attention. As noted in footnote 8, the estimated breakdown of growth between resource accumulation and productivity growth depends on the country and period chosen. Moreover, pressures for international competitiveness have tended to keep East Asia growth more efficient than in the forner communist countries, where investment and human capital were higher (Figs. 2. 1 and 2.2) However, there can be little argument with the proposition that as any country's per capita GDP nears that of the industrial countries, growth is likely to slow. This simply reflects that facts that a) gains from shifts of resources become increasingly limited as traditional agriculture declines, b) the service sector dominates output in high income economies and technical change in this sector appears to be slow or at least difficult to measure, and c) growth on the frontier of knowledge is likely to require more investment than adaptation of technology. However, income levels in the middle-income HighPerformers are substantially less than in the industrial countries. Hence, slowdowns in these countries are more likely to come from policy failures, such as failure to maintain macroeconomic stability, misallocation of resources toward non-competitive industries, failure to maintain economies open to international competition, failure to deregulate agriculture, failure to deregulate services, etc., than they are from reaching the frontiers of known technology. 11. See World Bank 1994b page 206. The only other region with positive real interest rates on average, and low variances was South Asia. Some authors, for example World Bank 1993b, Stiglitz and Uy, have argued that this constituted mild financial repression. But, with limited capital mobility in much of this period and high savings rates it is not clear exactly how much financial repression there was. Moreover, non-bank financial institutions offered rates above banks' in many of the HighPerformers. 12. In Korea, the most often cited case, export related loans were a much smaller percentage of bank loans than exports' share in the economy. The interest differential was nearly eliminated by the early 1980s and preferential access was reduced sharply. These loans clearly played a large role in Korea's early export success. Korea's experience with subsidized credits to large scale firms and Heavy and Chemical Industries in the 1970s was much less successful (See Box 2.4). 13. Two different initial approaches to export-led growth were followed by the HighPerfonners. Korea and Taiwan (China) and to a lesser extent Thailand continued to have high tariffs and quantitative import restrictions for some time after they began export-led growth, despite initial reductions in protection. These countries offset the anti-export bias of the protection through various types of export subsidies and duty-free access to imports for exporters, including indirect exporters (See Nam pp. 154-159 and 164-171; World Bank 1993b 295-300). Indonesia, and particularly Malaysia, dropped their protection faster once they began to deregulate, and relied less on export subsidies. Whatever the initial approach, tariffs and export subsidies generally were cut in all countries once the export push gained momentum, allowing the country to benefit from the gains of specialization in products in which they were efficient producers. 14. See World Bank, 1994a, 1995a, 1996a and Bhattacharya and Pangestu for a full discussion. 15. Using the standard approach to total factor productivity analysis, a joint statistical estimate was made of the contribution to growth of capital, labor and human capital and an (assumed) constant rate of total factor productivity growth. Specifically, for Indonesia in 1978-1994: GDP per worker= -0.106 + 0.52" Capital per worker + 0.018" prod. growth in 1986-94 adj. for educ. adj. for educ. where GDP and Capital per worker adjusted for education are in logs, and " indicates statistical significance at the 1 % level. This equation updates, and follows the same methodology as, the analysis reported in World Bank 1994a, p. 25 and Dasgupta, Hanson, and Hulu. It is broadly similar to the earlier estimate, except for 62 Chapter 2 a higher rate of total factor productivity (1.8% p.a. versus 1.2% p.a.) and a slightly higher output elasticity of capital (0.52 versus 0.45). The updating reflects a splicing to the new, 1993 base GDP and investment series of the old, 1983 base accounts prior to 1988, using GDP growth rates. The higher GDP growth in 1989-91 in the new accounts explains the higher estimate of total factor productivity growth. The capital series was generated as before; a base year (1985) capital was estimated simultaneously at 3 times GDP, based on best fit, lowest autocorrelation of residuals, and most reasonable elasticity of capital, the capital stock was then estimated using the permanent inventory method with a depreciation rate of 2% p.a. The adjustment for human capital was based on weighting each educational group of laborers by their wage in 1988. Labor data was adjusted for underestimates of unpaid family labor in the early years (See Dasgupta, Hanson, and Hulu for the data). The reported equation is a constrained version of the original equation that assumes constant returns to scale and the same coefficient of human capital and labor, with the constraints not worsening the fit significantly. The productivity growth was first estimated jointly by allowing for an average growth of total productivity for the whole period, which was insignificant statistically. Finally, some new estimates were made of productivity growth starting only in 1989 and of gradual slowing in productivity growth-these provided about the same fit as the reported equation. 16. In plantations and banking, which are directly comparable, public sector balance sheets are much worse, rates of return on equity are much lower, and costs are much higher than private sector firms (World Bank 1994a p. 50-55, World Bank 1995a, Kenward). 17. PT Tambang Timah's listing raised an additional $161 million offshore that was used for prepayment and $64 million that was used for additional capital. 18. Initial public offerings have been done through a "book building" process of orders, rather than through an underwriting process in which the marketeer competitively bids a guaranteed price for the offering and then takes the risk of marketing the shares. With "book building" the company bears the risk of a fall in price. 19. Indonesia's original take-or-pay contracts committed PLN to take a minimum amount of power at a contractually determined price. Recent Indonesian contracts have involved payment for capacity building, with the total payment depending on PLN's purchase, thus appropriately returning some of the risk of over- capacity to the power producer. 20. The Central Government also makes large transfers to sub-national governments for personnel, mostly teacher salaries. These items are included in personnel spending in Table 1.7, and are shown under Routine Expenditure, Subsidies to Regions, Personnel Expenditures in the national Budget. 21. Public enterprise profits are returned to the Finance Ministry, but investment expenditures financed by these profits may simply be approved by the Ministry. Perseros, public enterprises that have been given more independence by the Government, have more control over investments out of retained earnings and greater freedom to borrow, subject to overall control by the Government. 22. The figures refer to Development Expenditures excluding the Development Budget Reserve (CAP) of Rp.2 trillion in 1990/91 and Rp. 1.5 trillion in 1991/92. 23. The Development Budget includes some current, as well as capital expenditures, notably the fertilizer subsidy. World Bank estimates of the capital spending by the Central Government exclude the fertilizer subsidy and 10% of other development expenditures (see Table 1.7). Human Resource Development-Foundations for the Future 63 3 HUMAN RESOURCE DEVELOPMENT-FOUNDATIONS FOR THE FUTURE A. Introduction B. Education: Options for a Transition to Quality' 3.1 Further development of human resources is a key to Indonesia's future, as 3.3 Overview. In the past 20 years discussed in Chapter 2. Effective delivery of Indonesia's progress in education has been services to this end will also alleviate poverty impressive. Education levels have increased and improve regional equity. For example, dramatically since the 1970s, raising workers education is one of the best escape routes from average earnings. The narrowing of gender poverty, and the provision of basic health differentials across all levels of education has services is an important means of spreading the been matched by few countries around the benefits of development to the poorest of world. Indonesia's decision to decentralize society. This Chapter looks at human resource primary education since the mid-1970s (and to development in more detail, focussing on the equalize student-teacher ratios across Education and Health sectors. The former provinces) has increased access to education. (Section B) draws upon a major new sectoral Also, public educational funding has had a pro- study, which provides considerably more poor focus; over 50% of total public education detail, including data on expenditures; the latter spending was on primary education, which has (Section C) reflects more preliminary work. been assisted by a supportive policy towards the private sector. 3.2 The main messages are summarized at the beginning of each Section. Among these, 3.4 Indonesia now faces a second stage of four common features are notable. First, there educational upgrading. Since the mid-1980s is a need to expand basic services to the poor (when universal enrollment at the primary level and remote regions, particularly by raising was reached), the pace educational quality. Second, much more money is needed, improvements has tapered-off. Of particular but money alone will not be sufficient; in each concern has been the stable-if not sub-sector substantial changes in policy and declining-quality of education. Also, junior institutions are needed to make the additional secondary saw a decline in enrollments in the spending effective. Third, there is a need to late 1980s, which has raised concern about re-focus the role of the public sector, away achieving the next phase of expansion from those services that can be provided by the (notwithstanding possible reversals of declining private sector, in favor of basic services enrollments in the past two years). At the targeted on the poor. Fourth, one promising post-basic education levels, the rapid rise of the instrument appears to be further private sector calls for a refocusing of the role decentralization of responsibility to lower levels of the state. of government, supported by changes in fiscal arrangements that balance autonomy with accountability. 64 Chapter 3 3.5 These issues, the challenges they pose, school, dinas and Bupati-and changes and suggestions for policy change are the in incentives and funding mechanisms subject of this Section. The Section begins that balance autonomy with with a summary of Indonesia's successes to accountability to both national date, followed by a look at the key sectoral policymakers and the community. priorities and the constraints to making quick progress. In the penultimate sub-section, * The strong expansion of the private sector several policy suggestions are offered as the warrants a refocusing of the role of means to address these constraints. The final government, especially in post-basic sub-section looks at the financial implications education. This will entail measures to of future trends under various policy options. contain costs in public vocational and technical schools and the implementation 3.6 The main points that emerge from this of government plans for higher education. Section are as follows: Cost considerations place a premium on low-cost solutions and encouraging private * A significant enhancement of quality of schools. education is needed. The highest priority should be to improve quality at the B. 1 Brief Review of Successes in Education primary level. This is where most of the students are concentrated (80% of those in 3.7 Rapid Expansion of Enrollments. the entire public system) and this is the Indonesia's successes in the field of education best way to reach the poor. Also, are widely acknowledged and well- problems of low quality at the primary documented.2 In 1973, the primary school level are transmitted upward throughout gross enrollment rate (GER) was only 62% (13 the system. million students). Using revenue from the 1970s oil windfalls, the Government initiated a - The Government's plan for universal basic large primary school construction program. education (nine years) is desirable on both This infusion of financing, together with the efficiency and equity grounds. The abolition of primary school fees in 1984 and expansion will be costly and there is a large numbers of teachers trained through a need to consider different options to ensure crash program, led to a primary school GER of that the expansion is affordable, that it 107% by 1987 (Figure 3.1). Today, there are reaches the poor and isolated regions, and approximately 30 million students in primary that it does not replicate existing school, the majority of whom are in small inefficiencies in the system. Moreover, a public schools. prerequisite to achieving universal basic education is the reduction of drop-outs at 3.8 Junior secondary enrollments rose from the primary level. 17% in the early 1970s (1.5 million students) to 58% in 1995 (7.8 million students). Senior * Institutional factors are an important secondary and tertiary enrollment rates impediment to achieving quality universal witnessed substantial increases. In 1994, they basic education. It appears that these can reached 35 % and 11 %, respectively (up from be best overcome by devolution of 16% for secondary and 4% for tertiary twenty responsibility to lower level governments years earlier). They are now comparable to and schools. Decentralization would countries with twice Indonesia's per capita require clear assignment of responsibilities income. Growth in the tertiary sector has been -with a larger role recommended for the particularly impressive as actual enrollment has Human Resource Development-Foundations for the Future 65 risen six fold in the last decade, reaching 3.10 Up-grading the Workforce. The 2.2 million students in 1993. rapid increase in educational qualifications of workers has facilitated occupational, industrial, 3.9 Reliance on the Private Sector. The and geographic mobility, thereby integrating private sector is the major supplier of post- the national labor market (Manning, 1996). In basic education. At the senior secondary level, ten years, the percentage of workers with less the number of graduates from private schools than primary education declined from 56% to now equals the number from public schools. 37 % while the percentage with more than basic Graduates from private post-secondary increased from 9.5 % to 19%. Wage institutions and universities is more than double differentials have also narrowed owing to those from public institutions. With respect to improved educational attainments and increased training, publicly provided training is only a mobility. fraction of the private sector (World Bank 1996d). Figure 3.1: Indonesia Gross Enrollment Rates, 1971-95 120 - 100 soo- 60 40 - - 20 ,_ x_-X-XX-x x-x -x -x -x- e Year I Klindsorten Primary Junior Sec. -x Senior Sec. + Tertlary Source: MOEC Administrative Dea (excluding madresahs). 3.11 Narrowing the Gender Gap. Across points from 65 to 87%. The change at the all education levels, the gender gap in senior secondary level was the most striking; enrollment has declined sharply in the last whereas in the mid-1970s there were only decade. At the primary level, the gender ratio slightly more than half as many girls as boys (f/m) was already high in the mid-1970s at attending senior secondary schools, by 1993 86% and rose to 93 % by the early 1990s (Oey- the ratio had risen to 84%. At the tertiary Gardiner). At the junior secondary level, the level (public and private universities), the ratio gender ratio rose by more than 20 percentage was a very impressive 70% in 1993. 66 Chapter 3 3.12 Today, there is no significant gender overseas universities and the top Indonesian difference at the primary level either at the universities.3 national level (93 % for boys and 92% for girls) or across the expenditure quintiles, even 3.16 The highest priority to improving among the very poor. Also, at the next level quality should be at the primary level. This is of education, only a small gender gap exists. where most of the students are concentrated Gender differences start to appear among 16-18 (80% of those in the entire public system) and year-olds where enrollment rates differ by this is the best way to reach the poor. Also, almost 30%, even though they have been problems of low quality at the primary level narrowing rapidly. There are also some gender are transmitted upward throughout the system. differences in provinces in Eastern Indonesia The Government's commitment to ensure basic such as Central Kalimantan, Maluku, NTB, education for all provides an opportunity to put NTT, East Timor and Irian Jaya. quality issues squarely on the agenda. Implicit in the commitment to basic education for all is 3.13 Decentralization of Basic Education. a commitment to ensure basic education of an Indonesia's decision to decentralize primary acceptable quality. education since the mid-1970s has enabled greater access to education for the poor. 3.17 There are eight main reasons why basic Within the last year, the Government has education is of low quality in Indonesia. moved to build upon this success by placing First, school management is generally not the responsibility for implementing the program effective, particularly as it relates to the role of to achieve universal basic education (wajib the principal. Public school principals, on belajar sembilan tahun) directly with the average, have little autonomy in the running of Bupatis. In addition, the Daerah Percontohan their schools or deciding on resource program is increasingly placing implementation allocations, and they are ill-equipped to manage responsibility for services at the local or lead schools well. Second, teachers face an government level in the Kabupaten. incentive structure that does not adequately reward good teaching practices. The current B.2 Sectoral Priorities and Constraints policy of keeping salaries and working hours low, encourages teachers to hold second and 3.14 Notwithstanding these remarkable third jobs;4 because there are more achievements, much remains to be done if employment opportunities in urban areas, the Indonesia's educational system is to reach the policy also makes working in cities more levels necessary for rapid growth with equity in attractive. Third, student learning time is low the next century (Chapter 2). in grades 1 and 2. This is due to both low contact hours with teachers and unproductive B.3 Enhancing Quality: More Difficult than use of time when the teacher is in the Increasing Quantity classroom. 3.15 The quality of students (defined by 3.18 The fourth reason for low quality of competencies in numeracy, reading and education is that there is a large stock of reasoning skills) varies considerably, but on teachers who are poorly trained in both subject average it is low (Box 3.1). By contrast, matter and teaching processes. Fifth, schools several studies suggest that the job market in in poor communities have insufficient Indonesia is demanding higher quality resources. Parental contributions cover an graduates. The premium for perceived quality important part of non-salary costs in public is large, and largest for graduates from schools and there is a significant margin Human Resource Development-Foundations for the Future 67 Box 3.1: Evidence on Quality of Education There have been three major studies of achievement and the determinants of achievement in basic education in Indonesia. Two of these studies (Moegiadi 1976 and Suryadi 1989) tested students at the primary level in science, mathematics and the national language, Bahasa Indonesia. The third was a reading competency study conducted in conjunction with other countries and included students in primary and junior secondary grades (IEA, 1992) The findings of the Moegiadi and Suryadi studies suggest that achievement levels were low in 1976 and in 1989 (see Table A). On average, there was less than 50% mastery of science, mathematics and Bahasa Indonesia. Virtually the same low level of achievement was found in the second study conducted thirteen years later. In the 1989 study, achievement did improve somewhat in Bahasa Indonesia and science, but it declined in mathematics. A possible positive interpretation of the results is that, since there was a major expansion in the intervening years, one might have expected overall achievement levels to fall. The fact that they did not fall dramatically could be viewed as encouraging. Both studies also found substantial variation in achievement across the ten provinces and within each province. Table A: Results from Quality Studies in Indonesia Statistics Bahasa Indonesia Mathematics Science (n=5533) (n =5 75 7) (n=5790) Suryadi Study (1989) Mean 27.7 21.6 24.2 Standard deviation 7.9 8.7 6.8 Number of items 47 49 47 % correct answer 59% 44% 53% Moegiadi Study (1976) Mean 35 33 27 Standard deviation 12 9 8 Number of items 60 60 60 % correct answer 49% 55% 45% The IEA study (1992) was an international study of reading literacy. A sample of students was taken from grades 4 and 8 in Java, Riau and NTT. The results for primary students were low: most of the students correctly answered an average 36% of the items. There were wide regional differences as well: the lowest marks were recorded by those who attended rural schools. The highest literacy achievement scores were recorded by Yogyakarta, followed by Jakarta, East Java, Riau, Central Java, NTT and West Java. Boys and girls recorded similar literacy achievement scores and private schools did better than public schools. At the junior secondary level, the number of questions answered correctly were approximately 52%. The rest of the ranking was similar to that of the primary level. More recent informal surveys have been carried out on small samples of schools using classroom observations and testing of student cognitive abilities in basic number skills and reading in early years. One study found that students in grades 5 and 6 had not mastered many basic number skills (Somerset, 1994). Furthermore, teachers made similar mistakes as their students. A continuation of this survey into grades 7 and 8 found that errors done in primary school were still prevalent in later years (Somerset, 1996). These results suggest that poor performance begins in primary school and is perpetuated through secondary school. Evidence comparing Indonesia to other countries with respect to achievement is limited to the IEA reading competencies study mentioned above. Indonesia's primary and junior secondary school students lagged behind their regional counterparts in reading competency (see Table B): about 2% below that in the Philippines, 20% below scores in Thailand and 30 % below that in Singapore. Table B: Reading Achievement Test Scores for Grade 4 Pupils, 1992 Country Mean Score (%) Indonesia 51.7 Philippines 52.6 Thailand 65.1 Singapore 74.0 Hong Kong 75.5 Source: Vincent Greaney, Literacy Standards in Indonesia, 1992. 68 Chapter 3 between what poor and rich schools can raise major factor in reaching universal basic in fees to supplement official transfers. education. Moreover, this low level of resources in poor schools is becoming increasingly visible as the 3.21 Reversing Declines in Junior buildings constructed during the major Secondary Enrollment Rates. In the late expansion of primary education begin to 1980s to early 1990s, enrollment declined deteriorate. The problem of poorly maintained nation-wide at the junior secondary level. facilities is not confined to poor schools, Despite rising enrollments since 1993/94, the however, and is a manifestation of larger five consecutive years of sluggish demand for institutional problems. Sixth, there is junior secondary have raised serious concerns insufficient availability of textbooks and for achieving the Government's goal of materials and the quality of what exists is not universal nine-year basic education. In adequate. Seventh, insufficient monitoring of addition, much of the 5-year decline occurred student achievement and evaluation of among those in the lower income deciles. As investment programs means that problems a result of the decline, Indonesia's enrollment persist and are not brought more forcefully to rate has fallen behind that of its neighbors the attention of policy makers. Finally, the (Table 3. I). eighth reason for the low quality of basic education relates to institutional constraints Table 3.1: Junior Secondary Enrollment discussed in Section B.5 below. Rates in Selected East Asian Countries (latest year available) B.4 Priorities & Constraints: Achieving Universal Basic Education Country Enrollment Rates 3.19 In 1989, the Government of Indonesia (GOI) announced a policy of achieving nine years of basic education for all (wajib belajar Malaysia 83 (net; 1990) sembilan tahun). Achieving the target is GOI's Philippines 79 (gross; 1993) main education priority, and implementation of Thailand 63 (net; 1994) the policy began in 1994. While this is a Indonesia 47 (net; 1995) desirable objective on both efficiency and equity grounds, two major issues need to be addressed: (i) a national completion rate of Source: Edstat, World Bank, 1997. about 80% at the primary level, which has hovered around this rate for the past decade 3.22 High Costs and Uncertain Returns. and which is significantly lower in some The issues noted above have a common root. provinces; and (ii) the sluggish demand for Namely, high direct and indirect costs of junior secondary enrollment in the late 1980s. education, declining labor market returns and little prospects for continuing on to senior 3.20 Boosting Primary Completion Rates. secondary education. The lack of near-by The percentage of children who fail to junior secondary schools in rural and remote complete primary school has remained areas exacerbates the costs of schooling, and in stubbornly high over the last 10 years. Close the fast-growing urban areas, the possibilities to 20 % of primary children do not complete six for casual employment have acted as a years of primary education. In six provinces, disincentive for children to continue schooling more than 30% didn't make it through primary beyond primary. school. Higher completion rates will be a Human Resource Development-Foundations for the Future 69 3.23 The high costs of schooling and the junior secondary schools. These are: (i) burden they represent for poor families can be departures from lowest-cost school seen from household survey data (Table 3.2) 6 configurations; and (ii) deviations from optimal In West Java, total direct costs for junior teacher allocations. Schools with the same secondary schooling constitute 43 % of per number of classes vary dramatically in the capita household expenditures of the lowest number of teachers they have and many quartile. Particularly significant are schools have far more teachers than necessary transportation costs which represent 25% of to deliver the curriculum (Annex 3.2 of World total spending on junior secondary schooling *Bank 1997c). for those in the lowest quartile. Tuition is the next largest expenditure item at 17%. 3.25 On incentives, there are three major Overall, the cost to families in the lowest problems affecting the allocation of teachers. quartile of educating a child in junior First, there are strong incentives for teachers to secondary comes to an annual average of seek work in urban areas.8 Second, the Rp. 155,000, which is more than three times individuals who allocate teachers, do not bear the cost of primary education (Rp.50,000). the costs of an inefficient allocation. Third, those closest to the school, namely the 3.24 Inefficiency of Teacher Allocations principal and parents, have almost no incentive and Poorly Structured Incentives. There are to economize on the use of teachers. two significant types of inefficiencies arising Eliminating an unnecessary teacher does not from the current allocation of teachers across free up any additional resources that the principal can use for other purposes.9 Table 3.2: Average Household Expenditures per Student in West Java (Relative to total expenditure per capita, in %, 1995) Lowest Quartile Middle Quartile Highest Quartile Total Primary 14.2 14.5 12.2 14.0 Jun. Secondary 42.8 35.5 27.2 33.6 Sen. Secondary 71.9 56.2 39.0 49.1 Tertiary 151.5 134.4 79.1 84.6 Total 18.9 23.2 29.8 24.0 Source: SUSENAS 1995. 3.26 Desirability of Public Interventions at and Raney, 1993).10 While quantifying the Junior Secondary Level. Achieving externalities is a difficult task, there is little universal basic education is a desirable doubt that they are positive and probably objective on both efficiency and equity substantial. With continued economic growth, grounds. International research points to the those with only a primary education will find it existence of positive externalities associated increasingly difficult to break out of the vicious with expanding secondary education (Subbarao cycle of poverty. 70 Chapter 3 B.5 Priorities & Constraints: Overcoming 3.30 This system has several other negative Institutional Weaknesses implications. It discourages a clear sense of responsibility on the part of any level of 3.27 Among the various sectoral constraints, government or agency. Even when the some of the most intractable problems are those responsibility is clear (as in the maintenance of associated with organizational complexity, the school buildings), problems of implementation, fragmented budgetary process and the lack of monitoring and accountability allow many autonomy for principals and lower level schools to deteriorate. Planning and managers (see immediately below). development of service provision are difficult. There is no regular assessment of the real level 3.28 Organizational Complexities in Basic of funding needed, and when money is tight, Education. Assigning responsibility for cuts usually fall on operation and maintenance success of the universal basic education and quality funding. Also, it is difficult to program to the Bupatis was a major step. But ascertain and ensure that resources are it is just a beginning. Currently, there is a distributed equitably between regions since complex web of overlapping responsibilities for each source of finance is allocated separately, education," which makes it difficult to according to different criteria. Finally, the address personnel and materials issues,"2 and multiplicity of sources of finance makes room to affect change by actions that cut across for abuse. jurisdictions (e.g., converting a primary school, where there are excess resources, to a 3.31 Limited Autonomy for Managers of junior secondary school, where there are Schools. In general, public school principals shortages). Moreover, it is questionable and managers, who are closest to the problems, whether the scale of expansion contemplated by have little autonomy in running their schools or the Government forjunior secondary education in resource allocations. Research (Malo et. can be managed effectively under the current al.,1994) on strengthening local capacity in centralized system at this level. In this context basic education in Indonesia finds that more it is notable that the successful expansion of the autonomy at the school level enables better primary system was managed in a decentralized education. After controlling for resources, fashion. urban location and school type, the study finds that discretion has an independent effect on 3.29 Process and Fragmentation of the school performance. More autonomous Budget. Organizational complexity is reflected principals would be an important force for in rigidity and fragmentation of the Budget.'3 educational improvement in Indonesia, even in Consequently, there is virtually no the absence of broader structural reforms. substitutability among expenditure categories (for example, reducing spending on surplus B.6 Priorities & Constraints: Refocusing the teachers cannot be used to improve textbook Role of Government in Post-Basic supplies), and managers have little incentive to Education economize on use of either. Moreover, Budgeting involves at least five ministries 3.32 Achieving universal basic education of (MOF, BAPPENAS, MOEC, MOHA, and the necessary quality, which is the top priority, MORA plus BAKN) and at least four levels of will be expensive. This will draw budgetary administration (center MOEC and MOHA, resources away from lower priority activities, provincial Kanwil and dinas I, district Kandep such as post-basic education (SMK, SMU, and dinas II and sometimes subdistrict kancam training programs and university). and dinas kecamatan). Consequently, policy-makers will need to Human Resource Development-Foundations for the Future 71 search for low-cost, and cost-cutting, solutions graduates experiencing a long waiting time to to problems outside basic education. In this employment. There are low levels of internal regard, a distinction should be drawn between efficiency, as indicated by the excessive length vocational and technical training on the one of time students take to graduate; by the low hand and higher education on the other (see student-teacher ratios; and by the low number immediately below). of student/staff contact hours per week. Finally, there is an inadequate flow of 3.33 Government's Changing Role in information in the system about the quality of Vocational and Technical Education. GOI is programs to allow parents and students to make keen to reform the vocational/technical (SMK) informed choices. schools, which are relatively expensive operations (World Bank 1991b). It has 3.36 The Government has already articulated embarked on a strategy to make the SMK a strategy for improvement that largely system more effective in labor market terms by responds to the need to re-focus the role of the making it demand-driven. It has introduced a state. It is centered around the implementation dual system (Sistem Ganda or PSG) involving of a "new paradigm" in higher education formal institutional training and on-the-job management. This, in term, is built around the learning.'4 promotion of quality, autonomy, accountability, accreditation and evaluation both in the 3.34 Substantial improvements have already operation of the system as a whole (public and been made in the selection, evaluation, and private) and in the operation of individual replacement of principals in senior vocational universities. A key instrument in this schools. This should improve the quality of restructuring effort is to introduce competitive school management, which is essential if the processes in the way in which funds are PSG is to be a success. Further success of the allocated to public universities and subsidies PSG will depend upon progress in the three are provided to private universities. key areas: i) coordination among different players, including the Ministry of Manpower, B.7 Policy Options which runs its own large network of training centers (BLKs). It is not clear that two Addressing the Institutional Problem separate systems are justified, particularly from the employer's point of view. ii) Uncertain 3.37 International Evidence on industry interest and demand. iii) Potentially Decentralization. International experience higher unit costs than in a general senior provides some best practice lessons for secondary program, which must be shared addressing institutional weaknesses. Many among the students, firms, and the public. countries have decentralized their education And, iv) the development of effective feedback systems for various reasons. The results have mechanisms that will identify the factors been mixed (Box 4.1 of World Bank 1997c), associated with successful implementation of and decentralization is clearly not an answer the PSG in some schools. for all educational problems. However, the balance of evidence suggests that, in 3.35 Government's Changing Role in Indonesia's current circumstances, more Higher Education. The higher education decentralization will be a necessary-but not system has problems of quality (especially sufficient-condition for significantly among many private universities and newer improving teaching and learning (Chapter 4, public universities) and relevance, with many World Bank 1997). 72 Chapter 3 3.38 To affect improvements in quality and characteristics that are needed to operate universal basic education, it will be important effectively; (ii) a means of rewarding good to clearly define the roles of the many relevant principals and replacing poor ones; and (iii) agencies, particularly in light of the new modular training programs where specific responsibilities given to the Bupati's office. In deficiencies in management skills exist. this regard, the central government should focus on three aspects of education policy: i) 3.42 Many of these changes cannot be promoting national unity; ii) equity in the carried out quickly and would require provision of education across income groups, considerable effort and consensus building regions and genders; and, iii) standard setting, among the various players. For example, this evaluation and testing. would involve such very difficult tasks as transferring staff from the kandep to the dinas. 3.39 Among these, promotion of the second Moreover, over time, as has happened in other aspect (equity in the provision of education countries undergoing decentralization, new services) may require the Government to re- functions and responsibilities for the central examine the current formula for funding government will emerge, such as standard- underserved schools (paras 3.43, 3.48 and setting and technical assistance to other levels. 3.50). Also, some means is needed to reduce This means it will be necessary to strengthen the diversion of funds to other purposes at the the responsibility of the line ministries, local level. primarily MOEC, but also MORA, to carry out quality control, and monitoring and evaluation 3.40 Reforming Institutions. Assigning of the programs implemented by local responsibility for success of the universal basic government. To ensure that the Bupatis and education program to the Bupatis is a major other managers of education at the local levels step and represents an appropriate approach, can carry out their designated responsibilities, but much remains to be done. One proposed a certain level of capacity building will need to structure that would help clarify assignments be defined and carried out. involves reassigning functions at the primary level so that virtually all activities would be 3.43 In addition to clear assignments of carried out by the dinas, the school, or the responsibilities, it is important to develop school cluster-groups that report either institutional funding mechanisms that promote directly or indirectly to the Bupati. At the efficiency and equity and that balance junior secondary level, responsibilities that had autonomy and accountability. It is difficult to been assigned to kandep, kanwil, MOEC, and achieve these multiple objectives with a single Governor would be passed on to the Bupati, funding mechanism. However, by combining dinas and the schools. Curriculum and testing three different funding mechanisms, it is would remain the responsibility of MOEC. possible to move closer to achieving these The proposed structure at the junior secondary goals. The central government may want to level would parallel the primary level, consider employing the following three streamlining the institutional structure. mechanisms to transfer funds to the kabupaten: (i) matching grants based on parental (BP3) 3.41 Greater autonomy should be given to contributions; (ii) performance-based grants; school principals in deciding on resource use and (iii) unrestricted grants to the kabupaten and developing school-based strategies in line based on the number of students enrolled. In with local conditions. The greater autonomy the short-run, the Government could introduce would need to be accompanied by: (i) a process the matching grants and the performance-based of selecting good principals based on skills and grants without major disruptions to current Human Resource Development-Foundations for the Future 73 institutional arrangements and funding the mix of civil servant versus contract mechanisms. Introducing the third funding teachers, recruiting the contract teachers mechanism, the per-student grants, could be locally. Over the next ten years, in order to deferred until local level staff gain experience develop a high quality professional teaching working with the performance-based grants. A work force, Indonesia should move away from prerequisite for preparing such proposals is its policy of keeping salaries and official having consolidated budgets.15 Decision working hours low. This would imply having makers at different levels (schools, kecamatan, teachers who would work more hours but at kabupaten and provinces) cannot make good higher salaries. It would be advantageous to allocation decisions without better information use the opportunity presented by the major on their budgets. Moreover, without expansion of the junior secondary system to consolidated budgets, it is difficult for redeploy teachers to meet some of the demand policymakers to ascertain the distributional and to eliminate some of the excess teachers. consequences of the choices they make. Finally, in order to promote transparency and 3.46 Increasing Learning Time in Grades accountability to the parents/community at the 1 and 2. There is a need to increase learning local level, a greater role of the community is time for students in grades 1 and 2 coordinated needed in deciding how budgets are spent. with a planned expansion of the school feeding There are many options and several good program (see "Reducing Dropouts", below) to models to follow (e.g., COPLANER, IDT). re-enforce attention spans. This would require an increase in the length of the school day and Policies for Enhancing Quality and training of teachers on more effective use Achieving Universal Basic Education classroom time. With this change, teachers of grades 1 and 2 would teach the same number 3.44 The recommended strategy to enhance of hours as upper grade teachers. the quality of basic education is to combine a set of core interventions targeted on the main 3.47 Upgrading the Quality of Teachers. constraints (those related to teachers, The experience from the Primary Education management, and resources) with mechanisms Quality Improvement Program (PEQIP) has that would allow local level institutions to demonstrated the viability of an in-service propose actions tailored to more specific local- training model centered around the school level problems. These mechanisms could be cluster. Building on this experience, the modeled on the performance-based grants strategy should be expanded with the bulk of programs, already introduced in the higher the management done at the kabupaten level. education sector. In addition, the institutional In addition, the policy of having an reforms discussed above are essential elements "across-the-board" upgrading of all basic of the strategy of improving quality. education teachers should be reconsidered, in favor of a more targeted upgrading program 3.45 Improving Incentives Facing based on need. Teachers. To improve incentives facing teachers, the Government could: (i) change the 3.48 Increasing Resources Allocated to incentives facing civil servants by modifying Poor Schools. Efficient means are needed to how points are awarded in the functional credit channel more GOI funds to the poor schools system to reward activities that are likely to building on the experience of the PEQIP lead to effective teaching; (ii) structure program and school feeding program. In incentives of contract teachers to, for example, particular, the mechanism should not attract workers to rural areas; and/or (iii) alter undermine the existing system for parental 74 Chapter 3 contributions (BP3) in better-off communities. 3.52 Increasing Efficiency in Teacher One useful option would transfer some GOI Allocation by Changing Funding funds as matching grants to BP3 contributions Mechanisms. The introduction of the funding (on a sliding scale depending on the wealth of mechanisms discussed above could enhance the the community and up to a maximum incentives to allocate teachers more efficiently. contribution), which should actually stimulate Both per-student transfers from the center and parental contributions to BP3. performance-based grants would encourage the districts to focus on efficient outcomes. 3.49 Reducing Dropouts from Primary School. The Government's anti-poverty Policies to Refocus Government's Role in program launched in 1993 (the IDT program) Post-Basic Education and the school feeding program (intended to encourage attendance and lengthen attention 3.53 Vocational and Technical spans, by compensating for inadequate Education.16 On spending, the Government breakfasts) are the most promising initiatives in should consider having the budget for SMKs this area. In addition, consideration could be grow at the same rate as that of senior general given to policies for offsetting the tendency for education. To accommodate more limited late entry into school, particularly among poor budgetary resources, cost-containing measures rural children. are needed for the SMKs, including: (i) an overall reduction in the budgets for schools 3.50 Increasing Access by the Poor to based on providing, for up to two years, a Junior Secondary. Essentially, public policy curriculum more appropriate to general needs to address the income and price schooling; (ii) revisions to the budgets of constraints faced by the poor. Strategies could individual schools based on an assessment of include: (i) more-and better quality- student outcomes that consider the labor market financing for school facilities in rural and relevance of the courses being offered; (iii) remote areas, including alternative modes of revenue for vocational schools could be delivery such as SLTP Terbuka, Paket B and increased by charging higher user fees; and (iv) other non-formal models; (ii) providing the number of schools could be reduced, scholarships to poor students and particularly to targeting those engaged in small occupational poor girls; and (iii) providing grants to schools groupings or those offering courses that can be in poor areas to compensate for low BP3 substituted by private schools. contributions. 3.54 The Government should continue 3.51 In expanding facilities, three points efforts to make the vocational system more need to be considered. First, there is a responsive to needs of firms. This will involve problem of quality, which is largely a producing students with the balance of basic governance issue (Chapter 5). Second, lower education, general vocational skills and priority could be given to building public specialized skills that the market demands at schools in locations already served by private any given time. Effective feedback schools. If public expansion proceeds in mechanisms are needed to ensure that resources localities already served by private schools, are not wasted in producing the wrong mix of there is a substitution effect and little net gain skills. As the Government moves away from in enrollments. Thirdly, there are efficiency the old system of senior vocational schools to gains to be achieved from converting existing a new system with classroom learning, on-the- primary facilities to secondary schools. job learning and possible advanced training Human Resource Development-Foundations for the Future 75 through a system of expanded polytechnics, it be accredited over 5 years). It is highly likely should consider modifying the specificity of the that there will be pressure to lower standards training in senior secondary schools. The and direct more public resources to support curricula and qualifications system for SMKs failing programs. This pressure will need to could be revised to allow the introduction of be resisted since it would keep the Government more basic education within SMKs and the from following through on its plan to focus transferability of credits between streams. This public subsidies on high priority fields and to would leave more specialized training for promote geographical and social equity. It polytechnics or job-specific training in firms. could also risk distorting the overall strategic The relationship between the SMK system and plan for the entire education sector by diverting polytechnics needs to be assessed and a more funds to the higher education sector. combined strategy developed, particularly in Finally, a continued emphasis on cost recovery light of the Government's plans to add another is warranted since there are high private 155 new polytechnics by the year 2020-a plan returns to higher education and most of the which would have significant financial students come from families in the uppermost implications. income decile. 3.55 Carrying out such a shift in strategy in B.8 Financial Implications the SMK system (and polytechnics) would be difficult given the overlap in responsibilities 3.58 This sub-section considers the between Ministries involved in vocational financeability of initiatives that have either education and training. An over-arching been recommended here or identified as Council driven by the private sector is needed desirable by GOI. to take responsibility for setting policies. The Council would need to be given an appropriate 3.59 Projected Costs. Table 3.3 presents status in government, enabling it to handle estimates of the costs of specific investments. cross-ministerial issues. These include costs of recommendations made above, as well as costs of expansion in the 3.56 Higher Education. The increased post-basic sector that GOI desires. These importance of the private sector calls for some estimates are not comprehensive, but include shift in Government priorities. A greater role most of the major initiatives.'7 The for the Government is warranted in: (i) assumptions underlying the projected costs are regulation and accreditation; (ii) ensuring presented in Chapter 6 of World Bank 1997c. adequate information on quality of programs; (iii) investing where private interest is low and 3.60 Projected Availability of Resources. where social returns are sufficiently high to Affordability of the specific investments justify the investment; and (iv) creating depends upon the likely path of the education incentives for better management of public budget. The key determinants of the path are universities and more effective public the initial levels and trends of GDP, total assistance to private universities. government expenditure and the share of education. 18 3.57 At present, the main task is to implement GOI's "new paradigm" for higher 3.61 Three scenarios are considered for the education, which will require some time. On evolution of the total education budget. In all relevance and quality, a substantial challenge is three the share of government expenditure as a presented by the sheer magnitude of the task of percent of GDP is assumed to be the same and accreditation (with 11,500 programs needing to is fixed at its current (GOI basis) level of 76 Chapter 3 17.7%. The three scenarios are distinguished education expenditure in total government by the assumptions made about the rate of expenditure from 15.7% to 20% by 2010. growth of GDP and the share of public Note that increasing the share to 20 percent educational expenditure in total government roughly compensates for the difference in GDP expenditure. The base case uses baseline growth between the base case and low GDP projections for GDP growth (an average of growth scenarios. about 7 1/2% between 1997-2010; Chapter 2) and assumes that the share of educational 3.62 Projected Shortfall of Budgetary expenditures stays at its current level of 15.7% Resources. Figure 3.2 presents the projected (see footnote 18). The low GDP scenario shortfall of budgetary resources under the three combines the low case scenario for GDP scenarios discussed above, if all the growth (an average of 5% between 1997-2010) investments in Table 3.3 were to be with the same assumption of constancy in the undertaken. Under all three scenarios, there share of education expenditure relative to total would be a substantial budgetary shortfall in public expenditure. Finally, the third scenario the initial years. This implies that it will be combines the low case scenario for GDP necessary to set tighter priorities. growth with an increasing share of public Table 3.3: Estimated Costs of Specific Investments for Quality Improvement 1997 1998 2000 2004 2008 2010 Basic Level Continuous Teacher Training 0 139 556 1390 1390 1390 Matching Grants 0 46 184 461 461 461 Performance-based Grants at Basic Level 70 70 140 176 176 176 Increase in Non-salary Expenditures for Existing Junior Secondary Schools 17 36 77 177 307 384 Expansion of Junior Secondary (with Declining Private Share) 1057 1171 1399 1854 2309 2536 Post-Basic Level Expansion of Senior Secondary 368 438 593 963 1435 1718 Expansion of Existing Universities 747 779 842 967 1093 1156 Expansion of Existing Polytechnics 182 186 192 204 216 223 Expansion of Existing IKIPs & Art Institutes 10 11 13 17 20 22 Establishment of New Universities 0 0 16 297 313 113 Establishment of New Polytechnics 326 331 5007 1051 1281 1317 Performance Grants at Tertiary Level 70 84 98 112 112 112 Subtotal Post-Basic 1704 1829 2261 3612 4471 4661 Increase in Wage Bill (both levels) 316 656 1417 3255 5617 7013 Total 3165 3947 6033 10924 14730 16621 3.63 Figure 3.3 presents the budgetary teacher training, matching grants, increases in shortfalls after setting priorities. The non-salary spending in junior secondary and investments related to expanding junior performance grants) would be retained. The secondary schooling (but with encouragement major modifications to the investments for greater private participation) and improving described in Table 3.3 are: quality of basic education (through continuous Human Resource Development-Foundations for the Future 77 * Limit growth rates in senior secondary for 1997-1999, 50% of original target rate for both general and vocational to 3% for 3 2000-2002, 75% of original target rate for years. Thereafter, have public vocational 2003-2005 and 100% of the original target grow at the same 5% rate as senior rate for 2006-2010. general. * Phase-in expansion of existing polytechnics * Phase-in expansion of existing universitites following the same pattern as for at 20% of original target annual rate for universities. Figure 3.2: Budgetary Imbalance for Education Investments: Betore Setting Priorities (Rp. billions) 12000 10000 6000 < 4000 - 2000 - 0 -200d 206 2008 2 10 Yecr Base GDP Low GDP -< Low GDP+Incr&eslngShr Figure 3.3: Budgetary Imbalance for Education Investments: After Setting Priorities (Rp. billions) 12000 - 10000- 8000- 6000- 4000- 2000 - -200d S 1 299 2 2I2 1 -4000- Year | Base GDP A Low GDP -x-Low GDP+increa*ing Share 78 Chapter 3 * Phase-in the new polytechnics more slowly issues of ongoing changes, and discusses the and reduce the total number constructed, policy implications of these changes. The first with one polytechnic for 1998 and 1999 sub-section examines recent trends in and three new polytechnics a year between expenditures, financing and resource allocation 2000 and 2010; and in the health sector, including implications for geographical and vertical equity. The second * Delay the wage increase by one year. sub-section looks ahead at the implications for health spending of continued rapid income 3.64 To summarize considerations of growth and urbanization. The last sub-section financeability, although the priority investments recommends a focus for public policy for the (to achieve 9 years of universal education, forthcoming decade. quality improvements and limited expansion at the post-basic level) are substantial, they are 3.67 The main messages of this Section, feasible provided: (i) the initiatives are whose details are discussed below, include: phased-in over time; (ii) the Government adopts some of the lower cost options in * Increase Services to the Poor. Public expanding universal basic education; and (iii) sector spending has a vital role in the there is strong growth in the education budget. provision of basic health services for the poor. Government spending needs to C. Health: Transitions and Challenges increase substantially to fulfill this role. 3.65 Overview. Rapid development of the * Improve the Quality and Efficiency of Indonesian economy is engendering change in Public Institutions. Increased spending is the structure of health financing, expenditures not enough. Change is needed to achieve and service delivery. Some changes are the better budgeting, management and product of rapid economic growth while other organization of services, and to improve changes are the outcome of central government the incentives and skills of public sector policy choices. As regards the latter, over the health professionals, and better quality of last 5 to 6 years the Government has pursued services delivered in puskesmas. gradual decentralization of planning and budgeting, modest increases in administrative * Support the Provision of Private Health autonomy, control of growth in public sector Care. The demand for modern private employment in health, and experimented with sector services will continue to grow as alternative forms of financing. The household incomes and urbanization Government has also introduced innovative increase. The Government needs to initiate programs to widen access to services (e.g., the policies to support high quality private contract doctor (PTT) and low-income village services. (IDT) schemes). These policies are moving in the right direction, but they need to be * Continue the Decentralization of Health strengthened and accelerated, through Services. More decentralization would continued innovation in public sector finance assist with effectiveness and quality of and incentives, and growth in quality of both public sector spending. Clear public and private sector services. responsibilities and stronger incentives are needed to make the most of increased 3.66 This Section examines the changing authority of district and facility trends in finance and expenditures in the health management decision-making. sector. It sets out the salient features and Human Resource Development-Foundations for the Future 79 C.1 Expenditure Trends 3.69 Following a nadir of public expenditures on health in 1987/88, the 3.68 Aggregate Spending on Health. Government has achieved substantial increases Based on very rough data, Indonesia spends in health spending, which are continuing into less on health, in both the public and private the 1997/98 Budget. In constant 1993 prices, sectors, than other countries of a similar level the per capita aggregate expenditure for of development in the Asia region (Prescott Government at all levels, has increased by an 1997d). Total health spending (public plus annual average of almost 8% since 1987/88 private) was 1.9% of GDP in 1993, compared (Table 3.4). ' The increase in government to a range from 2.9% (China, 1993) to 5.4% health expenditures comes from both increased (Thailand, 1992) for five nearby comparators. government spending generally, and from an Public spending is especially low; it has increasing share for health in total public remained at less than 0.9% of GDP from expenditures. Health expenditures increased 1984/85 to 1994/95. This is less than two from 2.2% of total public expenditures in thirds of the next lowest comparator ASEAN 1987/88 to 3.5% in 1994/95 (Chapter 2). country at 1.3% (the Philippines). Table 3.4: Indonesia: The Structure of Health Expenditures (Rp. billions, in 1993/1994 prices) 1984/85 1987/88 1992/93 1993/94 1994/95 Growth of Spending Government 1188.0 1076.8 2030.4 2010.1 2062.7 7.8 Center 1014.3 874.6 1704.7 1687.9 1702.1 8.0 Level I 125.4 120.7 137.9 136.4 150.9 1.4 Level II 48.2 81.5 187.8 185.8 209.6 12.4 Aid Donors 66.1 45.2 318.3 215.0 348.8 31.5 Private 2872.0 3336.2 4011.2 3910.0 4158.0 1.3 Out of Pocket 2226.5 2605.3 3023.0 2954.0 3128.0 0.8 Corporate 158.8 230.8 386.8 375.3 405.5 6.4 Parastatal 289.5 347.7 420.5 407.9 440.8 1.6 Insurance 197.2 152.5 180.9 172.8 183.8 0.9 Total 4126.1 4458.2 6359.8 6135.1 6569.5 3.8 l Real per capita, in % per annum; 1987/88 to 1994/95. Source: Private data files of Dr. A. Ridwan Malik, LITBANKES, Department of Health. 3.70 Within overall government 3.71 Health Performance Indicators. expenditures, the shares of both central and Performance on key health indicators reflects district governments rose and the share derived the moderate rise in health expenditures. For from province revenues fell. Over 80% of example, many indicators of health have government expenditures continues to be improved over the past twenty years: infant accounted for by the central government, either mortality has fallen from 145 in 1971 to 55 in directly or indirectly through a system of 1995; and child mortality has fallen from 218 subsidies to local governments. It should also in 1971 to 103 in 1990.20 Despite this be noted that the points on institutional improvement, performance is well below what weaknesses in budgetary process for education would be predicted from the levels of income (para 3.29) apply equally to health. and literacy relative to other Asian 80 Chapter 3 21exml,o countries. For example, among Asian increased the share of expenditures onprimary countries in the early 1960s, the under-five health care and communicable disease control mortality rate (CMR) was 20% better than (Table 3.5). This shift in the functional would have been predicted for the income and allocation of health expenditures is consistent literacy level. By the early 1990s, the relative with the primary causes of morbidity, mortality performance had steadily fallen until it was and general health problems.22 approximately 40% worse than the predicted level (Figure 3.4). 3.74 International research has demonstrated that prevention and basic health services (delivered through primary health care) are the most cost effective programs to deal with Figure 3.4: Indonesia's range of health problems Indonesia: Health Performance Indicatoms (Box 3.2). Cost effective preventive programs so _ l i include: pre-natal care; immunizations; health 40- 30_ education; improved water and sanitation; and E 20- micro-nutrient supplements. Cost effective o1. primary care programs include: diarrhea -10 treatment using oral rehydration and -20 puskesmas-delivered care; tuberculosis - __ o treatment through outpatient short-term 1960 1965 1970 1975 1980 1988 1990 chemotherapy; safe motherhood programs sing fer prenatal care and delivery by trained personnel; |Chld Mortalty Rate (CUR) ITotal Fertility Rate(TFR) and facility delivery of high risk pregnancies. Sowm : P.rondcommuronsftsmKl,D.Jaon As mentioned, the Government has =nd 13 Wongl (Decmber INe strengthened these programs over the last few years through the greater allocation of resources to primary health care and 3.72 The deteriorating relative performance communicable diseases (Table 3.5). of child mortality contrasts with the performance on total fertility rate which Table 3.5: Government Expenditure throughout the last thirty years has remained on Health by Function substantially better than would have been (In % of total) predicated by income and literacy. Key factors in the good performance on total fertility are Function 1989/90 1994/95 the quantity of public and private resources committed, private sector involvement, and concerted institutional support at all levels of Hospitals 51 41 government. Primary Health Care 19 26 Communicable Disease 3.73 Functional Distribution of Public Control 2 5 Expenditures. Over the last 5 years, the Other 24 23 Government has made steady progress in improving the composition of health spending. It has steadily decreased the proportion of Source: Miniistry of Health, LITBANKES and Bureau government expenditures on hospitals and of Planning. Human Resource Development-Foundations for the Future 81 Box 3.2: Equity and the Provision of Health Services The Government has sought to redress regional imbalances in health status through wider access to health center services and a greater supply of health workers. There is evidence that this policy has had positive effects. The rates of infant and child mortality have declined in every region of Indonesia over the last ten years (World Bank, 1996a), as has variation across provinces.' However, some provinces are notable outliers, both statistically and geographically. One example, focussing on sensitive indicators, is a detailed examination of child mortality in 1993 and its relationship to illiteracy and per capita health expenditures across all provinces. After correction for differences in literacy, a 10% increase in health expenditures is associated with a 5% decrease in child mortality in the average province.2 Examining the difference between the predicted and actual child mortality rates for the separate provinces reveals five provinces which have greatly under-performed in relation to literacy and health expenditures. These are Nusa Tenggara Barat, North Sulawesi, Central Sulewesi, Central Kalimantan, and Irian Jaya. All are characterized by difficult transportation and communications, and challenging epidemiological environments, especially as regards water and sanitation problems, and low access to trained health professionals. Special efforts are likely to be required to offset their difficult situations. Turning to vertical equity, there are Equity and Health Services sizable imbalances in the use of health services across income groups that favor well-off households. 100. - _ - _ - _ - _ _ zf k This is true, not only for private service, but, go K R surprisingly, also for use of public services. The 80 - - - - - - - ~~~~~distribution of subsidies for various health services is compared with the distribution of income in the g 60 - _ _ _ - _ - - accompanying Figure, which uses 1990 SUSENAS data (World Bank, 1993c). The overall distribution 40 _ _ _ - m _ of the health sector subsidy is slightly more IL equitable than the distribution of income. However, < 20 _ L - l l the distribution of subsidy to hospital inpatient and outpatient services strongly favors upper income 0 1 0 0 0 _91 groups. By contrast, the distribution of the subsidy for primary care services has the opposite impact; % ot 20bo 30 40 50 60 70 80 90 10 namely, it favors lower income groups and improves % of Population equity. The implications are clear; if government Diagonal Income services are to be targeted on the poor, the subsidy . Hospitals PHC should be applied to primary health care services and facilities. Wherever feasible, hospital services should be left to the private sector. From 1990 to 1995 the standard deviation between individual province infant mortality and the average for Indonesia declined by 6 infant deaths, and the coefficient of variation (the ratio between the standard deviation and the average across provinces) also declined from 0.28 to 0.22. 2 Based on a cross section logarithmic regression of the under five child mortality rate (CMR) on illiteracy (ILLIT) and total per capita health expenditures (HEXT/N): CMR = 8.6 - 0.46 HEXT/N + 0.145 LLIT r2 = 0.32 No. obs. = 27 (4.49) (-2.42) (1.96) (t statistics in parentheses) 82 Chapter 3 3.75 Nonetheless, greater support is needed average of 25%, on some estimates); and for communicable diseases and primary health typically very little local value-added. More care programs. But further shifts in the work is needed to study the structure of this composition of government health sector industry. resources to these programs is not advisable; certain hospital services, especially at the Table 3.6: Government Health Expenditures district level where funding is already low, are by Line Item an important complement to the basic health (In % of total) care programs. It is essential to have a credible referral capacity if there is to be 1989/90 1994/95 effective use of primary care programs at the entry level. Consequently, additional resources to support prevention and primary care investment programs must basically come from an absolute Land 0.2 0.1 increase in government expenditures in the Construction 60.1 26.1 health sector and from greater sector Equipment 31.4 24.4 efficiency. Other 8.3 49.3 Total Investment 100.0 100.0 3.76 Patterns of Health Spending. There Recurrent has been a shift in the composition of Personnel 52.9 57.3 investment expenditures to non-construction or Drugs 14.5 9.2 equipment categories. From 1989/90 to Other Supplies 23.5 21.7 1994/95 the share of development spending for Other 9.1 11.8 these latter two categories fell from 90 to 50% Total Recurrent 100.0 100.0 (Table 3.6). The share of development Percent of Investment 24.8 33.1 expenditures for training, institutional Percent of Recurrent 75.2 66.9 development, rehabilitation, maintenance Total 100.0 100.0 increased from 8 to 49%. The shift to non- construction investment follows several years of facility construction to increase the density Source: Ministry of Health, LITBANKES and of health sector coverage in the last decade and Bureau of Planning. a half.23 This shift in focus was appropriate and needs to be maintained. 3.78 Investment expenditures have increased 3.77 On current spending, there has been a to 33 % of total spending in the health sector marked rise in the share of expenditures on (Table 3.6). Taken together, the increase in personnel and an off-setting drop in spending investment and the change in its composition for drugs. Other categories have been roughly are generating a need for increased operating constant (Table 3.6). This rise in personnel expenditures. It is estimated that the 1994/95 spending mirrors the upward trend in the level of investment expenditure, coupled with overall Budget (Chapter 1). The decline in baseline expenditures to continue operation of spending on drugs is less well understood but existing programs, will require a 10% increase points towards deep-rooted problems in the in the level of real operating expenditures.24 pharmaceuticals industry: high prices of drugs; In addition, added expenditure is needed to wholesale and retail margins (averaging 21 and cover the recurrent cost of demographic 34%, respectively) that are among the highest growth. Actual expenditures were appreciably in the world; low capacity utilization (an less from 1987 to 1995 (see the discussion of Human Resource Development-Foundations for the Future 83 expenditure trends, above). Consequently, to 3.82 The accompanying projections compare benefit from the current high level of health the status quo path of low public and private investment, a substantial increase in operating expenditures in the health sector with an costs will be needed in the near future. alternative path that is achievable by government policy (Table 3.7). On the basis 3.79 Role of the Private Sector.25 Private of reasonable assumptions,' the private sector sector health spending is almost twice the level will continue to decrease slowly as a of government expenditures. But private sector percentage of total health expenditures, and expenditures are on the decline as a share of total health spending as a percentage of GDP total health expenditures (from around 70% in will remain at 1.9% (Table 3.7, columns 1 and the mid-1 980s to near 63% in the mid-1 990s); 2). Under a more optimistic scenario measured on a real per capita basis, they have (Table 3.7, columns 3 and 4)28 the private grown by less than 1 1/2 % per annum over the sector would grow slowly as a proportion of past decade, which is surprisingly low. total health expenditures; public spending would rise; and the total health sector 3.80 Most private sector services are expenditures expand to 2.5% of GDP. provided by health professionals whose primary job is in the public sector.26 Health service 3.83 Faster growth in the provision of advice is also provided by pharmacists in private services allows re-prioritization of conjunction with pharmaceutical sales. Private public spending. Most importantly, it reduces clinics, hospitals and health personnel are the de facto subsidy of public services located primarily in urban areas. In rural currently enjoyed by upper income groups. areas, there are few private clinics or hospitals, The freed-up resources can be used to improve and most private services are provided by service quality and strengthen essential services individuals operating out of their homes or out for the poor and remote areas. This shift will of public facilities during off-hours. The use not occur spontaneously; it requires changes in of traditional healers and their medicines is public policy (see immediately below). very common in rural areas and it remains substantial in the cities. C.3 Looking Ahead: Policies C.2 Looking Ahead: Spending 3.84 Policies for Supporting the Private Sector. The most important step in this area 3.81 Future Spending Patterns. Income would be to convert selected urban hospitals growth and urbanization will be important and clinics to private status. This-coupled engines driving increased private sector with cost recovery in remaining public sector expenditures over the next decade. However, hospitals-would encourage a shift to private simple plausible projections illustrate that sector services, with the equity benefits policy change is needed. Without policies to outlined above. foster growth in the supply of private sector services, middle and upper income groups will 3.85 Government policy should support continue to place great resource demands on improved quality of private services. the supply of public services, diverting vital Transparent and effective licensing and services from the poor. The situation will be regulation are needed. Quality assurance exacerbated, if public support for the health programs and competency based training sector continues to be low. This may well should be extended to the private sector. threaten the objectives of delivering higher Professional associations (including those for quality essential services, especially to the nurses and other professionals as well as poor. doctors) need to be supported and encouraged 84 Chapter 3 Table 3.7: Projections of Health Expenditures Under Alternative Scenarios Year Staws Ouo Faster Expenditure Growth Spending" % GDP Spending" % GDP 1997 44 2.0 45 2.0 1998 46 2.0 48 2.0 1999 48 2.0 52 2.0 2000 50 1.9 56 2.1 2001 53 1.9 61 2.1 2002 56 1.9 67 2.2 2003 59 1.9 74 2.3 2004 62 1.9 82 2.4 2005 69 1.9 94 2.5 Source: Staff projections. 1) Per capita, per annum in Rp. 1,000. to be active within provinces as well as at the where market failures have prevented the center. The private sector should be allowed development of private services. The to benefit from training programs and distance priorities, including for donor support, should support.29 Training curricula should assist include: immunization; antenatal care; doctors, nurses and midwives in starting a micronutrient supplements; TB and malaria private practice. treatment; treatment for respiratory infection and diarrhea in children; vector control; health 3.86 Furthermore, decentralization of public education; family planning; school health services (see below) could be combined with programs; water and sanitation programs; and, contracting for private services at the local hygiene and sanitary education. Several level. Contracts can be used by districts for diseases or population groups are special specialist services, drugs and supplies, targets that will require added development materials equipment, training, and other inputs. expenditures, for example, high maternal Broader contracts can also be written to cover mortality and low quality of deliveries. entire units of care or population, as is being Primary health care services, including safe done in many other countries.0 Development delivery, can be strengthened by better of health insurance would be a complement to integration of district level hospitals into health the increased use of fees for public facilities sector services. and reliance on the private sector for high cost hospital services. By reducing the price 3.88 Policies for Improving the Quality of sensitivity of the insured, health insurance can Services. Programs of rational drug promote the development of the private sector. management (initiated since 1990) should be extended, and adequate resources of 3.87 Policies to Reach the Poor and pharmaceuticals and supplies should be Remote Areas. The freed-up public resources provided, especially of basic pharmaceuticals. should be shifted to primary care and essential In the private sector, more research is needed services, targeting the poor and remote regions to study the competitive structure of the Human Resource Development-Foundations for the Future 85 pharmaceuticals industry, especially at the and quality assurance, and personnel planning distribution. Also, training and information and management. Within provinces, important should support better dispensing and parts of these functions can be further devolved prescription practices. Quality assurance to kabupaten and facility level.3' For programs for service delivery are being example, increased responsibility for budgeting developed for puskesmas services in selected and short range planning is already being taken provinces. These programs need to be refined by district administration. Still greater district as experience accumulates, extended to other control over resource allocation is required, service levels, and replicated in other however, for increased sector efficiency. provinces. Improved professional standards Personnel is a particularly sensitive area where and quality of training are needed for all types greater district, and even facility, control is of health professionals (doctors, nurses, needed. Global budgeting of facilities and midwives, sanitarians, etc.). Both pre-service block grants to districts can facilitate flexibility and in-service training programs can be in resource allocation, and greater mobilization strengthened by rigorously screening defined of district and province revenues is needed, competencies and tying the training outcome to including through increased cost recovery and the quality assurance programs. broadening the local tax base. The Government is moving towards decentralization 3.89 Policies to Continue Decentralization. at a measured pace. But within a five year Building upon successes in this area to date, target, greater local control of resource more MOH responsibilities could be devolved allocation, over the entire budget including to provinces, including planning and budgeting, personnel, is needed to achieve greater procurement, service delivery, accreditation efficiency in the public sector. 86 Chapter 3 Endnotes 1. This Section draws heavily upon preliminary drafts of World Bank (1997c). 2. For example, Manning (1996), Oey-Gardiner, and World Bank (1996 and 1997). 3. Three separate studies of university graduates suggest that there is a premium paid to graduates of public universities over graduates in the same field coming from private universities. Except for a very few elite private universities, public universities are generally regarded as being of higher quality than the private universities. Dhanani and Sweeting (1995), reporting on the results of a 1994 Tracer Study of Technical Graduates report a 68 % premium for 1989-93 male engineering graduates from public universities relative to those of private universities. A tracer study of 1989-1991 graduates of ten universities indicated that the waiting time to a job was shorter and the average salaries roughly 80 % higher for graduates of universities considered to be among the top 5 in Indonesia. Finally, a survey of 350 firms in the private sector on their hiring and training practices revealed a smaller premium being paid between graduates of public and private universities (around 8 %). However, the premium for graduates trained in overseas universities was on the order of 80%. 4. These would include other teaching jobs in private schools, and providing private tuition. 5. Until recently, Thailand was the only fast-growing East Asian country with lower junior secondary enrollment rates than Indonesia. However, as a result of the Thai government's launching of an aggressive secondary education improvement program, transition rates from primary to secondary increased from 52 % in 1990 to 86% in 1994 (Thailand Secondary Education Quality Improvement Project, SAR.) 6. It's not clear where the "hidden costs" of education are categorized in the survey. These costs are believed to be substantial, and they may be additional. 7. In February 1994, GOI abolished official fees (SPP) for junior secondary education. Even though data on the effect of such a policy are not yet available, field visits reveal that schools reacted to the policy announcement by asking parents to pay the SPP in the form of higher parental contributions (BP3) as the school's loss of revenue was not fully compensated by additional public funds. Hence the costs to families may not have declined mush, and they continue to be a significant deterrent to the poor. 8. Typically, urban areas can afford to provide their teachers with higher salary supplements from the parental BP3 contributions, and there are more opportunities for second jobs. The current strategy of paying low wages but requiring few hours per week increases the relative attractiveness of working in urban areas. 9. Indeed, the incentives tend to be perverse, because some of the funding formulas governing non-salary expenditures are dependent on the number of permanent teachers. Reducing the number of permanent teachers may actually reduce resources that could be spent on educational materials. 10. These include reduced fertility, child mortality, and improved nutritional status, all of which correlate with female secondary education. For Indonesia, survey results indicate that a mother's education is an important determinant of prenatal care utilization: more than 90% of women with junior secondary education use prenatal care, in contrast to only 75% of women with some primary education (IFLS). Maternal education also has a strong effect on children's nutritional status. For Indonesian women with between zero and five years of education, an additional year of education has no impact on the child's nutritional status; among women with six to twelve or more years of schooling, an additional year of education improves nutritional status significantly (Frankenberg, Surisatini, and Thomas, 1996). Human Resource Development-Foundations for the Future 87 11. At the primary level, the Ministry of Education is responsible for technical quality and educational content (curriculum, teacher qualification and certification, testing, textbook evaluation and provision of teaching materials). The Ministry of Home Affairs (MOHA) at the local government level (kabupaten) is responsible for implementation of matters concerning manpower, materials and resources, including teacher recruitment and placement, school buildings and all physical aspects of the school (also see footnote 13). For junior secondary schools, the Ministry of Education is responsible for all educational activities and carries out most of the activities at the kanwil and kandep levels, rather than at the center. For religious schools, both public and private, the Ministry of Religious Affairs is responsible. 12. The supervision of the quality of teachers is considered to be a responsibility of MOEC, but they do not have the ability to affect personnel matters. The distribution of schoolbooks and materials has been interpreted sometimes as a technical issue (and therefore under the purview of MOEC) and sometimes as a physical issue (and therefore under MOHA). 13. The DIP and DIK are prepared in isolation from each other. MOF, MOEC and MOHA prepare the DIK. The DIP is prepared by Bappenas, MOEC and MOHA. BAPPENAS must approve the development budget for all MOEC programs, including the INPRES SD. The Ministry of Finance (MOF) must approve all routine budget requests. Budget proposals with staffing implications are jointly reviewed and must be approved by the State Ministry for Utilization of Government Apparatus (MENPAN) and the State Civil Service Agency (BAKN), as well as BAPPENAS and MOF. 14. Two other strategies, concerned more with education issues, are also being discussed, albeit at a more preliminary stage: i) the education and training system should be more flexible allowing freer movement between the two education streams; and ii) vocational schools should put greater emphasis on general education, leaving employers to provide more specific vocational skills. Debate continues over how best to bring about these strategic changes, how interested employers are, and how much public funds should be devoted to bring about these changes given competing demands. 15. A consolidated budget (incorporating central and regional governments and current and development expenditures on education) was estimated in World Bank (1997c). A review of recent expenditure patterns is included in Chapter 6 of that study. However, this type of consolidation should be carried out on a regular basis by GOI. 16. For more details in this sub-sector see World Bank 1991c. 17. The notable exception is the System Ganda, for which cost estimates are not available. 18. Base figures for 1996 are: Rp.528,954 billion for GDP (see Chapter 1); Rp.93,466 billion for total government expenditure (GOI basis); and Rp. 14,649 for consolidated education expenditure (Chapter 6 of World Bank 1997c). 19. The authors of this Report are grateful to Dr. Ridwan Malik for making these data available. It should be noted their collection on a reasonably consistent basis involves extensive effort, particularly at the provincial and district levels. 20. Indonesia, Indikator Kesejahteraan Rakyat (Welfare Indicators) 1995, Biro Pusat Statistik, Jakarta, 1996. 21. This result is based on an examination of residuals from a cross country regression of child mortality on income and education. The text reports ongoing research being conducted by K. Hill, D. Jamison, and J. Wang. December 1996 communication. 88 Chapter 3 22. As an economy develops, an epidemiological transition is expected with, for instance, rising rates of cardiovascular diseases and life-style health problems in more advanced stages of development. In Indonesia, the pattem of mortality is still pre-transition. Communicable diseases account for 56% of premature years of life lost from mortality, with the leading causes being diarrhea, respiratory infections, and tuberculosis. Malaria and tuberculosis are continuing problems that require an enlarged public effort to combat. Childhood malnutrition problems, especially micronutrient deficiencies, are an important underlying cause of mortality. Children account for 32% of the total number of years of life lost. In addition, the maternal mortality rate is among the highest in the world and obstructed labor, sepsis, complication of abortion, hemorrhage, and toxemia, together account for 5 % of total years of life lost from premature mortality. AIDS is a growing threat that needs a concerted public effort to control. See Soewarto, Kosen et. al., LITBANKES, 1996. 23. This extension of the network of health centers and district hospitals was required to achieve greater coverage with the public sector network of health services and to provide the hard infrastructure shell that facilitates the delivery of programs. The recent shift in the focus of investment expenditures to programs rather than new buildings and equipment has been important to allow the greater development of programs of primary care, outreach services, and programs targeting special diseases and vulnerable groups. 24. By way of rough estimates, new hospital construction has a ratio of recurrent expenditures to capital outlay of approximately 0.2, new health centers a ratio of 0.3 and primary care program investment a ratio of 0.5. These ratios can be used to approximate the operating cost implications of the aggregate program. 25. This is defined to include household expenditures and spending by business on health services for their employees. It excludes public sector insurance for civil servants (ASKES) and parastatal services. 26. For doctors with dual public and private sector employment, it is not clear whether the public job is subsidizing the provision of private care, or the private income makes low-salaried public employment feasible. 27. Both projections assume that GDP and personal consumption will grow at the rates projected in World Bank (1996a). Namely, Govermnent expenditures continue at the 1995 percentage of GDP, and urbanization continues at the pace of the last decade. The status quo projections for the public sector assume that the central health budget remains at 3.1 % of total Government expenditures, and the health expenditures derived from province and district revenues remain equivalent to 20% of central health expenditures. The status quo for the private sector assumes that household health expenditures grow modestly, with a household income elasticity for health of 0.5. 28. For the public sector, the alternative assumes that central government support of the sector will increase to 4.2 % of the government budget (which would bring the public share in line with other Asian countries) and that district and province resources are mobilized to bring their expenditures to 0.25 of the central level expenditures. For the private sector, the alternative assumes that policies are undertaken to increase the use of private sector services and the expenditure elasticity of demand for services increases to 1 by the year 2002. 29. For example, private sector professionals would have access to distance programs in the public sector, including networks for general practitioners, nurses and other health professionals, television and radio support, and access to reference resource centers. 30. For example, the French Government contracts for services of private clinics for the national health service; in the state of Massachusetts services for prisons are contracted-out. Among developing countries, the Governments of St. Lucia and South Africa contract with private providers to deliver services, and South African hospitals contract-out specific parts of service delivery. In Egypt, there are contracts with private general practioners for health services for school children. Human Resource Development-Foundations for the Future 89 31. Over the last few years, the government has expanded facility autonomy (unit swadanah) programs to allow increased autonomy for a growing number of hospitals. The program has great promise, and the consensus is that it has been a success. If it passes careful evaluation, it should be extended cautiously to smaller hospitals and puskesmas in selected districts. Building "Hard" Infrastructure: A Look at Key Sectors 91 4 BUILDING "HARD" INFRASTRUCTURE: A LOOK AT KEY SECTORS A. Overview Addressing these issues would go a long way towards reducing costs, sustaining high growth 4.1 Until the late 1980s, Indonesia and raising living standards well into the next followed the prevailing public sector approach decade. to infrastructure (World Bank 1 994a and Chapter 2). During much of the 1970s and 4.4 Role of the Private Sector. The most 1980s, this was mainly increased public striking commonality among these sectors spending, financed from oil revenues and concerns the role of the private sector. There donor assistance. Although Indonesia's are two equally important dimensions to this infrastructure expansion was among the most issue. The first is the wide possibilities for rapid in the world before the 1990s, relying more on the private sector. The second bottlenecks developed in key areas such as concerns the potential high costs of this urban infrastructure, power generation and approach, if it is not done in a competitive, transportation. Service problems sometimes transparent fashion. forced users to rely on higher unit cost alternatives, such as private power, wells or 4.5 The Government recognizes the bottled water. At the same time, mismatches potential benefits that the private sector can of capacity, high-cost contracts, inadequate bring to infrastructure provision. In some key maintenance, and "lost" output characterize sectors, foreign and local interest is high. some sectors. Resource constraints and However, in some cases (e.g., power institutional issues, particularly in the cities, generation, urban water supply and toll road have made it difficult to resolve these construction) there are signs that the process is problems. running ahead without the benefits of a transparent, competitive framework. 4.2 During the 1990s, the Government has Consequently, Indonesia risks creating high- begun to rely more on the private sector in cost electricity, toll roads and urban water some infrastructure areas that formerly were supply, and the Government's contingent reserved for the public sector. This Chapter liabilities are rising rapidly. Eventually, the looks at the status of the Government's efforts public will have to bear these costs, for in some of these areas, with an emphasis on example, in the form of large power tariff remaining issues and policy solutions. increases, which could be as high as 50% by Attention is focussed on three key 1999. sectors-Power (Section C), Urban Infrastructure (Section D), and Transportation 4.6 Creeping Reregulation. Another (Section E). common thread, especially in sectors that were early targets of deregulation (e.g., B. Cross-Sectoral Policy Issues transportation), is the increasing incidence of reregulation. For example, complaints were 4.3 Certain common issues emerge in the already on the rise concerning port delays sectors reviewed in this Chapter. The most attributed to the customs service, many months striking are highlighted in this Section. in advance of termination of the pre-shipment 92 Chapter 4 inspection service; there are proposals to some redistribution to poorer, lower level channel most cargo through Batam for trans- governments, as has been done in Chile shipment; levies are high in the road and (Box 4.5 in World Bank, 1996a). Some offset maritime subsectors; and there are pressures to these higher taxes could be provided by for reregulation of shipping. In almost all rationalization of existing local taxes, many of cases, the impact of the reregulation is to stifle which cost almost as much as they yield competition. It is important for Indonesia's (Box 5.5). economic future that there be a return to the spirit-and practice-of deregulation, which 4.10 Procurement and Contracting has been the basis for much of the country's Procedures. In all the sectors discussed below, success in the past decade. contracting is an important activity, and it is a very lucrative business-for all associated 4.7 Decentralization and a Sustainable parties-which also accounts in part for local Revenue Base. Another common solution to preferences for large projects. Consequently, problems dogging these sectors appears to be another common theme among these sectors is devolution of more authority to a lower level of the pervasive weakness in government government or to an agency that is closer to the procurement procedures (also see the Section user. To be sure, decentralization is not a on Governance in Chapter 5). For example, cure-all and there are significant risks (Davoodi well-connected parties often appear to get and Zou, and Prud 'homme). Nevertheless in preferential treatment under KEPPRES 16 and most of the cases considered here, a better for unsolicited proposals for private sector arrangement would be for the central participation in infrastructure development. government to focus on setting policy Also, agencies are sometimes pressured to frameworks, budget envelopes, best-practice accept overly costly equipment (e.g., buses, standards and implementation guidelines; local railways, vessels, and aircraft) and services. governments would have more autonomy (including the possibility of contracting-out) in 4.11 Human Resources. Most institutions the details of policy formulation and face major challenges in terms of human implementation. resource needs (e.g., pilots and air traffic controllers in civil aviation, and trained 4.8 For more decentralization to work, professionals for transport planning and traffic there must be greater financial autonomy on the management in urban transportation). Broadly part of lower level governments. To be sure, speaking, problems in this area are twofold: i) more block grants, grant funds on a matching recruitment and retention of competent basis, or greater borrowing authority would be specialized staff; and ii) training needs. of assistance. But the key is the creation of a sufficiently large, sustainable revenue base to 4.12 More financial autonomy for lower support greater autonomy. The Government's level governments, mentioned above, would be Local Taxes and Fees Bill, approved by of assistance in this regard. Failing this, local Parliament in early 1997, is a significant agencies should at least have the flexibility to development in this regard.' change the composition of staff to better meet local needs. Other steps would also be helpful. 4.9 Higher property taxes and increased For instance, the present system of user fees would add significantly to local incentives-whereby staff effectively get a governments' revenue base and they would share of spending-needs to change so as to improve equity (World Bank 1994a). The encourage saving, not spending. property tax could also be set up to provide Building "Hard" Infrastructure: A Look at Key Sectors 93 4.13 Technical Assistance. Many of the C. Power preceding comments also apply to the use of technical assistance (TA). Currently, much TA C. Overview is wasted on repetitive studies for central agencies, which are not disseminated or 4.16 Power sales of Perusahaan Listrik implemented. Better transparency, competition Negara (PLN, the State Electricity Company) and accountability should be introduced among have increased rapidly (by 14-15% per annum) heavily-used groups such as engineering, since the early 1980s. In parallel, the number design and supervision consultants, including of customers has grown from 2.7 million to performance records with non-performers being 20.1 million, and PLN is now connecting close disqualified. These issues will become more to 2 million new customers each year. Village pressing with decentralization. electrification increased from 12% in 1983 to 65% in 1996. PLN's operating efficiency has 4.14 Weak Institutions. Many GOI improved; for example, network losses were institutions have demonstrated that they are about 12% in 1995, down from 20% a decade good at planning and executing incremental earlier. Financial performance is also better. investments. However, they are less effective Prior to this decade, PLN was a loss-maker; in matters related to large-scale strategic now it turns a profit. investments and in the effectiveness of their spending. In some sectors, there is 4.17 PLN's supply system and customer institutional fragmentation (among levels of base vary significantly by region. Java (with government or across government agencies) 60% of Indonesia's population) has 70% of and typically no central policy-making or PLN's customer base and 80% of sales. The coordinating body. Also, there are often inter-connected Java-Bali system has a extra- competing factions-with overlapping high-voltage (500 KV) transmission grid, large mandates-within and across departments. In and efficient generation plants, and a large such circumstances, resistance to policy reform industrial customer base. Already 88 % of within agencies is common, especiallv at villages are electrified, and this figure is middle-management levels. Such weaknesses expected to increase to 98% by 1999. PLN's are sometimes amplified by on-going collusion Java-based operations earn a profit. In the between the bureaucracy and powerful private future, private sector plants will account for groups. As solutions, there could be most new grid-linked capacity on Java, with "unbundling" of some functions, and the first plants due in 1998. PLN's own on- corporatization of others prior to privatization. Java operations are slated for partial privatization. 4.15 There is also a regional dimension to many issues in these sectors. For example, 4.18 The rest of the country is served by there is a tendency to respond to demands for seven regional grids (with 150 KV or lower regional equity through the provision of more voltage transmission lines), numerous mini- "hard" infrastructure. In many cases these grids, and some 900 diesel plants, which demands may be justified. But it will also be together account for more than 50% of off- important to ensure reasonable rates of return Java-Bali generation. Village electrification in on such projects, or to subsidize the projects in 1996 is only 52%. With lower economies of a way that is measurable and kept under scale, costs are much higher, which makes regular scrutiny. PLN's operations unprofitable outside Java- Bali. 94 Chapter 4 4.19 Challenges: Service; Pricing; inflate costs; iii) an increase in transmission & Capacity; and Managing Private distribution capacity, which would assist with Participation. Despite its major increasing demand and PLN's revenue; and iv) accomplishments, PLN faces numerous a more transparent, competitive framework for challenges. Outages and supply constraints private power generation, transmission and raise costs to commercial users. Sales per distribution. It will also be important to avoid capita and village electrification are still over-capacity and to ensure that future plants low compared to (higher income) Malaysia and are efficient in terms of their place in the grid Thailand2. Slow adjustment of tariffs has and their choice of fuel. reduced average prices to the lowest in the region, thereby reducing PLN's profitability. C.2 Pricing Issues The uniform national tariff is below cost outside the Java-Bali grid. PLN still depends 4.21 The most recent revision to the uniform heavily on government and donor funding, with national tariff schedule was in October 1994. an average of around Rp.4 trillion ($2 billion) At that time, a quarterly automatic adjustment per annum from the Development Budget in the mechanism (ETAM) was introduced with the last two years, and has begun to borrow aim of maintaining the basic tariff in the face directly as well, with average annual of changes in fuel prices, inflation, the rupiah- borrowings of Rp. 1 trillion, also in the last two dollar exchange rate, and PLN's power years. In addition, generating capacity is purchase costs. However, the quarterly tariff expanding rapidly. PLN is completing its own adjustments did not enable PLN's revenues to large program, and power purchase agreements keep pace with increasing costs.3 The average (PPAs) have been signed for (generally tariff has risen only 2%, while PLN's costs unsolicited) private generation projects have increased by 8% (and inflation has been equivalent to 50% of PLN's current capacity, 15%). As a result, the rate of return on and negotiations continue on a similar volume. (revalued) fixed assets fell below 6%, rather Most of the PPAs are above, or similar to than increasing to the target of 8%. PLN's current average tariff. And, although transmission & distribution capacity is being 4.22 Tariff Level. Since 1989, tariffs have increased, it still lags generation capacity. The been adjusted about every two years, and a incidence of captive generation is likely to tariff increase is overdue, simply to compensate increase even further as domestic natural gas PLN for cost increases over the last two years. becomes available to industrial sites on Java. An increase would also ensure PLN is not snared in another liquidity crisis such as it 4.20 In these circumstances, the Government suffered in 1995 and 1996, and it is a faces two major challenges. First, to precondition to a successful privatization of restructure its approach to reduce government PLN's generating capacity. Furthermore, an involvement and increase private sector increase would help prepare PLN for its new participation within a competitive framework role (starting next year) as purchaser from that includes increased and restructured tariffs. large independent power producers (IPPs).' Second, outside the Java-Bali grid, the Even a substantial increase in tariffs should not challenge is to find innovative modes of undermine Indonesia's external competitiveness electrification while maintaining reasonable because Indonesia currently has a lower prices for social reasons. Important elements average electricity tariff than its East Asian in successfully meeting both these challenges neighbors (see Figure 4.1); one KWh of will be: i) an increase in tariffs; ii) a electricity costs 6.9 US cents today, the lowest restructuring to reduce cross subsidies that price since 1988/89. Building "Hard" Infrastructure: A Look at Key Sectors 95 Figure 4.1: Average Electricity Taris In East Asia, 1993-1996 (in constant 1996 prices) 14.189 1-00 1 ...14ii t 11.7 12 - - - - - -- - - - - - - - -- - - - - - - -.. . . . . . . . . tI A ... it 9.7 10 -.-- - - - - - - - - -- - - - - - - - - - -9 2 - -- - - - - - - - -- 9.2 .. . .10-- -- - - - - - - - 8.4 8.3 8.2 8.3 8.1 F 81B. 7.7 7.877 8 ...~~~~~~~--- ............... 6 .. p ~~~~~~..-.... ~ p ... 2 . . . . . . . . . . - - - - 2 Jan-9S Jan-94 Jan-95 Mar-96 Year * Indonesia m Thailand O Korea El Malaysia E Philippines 4.23 The automatic adjustment formula social arguments exist for subsidizing (ETAM) also would benefit from substantial minimum consumer service, there is no revision. There is some scope for improving reason why large power consumers, rather implementation of ETAM under the current than the nation at large, should pay for this Presidential Decree. However, a revised social goal. The cross subsidy puts the larger decree is needed to remove existing ambiguities users at a cost disadvantage vis-a-vis other and ensure that the new ETAM will be able to countries, and encourages them to turn to self- deal satisfactorily with the rapid increase in generation. To level the playing field, it would PLN's power purchase costs as the large be desirable to reduce the number of private plants come on stream, beginning in categories, reduce the subsidy (except for "life- 1998/99. line" levels of consumption) and consider covering the cost of social objectives directly 4.24 Tariff Structure. The current tariff from the national budget. structure involves 24 separate categories and embodies many cross-subsidies. Currently, 4.25 PLN's uniform tariff schedule gives large customers pay to cross-subsidize small customers identical electricity prices regardless users, and commercial customers generally of their location in the country. However, unit subsidize all other categories. The large costs are about twice as high outside the Java- number of categories makes the tariff system Bali grid. This implies a cross-subsidy from non-transparent and introduces potential Java-Bali consumers to the rest of the differences in costs for similar firms. While consumers. Part of the subsidy has been 96 Chapter 4 implicitly absorbed by Government acceptance additional capacity represented by all these of a low rate of return on equity. But, the projects is roughly equal to PLN's subsidy raises costs on Java-Bali relative to currentcapacity. Almost all of these projects competitors and encourages large consumers to originated from unsolicited proposals, with full install their own plant, as noted above. It also or partial "take-or-pay" power purchase makes it difficult to achieve a rate of return agreements (PPAs). In general, the PPAs attractive to private investors. If the provide for tariffs that are above PLN's Government seeks to retain the uniformity of average tariff, although there have been some the tariff structure for social reasons, then it recent exceptions. (The exceptions tend to would be desirable to spread its costs across reflect the few instances of competitive bidding the nation, rather than just to electricity users as well as the worldwide decline in prices of on Java-Bali. The subsidy could be made power generation equipment). The private explicit and the Government could directly re- power agreements under negotiation would imburse PLN. Clarification of this issue also easily provide sufficient generation capacity to would help make PLN a more attractive meet projected demands though 2006. candidate for privatization. In addition, it would encourage off-Java expansion, which 4.28 The ratio of capacity to peak load will now is hindered by costs that exceed the rise to at least 40% by the end of the 1990s average tariff. and the lower load factor will remain, given the commissioning of PLN's own ambitious C.3 Capacity Issues expansion program and the large private generating plants (beginning in 1998/99). 4.26 Generating capacity has grown rapidly Continued lags in transmission & distribution for some time under the Government's capacity, plus PLN's difficulties in negotiating expansion program. By contrast, transmission gas contracts, may limit the power that could & distribution capacity has typically lagged be sold from these plants. Given the take-or- (see below). The resulting problems with pay nature of the contracts, PLN will be forced service interruptions and high commercial to take power from the private plants, even tariffs have encouraged self-generation, which though their cost exceeds PLN's. has reached some 70 % of PLN's capacity. For PLN, the net result has been historically high 4.29 Managing New Capacity and ratios of capacity to peak load in the Java-Bali Lowering Its Cost. The capacity situation is grid, which reached 162% in 1993/94. likely to raise PLN's costs substantially. Recently, the excess of capacity to peak load Hence, the Government should go slow in has fallen to 35%, but because peak load has adding to capacity. An appropriate choice of increased much faster than sales, the average contracts would place more of the risk of load factor has fallen about 7%. In the near- excess capacity on the new plants. The large, term, PLN's recent ambitious investment projected volume of new capacity will give program is coming on line, but PLN plans no plenty of time to prepare new projects based on new base load generation capacity, apart from their efficient link-up within the network, and completing existing investments, before 2003. the most appropriate choice of fuels. Accepting any new, unsolicited bids would 4.27 Growth in Private Generation only add to the build-up of the already large Capacity. PLN has signed twenty-two power capacity. purchase agreements, of which 6 major plants have reached financial closure; twenty-four 4.30 De-Bottlenecking Transmission & more are in various stages of negotiation. The Distribution. Existing capacity of the 500KV Building "Hard" Infrastructure: A Look at Key Sectors 97 line will not be sufficient to enable operation of section) also has potentially serious the new plants currently under construction in implications for the planned privatization. In East Java. Slippages in the 150 KV and particular, it may become necessary to "back- 20 KV networks and substations in urban areas down" the Gencos' baseload plant in order to constrain sales growth and are a major factor accommodate the take-or-pay contracts (see in the frequency of outages and "brown-outs", para 4.27). Moreover, improvements in the although recently the network's performance regulation of the power sector, as well as the has improved significantly. Expansion of the tariff-setting mechanism, will be crucial to transmission & distribution network is thus establish the "rules of the game", and in critical to system improvement. The top particular to establish the scope for the Gencos priority should be construction of the southern in future expansion. 500 KV line and other key sections to allow sales from the large East Java plants. Some 4.33 No decision has yet been made to scope exists for private participation in establish PLN's four distribution units as stand- transmission & distribution, for example alone companies, and further technical work, through Build-Maintain-Transfer concessions, especially on the tax obligations, is required allocated by a transparent, competitive bidding before this can be done. At a minimum, process. however, PLN needs to accelerate the process of corporate decentralization, and the C.4 Institutional Issues establishment of its corporate headquarters as a "virtual holding company". 4.31 Privatization. The Government is restructuring PLN in preparation for its 4.34 Single Buyer Market. The privatization, but much remains to be done on Government is now implementing its plans for the pricing and regulatory front before a power sector restructuring, in particular for a successful privatization can be carried out. "single buyer market" for Java. Under the Two on-Java generating subsidiaries (PT PJB Government's plan, PLN would buy power I and II, also known as Gencos) were from a mix of partially-divested generation established in 1995 by "unbundling", and they companies and IPPs. The power would be sold are the initial targets for privatization. PLN to PLN's distribution units for sale to final has recruited an international auditor to provide consumers. The single buyer market is comfort to investors, and has retained a intended as a transition phase to a fully- domestic consortium as financial advisor. A competitive, multi-buyer, multi-seller market. track record for the Gencos is being Implementation of the single buyer market has established. However, a number of issues need already begun with divestiture of assets into to be settled to permit shares to be sold at two generating subsidiaries (the Gencos prices that reasonably reflect the value of the mentioned above), the preparation of PPAs Genco assets. The financial strength of the for these Gencos, and the gradual transfer of parent company is also important, and depends single buyer functions, including system on tariff increases and adjustments (Section C.2 planning, to PLN's Java-Bali Electricity above), because sales by the Gencos would be Transmission Unit (JABETU). to the parent company. There is also a danger of trying to achieve Genco profitability by 4.35 On the Regulatory Front. The sacrificing that of the parent company. Government has announced its intention to rewrite Government Regulation 10/89, which 4.32 The projected upturn in excess currently governs PLN's operations. The generation capacity in 1998 (see previous sub- redraft should: 98 Chapter 4 i) establish licenses as the main instrument constraints, particularly with regard to gas of regulation, thereby bringing the same allocation and pricing, still impede treatrnent to PLN (currently PKUK development of the domestic gas market. holder) and the private sector (IUKU Pertamina controls all geothermal resources holders); with power generation capacities in excess of 10MW, which impedes additional power ii) redefine PLN's role as single buyer and generation from this source. Policy changes allow for differentiation between PLN's are needed in order to encourage increased role in respect of on- and off-Java; exploration for and timely exploitation of small gas reserves and facilitate expanded use for iii) define the regulatory duties of the power generation. Likewise, subsidy of Minister and the newly-created domestic oil fuels, such as high speed diesel Directorate of Regulation; and (mainly used in generation plants), militates against expanded use of renewables and iv) establish the rules for ensuring encourages use of captive plant. Action on competitive procurement (of both power those fronts would slow depletion of scare oil and equipment) in the power sector. fields and make more petroleum available for future export. 4.36 The Captive Power Issue. Self- generation provides a way for businesses to 4.38 The Nuclear Option. GOI has been reduce the cost of poor service by PLN and it conducting detailed feasibility studies is a stimulus to improved performance by concerning the controversial possibility of PLN. Duty-free status for self-generators nuclear generation of electric power at a site in should continue, in line with PLN's status and Central Java. GOI has indicated that nuclear the treatment of many other capital goods. power is regarded as a last-resort option; this Over time, "self-generators" should be allowed is appropriate. Given the large additional to sell into the grid or to other buyers generation capacity still in the pipeline, the ("wheeling") to allow better use of private- continuing strong private interest in supplying sector generating capacity. However, it is also conventional power, and the possibilities for important that the playing field be leveled by expanding clean, gas-based capacity through removing the subsidy on diesel oil (the deregulation, nuclear power is not needed at preferred fuel for captives) and reducing the this time. This is particularly the case various cross subsidies and taxes (for off-Java considering the environmental risks and the operations, small consumers, and for street- international track-record of long lead times, lighting) that are borne by PLN's large users. which would require scarce government funding or guarantees. C.5 Energy Diversification D. Urban Infrastructure 4.37 GOI energy policy has long emphasized energy diversification away from oil in favor of 4.39 Overview of the Sector. Already renewable and "new" energy sources. Jabotabek is one of the world's largest Significant progress has been made in metropolitan area. Important basic services concluding agreements with combined-cycle (such as water supply, sewerage and solid gas turbine plants and numerous (mostly waste management) have fallen behind targets private) geothermal power plants. The in the face of rapid population growth (see Government is also trying to develop the Table 4.1). In addition, as mentioned in market for solar home systems in remote rural Chapter 2, an extended period of continued areas. However, regulatory and institutional urbanization is in the offing; by the year 2005, Building "Hard" Infrastructure: A Look at Key Sectors 99 Table 4.1: Indonesia: Estimated Public Urban Infrastructure Spending (trillion Rps.) REPELITA V REPELITA V7 Planned Actual a (indicative pro].) Total 10.9 4.5 22.6 Water Supply 4.5 c 1.5 10.0 I Roadse 2.7 1.6 2.5 Flood Prevention & Drainage 1.9 1.2 3.6 Sewerage & Waste 1.2 .. 5.4 Kampung Improvement (KIP) 0.7 0.2 1.1 Memo: Average Expenditure p.a. ,b 34 12 37 (In thousands of 1990 Rp. per urban resident) a Includes local spending, estimated at about 20% of total. b Estimated at middle year of plan period. c Includes projected Rp. 500 billion private investment. d Included in Table 3.1. Includes projected Rp.4 trillion private investment. e Excludes toll roads, includes the urban portion of Central Government spending in Table 3. 1. Source: World Bank 1994a, p. 45; World Bank 1993b, pp. 47, 132. more than 110 million people (50% of the total Thailand or Malaysia (World Bank 1994b and population) are expected to live in Indonesia's World Bank 1993c). Private solutions (such as cities, of whom well over 20 million will live wells, septic tanks, rivers and canals) in large in Jabotabek. In these circumstances, the cities, especially on-Java, have negative Government is facing three major challenges: externalities: ground water and rivers are i) to prevent urban congestion becoming a increasingly contaminated; seawater intrusion bottleneck to economic growth; ii) to avoid is contaminating coastal cities' aquifers; use of high-cost infrastructure becoming a hinderance ground water beyond recharge levels causes to growth; and iii) to provide an adequate land subsidence and flooding; and during the supply of basic services, which are vital to dry season, competition for water exists further reductions in urban poverty. between residential, industrial, recreational and agricultural uses (World Bank 1993 and 1994). 4.40 For the poor, who are a majority of Also, industrial and solid waste is often urban residents, Indonesia's cities are not a dumped into rivers and canals, thus causing pleasant place to live. International flooding and further contamination of water. comparisons (which, it should be noted, are not Moreover, air pollution is on the rise, largely fully comparable) indicate that urban access to due to transport congestion. For example, piped water and sewerage service is much sample evidence suggests that pollution levels lower in Indonesia than in the Philippines, exceed WHO standards for 173 days/year at 100 Chapter 4 some locations, versus 153 days/year in 125 broader-as befits current urbanization major Asian cities (World Bank 1993 and trends-and central government dictates are 1994). Moreover, lead pollution is an narrowing in line with decentralization and acknowledged issue; in late 1996, a increased private sector participation. While Presidential Instruction decreed that leaded details of new approaches still need more gasoline would be phased-out by 1999. definition, one basic problem is clear-limited institutional capacity is holding back progress 4.41 Currently, the better-off benefit more more than inadequate funding. In this regard, from urban infrastructure than do the poor. several suggestions are provided below for For instance, piped water is available to 91 % accelerating the provision of urban of well-off households (those spending more infrastructure. Many of these suggestions than Rp.400,000 per month) versus only 10% concern basic issues in development of the of poor households (those spending less than Indonesian economy, such as governance Rp.100,000 per month). Also, much of the (Chapter 5) and decentralization. Progress is benefit of low-cost water from standpipes may likely to be only gradual. be siphoned-off by caretakers or vendors. Transport investment tends to benefit car 4.44 Current Patterns of Expenditures owners, who are much wealthier than average. and Funding. Public expenditure in urban Air pollution, flooding and poor access to safe infrastructure is low (about Rp. 1,000 billion water fall most heavily on the poor, because of per year); it has consistently fallen short of where they live and their dependence on REPELITA targets (Table 4.1); and it has been vendors. Efforts are being made to increase roughly unchanged in real terms during the last services to the poor, but more attention is decade. Consequently, real urban expenditure needed. per capita has fallen-off markedly, to only about Rp. 11,000 in 1994/95. Urban spending 4.42 Until recently, the provision of urban is a small proportion (about 7%) of total infrastructure was largely controlled, managed regional government expenditures. Of this, and financed by central government agencies. only about 40% is development expenditure, Delivery is through standard-type service and less than half was spent by Level II provision as proposed by the Ministry of Public governments, which are more concerned with Works and Bappenas. Funding for standard urban infrastructure than Level I governments. budgets is formula-driven (based essentially on (By contrast, large urban projects are financed population and area) as set by Bappenas and directly by the central government.) On the the Ministry of Finance. In addition, tariff composition of spending, roads dominate; for policies have not always been effective; for instance, 43% of the urban investment under example, high tariffs on industry encourage the REPELITA VI was intended for roads use of substitutes, such as wells, which is not (Section E). socially optimal. Large funding needs are often covered by foreign assistance, although 4.45 Borrowing for urban infrastructure has local governments have recently been provided also been relatively low. Most of this greater discretion in planning and implementing borrowing has been donor-financed, with donor funded projects. central government involvement. To assist, the central government created the Regional 4.43 Looking ahead on an institutional basis, Development Account (RDA) in 1989. The many innovative ideas are under consideration local governments have indicated considerable in Bappenas and elsewhere, in preparation for interest in this facility, but their borrowings REPELITA VII. Their overall framework is Building "Hard" Infrastructure: A Look at Key Sectors 101 have been constrained by availability of funds. interdependent,5 would yield large benefits The largest municipal borrower from the RDA (Boxes 4.1 and 4.2): has been DKI Jakarta, with Rp.156 billion. All other municipal governments have * Change the staff payment system. In the borrowed in total some Rp. 150 billion from the current Indonesian system, staff have an RDA, since 1991/92. Most of the borrowing incentives to approve high-priced from RDA, some Rp.700 billion, has been by contracts, and little incentive to ensure PDAMs (the municipal water authorities; see quality or service levels. Large increases Section D.1). in staff pay to increase motivation are not an option, because of the budgetary 4.46 On the other hand, the discretionary implications. More innovative solutions investment resources available to Level II are needed (see Boxes 4.1 and 4.2). governments has increased over the 1990s in line with the government decentralization * Introduce more competition into the policy. For example, the proportion of grants procurement system. Currently, agencies under local discretion increased from 20% in use a reference price system; bids are 1990/91 to 28% in 1995/96 (INPRES), while usually within 1 % of the reference price; the proportion of INPRES available to level II and, at times, participants seem to take governments increased from 45 % in 1990/91 to turns winning (the arisan system). 57% in 1994/95. Despite some declines, Despite KEPRES 16,6 fundamental allocations to DIPs (through central line change is needed in this system. One agencies) still dominated through 1996/97, option might be the establishment of a before falling dramatically in 1997/98. Some "civil society group" that calls for bids large projects are executed by the central and selects winners. Another possibility agencies even when they are not "national" is better packaging of contracts to attract projects (such as urban by-pass roads). international bidders. 4.47 Looking at the regional dimension, * Delegate more authority to local agencies there has been a large shift in public sector concerning the level and composition of investments to Eastern Indonesia, where agency-level staff. A good model is the investments per capita are about double those experience to date with the in the other islands. Smaller and medium cities decentralization pilot project. accounted for 53 % of total urban investments by 1993/94 compared to 28% in 1989/90. * Introduce multi-year contracts. The current system typically leaves 3-4 D.1 Accelerating Delivery of Better months per year to complete the work, Urban Services which is unduly restrictive. 4.48 CommercializingMunicipalServices. * Equipment pools could be In general, private sector involvement would commercialized or privatized to improve increase efficiency. But competition, not utilization and reduce costs. Similarly, necessarily ownership, is the key to greater private operators could directly collect efficiency, and exposing public agencies to the fees for their services.7 greater competitive pressures is often a more feasible alternative than privatization. Changes * Rationalize the use of technical along these lines, which are highly assistance. 102 Chapter 4 4.49 Modifying Financing Arrangements. better are supposed to self-finance more and Some 85% of municipal expenditure is borrow more, while those that do poorly, financed with transfers from centrally collected eventually get more grant financing. taxes, through block grants (INPRES), allocations to the province, or centrally 4.50 Better financing arrangements can come executed projects/budget (DIPs, which are from basically two directions. First, by decreasing, as already noted). The allocations increasing local revenues (e.g., by raising the are formula-driven (using population per unit property tax rate which is very low, 0.1 % of area of the kotamadya, a minimum allocation assessment values). And second, by the and other factors). When foreign financing private sector financing more of the services agencies are involved, the expenditure level of that can be commercialized; the public sector the related city normally increases for the could provide equity, as necessary to make duration of the project. Cities are told to public projects commercially attractive to the borrow more against their own resources. For private sector. Beyond this, the time may be cities that are able to borrow, there is no ripe to include an incentive mechanism in the mechanism to enforce repayment or penalize allocation of grants to Level II governments, lack of repayment. In addition, many agencies perhaps on a matching-funds basis to encourage are getting to the end of the grace periods and local governments to increase their locally- may soon face cash flow difficulties. None of sourced revenues. Also, there is need for these systems rewards the kotamadyas that greater transparency and efficiency in the use perform better-on the contrary, those that do of funds. More specific suggestions include: Box 4.1: Gainsharing: An Innovative Approach to a Difficult Problem Indonesia's problem of limited budgetary room to raise the salaries of underpaid municipal public servants is not uncommon these days. Innovative solutions are starting to appear, such as the concept of "gainsharing". In the city of Indianapolis, United States, the Mayor reports that gainsharing reduced unit costs by 25 % over 5 years; staff numbers were also reduced by 25 %; staff who left, found jobs in the private sector; and all remaining workers are earning more. In Indianapolis, the ideas for cost-cutting (e.g., out-sourcing) originate with local staff. When these ideas result in lower costs, the staff get a share of the savings. At fiscal year-end, instead of trying to spend the entire budget, staff are looking to save money because they will share in the savings. A system like this is not easily transferrable, and it has many important preconditions, for example: reference prices; monitoring of service and quality; a transparent procurement system and multi-year contracts; and a transparent process to distribute a share of savings. In Indonesia, this would mean changing many current modalities (e.g., decrees and regulations), and it would not do to change only a few of them. Piloting in a small number of forward-looking agencies may be one way to assess how well a more transparent and "rewarding" system might work for Indonesia. Source: Osborne. Building "Hard" Infrastructure: A Look at Key Sectors 103 Box 4.2: The Case of Urban Water Supply This subsector is important for several reasons. First, the provision of clean water is fundamental to urban poverty reduction. Second, results have been unsatisfactory to date: levels of public investment have been low; service is poor; and costs are high. And third, the commercial nature of much of urban water supply makes it ripe for greater private sector involvement. At present. the major water-suppliers are state-owned regional companies known as PDAMs, which are small-scale (80% serve less than 10,000 customers), high cost and unable to attract good staff. A major overhaul of the sector is needed. Level of Service. At present, only around 40% of urban residents have access to piped water'), and much of this is non- potable."' Piped or not, water is generally boiled prior to consumption, and bottled drinking water, which is relatively expensive, is a rapidly growing market even for lower income households. Many commercial/industrial firms rely on deep aquifers for their water needs, often with a negative environmental impact such as sea water intrusion. High Water Losses. Approximately 40% of the water produced by the 296 PDAMs is "unaccounted for". This is very high by international norms. If this loss-rate could be decreased to 25 %, a barely satisfactory level by international standards, and the consumption remained at present levels (of 130 liters per capita per day), then the existing production capacity could serve some I million more households, up from 4 million served currently?' Major Expansion Foreseen in Demand for Services. Projections indicate that the urban population is likely to almost double by the year 2010 (see Chapter 2). Water will be needed by some 7 million more urban households--more than double the current water supply capacity. More Public Investment Needed. At current levels of investment, the service rate would rise from about 40% at present to around 50 % by 2008, which would still leave some 55 million people unserved. To achieve a 70 % service rate requires major new investment (some Rp. 9 to 8 Trillion). But More Needed than Additional Public Investment. Public investment has increased piped water coverage from some 37% of the urban population in 1990/91 to the above mentioned 40% in 1994/5. To be sure, spending needs to increase further.4' But funds on their own will not solve the municipal water problem, as evidenced by the experience of recent years when more funding was budgeted than was invested. Significant progress requires that the water supply industry move quickly along the following lines. * Investment can be financed through cash generation (30%), commercial loans (30%), central government equity (30%), and bonds and private sector equity (10%). A modest tariff increase is needed in the next year or so, followed by automatic adjustments to keep up with inflation. Subsidized loans (e.g., RDA) should be phased-out during Repelita VII. * Revise pricing principles to serve efficiency and equity objectives. A greatly simplified rate system would be appropriate," reflecting costs and a relatively cheap "lifeline' rate for low-volume, low-income users. The average tariff needs to go up, and billing/collectionprocedures improved. * Expand current thinking on private sector participation, from the current view that this is only relevant for enclave areas and production facilities. For example, increased commercialization of operations and management, and private (foreign and off- shore) financing of the investments. * Re-group or form consortia of PDAMs to gain economies of scale, increase autonomy from municipal politicians, and attract qualified staff. In particular, the principle of one PDAM per local government has to be revisited; ownership could remain with individual local government. * Prepare long term water supply master plans for all urban areas, taking into account alternative demands. Currently plans are normally prepared on a 5-year basis, which is inefficient and does not guarantee a least cost solution over the longer term. * On institutions, some consolidation is needed and responsibilities clarified. And, * Encourage a more customer-oriented attitude, e.g., by, customer representation on Boards of Directors. As further concerns private participation, there are issues of transparency, as well-connected firms have been awarded contracts in both Jakarta and Surabaya. The central government needs to put-in-place a regulatory framework and an independent body to mediate issues that will arise even with well-drafted contracts. In addition, better/more independent auditors and certification agents should be available. If a private operator wants to start a new water company, it should be allowed to compete with the existing one, perhaps in different zones. For most PDAMs, only management or lease contracts may be feasible with public sector funding still needed. ') The rest rely on shallow wells or surface water. Shallow aquifers are oftenpolluted by sanitation facilities at the households. 2) Treatment plants cannot remove pollutants that are accumulating in water bodies, and intermittent service allows suction of 3)pollution into distribution networks.i i d4, p 3cieyi)b oe3milo eiential connections and 40,000 standptipes. 4)Some estimates suggest that $500 million per year is needed for this sub-sector. ) Only one rate is needed, with a heavy discount to the first, say, 10 m' per household. At most, another higher rate could be charged for large monthly consumption. 104 Chapter 4 * Provide grant funds selectively, to meet from region to region and from urban to rural the needs of poorer local governments. areas. This necessarily limits the scope for Matching grants are better, as an making meaningful generalizations and incentive for better performance. international comparisons. Moreover, the structure of the transport industry-which is * Increase the share of block grants in characterized by large numbers of operators, transfers, with the role of the central some of which serve only their own agency limited to the implementation of needs-necessarily poses problems of data large projects. coverage and reliability. * Greater predictability in financing, to 4.53 This sector is vital to sustaining allow better multi-year planning. Indonesia's growth. To date, the capacity of the transport system has generally been able to * Review borrowing mechanisms. As part keep pace with increasing demand, although of the current review of the RDA bottlenecks and traffic congestion are emerging mechanism, consideration could be given in urban areas and regions that have to establishing a Municipal Fund for use experienced especially rapid economic growth. by qualifying local governments. Services are predominantly private, and there is generally plenty of competition. The quality 4.51 Changing the Roles of Central of transport infrastructure varies considerably Ministries. The current system is still too between regions and modes, but is generally centralized. It is cumbersome because of the appropriate to demand levels and number (more than 200) of cities that the characteristics. However, there is overloading central ministries oversee, and it reduces local of the road infrastructure, and costs continue to ownership at time of implementation. More is be inflated by illegal levies collected by needed along the lines of recent GOI actions to government officials; by distorted procurements make central agencies more like advisors and of state transport enterprises; and by late monitors, with local agencies having greater payment for contractors' costs. Illegal levies independence in their decision-making. Some are most pervasive in the road and maritime staff may need to shift from Jakarta to transport subsectors; excessive BUMN provincial agencies, and better use is needed of procurement costs are an across-the-board TA and training,8 preferably on a requested phenomenon. and fee-based basis, including in private entities. 4.54 The public sector continues to finance most infrastructure investments,9 but there is E. Transportation strong and growing private sector interest to invest in transport infrastructure in Java and 4.52 Overview of the Sector. The other, more developed regions. The private Transportation sector in Indonesia is highly sector already accounts for the major share of diverse, reflecting the far-flung nature of the total transport services, and its role has been archipelago. By way of example, Indonesia's increasing in some subsectors-such as civil international and domestic passenger and aviation-where the public sector was freight transport demands are served by several previously dominant. Nevertheless, state competing and complementary modes-road, companies still dominate in some modes (e.g., rail, inland waterway, shipping and civil rail).10 State corporations also continue to aviation-whose characteristics and play a major role in the construction of roads performance in some instances differ markedly and other transport infrastructure, and in some Building "Hard" Infrastructure: A Look at Key Sectors 105 instances (notably Pertamina) operate large the absorptive capacities of the responsible "own-account" transport fleets. agencies-including as regards their capacity to carry-out competitive bidding-and the longer 4.55 There is an important weakness of lead times associated with road widening and GOI's institutional arrangements that cuts new road construction works. Better planning across the various subsectors of transportation. continues to be needed-programs for the This concerns insufficient strategic planning in upgrading of individual links need to be intra-modal forms of transportation. By way conceived within the context of longer term of examples, toll and non-toll arterial roads do regional road network development plans. not necessarily connect in a rational way with Particularly for Java, increased attention also each other or with competing rail networks or needs to be focused on the better integrated complementary ferry services. Also, analysis planning of investments in the toll and non-toll of demand for transport services has under- arterial road networks and competing rail estimated the pace of actual developments services. Moreover, there remains significant resulting in capacity constraints on many key scope for improving the quality of works linkages. The reasons seem clear: there are implementation,12 including through increased few clearly articulated policies; there are no private sector involvement (see immediately linkages among policy, planning and below). budgeting; and, many decisions are made on an ad hoc political basis, often against sound 4.58 The private sector in Java and a technical advice. few other developed regions (North Sumatra and South Sulawesi) has shown strong interest E. 1 Roads in toll road investments. 3 Several of the consortia include foreign partners, although no 4.56 Inter-Urban Roads: Key Issues and toll road involving a foreign partner and Policies. Road is the dominant transport mode offshore borrowing had achieved financial by all important measures, including traffic closure as of end-1996. carried and level of investment. Spending on road infrastructure now represents around 4.59 On the side of transport services, 1.5% of GDP and 20% of the Development almost all are provided by the private sector. Budget." This reflects rapid growth of 7% Bus routes and tariffs remain subject to per annum during the past decade. The public government control, but trucking is largely free road network has been able to cope with this of "economic" regulation. Competition among growth in part because GOI has consistently operators is generally intense (bus companies devoted considerable resources to road network compete on quality of service) and tariffs are development and maintenance, and in part relatively low by international standards. The because of existing "spare capacity". main problems in this area are: heavy However, it is estimated that, in 1994, 22% of overloading of trucks which reduces pavement the inter-urban network suffered congestion lives by 20-60%; and traffic accident rates sufficient to justify widening and de- (particularly fatalities), which are high by bottlenecking (Box 4.3). international standards.'4 To address the former problem, a two-part strategy is needed: 4.57 To avoid capacity constraints on the i) GOI needs to restructure the annual motor approaches to major urban areas-and to vehicle tax (PKB) to reflect the road-damaging implement plans to improve road networks in potential for trucks that are properly loaded;'5 Eastern Indonesia-substantial increases in and ii) better enforcement is needed to prohibit road expenditures will be needed in coming over-loading of trucks. years. The main constraints will be budgetary, 106 Chapter 4 Box 4.3: The Urban Transport Sub-Sector Jakarta, indeed many of Indonesia's major cities, are already congested. Based upon the outlook for urbanization (see Chapter 2), major efforts will be needed to keep the situation from becoming a significant constraint to maintaining the pace of economic growth. Fortunately, there is much that can be done (see below). Assessment of Current Situation. During the past decade or so, there have been major transport improvements with the construction and extension of intra-city highways, which largely accommodated growth in demand. Nevertheless, analysis indicates that 58% of the present urban road network is sufficiently congested to warrant some intervention to improve traffic flow. To meet their daily needs, the majority of urban residents are captive to walking or low quality bus systems, often for long distances; as soon as incomes permit, people switch to cars or motorcycles. Surveys indicate that 50% of motorized travel in Jakarta and Surabaya is by private vehicle. As a by-product, air pollution levels are high. Decision-making is institutionally fragmented; there are no clearly articulated policies; and there are no linkages among policy, planning and budgeting. This is further complicated by ad hoc political decisions that often run counter to professional technical advice. Fundamentally, the reason is clear; the financial stakes in this sub-sector are high, owing to the costly nature of most solutions and to the lucrative opportunities this presents on all sides (see the Section on Governance in Chapter 5). Priorities for Economic Policy. The top priority is to create a policy and planning framework that includes a fair, transparent bidding process for private provision of infrastructure e.g., for parking. Next in line are better pricing policies as regards, for example, congestion pricing in the larger cities and user charges to cover the full cost of road maintenance and operations. Also, "dirty" fuels (e.g., leaded gasoline) should be heavily taxed. More deregulation of bus service would also be helpful, and more thorough analysis is needed of the options for supplying transportation services, given that land costs are escalating. Role of the Private Sector. There are wide possibilities for an expanded private sector, if the process can be implemented within a proper framework (see above and main text). To cite a few examples: toll roads; MRT and LRT (including rolling stock and services); road maintenance; bus services; on- and off-street parking; and training programs. Institutional Priorities for the Next Decade. Responsibilities in the central government need to be clearly defined (preferably with DGLT taking the lead), including a clear policy on urban transport at the national and local levels. In addition, there needs to be separation of the responsibility for ownership and management (the client function) from design, construction, operations and maintenance (the producer function); those performing the producer function should be corporatized as a step towards eventual privatization. More decentralization of responsibility is also needed. E.2 Trains and Boats and Planes and air transport. Ownership of the main railway infrastructure rests with the 4.60 Rail Transport. Indonesia has four Government, while Perumka is responsible for separate railway networks, one in Java operating train services and, on behalf of GOI, (primarily passenger) and three in Sumatra for operating and maintaining the (primarily bulk freight). Except for some bulk infrastructure. Private participation is freight, rail already faces strong competition permitted and now actively encouraged, but to from road and-in some corridors-maritime date most private projects have only involved Building "Hard" Infrastructure: A Look at Key Sectors 107 development of prime railway land, often by improvements in service and reductions in rates well-connected parties. Rail traffic has been on the trunk domestic routes.'9 They also growing steadily in recent years, while provided a foundation for improved efficiency productivity and financial performance have and competitiveness in the subsector, but been improving. significant constraints remain and there are signs of creeping reregulation. 4.61 Java's very high population density will ensure growing demand for efficient passenger 4.64 Domestic shipping is generally highly rail services, while continuing development of competitive.20 However, restrictions on coal and other resources will create viable new vessel imports (see Chapter 5) coupled with opportunities for bulk freight services. bureaucratic impediments to the Development to date has been hindered by leasing/chartering of foreign vessels have excessive GOI intervention and an outdated constrained the ability of private national lines regulatory framework. Controls on Perumka's to compete with regional carriers and created tariffs has precluded profitable operation and strong pressures for reregulation in some necessitated reliance on the national budget to quarters. Levels of investment in modern finance investments. This in turn distorted capacity have been modest due to the decision-making and encouraged under- constraints mentioned above. maintenance of assets. At the same time, dependence on bilateral financing has 4.65 Indonesia's main public ports are contributed to some poor investment operated by the four state-owned port choices.'6 corporations (Pelindo I - IV), while the smaller ports are still managed by DGSC (companies 4.62 During the late 1980s, GOI embarked are permitted to own and operate special upon an initial program of subsector industrial ports to serve the movement of their reforms.'7 Now GOI has entered the second own raw materials and products). The private phase of the reform program. This will entail sector has long been involved in port converting Perumka into a Persero (PTKA) operations, notably in the general cargo organized along "line of business" principles, stevedoring business. More recently, MOC establishing a more clearly defined financial has approved several unsolicited private relationship between GOI and the new proposals to develop new container terminals in company, and enabling expanded private major ports (Tanjung Priok, Tanjung Perak) participation through partial divestment of and to construct major new public ports existing businesses and through creation of (notably new deep-water facilities in the conditions conducive to private investments in Merak/Cilegon area). new businesses.'8 There is strong commitment in GOI to these policies; 4.66 Port productivity remains well below nonetheless, there is a danger that unsolicited best practice international levels. private participation proposals targeted at Congestion/slow turn-around continues to raise Perumka's core businesses could disrupt their costs, hurting both non-oil exports from Java implementation. and shipping to the Eastern Islands.2' The Government's plan to discontinue pre-shipment 4.63 Maritime Transport. Maritime inspections could increase greatly port transport is vital to Indonesia's inter-island and congestion and shipping costs, and will need international trade (see Box 4.4). The major close monitoring (see Chapter 5). A similar deregulations of the 1980s (Inpres 4/85 threat is posed by proposals for new private and PakNov 88) resulted in significant container handling facilities at Batam. 108 Chapter 4 Box 4.4: Regional Dimensions of Transportation; Inland Waterways and Ferries Inland waterways provide the basic transport infrastructure in many isolated parts of the country, notably Kalimantan. Ferries are the key links in the road network between islands. The public sector is no longer involved in the operation of inland waterway transport services, but continues-through DGLC and PT ASDP-to provide and manage inland waterway and ferry terminals. It is also the principal operator of ferry services, although private operators are permitted to serve some trunk routes. There have been two important developments lately: the sinking, with considerable loss of life, of a PT ASDP ferry in Aceh; and severe congestion on the Java-Sumatra ferry route linking Java and Sumatra (truck queues over 3KM long). These problems are symptomatic of more fundamental regulatory issues that have inhibited private investment in new vessels and contributed to a poor reliability and safety record. If the Government wants to promote development in the Outer Islands, major investments in larger and faster vessels and efficient terminals are urgently needed. At present, the main proposal on the table is the high-tech option of replacing ferries with inter-island bridges. A simpler, cheaper solution would be efficient private investment in ferries, assisted greatly by reduced government intervention. 4.67 Civil Aviation. The civil aviation pressures to buy (or lease) specific equipment. subsector has been able to cope reasonably well On airport operation, there have recently been with sustained rapid growth in demand several unsolicited private proposals for airport (international and domestic, passenger and development (e.g., Medan, Solo, Lombok, freight). This is due in part to the priority GOI Bali). As yet, MOC has not established clear has accorded to investments in airport principles and rules to govern such proposals; infrastructure (notably at Soekarno-Hatta) and such a framework would increase the benefits in part to domestic tariffs having been of private participation and competitive bidding regulated at levels that have permitted on well-specified proposals. In addition, the profitable airline operation, albeit at less than sector faces major challenges in terms of best practice performance levels.22 Another human resource needs (e.g., pilots, licensed contributing factor has been the rise of private aircraft maintenance engineers, air traffic airlines, which were permitted to operate jet controllers, communication and maintenance aircraft and allowed increase access to trunk technicians for navigational aids). MOC has routes after Sempati's ownership changed. In been attempting to meet these through its civil general, GOI has generally actively encouraged aviation training facilities, but this is proving increased calls by foreign carriers, but the inadequate in terms of quantity and quality. proposal that foreign cargo-only flights would Finally, there are on-going safety issues. The be permitted to land only at Batam and certain FAA recently found DGAC's supervision of other areas, with onward domestic transport airline maintenance procedures to be being handled only by national airlines, would unsatisfactory,23 and ICAO and others have be a costly reregulation. warned that urgent action is needed if the Air Traffic Services system is to cope safely with 4.68 Domestic airlines' fleet development projected rapid traffic growth. plans have been constrained and costs raised by Building "Hard" Infrastructure: A Look at Key Sectors 109 Endnotes 1. The legislation provides for substantially greater local revenues, notably (maximum) taxes of 5 % on gasoline and 20% on ground-water use. Both would improve efficiency by reflecting social costs more accurately. 2. Partly this is compensated by self-generation, which is estimated at 70% of PLN's capacity. 3. There appear to be four main reasons: i) the 1994 base tariff was too small because it substantially overestimated the increase in power demand in 1994; ii) the formula does not pass through 100% of price increases; iii) the formula has not been applied as intended; and, iv) there have been delays in implementation. 4. In the absence of a tariff increase, PLN will incur losses on power purchased from these plants even before provision is made for transmission and distribution costs (Section C.3). 5. For example, delegation of authority will be effective only if it is accompanied by participation of users and professional managers. 6. This Presidential Instruction of April 1994 lays out rules and procedures for implementation of the GOI Budget, including procurement. The regulations cover: all development and recurrent expenditures; central and regional governments; and unlisted state enterprises. 7. For example, a contracted garbage collector currently has to rely on the Dinas Kebersihan to collect fees for his services. If he collected the fees directly, he would get the funds sooner and in larger quantity. 8. Currently, much training is attended simply because a minimum number of days per year is mandatory, or because an attractive pay premium accrues during their training. 9. The great bulk of the spending is done at the provincial and national levels; little is done at the kabupaten and kecamatan levels. 10. There are 17 state transport enterprises, including 2 airlines, 2 airport corporations, 3 shipping lines, 4 port corporations, 1 ferry corporation, 2 bus corporations, 1 railway corporation and I freight-forwarder. 11. See World Bank (1996c). 12. These include issues related to design specifications, procurement, supervision, timing of construction and contractors (see World Bank 1996c). 13. There are currently 531KM of toll roads now in operation; 162KM (including 59KM for which financial closure has not yet been achieved) are under construction; and approximately 1021KM are under negotiation. 14. Informal information suggests that official statistics considerably understate the extent of the problem. 15. A better option would be to structure the tax on the basis of gross vehicle weight and axle configuration, rather than on engine capacity and year of manufacture, as at present. 16. For instance, adoption of several different electronic signaling technologies on the same network. 17. This mainly comprised converting PJKA-formerly a Departmental Agency-into Perumka, deregulating its freight and "commercial class" passenger tariffs, and enacting a new Railway Law (which is not yet implemented by new Government Regulations). 110 Chapter 4 18. The new financial relationship will involve GOI: (a) compensating PTKA for its public service obligations (essentially economy class passenger services that GOI requires PTKA to operate at tariffs set by GOI); (b) paying Perumka for the costs it reasonably incurs in operating and maintaining the main infrastructure; and (c) levying track access charges from PTKA and other users (the level of these charges will be progressively increased having regard to the level of road user charges). 19. On other routes, particularly between Java and Eastern Indonesia, imbalanced and fluctuating general cargo flows have limited the impacts of deregulation; tariffs remain relatively high, and the frequency and reliability of services is sub-standard. 20. There are three state-owned shipping lines (Pelni, Djakarta Lloyd, Bahtera Adhiguna) each depend on GOI financial support (e.g., Pelni for passenger ships; Djakarta Lloyd for container ships) or benefit from allocated state traffic (e.g., Bahtera Adhiguna's Bukit Asam coal traffic). 21. The causes differ considerably by type of traffic and port. For instance, movement of containers through Tanjung Priok has been impeded by delays in the construction of the third container terminal (being developed as a public-private partnership) coupled with sub-optimal productivity at the two existing terminals operated by PT Pelindo II. In the smaller ports, problems include outdated breakbulk handling methods/lack of mechanized equipment attributable to lack of appropriate incentives for stevedoring compamies. 22. Tariff competition on domestic routes is not permitted, although limited discounting does occasionally occur, and airlines have extremely limited scope for offering special fares (e.g., no standby fares, no differentiation by season and time of day). 23. Suspension of Garuda's flights to the US was threatened, but the immediate problems have been overcome. "Soft" Infrastructure to Sustain Rapid Growth with Equity 111 5 "SOFT" INFRASTRUCTURE TO SUSTAIN RAPID GROWTH WITH EQUITY A. Sunmmary and Overview (i) completing deregulation of international trade; 5.1 Continued improvement in "soft infrastructure" (the incentive framework, (ii) continuing domestic deregulation; business practices, and legal and institutional arrangements) is critical to rapid growth and (iii) strengthening the management of improved equity. Soft infrastructure natural resources; determines risks and rewards of various activities, and thus investment, employment, (iv) strengthening financial sector and the efficiency with which resources and performance; and technology are used. It also influences equity by determining the degree to which public (v) improving governance to reduce resources and concessions are developed for "invisible" costs. the benefit of all Indonesians, including future generations. Continued improvement in soft 5.3 To further increase the efficiency, infrastructure will depend not only on reduce business costs, and improve equity, the completing the unfinished agenda of trade Government could: deregulation but also on reforms of domestic regulations and on institutional improvements. * continue trade deregulation: 5.2 In the past, deregulation successfully (a) implement the announced program of cut costs and increased national efficiency, tariff reduction through 2003, catch up labor demand, and international on delays that have occurred, and competitiveness. Reductions in protection avoid selective exemptions and further reduced the diversion of capital and other delays; scarce resources into inefficient, high-cost (b) bring tariffs for motor vehicles, industries. Cuts in regulations reduced chemicals, metal products, agricultural incomes of those who benefitted from rules products and alcoholic beverages in rather than business skills, and reduced the line with the program of tariff reform, costs involved in contacts with the and move to excise duties to tax the bureaucracy. However, a widely held consumption of socially undesirable perception still exists that aspects of the goods such as alcohol, irrespective of business environment significantly raise the whether they are imported or cost of doing business in Indonesia, lower domestically produced; efficiency, undermine international (c) abolish quantitative import controls and competitiveness, and contribute to inequity. related domestic controls, especially in This Chapter considers ways to reduce real and agriculture; and perceived costs and to increase efficiency and (d) remove quantitative controls and taxes equity further through reforming policies and on exports; regulations. For simplicity, the analysis is organized into five sections: 112 Chapter S * reduce impediments to intra-country trade, barriers would reduce Indonesia's production such as retribution taxes (retribusi), costs and strengthen its international quantitative controls on the movement of competitiveness. Indonesia is publicly goods, and monopolistic marketing committed to the reduction of trade barriers, as arrangements; indicated by the President's statement that "we in Indonesia sincerely believe that all APEC * establish clearer property rights (for water, Economies ... can benefit from freer trade and forestry, land and minerals) and charge increased economic integration" (APEC appropriate fees to improve resource Leaders Meeting, Nov. 1994). The challenge management and sustainability, and to is to sustain the reform effort and to ensure the public at large benefit. In continually support this commitment with forestry, this includes opening the log actions. Only then will Indonesia be able to market to more competition, monitoring achieve its potential for sustained growth over and enforcing sustainable utilization the coming years and enjoy the benefits that practices and strengthening property rights; export growth brings in terms of jobs, lower prices and improved quality of goods. * increase market discipline and regulatory supervision in the financial sector to cut B.1 Customs Tariffs the cost of finance and reduce potential instability; and 5.6 Indonesia's trade deregulation has reduced the cost of many traded goods and * improve institutions and governance to forced producers to become more efficient. reduce invisible costs, improve confidence The average tariff (plus surcharge) was cut in the legal environment and strengthen from 22% in 1990 to 19.5% in 1994 and 15 % equity. in 1995. The tariff reform program announced in 1995 basically establishes a three tier B. Completing Deregulation of structure of tariffs by 2003-0%, 5% and International Trade 10%, which effectively multilateralizes ASEAN commitments. Exemptions were limited to 5.4 Impediments to trade are undesirable motor vehicles, chemicals, metal products, because they divert the nation's scarce capital, selected agricultural products, and alcoholic labor and management into uncompetitive beverages. The program was strengthened in activities, thus lowering overall growth. 1996 by: Impediments to imports raise the cost of doing business in Indonesia and reduce international * the announcement of a schedule for competitiveness. They protect high cost implementing the tariff reductions over the production of import substitutes and next seven years (see Table 5.1); disadvantage non-protected activities, including export activities. They also "tax" consumers. * a reduction, by 5 percentage points, of Export barriers hold down non-oil exports and tariffs for over 1000 items (9-digit disadvantage regions of the country that Harmonized System (HS) tariff codes); produce such goods. They effectively "tax" efficient producers of basic commodities and * further reductions for selected capital divert resources into less competitive goods, including outboard motors, furnaces industries, which lessens national efficiency, and stoves, and machinery for use in even if the protected firms are using the most paddy fields; and up to date techniques at the "micro" level. * the merger of import surcharges with 5.5 Sustained implementation of tariff customs duties. reductions and relaxation of non-tariff import "Soft" Infrastructure to Sustain Rapid Growth with Equity 113 As a result of ongoing reform, the average future reductions provides investors in most tariff (including surcharges) is now 13.1% activities with a clear indication of what tariffs (see Table 5.2). Furthermore, the schedule for will be, so they can more objectively assess the costs and likely returns from projects. Table 5.1: Schedule of Customs Tariff Changes (ad valorem rates) 1995 1995 1996 1997 1998 1999 2000 2001 2002 2003 Early 0 0 0 0 0 0 0 0 0 0 5 5 5 5 5 5 5 5 5 5 10 5 5 5 5 5 5 5 5 5 15 10 10 5 5 5 5 5 5 5 20 15 15 10 10 5 5 5 5 5 25 20 15 15 10 10 10 10 10 10 30 25 20 20 15 15 10 10 10 10 35 30 25 25 20 20 15 15 10 10 40 30 25 25 20 20 15 15 10 10 Four groups of goods are exempt from this schedule: (a) selected agricultural products (125 items from Chapters 7-9 of the HS code), (b) products of the automobile industry (mainly Chapter 87 of the HS Code), (c) certain chemical and plastics (97 items for Chapter 39) and metal products (Chapter 72) (though these are still scheduled to have a maximum tariff of 10% by 2003), and (d) alcoholic beverages (Chapter 22). Source: Ministry of Trade and Industry, Decree No. 133/MPPlKep/1996 5.7 The scheduled tariff reductions are tariffs reduced by 5 percentage points in 1996, highly desirable. If implemented, they will as scneduled. As of mid-May 1997, there keep Indonesia's tariffs among the lowest for were indications of pending measures to large developing countries (see Box 5.1), and reduce-but not eliminate-this backlog. they will strengthen competitiveness by Slippage maintains protection for a few at the compressing costs. Efficient activities will expense of others. It also increases uncertainty benefit from the reduction of protection for and encourages other enterprises to pressure less-efficient, less competitive activities. government to delay the scheduled reductions Unless there are exemptions to the maximum in their protection. Second, the schedule of customs duty of 10%, the maximum tariff- tariff reductions for chemicals, metal products, based effective protection' for import selected agricultural products and automobiles competing activities will be quite low by 2003 is yet to be detailed. The importance of these and hence, the dispersion in (effective) two issues is highlighted by the fact that much protection for different activities will be small. of the large investment approvals of recent years has been in the sectors that continue to 5.8 Some slippage in this tariff reform, enjoy import protection-e.g., chemicals, unfortunately, occurred in 1996. About 800 automobiles and metal products. Without cuts 9-digit textile and clothing items (from in their protection, there is a danger of Chapters 53 to 63 of the HS Tariff Code) that encouraging high-cost production in these have tariffs of 20% or more did not have their sectors. 114 Chapter 5 Table 5.2: Distribution of HS Tariff Codes by B.2 Non-Tariff Import Barriers: Rate (%) Licensing and Local Content Regulations Tariff Rate Beginning End 2003 (incl. surch.) 1996 1996 Target 5.10 Non-tariff import barriers also raise costs and reduce the efficiency of resource use. For example, import licensing, inevitably 0 14.5 19.2 19.2 confers special privileges and shields those 10 30.1 28.4 36.7 with licenses from competition. Users would 15 11.7 11.2 0 benefit from the added market efficiencies that 20 3.8 11.4 0 the removal of these licensing practices would 25 19.4 14.3 0 yield. Specialization generally generates 30 11.1 5.6 0 productivity gains, which suggests that national over 30 1.4 1.3 1.2 interests would be well served by eliminating Simple ave. 14.6 13.1 6.3 import licenses and allowing enterprises to specialize in either production or importation, The 2003 target and average have been without having to engage in both at the same computed assuming that alcoholic beverages time. It is important to ensure that such and automobiles are the only items with tariff impediments to competition and efficiency over 10% by 2003. The rate for the m ent s to cete passenger motor vehicles is assumed to be contiue to be reduced. 99%, and that for alcoholic beverages 170%. 5.11 Incremental progress was made during Source: Ministry of Trade and Industry Deregulation 1996, with: Package of June 4, 1996 (Decree No. 133/MPP/Kep/1996) and Bank staff moving soybean cake and nine other tariff estimates. codes (including tractors, motors and electric generators, displacement and 5.9 It would be desirable for the rotating pumps) from the list of goods Government to: restricted by producer-importer licenses to general import licensing; * keep to the announced schedule for tariff reductions and avoid exemptions; * allowing tourists to enter the country with their automobiles at a few locations; * finalize programs for the excluded categories (chemicals, metal products, * simplified import procedures for capital selected agriculture products and goods and basic materials; and automobiles), to bring their tariffs in line; and * regulation on imports of fishing vessels were changed (see Box 5.3). * subject luxury goods and alcoholic beverages, to a high excise tax levied on However, further removal of non-tariff import both imports and domestically produced controls would benefit the vast majority of goods, in place of a high tariff. This Indonesians. would avoid giving a high incentive for local production. 'Soft" Infrastructure to Sustain Rapid Growth with Equily 115 Box 5.1: Trade Policy Indicators for Selected Countries * Indonesia's program of tariff reductions, if implemented on schedule, will keep tariffs close to the lowest rates among rapidly growing large developing countries. * Indonesia continues to have a large number of non-tariff harriers to trade (Box 5.2). Average tariff (unweighted) (%) Couwtry 1991-93 Post-Uruguay Round China 30.6 16.6 India 42.6 30.9 Indonesia 19.9 16.32 Korea, Rep. of 10.0 7.7 Malaysia 11.2 6.4 Pakistan 56.2 na Thailand 36.9 26.1 Including surcharge. 2 Target for 2003, as given in Table 5.2. This goes beyond Uruguay Round comniitments. Source: UNCTAD (1994), Min. of Trade and Industry, Deregulation Package, June 4, 1996, (Decree No. 133/MPP'Kep/1996), and Bank staff estimates. 5.12 Non-tariff import barriers (Box 5.2) their outputs and hence can pass the additional are heavily concentrated on agricultural cost on to consumers through higher prices (see commodities and selected "strategic" activities. Table 4.4 in World Bank 1994a). Removing The Ministerial Decree of June, 1996, listed non-tariff import barriers would benefit all 206 nine-digit HS tariff codes that are still users, including exporters and consumers. For subject to some form of non-tariff import example, non-tariff barriers kept sugar prices control. These regulations distort prices and at least 20% higher than world prices during business opportunities, thereby increasing the 1980s and a quality-adjusted differential of costs and causing losses in efficiency as 27% prevailed in 1994. Such price effects are resources get attracted to protected activities. particularly important for poor consumers who They also raise costs to consumers, often spend much of their income on food. hitting low income consumers especially hard. For example, BULOG's monopolies over 5.13 Some regulatory policies under imports of rice, sugar, wheat (and associated discussion during the past year would offset restrictions of flour imports and related progress in deregulation that has already been domestic activities) and soybeans raise average made. For example, one such proposal was to prices and "tax" consumers. They also raise have most air freight pass through Batam. costs to user activities, such as agro- Even if there were facilities at Batam to handle processing, making them less competitive in trans-shipment of all air-freight, this would export markets. Industries producing for the increase input costs and greatly handicap domestic market generally enjoy protection on Indonesia's export effort. 116 Chapter s Box 5.2: Key Non-Tariff Import Barriers Import monopoly by BULOG: rice and rice flour, sugar, wheat and wheat flour, soybeans, onions, shallots, garlic, leeks, etc. Other import monopolies (sole importer arrangements): petroleum and other oil and gas products, fertilizer, cloves, insecticides. Restricted by licenses to producers: retreaded or used tires, paper and paperboard scraps. Restricted by licenses to general importers: dairy products, hand tools, pumps, electric motors. Local content plans and other special arrangements: motor vehicles. hnport bans: waste of selected plastics, selected printed matter, videos. Source: Ministry of Trade and Industry, Decree No. 133/MPP/Kep/1996 (June 4). 5.14 Local content programs are a form of of fiscal revenue and investment of resources non-tariff protection. The most visible current in operations that are not internationally example is motor vehicles and the "National competitive, is yet to be seen. There is a risk Car". Policy changes introduced in 1996 that those policy changes could leave Indonesia exempt from luxury sales tax as well as from as a high-cost, producer of automobile and auto customs duties: parts that does not participate in the globalizing, increasingly efficient market for - any manufacture of commercial vehicles, "World Cars". This could have been avoided vans, or sedan cars (with an engine by introducing general tariff cuts that didn't capacity of less than 1600cc), that have discriminate between producers, as this would reached 60% local content (Government have increased competition and promoted Regulation No. 36/1996, June 4, 1996)2; efficiency. The removal of luxury taxes for and motor vehicles with high local content is a regressive tax change that effectively increases * Timor Putra (the maker of the "National protection of these producers. Passenger motor Car") and its joint venture partner, KIA vehicles are clearly luxuLry goods and should be Motors of Korea, in advance of achieving subject to luxury sales taxes in the Indonesia 60% local content, as long as it achieves interests of equity. 20% local content by the end of the first year (1997), 40% by the end of the second 5.16 Pressures to extend similar provisions year and 60% by the end of the third year to other industries may increase over the next (Presidential Instruction No. 2/1996; few years. Shipbuilding already appears to Decree of the Minister of Industry and have a local content scheme, as buyers are Trade No. 31/MMP/SK/2/1996, dated obliged to purchase locally built ships as part February 19, 1996; and Presidential of the agreement for their receiving import Decree No. 42/1996, dated June 4, 1996). licenses (see Box 5.3). So does the dairy industry (Erwidodo & Trewin). Local content 5.15 These changes have given rise to, or at schemes often appear attractive to political least coincide with, efforts by existing leaders as a means to develop enterprises that manufacturers to increase their local content. will eventually be able to compete with However, the cost of these changes, in terms imports. However, like other quantitative "Soft" Infrastructure to Sustain Rapid Growth with Equity 117 import restrictions, the cost of these users of these goods. Moreover, though arrangements tends to be hidden. Almost frequently intended to foster downstream without exception, industries that are fostered activities and add value prior to resource-based by such arrangements tend to require continued goods being exported, the net result may be protection to be financially viable. little value added.3 The combined effect of Furthermore, the outputs make high cost export barriers on logs, together with domestic inputs, raising costs for the users of these controls on logging, is one example (see products, thus reducing their international paragraphs 5.33 to 5.35 and Box 5.8). competitiveness. Similarly, the export ban on rattan has ultimately reduced supplies, as land, labor and B.3 Export Restrictions capital have been diverted to other uses (e.g. rubber and cocoa), and led to a crisis among 5.17 Export restrictions (export bans, rattan furniture producers (see World Bank "regulated" exports, "supervised" exports, and 1996a, Box 4.1). export taxes; see Box 5.4) still affect nearly 2000 items (mostly forest products and 5.18 Export restrictions also often have agricultural commodities), reducing non-oil unintended equity and regional effects, as the exports. Export barriers also disadvantage costs often fall on outlying regions, where producers of primary goods and favor domestic these goods are produced. They decrease Box 5.3: Import Ban on Vessels Replaced by Unclear Licensing and Local Content Guidelines Import Ban. Indonesia banned the importation of vessels (including fishing vessels) for many years, in an effort to foster shipbuilding. This tended to increase the costs of inter-island shipping and the fishing industry. This import ban on vessels reduced national efficiency and raised costs, in particular, raising prices to the Eastern Islands of goods they buy elsewhere, and lowering the prices that Eastern Island exporters receive. Higher costs are part of the reason fish production is still below potential and foreign vessels poach in Indonesian waters (World Bank 1996a, Box 2.3). Indonesia's fishing industry has the potential to expand beyond its present level, with benetits for nutrition, export earnings and employment, especially in the Outer Islands. Recorded fish production was only $1.4 billion in 1995, compared with a sustainable harvest of about four times this much according to Government assessments. (However, this estimate of sustainable harvest may be high, as there is evidence that some parts may already be over-fished (Tsamenyi and Bateman)). Nonetheless, to he internationally competitive and expand, the transport and fishing industries need access to vessels at the lowest cost possible, and this means free access to imports. Similarly, lower cost ships would help integrate markets within Indonesia, thereby increasing efficiency and benefiting the Eastern Islands. Licensing and then Local Content. In mid-1996, the ban on vessel imports was replaced by an import licensing system. When first announced, this appeared to he a conventional use-linked import licensing arrangement and hence a significant improvement over the import ban. However, subsequent refinements prohibit leasing after 1999 and suggest that fishery operators may have to purchase a certain number of local vessels for each one imported. As the system is not yet fully operative, it is still unclear whether this change will reduce the implicit tax on users. The new system could actually increase costs in the transport and fishing industries, which would further hamper competitiveness and limit production. Source: Decree of the Ministry of Agriculture No. 508/Kpts/PL810/7/96 118 Chapter 5 economic opportunities and incomes in these 5.20 Indonesia did manage to increase the regions which conflicts with the national percentage of textile quotas utilized to over objective of increasing development in the 80% in 1996. But until these quotas are Outer Islands. transparently auctioned and made more transferable, this percentage is unlikely to be 5.19 In 1996, no progress was made in close to 100. Moreover, until this change is reducing export controls. Instead, Indonesia made, exports will not be produced as focused efforts on improving export facilities, efficiently as possible, because the producers including customs, rebates of VAT, taxation, are firms that happen to receive export quotas and lower credit costs for selected producers of rather than the most efficient firms. Similarly, selected products. To qualify, producers must if freed from other impediments, downstream already be established, have a good credit and activities will develop without the implied taxpaying record, and manufacture one of the subsidies arising from export controls on their following-textiles and textile products, inputs, if they are economically efficient. electronics, wood and rattan products, footwear Moreover, by eventually reducing the supply and leather products, paper products, processed and quality of materials in the domestic food, vegetable oil, processed rubber, toys, market, export controls can initially help but fish and frozen shrimp. Such an initiative does later hurt users. This has happened with rattan not address the fundamental problems posed by (World Bank 1996a, Box 4.1). export constraints and it excludes many potential exporters. Box 5.4: Key Export Barriers Export Bans: Iron and steel waste and scrap, copper waste and scrap, live fishery products, protected wildlife and natural vegetation, hides and skins of reptiles, sub-standard rubber and remilling rubber materials. Regulated Exports - exports that require government approval: Soya beans and soybean flour, rice and rice flour, wheat and wheat flour, sugar, live cattle, selected fish and fish products, urea, gold, silver, petroleum and natural gas, lead, and tin. Supervised Exports - restricted to approved exporters: Textiles and textile products to quota countries, rattan, wood and wood products, products of sandalwood, coffee, and manioc for export to Europe. Export Taxes: Logs and sawn timber ($250-4800/cub.m.), rattan ($15/kg), hides and skins ($4/kg or $100 each), wet blue or crust leather (30%), palm nuts (4%), cinchona bark (30%), sands (10%), iron ore (10%), ores and concentrates of copper, lead, tin silver and platinum (10%), natural and waste cork (5%), aluminum waste and scrap other than alloys (30%), and crude palm oil (40-75% of export price less base price). Source: Ministerial Decree No. 124/MPP/Kep/5/1996, dated May 31,1996 Decree of the Minister of Finance, No 666/KMK.017/1996, Dec. 2, 1996 C. Further Domestic Deregulation poor. These include, marketing controls, pricing, industrial licensing, public sector 5.21 Indonesia has extensive regulations and dominance in certain activities, cartels, ad hoc restraints on domestic competition that increase instruments in certain industries, and controls the cost of doing business, reduce efficiency and "taxes" on intra-country trade. Many of and limit economic opportunities, often for the these have been discussed in previous reports "Soft" Infrastructure to Sustain Rapid Growth with Equity 119 (e.g., World Bank 1995a, pages 45-50). tend to increase livestock prices in Java and Reducing them would lower costs and make Kalimantan. These quantitative domestic Indonesian enterprises more competitive controls thus have all the losses in efficiency internationally. The increased competition and associated with quantitative import controls, lower costs would also provide consumers with except that these losses and distributional better quality goods at lower prices. effects are all internal to the country. By suppressing prices in the Eastern Islands, they 5.22 This section focuses on some other reduce production and incentives for livestock impediments to intra-country trade, as an management in these areas, encouraging example of how these controls limit economic producers to move into other activities such as opportunities and create inefficiency. reverting to subsistence agriculture. Moreover, Discussion is confined to three issues-local as the surplus areas are commonly the Eastern government taxes and fees on the movement of Islands, these controls are inconsistent with the goods, such as retribution taxes (retribusi), Government's stated desire to foster economic quantitative controls on the movement of development in the Outer Islands. Overall livestock, and uncompetitive marketing development and regional equity would both be arrangements. enhanced by removing these controls. 5.23 Impediments to trade between different 5.25 Non-competitive marketing regions of the country fragment markets, arrangements for agricultural products often protect inefficiency, implicitly tax users, and result in lower farmgate prices. Farmgate raise the cost of transport (Box 5.3 and World prices are often kept low by a cartel of Bank 1996a, Box 2.3). They reduce national buyers/traders, thus reducing incomes for the efficiency. For example, commodity-specific poor. However, it is quite difficult to retribusi imposed by local governments, document these practices with much precision, fragment markets by acting as intra-country as they are location- and time-specific and trade taxes (see Box 5.5), create opportunities change frequently. For example, oranges and for rent seeking, and frustrate growers and cloves have been commonly cited as examples transporters. They disadvantage growers in of commodities where monopolistic or outlying regions by taxing them, along with oligopolistic marketing practices, supported by consumers. In addition, they actually yield government regulations, disadvantaged growers relatively little tax revenue to local (World Bank 1993a, Box 3.1). A succession governments; much of the potential revenue of "sole-buyer" marketing arrangements for never reaches government accounts and costs oranges, starting in 1988, has been so of collection are high compared to actual unsuccessful in meeting the needs of growers revenues. Moreover, their cost tends to be that many trees have not been maintained. disproportionately borne by the poor, who Similarly, the monopoly clove marketing produce relatively low value goods. Recently arrangement suppressed farmgate prices, and introduced new laws on Non-Tax Revenue and the farmer's share of the cigarette Local Tax Revenues will help, but the manufacturers' price (Sondakh), and many effectiveness with which they can be trees have been cut down. However, these implemented is yet to be seen. are far from the only commodities to suffer from uncompetitive marketing arrangements. 5.24 Quantitative controls on the movement of livestock also exacerbate differences in 5.26 The Tengkuwang nut (the source of an prices between producer areas and large oil used in cosmetics) price fell sharply in domestic markets (see Box 5.6). They reduce 1991, under the influence of monopoly livestock prices in the Eastern Islands and purchasing. The same firm had control of 120 Chapter S exports and the sole processing plant. More gate prices. Government sponsored bidding in recently, moral and social pressure has restored rubber markets in Sembadu and Karangan farmgate prices, but not before farmers began (West Kalimantan) resulted in these markets to cut the trees down for timber. In South achieving higher prices than those in Sumatra, a central purchasing authority was neighboring ones, thereby illustrating the value established for rubber, and private trade was of competitive marketing systems with excluded; as the result, farmgate prices fell transparent price information systems. about Rp.400 per kg. below prices that private Growers benefitted from a combination of traders were said to be offering. improved market information and more competitive markets. 5.27 In other cases, government actions have increased domestic competition and farm- Box 5.5: Commodity Specific Retribution Tax (Relribusi)-an Inefficient and Distortionary "Tax" The retribution tax (retribusi) is a specific tax or fee levied by local government on a wide range of goods and services. In the case of goods, it is generally levied on the weight transported. Thus, the ad valorem equivalent, which is what is important for incentive effects and resource allocation, tends to vary inversely with the value of the good. These taxes also vary substantially, from one local government area to another. Hence, there are widely different percentage taxes for different goods and for the same good produced in different regions. For example, in Timor Tengah Selatan in 1996, it was Rp. 1500-6000 per kg (between 9 and 24% of farmgate price) for garlic, Rp.1,500 per kg (1%) for red beans, and Rp.500 per kg for unshelled candle nut. Retribusi on cocoa in 1995 was Rp.85 per kg in Luwu, Rp.50 per kg in Mamudya and Rp. 100 per kg in Kab. Ende, South Sumatra. In accordance with Keputusan Menteri Dalam Negeri (Ministry of Home Affairs Decree) No 48, 1984, amended by Kepman 29/1986, the following goods are supposed to be exempt; plywood, sawn wood, rattan, rubber, oil palm and products, coffee, shrimp, tuna fish, tongkol/cakalang fish, cassava chips, maize, and cocoa beans. However, many local governments do in fact impose retribusi on rubber and cocoa, for example. Inefficiency in Production and Distribution. Retribusi on specific commodities, such as garlic, act like a tax on the trade between different regions within Indonesia. Hence, they fragment markets and distort both production and consumption decisions. Producers are discouraged from producing goods with high retribusi, while consumers are discouraged from using such goods. Hence, the different rates distort resource use between different products. Moreover, the fact that retribusi is higher on goods with a low value per kg means that it falls disproportionately on areas and individuals that produce low value goods. These producers are often the relatively poor. Inefficiency of Retribusi Tax Administration. The retribusi appears to be an inefficient way to raise local government revenue. In a study of one province, about 80% of potential revenue was uncollected or diverted to raise the income of those involved with its administration. Over half of the revenue actually collected is needed to pay for the costs of collection. In essence, commodity specific retribusi tend to give rise to malfeasance, contribute little to local government revenue, and discourage the production and trade of agricultural products in which Indonesia is internationally competitive. Source: Garcia-Garcia. "Soft" Infrastructure to Sustain Rapid Growth with Equity 121 Box 5.6: Impediments to Intra-Regional Trade: The Case of Livestock One of the products that many of Indonesia's Outer Islands can produce competitively is livestock. But their ability to sell livestock to other parts of the country is limited by quantitative controls and high costs of shipping (see Box 5.3). Both those impediments need to be removed for livestock production and incomes in the Outer Islands to reach their potential. Restrictions on the shipment of cattle, goats, sheep and pigs from the Eastern Islands are of particular concern. Central govemment regulations decreed by the DG Livestock, determine how many of each type of livestock can be shipped from each region to each other part of the country each year. As part of this, Government reduced the number of cattle that could be shipped from NTT from 67,000 in 1993 to 59,000 in 1996, and none can be shipped to the lucrative market of East Kalimantan. NTT was restricted to shipping 30,500 to Jakarta, 25,000 to West Java and 3,500 to Irian Jaya. The reduction for South Sulawesi was even greater, from 47,500 to 19,000. No goats, sheep or pigs can be shipped from NTT or from North Sulawesi. These controls reduce farmgate prices and widen the disparity between prices in surplus and deficit areas. In addition, shipping is restricted to licensed traders that hold a permit to ship livestock, and each shipment must be accompanied by a live-stock ownership letter. The permit is reported to cost about Rp.4,000 per head, retribution tax about Rp. 11,000, and the "cost" of acquiring all the signatures needed on the letter of ownership (in South Sulawesi) about Rp.45,000. Together these add about Rp.60,000 per head to the cost of selling cattle (i.e. about 5%). Higher prices for privately owned resources, such as livestock, would result in increased production and improved management. Relaxing these restrictions on intra-country trade in livestock would benefit Outer Islands and would improve the efficiency of resource use within the country as a whole. Source: Directorate General, Livestock, Decree No. 12/TN.320/Kpts/DJP/1996; Project Documents. 5.28 In 1996, the Government also began to 5.29 Another notable development is the deregulate sugar markets by weakening announcement of Government Regulation BULOG's monopoly. New sugar mills in No.41/1996 in mid-June 1996, that foreigners Eastern provinces are now allowed to sell 75% would be allowed to own land in Indonesia. of their output to buyers other than BULOG, However, the form of ownership is weak (Hak while the percentage for new mills in Western Pakai, essentially a 25-year lease, entendable provinces is 50% (BULOG Decision No. for another 25 years, for foreigners residing in 128/KA/03/1996, dated March 29, 1996). Indonesia) and it seems to have had no They had previously been required to sell all noticeable impact to date. their output to BULOG. This change will tend to increase competition but the effects will be 5.30 A significant, detrimental development limited unless the licencing of sugar in early 1997 was the freeze on foreign distributors is also relaxed. Then, increased investment in the palm oil sector. This limits competition throughout production and competition and growth in the sector, thereby distribution would compress margins and protecting existing investments in the sector improve quality, thus benefitting consumers and "taxing" buyers of palm oil. This change and agro-exporters that use sugar. Moreover, is inconsistent with the significant progress to as older mills in Java are taken out of date in opening the foreign investment regime production, their land can be freed up for more and it undermines foreign investor confidence. efficient use in rice production. The objectives of growth, export expansion and 122 Chapter 5 employment would be better served by 5.34 The Government's approach to continued openness to foreign investment. In resource management/use has varied from particular, growth and employment in sector to sector. In the case of oil and gas, downstream activities will be adversely effected government, through Pertamina, has been by this change in policy, heavily involved in every phase of resource use. The revenues from oil and gas have D. Managing Natural Resources contributed greatly to public revenue. Revenues have been increased by standard 5.31 M a i n t a i n i n g i n t e r n a t i o n a l contracts, auctioning concessions and output competitiveness in natural resource-based management. With minerals, government has activities depends on sound, sustainable generally endeavored to ensure that the management of the natural resource. Improved resources are developed in a manner consistent equity, by ensuring that all Indonesians benefit with national interest by licensing individual from the use of those resources, also depends developments. From the late 1970s until the on sound management. In turn, sound 1990s, the particular policies, together with sustainable management depends heavily on the investor perceptions regarding likely returns establishment of property rights, enforcement and risks, resulted in very little mining under laws and competitive pricing for development. In recent years there has been concessions. rapid expansion of copper and coal production and this seems likely to continue, provided a 5.32 In Indonesia, natural resources (e.g., sound regulatory environment is sustained. water, minerals, and forests) are ultimately There has been no clear mechanism for controlled by the Government. This poses a pricing, allocating and managing water challenge for Government to not only ensure resources. Underground water has not been that externalities4 are taken care of, but to managed; effectively it is a"free" good except simulate market outcomes as if there were for well costs. This approach can lead to over- private property rights in determining (a) prices exploitation of the aquifer. In Jakarta, the use paid to the Government for using these of well water is taxed but over-exploitation resources, and (b) sustainable and economically seems to remain a problem (Chapter 3 and efficient maintenance of, and investment in, World Bank 1995a). these resources. As illustrated in Box 5.7, it is very difficult to maintain public ownership and 5.35 Government has controlled the use of supervise use to simulate an economically forestry resources though the ban/prohibitive efficient outcome. tax on log and sawn timber exports, the granting of time specific (usually 20-year) 5.33 With every resource, such as a forest, concessions to users of logs and the there is a fundamental choice to be made establishment of royalties and fees to finance between public ownership and supervised use replanting programs (Box 5.8). and maintenance, and private ownership with market incentives guiding use and maintenance. 5.36 Indonesia has had mixed success with If the resources were privately owned, the this array of approaches. While the system for owner would have incentives to use them oil and gas seems to have operated effectively, efficiently and to manage them well, since he that for water and forestry has been less so. could always sell the forest that remains. The largely unfettered exploitation of Private ownership need not result in the underground water does not result in this destruction of the resource. Rather it provides resource being well maintained and is not built-in incentives for investment and sustainable in the face of ever-increasing use. maintenance, especially if there are no In Java, the competition between rural and externalities. urban uses for limited water is increasing. "Soft" Infrastructure to Sustain Rapid Growth with Equity 123 Box 5.7: Public Ownership and Reguilations Can Have Perverse Effects Sandalwood. Government has long tried to regulate the cutting and trade of sandalwood by declaring all sandalwood trees to be government property and setting rules on how many trees can be felled, the characteristics of trees to be harvested, and the price to be paid. As the trees don't belong to farmers and the administered price has been far below market levels (about Rp.200/kg, compared with Rp. 11,000/kg), there has been a strong incentive to cut trees down and smuggle the wood onto the market. The incentives for smuggling are so great that police in Kupang are reported to have intercepted a group attempting to smuggle sandalwood as a body in a coffin (Jakarta Post, December 12, 1996). Moreover, there is no incentive for individuals to plant sandalwood trees, as they are prevented from owning them. Not surprisingly, corruption thrives and the policy has not been successful in preserving sandalwood resources. Jelutung. Jelutung trees similarly belong to government. Persons, villages and companies are granted short-term licenses to tap the trees. The licensees have an incentive to extract as much from the trees while their permit lasts and have little incentive to care for and maintain the trees. Hence, the long-term productive potential of the trees declines, and there is little investment in the establishment of new trees. In addition, illegal tapping seems common. It is true that law enforcement agencies have the right to confiscate illegally tapped jelutung, but it is widely recognized that a mutually beneficial arrangement can usually be reached whereby trade continues. Duku. Duku trees are owned by farmers. Hence, farmers have the right to benefit from their output in perpetuity. Farmers and traders who purchase the fniit in advance of harvest time do incur the costs of enforcing their property rights, but the consequences of private ownership are striking. Duku trees tend to be well maintained, there has been investment in new trees, and production is expanding. Source: Garcia-Garcia and World Bank project documents Moreover, inappropriate agriculture and other groundwater would improve water availability developments in upper watershed areas, and promote aquifer recharging. combined with poor solid waste management, contribute to frequent flooding in several urban 5.37 Air quality has fallen to the point areas on Java and to the spread of waterborne where it could be considered a health hazard, diseases from poor water quality. Institutional and now has brought some efforts at clean-up arrangements need to be developed to improve (World Bank 1994a, 1995a). Efforts to allocation, reduce pollution through better establish effective controls on air pollution enforcement of standards and implement cost need to be continued, as poor air quality has recovery pricing. Such fees will be permitted widespread detrimental effects on Indonesia as with the new Non-Tax Revenue Law, but will a whole. be hard to enforce. Integrated river basin management, which considers water resources 5.38 Efforts to manage the use and comprehensively, could be developed and maintenance of forestry resources have not led implemented. Better flood and pollution to sustainable outcomes or economically control would reduce contamination of shallow efficient use of the resource (Box 5.8). The wells in urban areas and lower heath risks, effective tax on log production and subsidy to while integrated management of surface and domestic log processors (inherent in current 124 Chapter S Box 5.8: Forestry: Illustrating the Importance of "Soft" Infrastructure Export licensing and prohibitively high export taxes (earlier export bans) on raw logs and sawn products are the central feature of trade policies affecting the use of forest resources in Indonesia. The main purpose of these policies was to expand domestic processing of forestry resources with a view to increasing value-added prior to their being exported. In addition, plywood producers have received favorable tax provisions and timber concessions are allocated in a non-transparent fashion to firms with existing plywood capacity. The result has been the establishment of a large export plywood sector that uses logs relatively inefficiently with little value added at world prices. The prohibitive export tax on sawn timber even redirects logs of high-valued species to plywood production. The policies restrict entry by new and alternative users of forestry resources, inhibit competition and suppress the price of logs. The low log prices have enabled existing plywood plants to supply their products to the international market at competitive prices without using logs very efficiently. The gap between what an open market price for logs and what users are currently charged (including the 10% increase in royalty fees introduced on April 1, 1997) implicitly provides concessionaires with a subsidy estimated to be at least $600-1200 million per annum (i.e., $25-50 per cubic meter of log). As the forests are publicly owned, this is effectively a loss is public revenue. The policies also militate against concession holders utilizing and managing forest resources sustainably, because (a) the term of concessions is too short at 20 years; (b) concessionaires are not able to transfer their licenses (thus removing an incentive for them to keep a working concession in good condition for a potential buyer); and (c) there is a history of concessions (or parts thereot) being re-allocated with little warning, thus creating uncertainty and encouraging short time horizons on the part of concessionaires. In addition, local communities generally have no share in forest proceeds and hence they have an interest in converting forest land to other uses, rather than seeing forestry resources managed sustainably. The Ministry has taken over some concessions in which cutting exceeded sustainable yields substantially. Felling rates in natural forest are officially reported to have fallen to around 22.5 million cubic meters annually. Actual output has declined, suggesting previous overcutting has let to higher costs. However, unofficial estimates based on forest product outputs still suggest that the actual amount felled was larger than 22 million cubic meters. Either way, the amount being felled is well above the Ministry of Forestry's estimate of sustainable yield from remaining natural forests of about 22 million cubic meters annually. Indonesia has committed itself to attainment of sustainable management of its natural forests by year 2000, which is the best course for Indonesia from the economic, environmental and social points of view. A number of important steps have already been taken: the number of operating concessions has been reduced; the Ministry has introduced more rigorous accounting standards for concessionaires; Ministry efforts to control illegal logging and log shipments seem to have had some success; and the Reforestation Fund may come on-budget under the new Non-Tax Revenue Law. However, the problem in Indonesia is that the pace and scope of reform do not match the very rapid declines in both the area, and the condition, of Indonesia's natural forests, and unlike the situation which prevails in other sectors, where reform can be implemented over extended time frames, this is not an option in forestry. The resource will be lost or badly damaged, unless timely action is taken. Clearly, there is a strong case for reform of the "soft" infrastructure governing the use of forestry resources to: i) increase competition and bring private costs into line with social costs; ii) improve sustainability, (iii) capture more of the revenues publicly so they benefit all Indonesians. prohibitive export taxes on raw logs and sawn Cutting has exceeded the Government's products), have undermined incentives to estimates of sustainable harvest and output is regenerate the forests and manage them now falling. The test of Government efficiently. They have also enabled log management of a public owned forest is to processors (such as plywood producers) to sell achieve a degree of sustainability that simulates internationally without using logs as efficiently private ownership, and receive returns as possible and without much value added. equivalent to what a private owner would get. 'Soft" Infrastructure to Sustain Ralfid Growth with Equity 125 5.39 To increase the efficiency and experimentation has already occurred in sustainability with which forestry resources are Indonesia with this approach, with considerable used, the Government could: success. * open the log market to more competition, 5.41 Another closely related issue is land by auctioning concessions among resource management. A high-priority issue alternative competing users, removing the has been the use of location permits. The prohibitive export tax on higher valued permit system is highly inequitable since it sawn timber, relaxing export licencing, gives the holder of the permit (typically a and raising royalties (IHH); developer) a monopoly purchase right (hence leading to lower bid prices), and leads to * utilize more effective instruments for inefficient use of land (see World Bank 1996a, monitoring and enforcing sustainable Chapter 2). GOI took a step towards practices in field operations, such as the addressing these problems when it suspended use of performance bonds (subject to issuance of new location permits in the confiscation of the bond and the JABOTABEK area in late 1996. At that time, concession, if performance is permits had already been issued for 120,000 unsatisfactory), and streamline and hectares, enough to build around 6 million strengthen enforcement capacity in the houses. However, in February 1997, GOI field; and decided to end the suspension, stating that small developers needed the permits, especially * improve property rights by ensuring that to build low cost housing. GOI would do well (a) concessions are allocated to users under to reconsider the concept of the location permit terms that encourage a long-term approach especially now, when the property market is to the resource (lengthening the concession particularly risky (see Box 1.1). period, and introducing a right of transferability), and (b) forest dwelling and E. Strengthening Financial Institutions adjacent communities receive access to the benefits of sustainable forest production, in 5.42 There have been large advances in the preference to encroachment onto range and quality of financial services in regenerating forest lands. Indonesia since deregulation of this sector began in a major way in 1988. Nevertheless, 5.40 Some logging concessions in Indonesia the high cost of local credit continues to be a already operate with the high standards chronic complaint among Indonesian conducive to sustainability. As an interim businessmen. They point towards: high approach, the Government could identify other borrowing rates ("prime" rates of 10% or more operations with similar operating conditions, in real terms); limited access to long-term and require that within a given time frame, all finance; and the lack of liquidity of many listed such operations at least reach the standards of stocks. Other structural aspects of doing the model operations. Such a standard would business in Indonesia also add to financial not be based on theory or untested research, costs. For example, many businesses are but on field operations of the best firms. highly leveraged, and there are well-known Provided a sufficient number of concessions difficulties in enforcing contracts and were included, this would generate a significant exercising collateral (see Section F.2 and improvement in the state of forests and forest World Bank 1996a, pp 50-52). In these operations in the country. Further inducement circumstances, the typical businessmen has a could be offered, via simplification of good possibility of "walking away" from a regulatory and reporting process. Some project without major financial loss, even in 126 Chapter 5 the worst case scenario. As a result, the risk 5.46 Bank Indonesia. The Central Bank of default is high and banks must charge high has primary responsibity for supervision of the rates to cover bad debts. Pressures also arise nation's banking system. It is widely for government assistance to support weak recognized that there has been significant institutions, which loosens monetary and fiscal progress since deregulation in 1988, including policy. Policies to overcome such "moral last year (Box 5.9). As next steps, the hazard" problems are an important part of following could be considered: improving Indonesia's soft infrastructure. *Stronger enforcement of Bank Indonesia's 5.43 In general, the authorities have existing regulations, together with a shift continued to make headway in institutional in Bank Indonesia's approach to classifying development of the banking system during the credits, away from its current approach of past year (Box 5.9). Also, banks' classified waiting until payments are late,5 in favor assets continued to decline in relation to total of genuine credit assessment.6 It would assets. Indeed, by end-1996 reported classified also be helpful to look carefully at banks' assets (as a percent of total credits) were less procedures for valuing collateral (which is than two-thirds of that recorded three years a credit in calculating required earlier. However, classified assets still rose in provisioning for bad debts), given absolute amount (Box 5.10), and the difficulties in exercising collateral. announcement in April 1997 concerning * An extension of Regulation No. 68/1996 to required lending to small business (Box 5.9) is provide a well-defined threshold for Bank likely to be a step backwards in strengthening Indonesia intervention in weak banks, clear the portfolios of many banks. gu idelines for access to Bank Indonesia assistance (e.g., amount of direct and 5.44 At the macro level, there continue to indirect credit, terms, collateral, limits in be concerns that the financial system could fail relation to capital, etc.), stronger sanctions to act as a shock absorber in the event of some for repeat violations, and higher capital large macroeconomic disturbance. Concerns in requirements for non-foreign exchange this regard have been discussed in previous banks. World Bank Country Economic Reports (World Bank 1996a, Chapter 2, and World Bank * Accelerated implementation of Bank 1995a, Chapter 1). Indonesia's new payments system and publication of the cost and terms of E.1 Improving Banking Institutions assistance to troubled banks in Bank Indonesia's Annual Report. Also, Bank 5.45 In an approach that has been successful Indonesia's own financial statements could to date, the Government has relied upon a be disclosed in more detail. case-by-case approach to solving banking problems. However, the Government could 5.47 The State Banks. Despite increased increase the pace of progress by adopting a competition since 1988, the state bank's more transparent, market-oriented strategy. efficiency seems little changed. For example, The key to success would be timely actions to their reported interest margins actually widened penalize (ultimately, by closing) chronic from 1988 through 1994 and their costs offenders without causing serious runs on (notably bad debts expense) increased banks or the currency. Reforms would be (Kenward). Credit assessment procedures helpful in three types of institutions-Bank appear to have changed little. Major changes Indonesia, the state banks, and the private will be needed to address these weaknesses, ns banks. which are essentially ones of corporate governance. As suggestions in this regard: "Soft' Infiastructure to Sustain Rapid Growth with Equity 127 Box 5.9: Recent Institutional Developments in Banking The most high profile recent development during 1996 was BNI's partial privatization, which raised almost Rp.1 trillion of new capital on the local market. Several private banks also went to the market for major rights issues during 1996 and early 1997, to strengthen their capital in line with Bank Indonesia's regulations. Concerning mergers and acquisitions, near mid-1996 Bank Indonesia announced that it had helped 27 banks with management or financial problems during fiscal year 1995/96, including 17 commercial banks and 10 BPRs. On the basis of informal World Bank estimates, this would bring to approximately 30, the number of commercial banks experiencing some form of management change during the past 3 years. Bank Indonesia's policy of strictly limiting new licenses, is one arm of this policy, as it forces prospective new owners to buy into existing banks, rather than establishing new ones. In December 1996, the Government released Regulation No. 68/1996, concerning liquidation of banks. This puts in place a procedure for closing and liquidating banks, but is mainly concerned with the process of liquidation/closure (and with establishing the authority of "settlement' and "liquidation" teams) after the decision has been made to close a bank. It does not address the larger, prior problem-namely, actually making the decision to close. In particular, the Regulation leaves Bank Indonesia and Ministry of Finance with great discretionary authority as to when a bank should be closed. In November 1996, the management of Bank Indonesia decided to step-up its use of Cease and Desist Orders (CDOs). During the past 5 years, Bank Indonesia has issued CDOs 85 times, of which 35 were against commercial banks, including state banks and very large private banks. The CDOs range from light sanctions to severe penalties, such as placing a bank's management on a "blacklist" and excluding a bank from the clearing system (effectively closure). In another very positive development in early 1997, the Governor of Bank Indonesia announced that the central bank had recommended to the Ministry of Finance that 22 Smaliholder Credit Banks (BPRs) be liquidated and that another 21 be closed. He also has annotinced that Bank Indonesia will sell its shares in commercial banks. In early April 1997, Bank Indonesia announced new regulations concerning banks' credit portfolios. On the positive side, foreign and joint venture banks would no longer be subject to the requirement that 50% of their credits be extended for export credits. Also, violations for domestic banks' not placing 20% of their credits with small businesses were removed from the (CAMEL) bank rating criteria. Instead, all banks are expected to increase the proportion of new credits that are extended to small businesses (KUK); for foreign banks, to 12.5% of the 1997 incremental rise, increasing to 22.5% in 1999. For domestic banks, the increase is 20% to 22 1/2%. For enforcement, a system of (modest) penalties (which are expected to be tax deductable) was also introduced for firms that do not meet the targets, with the proceeds to be used to reward firms that exceed the targets. Finally, new limits on short-term horrowing by banks were announced in March 1997 (see Chapter 1). * More high-level political support is needed * Going-public is a step forward. However, to assist with the collection of state banks' selling small ownership stakes alone is bad debts. Consideration could also be unlikely to lead to significantly improved given to more imaginative sanctions performance. Continued restrictions on against state banks' bad debtors, for operations and other interim solutions (see example; publishing the names of the immediately below) are likely to be needed largest bad debtors, and seizing their until the state banks fully comply with exports at a foreign port-of-entry, as is Bank Indonesia regulations. being done by some private banks. 128 Chapter 5 Box 5.10: Update on Banks' Classified Assets The quality of commercial bank portfolios continued to improve during 1996, albeit slowly (see accompanying Table)'. Classified assets (measured as a percentage of total credits), which have been on a marked downward trend since end-1993, declined to less than 9% by end-1996. Bad debts (the most serious category of classified assets, the others being "substandard" and 'doubtful") seem stuck at around 3.0%. Commercial Banks' Classified Credits (end-of-period) 1993 1994 1995 1996 All Banks: Total Credit] 177.5 217.0 267.8 331.3 Of which: Classified (as %) 14.2 12.1 10.4 8.8 Bad (as %) 3.3 4.0 3.3 2.9 State Banks2: Total Credit' 94.1 104.1 120.9 138.9 Of which: Classified (as %) 19.8 18.6 16.6 13.4 Bad (as %) 4.2 5.9 5.3 4.6 Private FX Banks: Total Credit' 55.3 78.1 103.1 139.4 Of which: Classified (as %) 5.2 3.7 3.7 4.3 Bad (as %) 1.6 1.3 1.0 1.2 Private Non-FX Banks: Total Credit' 9.8 12.0 13.8 18.0 Of which: Classified (as %) 22.3 16.0 13.8 11.1 Bad (as %) 5.1 5.1 3.2 2.5 In trillions of rupiah 2 Excludes BPDs Source: Bank Indonesia At the state banks, classified assets declined to 13.4% of total credits, mainly due to the write-off of some Rp. 1 trillion at Bank Rakyat Indonesia, and a major push by BNI in preparation for privatization. Bad debts at the state banks also declined a little, to 4.6% of total credit by year-end. Among the private banks, there has been a partial reversal of the improvement achieved during 1994 and 1995. In particular, the private foreign exchange banks' situation deteriorated, with classified assets rising from 3.7% of credits at end-1995 to 4.3% at end-1996, their highest level in more than 2 years. The rupiah value of classified assets at these banks has doubled in less than 2 years. These data, which are based upon monthly self-assessments by the banks, should be regarded as a lower bound on the underlying "true" amount of classified assets. International experience with banking crises inevitably shows that reported classified assets understate portfolio weaknesses. * For banks not ready for some form of * Closures, mergers and downsizing of state privatization, interim solutions are banks could be given more consideration, needed to promote better corporate possibly in conjunction with "unbundling" governance, such as adoption of of some activities that could be strategic partners, emphasis on core competitively sold-off to the private sector. activities, etc. * A policy of "no-regulatory-forbearance" is needed vis-a-vis the state banks, especially "Soft" Infrastructure to Sustain Rapid Growth with Equity 129 as concerns the schedule for strengthened * Spontaneous consolidation would be capital requirements. This could be costly facilitated by clarification of circumstances for the Government, but the cost should be whereby foreigners may buy into troubled borne by the Budget, in an explicit line- domestic non-foreign exchange banks. item. Regulations regarding mergers of listed In the long-term, the only real solution companies. seems to be full privatization, which may require amendment of the Banking Act and E.2 Non-Bank Financial Institutions a different state philosophy towards banking in Indonesia. 5.49 The Bond Market. Indonesia's private bond market is small in relation to 5.48 The Private Banks. Competition GDP, but it is not much smaller than almost all among these banks is intense, and interest the others in East Asia. By contrast, there are margins have come down appreciably with no domestic government bonds (because of the deregulation (Kenward). This market-based "balanced budget" regulation that prohibits solution for improving efficiency has been very local borrowing) which makes the overall bond effective, but it needs to be supported with market very small relative to Indonesia's more pressure from Bank Indonesia to close neighbors. down chronic regulatory offenders. The main concern vis-a-vis private banks is systemic risk 5.50 There are good reasons why that arises from moral hazard. To address this Indonesia's private domestic bond market is issue, the following would seem desirable: small. Historically, it is hampered by high interest rates, significant risks and virtually no * Stricter enforcement of key Bank Indonesia secondary trading.' Consequently, private regulations (e.g., legal lending limits, sector purchasers are often reluctant to take-up higher capital requirements, measurement long-term instruments at rates that issuers can of capital net of underprovisioning, etc.), afford. Until inflation and risk come down strengthened bank supervision, and greater significantly and in a lasting way, development use of sanctions (e.g., fines, tougher bank of Indonesia's bond markets is likely to be rating penalties, reduced access to Bank disappointing. Nonetheless, smaller steps Indonesia credit, etc.) for offenders. A could be taken to build upon the successes of good model might be the substantial fines 1996, which was a relatively strong year announced by Bapepam near the middle of (Box 5. 11). For example; ease restrictions on 1996, on companies (including 3 banks) institutional investors, while increasing their for failing to submit their financial independence; and develop secondary trading statements on time. in bonds (see Box 5.11). * Transparent, pre-announced rules for Bank 5.51 It should also be noted that ready Indonesia's intervention in troubled banks, access to offshore markets provides a low cost together with consistent enforcement of alternative to domestic bonds for larger, these rules. creditworthy firms. Firms can raise large amounts of funds offshore with 5-7 year bank * A sizable, phased increase in capital credits (or bonds), often with very thin requirements for non-foreign-exchange spreads. If firms wish to avoid exchange rate banks, which could force some risk, the proceeds can be swapped back into consolidation in this sub-sector and reduce rupiah, yielding a total cost roughly equal to moral hazard problems. bank deposit rates. For those firms willing to 130 Chapter 5 Box 5.11: Capital Market Developments Indonesia's capital markets had a strong year in 1996, reflecting the robust expansion of the non-oil, non-agricultural economy and a rising wave of external confidence. For example, the number of companies listed on the stock exchange increased by 19, and funds raised rose by more than 40%. Market capitalization rose by about 40%. Capital Market Developments Stock Exchankes Bond Markets Companies' Shares2 Capitalization3 Foreign Foreign Issues' Value2 Owned4 Trading5 1988 25 0.2 0.5 - - 9 0.9 1990 132 8.0 12.4 - - 23 2.1 1992 162 11.2 24.8 25.4 - 34 3.9 1994 231 26.5 103.8 29.6 67.1 46 6.7 1995 248 35.4 152.2 27.7 58.9 50 8.7 1996 267 49.8 215.0 25.5 52.2 55 11.5 ' Number of listed companies/issues, end of period. 2 Cumulative value of funds raised in trillions of rupiah. 3 The value of all listed shares, at current prices, in trillions of rupiah, JSE only. 4 In percent of capitalization, JSE only. 5 Share of turnover accounted for by foreigners. Source: Bapepam. After expanding strongly through April, the Jakarta Stock Exchange Index turned downwards for about 4 months, in a slide that was similar to other countries in the region. Social disturbances at the end July barely affected the market. The index recovered strongly in the final months of the year, ending 1996 on a high note. Record levels were recorded in early 1997, but all these gains were erased by April. Other important developments during the year include a trend towards lower foreign ownership of listed companies, and a continuing drop in the share of trading accounted for by foreigners. This seems to be partly due to the rapid expansion of newly-established open-ended mutual funds, whose transactions are defined to be domestic. In other developments, the share of the market accounted for by state-owned enterprises continues to rise, reflecting the Government's privatization program. Following BNI's IPO (see Box 5.9), the share in total market capitalization rose above 25%. Performance of the bond market-which, as noted in the main text, is small in relation to GDP because there is no domestic government debt-was less impressive than the stock market, but it improved upon 1995. There were 5 new issues (versus 4 in 1995) and the value of outstanding issues rose by almost one-third. Of this, more than one-third was accounted for by PLN, which floated bonds worth a total of Rp. I trillion in 2 separate issues, reflecting the company's need for liquidity (see Chapter 4). carry the exchange rate risk, the cash flow 5.52 The Stock Markets. Long-term costs are reduced markedly because of lower development of Indonesia's stock markets is interest rates in major foreign currencies. also hampered by high-risk factors. Returns These possibilities add significantly to the must compete with high yields on safer, competitive nature of Indonesian financial rupiah-denominated, short-term, fixed-income markets. assets. From a longer-term perspective, "Soft" Infrastructure to Sustain Rapid Growth with Equity 131 Indonesia should continue policies that reduce first step in reform, mandatory participation the risks of holding rupiah-denominated assets should be abolished for companies with and strengthen local auditing standards and approved pension plans. Companies without disclosure procedures. Other measures that approved pension plans would have the right to could be taken in the meantime to build upon chose any accredited pension service company the progress during 1996 (see Box 5.11), to set up and administer a program. On the include: i) continue with the privatization civil service pension plan, the most important program; ii) ease restrictions on the amounts issue concerns the extent of the Government's that institutional investors can place in the unfunded liabilities (Leechor), which are stock exchanges, while ensuring fund estimated to be the same order of magnitude as managers' independence in making portfolio (net) external public debt (measured at current decisions; iii) improve the quality of exchange rates). Among the options to reduce information and disclosure requirements; iv) this potential budgetary burden are the strengthen monitoring of developments (for following (Leechor): i) better investment example, of short-term stock price movements) results, which could be assisted by independent and control over insider-trading; v) change the external investment advisors; ii) lower tax system to "level the playing field" for all administrative expenses; iii) basing pension financial assets (e.g., taxation of pension benefits on the average salary of the final 3-5 funds' income from open-ended mutual funds); years of service, not the final month; iv) vi) introduce scriptless trading as soon as linking cost of living adjustments for retirees practical; vii) strengthen institutional linkages to prices, not wages; and, v) raising the between the Jakarta Stock Exchange and off- retirement age (in stages), as currently seems shore bourses, and (viii) expand training of to be under consideration. professional staff. F. hnproving Governance to Reduce 5.53 Pension Plans. The state-run social Costs security program, JAMSOSTEK, suffers from a number of institutional and governance F.1. The Importance of Good Governance problems. About 40% of total assets are not accounted for; administrative expenses are 5.55 In all countries, good governance is high, despite some recent declines; real returns important to hold down costs of doing on investments are virtually nil; membership business, to sustain investor confidence, records are poorly maintained; and members' maintain international competitiveness and contributions are at risk, in part because there improve equity. The consistent and predictable is no segregation of assets and earnings application of rules and contracts over time is between different programs (Leechor). Of vital for investor confidence and investment particular concern are the opportunities for productivity. World Bank survey information misallocation of funds because the program is suggests that "credibility" of public policy-the not subject to competitive forces or adequate absence of unexpected changes in rules and regulation (Leechor). policies, and the consistency with which rules are enforced and property rights 5.54 The best option is to make enrollment protected-has an important positive effect on voluntary in JAMSOSTEK, while pursuing the level and pattern of investment (World deeper reforms (Leechor). If the reforms are Bank, 1997). In low credibility environments, not successful within a well-defined period of investors tend to "wait and see". Investors are time, the program should be abolished. As the 132 Chapter 5 Box 5.12: Consensus Regarding the Importance of Good Governance "The Government is fully aware of the danger of these issues [corruption, collusion and manipulation]. The Government and law enforcement agencies will continue to take firm action to eliminate all the malfeasance. " President Soeharto, Republic of Indonesia, Statement on the Draft State Budget for 1997-98, Jan. 6, 1997. Jakarta, Indonesia, October 29, 1996. "Business and development are becoming more complex, because of rapid changes in dimensions of ethics and morals, and a new phenomena is becoming a global imperative. It is called "good governance" and it brings together sound and fair business practice. In other words, in politics, economics and business it is not enough to attain political and economic leadership; it should be combined with moral leadership." Mar'ie Muhammad, Minister of Finance, Republic of Indonesia, Speech at the 42nd Anniversary of the Airlangga University, Surabaya, Indonesia, November 11, 1996. "Let's not mince words; we need to deal with the cancer of corruption....Corruption diverts resources from the poor to the rich, increases the cost of running business, distorts public expenditures, and deters foreign investors... .We all know that it is a major barrier to sound and equitable development. Solutions, however, can only be home-grown. National leaders need to take a stand." James D. Wolfensohn, President, The World Bank Group, Address to the World Bank Board of Governors, Washington, D.C., October 1, 1996. reluctant to enter into situations where costs are with connections gain over those who are the incurred much earlier than returns are most efficient. Costs increase due to the received. This reduces growth by lowering introduction of unnecessary delays or both the level and quality of investment. requirements, and output may suffer. Investment tends to be in shorter-term projects Moreover, these practices impose a which require little up front, fixed capital or disproportionate burden on the poor and small equity; often they are financed through local businesses, which are not able to spread these bank credit on which defaults are easy. (largely fixed) costs across larger output. Such practices result in inefficiencies and unfairness, 5.56 Without effective institutions and good that are a major source of dissatisfaction. governance, businesses can have their competitive position adversely affected by the 5.57 Governments' purchases and sales are selective imposition of regulations, taxes and another area where good governance is laws. Their cost can rise simply as a result of important. Through its purchases and sales, delays by public officials. Faced with such Government can distribute subsidies and create possibilities, businesses or individuals may be room for private profit at public expense. For eager to pay for a favorable interpretation of example, the sale of concessions without rules or to get a speedy settlement. Informal auctions, or granting of a concession with low payments may be common to obtain even royalties, can generate private income at ordinary services such as a driver's license, an national expense. Similarly, a privatization identity card or a passport. Law enforcement process can favor those with inside information authorities can accept payments to overlook and connections, as occurred in the former violations or to limit penalties, and teachers Eastern bloc and before recent reforms in can inflate grades in return for gifts. Those Argentina (Celarier). "Soft" Infrastructure to Sustain Rapid Grouwh with Equity 133 5.58 The way policies and regulations are periodically arisen with public housing administered can also create benefits for some programs in the United States. and costs for others. When the state controls the supply of credit and interest rates, 5.59 The Indonesian Context. Indonesia additional fees are often paid for by those has an outstanding track record in seeking loans (see Box 5.13, de Melo, Gur and macroeconomic management. Surveys give Sadler, and Webster). When spending on Indonesia high marks for there being little "risk subsidies is too low to satisfy or supply all who of expropriation with no compensation" (Knack qualify, public officials may use discretion in and Keefer), reflecting the nation's allocating services. This problem has commitment to respecting its international agreements. Box 5.13: Trade Credit in the ViBlage Despite Bank Rakyat Indonesia's extensive, well-regarded Unit Desa System (see Box 2.6 in World Bank 1996a), formal credit institutions do not always work well in the villages. Nonetheless, the demand for credit is high there, causing alternative delivery systems to evolve. Unfortunately, these tend to be very expensive and most of the cost can fall on the poor, as illustrated by the following examples. In the province of Jambi, there is an extensive system of farmers, village traders, provincial traders, industrialists and exporters, dealing, inter alia, in duku (a popular fruit), latex (rubber) and jelutung (a milky sap substitute for rubber). A typical trader will sell consumer goods on credit to villagers in remote areas, and buy rubber with credit extended to farmers/tappers. On the selling side, the trader offers, for example, cigarettes, sugar and rice, at different prices-one for cash and a higher one for credit. The difference in price implies an interest rate of almost one per cent per day. On the buying side, the trader also provides credit to the tapper, who repays when he delivers rubber to the trader; the implicit interest rate is believed to be similar to that charged by the trader for consumer credit. Why does the fanner (or the trader) not use formal institutions? Clearly, in very remote regions, these are not available. But even where available, other considerations interfere. For example, a garlic trader in a village in NTT can obtain credit from a major bank at 2 % per month, which is reasonable by Indonesian standards. But he may also have to pay an additional, informal "facilitation fee" to the local bank official for processing papers and arranging eligibility. This can amount to 3% per month for short-term credit. Such fees normally have to be paid up-front, but cost falls with the size of the loan-for example, for a loan of Rp.l millionhe must pay Rp.200,000 (20% of the loan); for Rp.5 million, the fee is Rp.500,000 (10% of the loan). The facilitation fee paid by the garlic trader has important economic effects, including adverse distributional effects on the poor. It discourages investment and raises the cost of holding stocks, thereby increasing the bunching of sales at harvest time and amplifying price fluctuation over the season. When facilitation fees are "folded" into the loan, the risk of the loan naturally rises, with the bank bearing the cost of increased defaults. Source: World Bank Staff. 5.60 However, a widely-held perception "complexity of administrative procedures" as exists that the invisible costs of doing business the most difficult problem faced by their in Indonesia are very high. A survey done by businesses. This problem was not even among the Overseas Research Department of the Japan the top five problems faced by Japanese firms External Trade Organization, conducted in late operating elsewhere in major ASEAN 1995, indicated that more than 50% of countries.8 Similarly, the Index of Japanese firms operating in Indonesia cited Bureaucratic Effectiveness consistently ranks 134 Chapter 5 Indonesia relatively low on "Contract paid to acquire the signatures needed for Enforceability" (Knack and Keefer). In recent transporting livestock (see Box 5.6). Small years, Indonesia's ranking has been comparable scale enterprises and the poor are particularly to Mexico, Colombia and Russia. disadvantaged by such costs and feel unfairly treated. Another example, affecting equity, is 5.61 Three examples of ways in which the sale of concessions or public assets through public administration can raise the "invisible" negotiation, rather than in a transparent costs of doing business in Indonesia are: (a) competitive auction to the highest bidder (see "facilitation fees" that small scale borrowers Box 2.5). Without such an auction, the often pay for credit (see Box 5.13), (b) concessionaires can pay too little and hence the payments made to local government officials in state receives too little. lieu of retribusi (see Box 5.5), and (c) "fees" Box 5.14: "Good Governance" a nd Ctiltujral Norins Comparing the quality of governance in different cotintries is difficult because social customs vary. In particular, westem countries have tended to place high value on rule-of-law concepts, whereas other cultures may rely more heavily on business associations and the quality of personal relationships. In Asia, indeed in many parts of the world, the practice of providing gifts for services perforned-and the exchange of gifts-is a long-standing custom. It is practiced as much in private sector transactions as in public-private transactions, and there are elaborate social customs within which gift-giving and exchange of services are common. Hence, while some cultures would interpret certain payments as a gift for service that circumvents an inefficient bureaucracy or an ineffective legal system; others see the same payments as bribes. Inevitably, the visibility of this issue will rises with economic development, as has already occured in some Asia societies. As society becomes more open, the public and the (local and international) news media create expectations and set standards that are increasingly in favor of "rule-of-law" institutions; civil service salaries rise to levels that obviate the need for supplementary income; middle-class taxpayers come to demand better service from cumbersome, government bureaucracies; and side payments fall out of favor. 5.62 The Case of Customs Services. the pre-shipment inspection system of the past Customs administration is of particular current 12 years was replaced by a post-shipment interest as an example of governance in inspection'. Indonesia. In 1985, Government placed customs administration in the hands of a 5.63 Spokespersons for importers were so private company, Societe General de concerned by the prospect of additional hidden Surveillance (SGS), and significantly improved costs and reduced predictability of service that the timeliness and predictability with which their association spoke of paying the costs imports were cleared and the amount of associated with continuing the pre-shipment customs revenue collected. In 1995, customs inspection. The Indonesian Importers administration was passed to PT Surveyor Association also proposed that the Government Indonesia, a state-owned company in which maintain the current pre-shipment system until SGS maintained a 20% share. However, this 2000, to allow time to adequately prepare arrangement come to an end on April 1, 1997 customs officials. Whether importers' when the responsibility for customs inspection concerns are realized will depend on the was returned to the Directorate General of efficiency, transparency and timeliness of Customs and Excise. As part of this change, customs administration and this cannot be fully assessed in advance. "Soft" Infrastructure to Sustain Rapid Growth with Equity 135 5.64 In an effort to avoid a deterioration in Minister/BAPPENAS for Legal Development, customs administration, it would be desirable Social Communication and Institutional to monitor performance closely over the next Relations, Sutadi Djajakusuma, spoke of year or two. Ideally, there would be building a state based on the rule of law, with independent evaluations of custom's a modern body of laws, a responsible and performance on a regular basis. If there is a qualified judiciary, and an efficient and deterioration, it is essential that actions be affordable judicial process to provide access to taken quickly to restore quality service; justice for the society at large, in particular, otherwise, opportunities for growth and the underprivileged (Semarang, 1996). He employment expansion will be forfeited, by highlighted the need to (a) reform judicial increased costs of imported inputs. administration to ensure the speedy resolution of conflicts and an effective appeals system, 5.65 Even now, the growing concentration and (b) improve the skills and performance of of non-resource-based export-oriented legal and judicial personnel by strengthening enterprises in Export Zones (or under bonded ethical and professional standards, transparency manufacturing provisions) suggest that there and accountability. are hidden costs associated with importing or exporting goods. Otherwise, it seems 5.68 One step that has already been taken is reasonable to expect that a larger share of such the introduction of a new company law in enterprises would locate outside these areas and March 1996. The new law sets time limits on supply both the local and export markets. Cost the process of company approvals (though associated with customs administration are initial indications suggest that these are not likely to be part of this. But so too are delays being observed), strengthens the rights of with refunding VAT to exporters. The minority shareholders, sets guidelines for importance of timely refunds is acknowledged liquidation, and attempts to increase by ongoing efforts by taxation officials to transparency (see Box 5.15). reduce delays. 5.69 The effort to reform the legal system is F.2 The Legal System: A Key Institution benefitting from widespread consultations within the country and the Government's use of 5.66 Public confidence in the efficiency and international experts. For example, fairness of the legal system is a critical part of preparatory work for the 1995 Company Law good governance. The need to improve the involved widespread discussion and legal system to strengthen its credibility is contributions from within the country and in evident from survey results and workshops and this way provides a model for on-going work the words of Prof. Dr. Mochtar to follow. External assistance has included the Kusumaatmadja; "Our legal situation is indeed AUSAid Specialized Legal Training Project, critical but not desperate" (Regional Workshop, the EU-IPR program, and the USAid-funded Semarang, 1996). Moreover, reforms are on- ELIPS project. going, as evidenced by plans to update 350 laws inherited from colonial times by the end 5.70 Priorities for this legal reform effort of 1999 (BPHN's National Conference on include: Legal and Development Plans, 1996). (i) Strengthening national commitment to 5.67 The importance of a well functioning the rule of law (Rechtsstaat) and the legal system is recognized by the inclusion of effective working of an independentjudicial plans for legal reform in REPELITA VI. In system. Government needs to show on- discussing these plans, the Assistant State going commitment to the transparent 136 Chapter S Box 5.15: The Company Law, Law No. 1/1995 Indonesia's new company law came into effect 7 March 1996. This was an important development for two reasons. First, the process of bringing the law to closure elicited discussion and contributions from various camps, which was a marked departure from previous law-making process. Second, the new company law has positive new provisions of interest to foreign investors. First, the law defines a relatively simple, time-bound (60 days) process for approval by the Minister of Justice, followed by another time-bound (30 days) period for the company to he gazetted. These provisions are laudable, but in practice, the approval times seem to be much longer than 60 days, which can be a problem for foreigners. Also during the waiting period, company directors are personally liable for all company obligations. Second, the law enshrines the principal of "limited liability" to value of shares held by shareholder. However, shareholders may be personally liable, including for pre-incorporation acts by a founder. The duties of Board members (see below) are clarified, and Directors munst declare conflicts of interest and may be disqualified from acting on behalf of the company. Third, the law requires a dual board structure-a Board of Commissioners and a Board of Directors. The former acts in an executive role, supervising and advising the Board of Directors; it has great access to information and can suspend Directors. Fourth, the law significantly strengthens the rights of minority shareholders (which were essentially non- existent previously). Indeed, it may have gone too far in this direction, as for instance: they have a .guaranteed price" for share transfers; they have access to considerable company information; and, anyone with more than 10% ownership essentially has veto power. Five, different classes of comipany shares are now possible, and there is a provision for the company to buy-back its own shares (up to 10% per year) and thereby change ownership. Also on financial aspects, a company must set aside a percentage of its profits each year in a reserve find, until the reserve totals 20% of issued capital. This may create a problem for some joint ventures. There are also provisions for liquidation, including automatic dissolution if losses exceed a certain percentage of capital. This provision seems likely to be unenforced or widely circumvented. Finally, the law requires the Directors to submit an Annual Report to shareholders within 5 months of the end of the fiscal year. The financial statements must, inter alia, give details of the salary and benefits of each Board member-a provision that seems to be meeting resistance. Also, each Board member must sign the Annual Report (or give reasons for not doing so) and can be held personally responsible for false or misleading information; this is a very wide potential liability. establishment and enforcement of laws and formal arbitration systems more and regulations, as part of maintaining a often than can be readily explained by consensus on the role of law. Providers the culturally recognized and widely and users of judicial services point to the respected "musyawarah" concept of lack of independence of the judiciary as reaching consensus and avoiding the paramount deficiency in the conflict. This creates uncertainty system.'° regarding the equity with which many disputes are resolved. There is a need (ii) Institutional reform of the judicial for improved screening procedures to system. Public opinion and modern appoint judges, attorneys and court business practices demand efficient means administrators, accreditation boards of dispute resolution. At present, for the legal profession, and a code of economic actors are bypassing the courts ethical and professional standards. "Soft" Infrastructure to Sustain Rapid Growth with Equity 137 Government and NGO sponsored legal growth have been high recently. Nonetheless, aid centers may be one way of providing Indonesia will need to keep pace with other legal advice to the poor and increasing countries and improve investor perceptions the equality of access to justice. regarding governance in order to reduce risks Similarly, the use of ADR mechanisms and ensure that its impressive development (i.e., conciliation, mediation or record continues into the 21st. century. The arbitration) prior to proceeding with civil challenge is to maintain rapid growth and litigation is in line with Indonesias improve equity and perceptions of fairness, by culture. However, conciliation is not maintaining clear policies and administering currently mandatory under Indonesian them consistently over time. This challenge is law, and legislation in this area is increasingly important because of growing required to clarify the extent and nature public and international interest or expectations of such ADR mechanisms. concerning corporate governance (see Box 5.16). (iii) Modernizing laws. Rapid changes in trade, business and technology require 5.72 Reducing the hidden costs of doing new laws to regulate activities and business in Indonesia involves changes by both maintain confidence in public the public and private sectors, and will be a policy"1. Similarly, there is a need to lengthy process. It entails a combination of update laws on arbitration, competition, policy and institutional reform, and changes in bankruptcy intellectual property rights the way business is undertaken. World Bank and secured transactions. There is still a cross-country experience indicates that a monumental task of overhauling the successful strategy of policy and institutional Civil, Commercial, Penal and Civil reform to reduce the hidden costs of doing Procedure Codes and other fundamental business in Indonesia and improve equity is laws dating from the Dutch colonial era. likely to involve five aspects: Moreover, this process needs to have widespread public participation, as was * strong, sustained commitment to the done in developing the new Company program at all levels, by leadership and Law (Box 5.15), to reflect the interests of example; affected parties, and to ensure credibility and administrative feasibility. * policy reform to reduce discretionary authority and increase transparency and (iv) Capacity building by strengthening competition, as this reduces opportunities human resources. Indonesia already for corruption; places a high degree of importance to human resource development and there * a new civil service pay structure and a are already about 13,000 law graduates system of recruitment, (iter- and intra-) from over 200 law schools in Indonesia departmental mobility, and promotion that every year. However, the Report by the is merit-based; Consortium of seven leading law faculties suggests that the curriculum needs to be * increased civil service accountability by made more relevant. Second, ongoing strengthened monitoring of public education for law professionals is employee performance, and penalties for essential for their skills to remain up-to- poor performance, abuse of power or date with changes in the law and its malfeasance; and application. * the continued development of a sound F.3 Improving Institutions and Governance predictable legal system, and an effective and independent judiciary. 5.71 Despite the perceptions of large hidden costs in Indonesia, foreign investment and GDP 138 Chapter 5 Box 5.16: Global Developments in Corporate Governance: Implications for Indonesia As Indonesia becomes increasing integrated in international markets, important changes are occurring in corporate governance world-wide. Most important among these, shareholder activism is on the rise. In the United States, this movement has been led by public pension funds, but their precepts have generally been adopted by a broad range of institutions, and the philosophy is being exported outside the United States. An Intemational Corporate Governance Network has held two annual meetings to date, as a forum for institutional investors to exchange ideas on corporate governance. Their main concerns appear to be: * Good corporate performance; * Oversight of the company by its outside board of directors; * Accountability of management to the company's shareholders; * Processes for shareholders to vote their stock and for minority shareholders to voice their concerns; * Close communication between company management and shareholders; and * More complete and transparant disclosure of information. Indonesian corporations have already begun to feel somne fallout from such heightened investor assertiveness. For example, the Gajah Tunggal Group experienced a large sell-off of its stock during 1996 after pushing ahead with expansion into the textiles sector, despite a negative assessment on the part of analysts. By contrast, Lippo Group sweetened the terms of its re-structuring when analysts re-acted negatively to the initial proposal. Elsewhere in Asia, Telekom Malaysia made an unusually open-and successful-public relations effort, following significant policy revisions in July 1996. Not so in Hong Kong where Tsingtao Brewery lost favor when analysts learned that proceeds from its IPO was being on-lent to other companies in China. These developments have implications for economic policy-making, if Indonesia hopes to attract its share of quality foreign capital. It is clearly in the national interest to have a stable base of foreign investors who buy and hold corporate stock on the basis of "fundamentals". There are various ways to attract such .quality' investors. At the most general level, the key is transparency and a high degree of ethical conduct. More specifically, during privatizations through IPOs or rights issues, road shows are critical, as is the quality of information thereby provided to the public. Regular follow-up communications are also important regarding, for example, the direction in which a company is headed (without providing inside trading information). Likewise, the quality of investor relations-including through its annual report-are of concern to the serious investor. These considerations also tnderscore the key role played by Bapepam in ensuring the timely disclosure of accurate data on the financial condition of listed companies. The rise of shareholder activism is also a good reason for GOI to privatize state enterprises-even on a partial basis-as one means to improve corporate governance. Source: Various Corporate Governance Reports of The Conference Board, New York, 1994-96. 5.73 The continued deregulation discussed in example, removing non-tariff import barriers Sections 5.B, 5.C and 5.D is an important part would not only reduce direct costs and of the second of these five aspects. With a strengthen competition, but it would simplify more market-oriented policy environment and import administration and reduce the scope for less reliance on policy interventions, there is rent seeking. Similarly, reducing retribusi less scope and incentive for corruption. For taxes and removing controls on the intra-county 'Soft" Infrastructure to Sustain Rapid Growth with Equity 139 movement of goods would not only increase represents a major civil service reform. But, producer returns by integrating markets, but simply adjusting pay, without such a reform also reduce elicit payments to policy runs a serious risk of generating little or no administrators. Greater reliance on transparent improvement. Similarly, continued competitive sale of infrastructure concessions development of a sound, predictable legal would increase revenues and decrease costs of system will not be easy. Success will depend services. sustained effort and strong leadership from all levels. However, actions to reduce the hidden 5.74 The other parts of such a strategy are costs of doing business tend to be self re- not amenable to straight forward policy or enforcing as they create a virtuous cycle. regulatory changes. For example, establishing Success raises investment and growth, and this a merit-based civil service system of pay, in turn increases accountability, openness and promotion, and penalties based on performance transparency of business practices. 140 Chapter 5 Endnotes 1. Effective protection is the net additional return provided to resources in the industry by policies affecting input costs and output prices compared to what return would he in the absence of these policies. 2. Producers get partial reduction in custom duties for local content rates between 20% and 60%. 3. The official rationales for export controls are: (a) to match exports with quotas imposed by importing countries; (b) to conserve natural resources and endangered species; (c) to promote downstream activities with higher value added; (d) to raise or ensure export quality; and (e) to ensure adequate domestic supplies. However, the only one of these objectives that cannot clearly be achieved by alternative instruments, with fewer adverse side effects, is the protection of endangered species. For example, in cases of quantitative import restrictions imposed by importing countries, the best option would be for Indonesia to use a transparent, competitive auction of the right to fill them. 4. Externalities refers to a situation in which one producer's activity directly affects the costs, output or returns of another. Examples include the depletion of ground-water by a well, upstream pollution affecting downstream users of water. Markets can rarely resolve such externalities effectively, hence Government regulation may be needed. 5. At present, Bank Indonesia's main criterion for determining the quality of assets is tardiness on principal and/or interest. This is a relatively late stage to be classifying an asset, and more emphasis is needed on assessing the capacity of borrowers to service their credits. 6. This would probably require an extensive credit training program for Bank Indonesia staff. 7. There is only an informal, over-the-counter secondary market. S. 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A., 1995, "The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Experience", Quarterly Journal of Economic, pp. 642-80. 148 Bibliography Statistical Annex 149 INDONESIA COUNTRY ECONOMIC REPORT STATISTICAL ANNEX a List of Tables Population and Employment 1. 1 Population and Growth Rates by Province, 1930-1995 1.2 Distribution of Population by Age Group and Sex, 1961-1995 1.3 Employment by Main Industry, 1971-1995 1 .4 Population Distribution by Province and Urban & Rural, 1980-1995 National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1983-1996 2.2 Gross Domestic Product by Industrial Origin at Constant Market Prices, 1983-1996 2.3 Expenditure on GDP at Current Market Prices, 1983-1996 2.4 Expenditure on GDP at Constant Market Prices, 1983-1996 International Trade & Balance of Payments 3. 1 Balance of Payments, 1983/84-1996/97 3.2 Selected Non-oil Exports, 1986-1996 3.3 Value of Exports by Principal Country of Destination, 1985-1996 3.4 Value of Imports by Principal Country of Origin, 1985-1996 External Debt & Capital Flows 4.1 Summary of Public and Publicly Guaranteed External Debt, 1983-1995 4.2 External Public Debt Outstanding as of December 31, 1995 4.3 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt, 1980-2009 Public Finance 5.1 Central Government Budget Summary, 1984/85-1997/98 5.2 Central Government Receipts, 1984/85-1997/98 5.3 Central Government Expenditures, 1984/85-1997/98 5.4 Development Expenditures, 1984/85-1997/98 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. 150 Statistical Annex Monetary Statistics 6.1 Money Supply (MI), 1983-1996 6.2 Changes in Factors Affecting Money Supply, 1983-1996 6.3 Consolidated Balance Sheet of the Monetary System, 1983-1996 6.4 Banking System Credits by Economic Sector, 1983-1996 6.5 Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks, 1984-1996 6.6 Investment Credits by Economic Sector, 1984-1996 6.7 Outstanding Bank Funds in Rupiah and Foreign Exchange by Group of Banks, 1984-1996 6.8 Interest Rates 1985-1996 Agricultural Statistics 7. 1 Principal Agricultural Products by Subsectors, 1983-1995 7.2 Production of Major Crops by Type of Estate, 1984-1995 7.3 Rice-Area Harvested, Production and Yield, 1982-1996 Industrial Statistics 8.1 Index of Manufacturing Production by Selected Industry Group, 1986-1996 8.2 Production of Minerals, 1984-1996 8.3 Crude Oil Production by Company, 1974-1996 8.4. Domestic Sales of Petroleum Products, 1983-1996 Prices 9. 1 Consumer Price Index, 1979-1996 9.2 Inidonesia Wholesale Price Index, 1983-1996 9.3 Domestic Prices of Petroleum Products, 1984-1996 Investment Statistics 10.1 Approved Foreign Investment by Sector, 1983-1996 10.2 Approved Domestic Investment by Sector, 1984-1996 INDONESIA ro COUNTRY ECONOMIC REPOR-T Population And Growth Rates by Province. 1930-1995 Region Population ('000) Average growth rate (%,6 p.a.) 1930 1961 /a 1971 /a 1980 1985 1990 1995 1930-61 1961-71 1971-80 1980-85 1985-90 1990-95 .lava 41.718 63,054 76.086 91.270 .852 107.528 114.733 1 U.9 2.0 1.8 .s 1.3 DKI Jakarta 811 2.973 4.579 6.503 7.885 8.225 9,113 43 44 40 39 08 2 1 West Java 10,586 17,615 21,624 27,454 30,830 35,380 39,207 1 7 2 1 27 23 28 2.1 Central Java 13,706 18,407 21,877 25.373 26,945 28,519 29.653 I o 1 7 1 7 12 1 1 0 8 Dl Yogiakarta 1,559 2,241 2,489 2,751 2,930 2,915 2,917 1 2 1 1 1 1 1.3 -0 I 0.0 East Java 15,056 21,823 25,517 29,189 31,262 32,490 33-844 1 2 16 1 5 14 0.8 08 Sumatra 82s 15.73g 20.809 28.017 32.603 36.436 40.830 L 2U8 3.4 3.1 2.2 Lampung 361 1,668 2,777 4,625 5,905 6,006 6,658 5 5 2 5 8 50 0o 3 2.1 Bengktlu 323 406 519 768 943 1.181 1.409 07 25 45 42 4.6 36 South Sumatra 1.378 2,773 3.441 4,630 5.370 6.278 7,208 2 3 2 2 3.4 3 0 3 2 2.8 Riau 493 1,235 1.642 2,169 2.548 3.283 3.901 30 29 3 1 33 52 35 Jambi 245 744 1,006 1,446 1,745 2,016 2,370 3 6 3 1 4 1 3 8 2 9 3.3 West Simatra. 1,910 2,319 2,793 3,407 3,698 4.001 4,323 06 1.9 22 17 1.6 16 North Sumatra 2,542 4,965 6,622 8,361 9,422 10,254 11.115 22 29 26 24 1 7 16 Aceh 1,003 1.629 2,009 2,611 2.972 3,417 3.848 1 6 21 30 26 28 24 Kalimantan 2.170 4.102 5s 6,723 7.722 9.111 10471 2 3 3.0 LA 3.4 2.8 West Kalimantan 802 1,581 2,020 2.486 2,819 3.237 3.636 2 2 2 5 2 3 2 5 2 8 2 3 Central Kalimnantan 203 497 702 954 1,118 1,398 1,627 29 3.5 35 32 46 3 1 South Kalimantan 836 1,473 1.699 2,065 2.273 2.599 2.893 1.8 14 2 2 1 9 2 7 2 2 East Kalimantan 329 551 734 1,218 1,512 1.877 2.314 17 29 58 44 44 43 Sulawgi 4.231 7.079 8 528 10,49 11.554 12.519 13-73 ,7 1.9 22 Li 1.6 1.9 Central Sulawesi 390 693 914 1,290 1,511 1,705 1.938 19 28 39 32 24 26 North Sulawesi 748 1,310 1,719 2,115 2,313 2,480 2,649 1 8 2.8 23 1.8 14 1 3 South Sulawesi 2,657 4,517 5.181 6,062 6,610 6,983 7,558 1 7 1 4 1 8 1 7 1 1 1.6 Southeast Sulawesi 436 559 714 942 1,120 1.351 1,587 08 2.5 3 1 35 38 33 Other Islands 4X,9 7.106 8.630 11.071 12316 13,654 14,9s8 L 2e 2.8 2.2 L L9 Bali l,101 1,783 2,120 2,470 2,649 2.779 2,896 1 6 17 1 7 1 4 1 0 08 West Nusa Tenggara 1,016 1,808 2,203 2,725 2,995 3.371 3,646 1.9 20 2.4 19 24 1.6 East Nusa Tenggara 1,344 1,967 2,295 2,737 3,061 3,270 3,577 1 2 1.6 2 0 2 3 1 3 1 8 Maluku 579 790 1,089 1,410 1,609 1.853 2.087 1 0 33 29 27 29 24 Inanlyav 179 75% 923 t,174 1,371 B,631 t.943 48 2 27 32 35 36 East Timor n.a na n a 555 631 750 840 n.a na na 2 6 3 5 2.3 Indonesia 60.593 97,085 119,208 147,490 164.047 179,248 i94,755 1.5 2,1 2.4 2.2 1.8 1.7 /a Includes adjustment for the exclusion of rural Irian Jaya. 5 Source: Central Bureau of Statistics, 'Population Census Reports' year 1961. 1971, 1980 and 1990; ( 'Statistical Yearbook of Indonesia 1984'; and 'Intercensal Population Survey (SUPAS)' year 1985 and 1995. - 5.8 INDONESIA COUNTRY ECONOMIC REPORT Oistribution of Population by Age Group end Sex. 1961-1995 ('000) 1961 1971 1980 1985 1990 1995 Age Group Male Female Total Male Female Total Male Female Total IMale Female Total Male Female Total Male Female Total 0-4 8,529 8.649 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 10,475 9.977 20,452 5.9 7,744 7,701 15,445 9,593 9,302 1.s895 10,889 10,446 21,335 11.379 10,739 22,118 11,791 11,290 23.081 11.130 10,659 21,788 10-14 4,353 3,892 8,245 7,406 6,875 14.281 9,179 8,525 17,704 10,783 10,113 20,896 10,998 10,438 21.437 12,038 11,671 23,709 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 10,273 10,006 20,279 20-24 3,480 4,373 7,853 3,627 4,461 8.088 6,010 7,055 13,065 6,385 7.903 14,288 7,662 8,486 16.148 8.037 9,114 17,151 25-34 7,392 8,610 16,002 7,722 9.226 16,948 9,685 9,920 19,605 12,026 12.442 24,468 13,962 14,770 28732 15,060 16,230 31,290 35-44 5,765 5,406 11,171 7,062 7,119 l4.t18 7,876 8,172 16,048 S-538 8,495 17,023 9,778 9.475 19253 12,871 12,351 25,221 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 7,9S3 7,419 15,371 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 5,235 6,142 11.377 65+ 1,183 1.245 2,428 1,450 1.539 2.989 2,200 2,593 4,793 2,619 2.954 5,573 3,213 3,749 6,962 3,859 4,257 8,116 Not stated 60 57 117 7 8 15 11 9 20 4 3 7 3 5 8 0 0 0 Total 47_871 49.214 97.085 58_753 60455 119208 73,332 74J.18 147.490 81645 82402 164.047 89,376 8S9.72 179_48 96930 97.85 194755 Percentage distributio, 0-4 178 176 17.7 16.5 15.8 16 1 148 14.1 144 135 12.8 13 1 12.0 11 3 II 7 10.8 10.2 10.5 5-9 162 15.6 15.9 16.3 15.4 159 14.8 14.1 14.5 13.9 130 135 132 126 12.9 115 10.9 1i 2 10-14 9.1 79 85 12.6 11.4 12.0 12.5 11.5 12.0 13.2 12.3 12.7 12.3 11 6 120 12.4 11.9 122 15-19 81 7.9 5.0 9.6 9.6 96 103 10S 10.4 10.2 100 10.1 107 10.4 106 106 10.2 104 20-24 7.3 8.9 81 62 74 68 8.2 9.5 89 7.8 96 8.7 8.6 94 90 8.3 93 88 25-34 15.4 17.5 16.5 13 1 153 14.2 13.2 13.4 133 14.7 151 149 15.6 164 160 155 16.6 161 35-44 12.0 11.0 II 5 12.0 11.8 119 10.7 11.0 109 105 10.3 10.4 10.9 10.5 107 133 126 13.0 45-54 7.5 7 1 73 7.4 70 72 7.9 7.9 7.9 79 79 79 79 8 1 8.0 82 76 7.9 55-64 4.0 3.8 3.9 3.8 39 3.9 4.5 4.5 4.5 S1 54 5.3 5.2 54 53 54 63 5.8 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 4.0 4.4 4.2 Not stated 01 0.1 0.1 0.0 0.0 00 0.0 0.0 0.0 0.0 0.0 0.0 00 00 00 0.0 0.0 0.0 Tota 100 0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1°000 100.0 1000 100O0 100.0 100.0 00 Source Central Bureau ofStatistics, 'Population Census Reports' year 1961, 1971. 1980 and 1990, 'Statistical Yearbook ofindonesia 1984; and 'intercensal Population Sursey (SUPAS)' vear 1985 and 1995. C-, INDONESIA COUNTRY ECONOMIC REPORT . Employment by Main Industry . 1971-1995 ta 1971 1980 1982 1985 1990 1995 Main Industry million % million % million % million % million % million % Agriculture. forestry. hunting& fishery 26.5 64.2 28.0 54.8 31.6 54.7 34.1 54.6 35.5 50.1 35.2 44.0 Mining and quarrying 0.1 0.2 0.4 0.7 0.4 0.7 0.4 0.7 0.7 1.0 0.6 0.8 Manufacturing 2.7 6.5 4.4 8.5 6.0 10.4 5.8 9.3 8.2 11.6 10.1 12.6 Electricity, gas& water 0.0 0.1 0.1 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.3 Construction 0.7 1.6 1.6 3.1 2.2 3.7 2.1 3.4 2.8 4.0 3.8 4.7 Wholesale and retail trade & restaurants 4.3 10.3 6.6 12.9 8.6 14.8 9.4 15.0 10.6 15.0 13.9 17.3 Transportation. storage & communications 1.0 2.3 1.5 2.9 1.8 3.1 2.0 3.1 2.7 3.8 3.5 4.3 Finance, insurance, real estate & 0.1 0.2 0.2 0.4 0.1 0.2 0.3 0.4 0.5 0.7 0.7 0.8 business services Public services 4.1 10.0 7.7 15.1 7.1 12.3 8.3 13.3 9.7 13.7 12.1 15.1 Others 1.9 4.6 0.7 1.4 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 Total 41 3 100.0 51,2 100.0 57.8 100. 621 5 10. 70.8 100.0 ad1 100. /a Refers to population 10 years of age and above who worked during the week previous to the census. Source: Central Bureau of Statistics. 'Statistical Yearbook of Indonesia' year 1975, 1982, 1985 . 1990: and 'Intercensal Population Survey (SUPAS)' year 1985 and 1995. CD 154 Statistical Annex Table 1.4 INDONESIA COUNTRY ECONOMIC REPORT Pormdation Diribietion by Province and UIrbn & Riral. 1980-1995 1980 1990 1995 Average Growth Rate (% p.a) Region Urban Rural Urban Rural Urban Rural Urban Rural 1980-90 1990-95 1980-90 1990-95 Jam 22,926 68.291 38.335 69,183 47.854 66,880 5,28 4.54 0.13 (0L. DKI Jakarta 6.072 409 8.223 0 9,113 0 3.08 2.08 0.00 0.00 WestJava 5,771 21.679 12,208 23,17() 16,738 22,469 7.78 6.51 0.67 (0.61) Central Java 4,756 20,611 7,695 20,822 9,460 20,194 4.93 4.22 0.10 (0.61) DI Yogyakarta 607 2.143 1.294 1,619 1,693 1,223 7.86 5.52 (2.77) (5.44) EastJava 5,720 23.449 8,916 23,572 10.850 22.994 4.54 4.01 0.05 (0.50) Sumatra 5,481 22.514 9.294 27.129 12.018 28,812 5.42 158 1.88 121 Lampung 577 4,047 747 5,257 1,046 5,612 2.62 6.96 2.65 1.31 Bengkulu 72 695 240 939 362 1,047 12.73 8.57 3.04 2.20 South Sumatra 1,267 3,361 1.839 4,438 2,185 5,023 3.80 3.50 2.82 2.50 Riau 588 1,576 1,047 2,234 1,340 2,560 5.94 5.05 3.55 2.77 Jambi 183 1,262 433 1,581 644 1,726 9.00 8.26 2.28 1.77 West Sumatra 433 2,973 808 3,191 1,083 3,240 6.43 6.04 0.71 0.31 North Sumatra , 2,127 6,224 3,639 6,613 4,568 6,547 5.51 4.65 0.61 (0.20) Aceh 234 2.377 540 2,876 790 3,057 8.74 7.93 1.92 1 23 Kalimantan 1,441 S.276 2,507 6.59 3.183 7.288 5.69 4.89 2.26 2.02 West Kalimantan 417 2.068 643 2,592 788 2,848 4.43 4.14 2.29 1.90 Central Kalimantan 98 856 245 1,151 366 1,262 9.58 8.32 3.00 1.86 South Kalimantan 441 1,622 703 1,894 867 2,027 4.78 4.28 1.56 1.37 East Kalimantan 485 729 915 960 1,162 1,152 6.55 4.89 2.78 3.72 Sulawesi f154 8.746 2.761 9.750 3.612 10.121 5.26 5 1.09 0.7.15 Central Sulawesi 115 1,169 281 1,422 424 1,514 9.31 8.56 1.98 1.26 North Sulawesi 355 1,760 565 1,913 696 1,953 4.76 4.27 0.84 0.41 South Sulawesi 1,096 4,963 1,685 5,295 2,137 5,422 4.40 4.86 0.65 0.47 Southeast Sulawesi 88 854 230 1,120 355 1,232 10.06 9.11 2.75 1.93 Other Island 1.342 9.659 2.494 11,150 3.270 11,717 6.39 5.57 145 1.00 Bali 363 2,106 734 2,043 994 1,902 7.29 6.24 (0.30) (1.42) West Nusa Tenggara 383 2,340 582 2,790 687 2,959 4.26 3.37 1.77 1.18 East Nusa Tenggara 205 2,532 372 , 2.896 497 3,081 6.12 5.94 1.35 1.25 Maluku 153 1.256 352 1,499 513 1,574 8.71 7.79 1.79 0.98 IrianJaya 237 870 395 1,234 500 1.442 5.23 4.83 3.56 3.17 East Timor * 0 555 58 689 80 760 0.00 6.52 2.18 1.97 Indonesia 32.846 114.486 55,391 123,808 69k937 124,818 5.36 4.77 0.79 0.16 Source: Central Bureau of Statistics, 'Statistical Yearbook Of Indonesia 1984'; and SUPAS 1985 and 1995 INOONESIt COUNTRY ECONOMIC REPORT Gross Domatic Product by Industrial Origin st Current Market Pnlces 1983-1996 /a jtp. b0ont 1983 base 3 1993 base 1983 1985 1986 1987 19S8 19S9 1990 1991 1992 1993 1993 1994 1995 1996 a 1. &gdeicmm 17764.7 22512.9 24A76.9 29.116. 34177 t 39.163.9 42.14U.7 424.9 50,733.A 55.745U 5S.63. 6".0715 7763S93 86.2121 Foretry and rfiski ey a.Farmfoodcwps 11,125.9 13,860.2 15,084.9 17,540.2 21,123.8 24,491.9 25,907.5 26,149.2 29,443.0 31,403.5 11 32,093.4 34,941.0 41,958.0 46,298.6 b. Non-foodcrops b 2,670.2 3,693.1 4,224.7 5,118.8 5,633.5 6,196.7 6,666.6 7,6041 8,717.1 9,422.0 1 9,014.8 10,587.2 12,676.4 14,085.7 c. Livestock products 1,754.3 2,427.0 2,639.6 3,014.6 3,544.8 3,814.0 4,368.0 5,126.2 6,040.7 7,025.9 11 6,202.7 7,102.3 7,998.5 9,088.9 d. Forstry 994.2 938.0 1,0006 1,246.8 1,44S.3 1,634.7 1,S54.6 2,01S.0 2,179.6 2,541.4 II 6,267.6 6,897.4 7,390.4 7,839.7 e. Fishery 1,220.1 1,594.6 1,921.1 2,195 6 2,527.5 3,026.6 3,352.0 3,823 3 4,352.7 5,352.7 5,3S4.9 6,543.6 7,616.0 8,899.2 2. Minig & Ouamin 16.107.4 13.570.S il.502S 17.266 17.161.S 21LS22,. 26.119, 31.402. 29.7.2 30.749.1 31.497.3 33.507.1 U.045.1 43.S93.2 a. oil & natural gas 15,103.0 12,583.8 10,501.8 15,979.4 15,524.7 19,283.0 21,789.2 26,126.1 23,383.9 23,168.6 23,120.8 23,070.0 24,639.9 26,398.3 b. Oth. miningi Aquarrying 1,004.4 987.0 1,001.0 3,287.4 1,637.1 2,539.5 4,329.8 5,276.5 6,523.3 7,581.0 II 8,376.5 10,437.1 13,405.2 17,494.9 3. MUnuirctrin 2 15,503.4 17.1U .7 21.15._4 26,252.4 30,323.3 3S.910.2 47.665,. X541.6 67.441,4 73.5X6. 89,240.7 109.3S.0 1330U.4 a. Refinery oil 358.9 1,S63.7 1,915.4 1,819.7 2,025.9 2,14S.1 3,575.0 3,806.5 4,321.6 5,210.7 I 5,540.5 5,855.1 6,599.1 7,060.9 b. LNG 1,871.2 2,423.7 1,968.5 2,097.3 2,948.2 . 3,298.9 3,714.6 4,7t4.4 4,383.6 4,253.3 4,253.3 4,584.0 4,799.5 . 5,050.0 c.Non-oilhBag mfg. 7,666.3 11,216.0 13,300.8 17,233.4 21,278.3 24,8763 31,620.6 39,144.6 47,836.4 57,977.4 63,762.5 78,801.6 97,996.4 120,977.5 4. Eketriaty. gm & wate 313 am9. 641A 746.9 869.0 1.001.3 1.256.1 1.750.2 2,147.7 21714-3 32. 4.577.1 5.624, 6.5C1. 5. Co 42591.2 5.301A 5.13.7 6.087.4 7169.2 S46.2 10.748, U2.9L1 15230S.2 1139 224512. 282016C 34.451,9 421279.2 6. Trade. Hatd & Restauranl 11.41S.7 15.416 17.1121. 21.048 24379.2 2S.S55.5 32.9S9.7 26953. 42.731.5 49.789.4 I 55.297.6 63.85S.7 7J74. U.451.2 a. Retail & wholensle rde 9,810.5 12,962.2 14,235.3 17,561.2 20,388.5 24,441.0 27,711.7 30,769.8 35,645 3 41,496.1 11 44,604.8 531,133.8 60,892.0 70,805.6 b. Hotels& Rest. 1,608.2 2,454.6 2,886.5 3,487.1 3,990.7 4,414.5 5,288.0 6,184.0 7,086.2 8,293.3 10,6928 12,724.9 14,982.0 17,645.6 7. Trmnsort & Commuicadoes 4.09S.1 6.100.3 6.406, 7,42.6 1139.7 S.305.5 1.9S.6 131.9 1 , 1724 207.2L2 23.24S. 27.352.7 3 07. 35.553.7 a. Trnsport 3,693.7 5,538.5 5,769.7 6,638.8 7,227.2 8,280.1 9,693.5 12,3274 15,133.2 18,183.1 20,101.2 23,191 1 25,523.0 29,299.2 b. Communications 404.4 561.8 637.2 803 8 912.5 1,025.4 1,306.1 1,580.6 1,966.1 2,545.1 jj 3,147.7 4,161.6 5,255 3 6,254.5 S. Bank & Aian1 2.35S6 3496,2 4.036,7 4,795.1 5322.4 6.666.7 .2S7.1 1,157.5 12.4 15.256 || 14-005-3 17,.17,5 21232.! 25.531.5 9. Owreenbigof we2in ,5.5 2.775.0 2l976.0 3.349.1 3.736.0 4,151.1 4J2S. 5.924.7 6526.9 7..610.6 11 A1 1239.0 11.122 132371A 10. Otberservices l.712.3 11.923.7 12t620 13.814.3 14,797.3 17,003.7 19.235.5 22.06.9 26,222 W4A4 37n708.9 40.53S.5 47.440.S 54.149. a. Public 5,711.5 7,925 1 8,307.3 8,911.8 9,446.2 11,174.2 12,801.4 14,621.6 17,309.4 22,458.0 11 22,458.1 22,7549 26,555.2 29,531.5 b OtherPrivate& Services/d 3,0008 3,998.6 4,314.6 4,902.5 5,351.1 5,829.5 6,434.1 7,443.3 9,013.9 11,3844 15,250.8 17,783.6 20,885.6 24,617.5 Gross Domestic Products 77,622.8 S6.5J8 102,6S2.5 124.816.9 142,104.9 167,184.7 195,597.2 127,450.1 259.884.5 3021017,9 329.775,9 382,219.7 451230.9 528,956.4 Prelimin ry figures. Very preliminary figures. [a. In 1996, the Govemnment released national accounts series using a 1993 base, based onan up-datc of the 3990 Input-Output Table and reried estim of some sub-sectors. /b. Includes the fonmer smatlholder and estate food crops under the National Accounts with 1983 base. /c. Using 983 base, this line refers only to Ownership of Dwellings. Using the new base, it includes RealE states. /d. Includes Business Services. Source: Central Bureau of Sttistics - c>D INDONESIA I_ COUNTRY ECONOMIC REPORT CI Gross DomaUtic Product by hkdustrial Oridn at Constant Market Pces, 1983-1996 /a (Rp. boilon) n 19S3 base .31 1993 bate 1983 1985 1986 1987 1988 1989 1990 1991 1992 3993 3993 1994 1995 ' 1996 " 1. Agdeclterem Uvestock 17764.7 13m.0 19.79.1 292212.5 2213.7 21.918.0 22.356.9 22.714. 8 24.2255 24.5693 1593.4 59.291.2 6L176.8 62937.2 Foretry and rFierv a. Fanofoode ops 11,125.9 11,985.6 12,286.6 12,415.4 12,974.0 13,488.7 13,558.2 13,484.2 14,526.7 14,355.9 il 32,093.4 31,407.8 32,851.5 32,959.3 b. Non-food crops Ab 2,670.2 3,086.5 3,142.3 3,257.6 3,458.1 3,549.2 3,723.6 3,924.0 4,111.2 4,350.7 II 9,014.8 9,471.6 9,918.3 10,287.9 c.Livestock products 1,754.3 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 II 6,202.7 6,451.4 6,719.8 7,013.8 d. Foresty 994.2 850.7 888.7 967.9 1,013.0 973.8 1,002.7 1,002.9 980.4 996.6 II 6,267.6 6,300.9 6,303.6 6,412.3 e. Fishery 1,220.1 1,340.7 1,417.8 1,471.8 1,556.9 1,662.6 1,744.7 1,835.4 1,942.7 2,052.6 II 5,384.9 5,659.5 5,973.6 6,263.9 2. Minigm & Ou jrrninz 1617.4 15 184490A I6A, 16.365.5 ISJ92.9 16,663.8 17531.7 19317, 18957.7 19.370.3 11 3I1.97.3 33.261.6 3 ,02 2 38.03.5 a. Oil &naturalgs 15,103.0 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 11 23,120.8 23,719.6 23,719.9 23,763.7 b. Oth.mining&quarrying 1,004.4 967.8 1,071.6 1,146.2 1,201.3 1,273.1 1,502.2 1,804.4 2,238.5 2,703.8 8I 8,376.5 9,542.0 11,782.3 14,269.8 3. Mssfsctrai 9.96.4 133430.6 14,678.1 16,2353 18182L3 19,855,7 22.336.9 24.85. 26.963.6 29.4U.4 I 73,556.3 82.649. 91,580,7 10125 a. Refinery oil 358.9 766.6 927.2 937.7 983.2 990.0 1,094.2 1,136.7 1,202.3 1,386.8 II 5,540.5 5,547.9 5,392.1 5,602.7 b. LNG 1,871.2 2,913.5 2,922.8 3,233.2 3,594.5 3,685.1 4,093.1 4,433.1 4,662.7 4,753.3 II 4,253.3 4,720.9 4,390.3 4,437.7 c. Non-oil &gas mfg. 7,666.3 9,745.5 10,828.1 12,064.4 13,606.6 15,180.6 17,149.6 19,015.2 21,098.6 23,544.3 63,762.5 72,380.2 81,798.3 91,642.1 4. Electridt. ma & water a1m 30.9 4298 494.6 5489 615.6 72. 8a.8 928.2 1.022.3 1 3.29.2 3.702.7 4,276.9 4,816.2 5. Cons trution 4,597.2 4,5048, 4.609.e 4,802.9 5,259.1 .8S7S,. 6672.9 7.423.7 8223.6 9.222.5 1 2 ,512. 25.857.5 29,1297 32J10.6 6. Trade. Hotel & Restaurant A1S.7 12.398.6 13398.5 14,356.2 158A88 17,33.1 18.568.6 19.576.2 21.009.1 22SS01 11 55.2976 59,8U.1 564,113.7 69.08J a. Retail & wholesale trade 9,810.5 10,412.0 11,238.0 12,004.9 13,035.4 14,446.8 15,425.3 16,213.5 17,405.8 38,968.8 11 44,604.S 47,619.5 51,290.4 55,285.9 b. Hotels& Rest. 1,608.2 1,986.6 2,160.5 2,351.3 2,621.4 2,891.3 3,143.3 3,362.7 3,603.3 3,881.3 II 10,692.8 3,884.6 12,823.3 13,719.9 7. Trausort & Communications 4,098.1 4.487.0 4668.5 4,938.5 5.211.5 811.S 6367.9 6.869.4 7.554, 8s302.2 II 23.248.9 28,118 27.555.0 29.914,0 a. Transport 3,693.7 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 II 20,101.2 21,400.2 22,965.1 24,451.6 b Communications 4044 455.2 490.3 544.8 5855 660.2 771.5 8667 9536 1,1103 II 3,147.7 3,788.3 4,589.9 5,462.4 S. Banks & ,sEbace 2358.6 3.020.3 3.413.1 3659,3 3752.2 4290.7 4.893.8 5,535.1 6.25S. 7.069.6 l 14.005.3 15.944.6 18.164. 20.480.4 9. OwnershinofDwellinga 2355.5 2.460,9 2.545.1 2,653.9 2762.2 2.877.7 2.9S.8 3,119,7 3,249,3 3.411.1 II 9,695.1 10.086.S 10,643.0 11265.6 Real Estates/cl 10 OtherServices 8.712.3 9,635,3 10.160.7 10.7S.2 11,501,9 12.127,7 12,764.1 13.241. 13,817.2 14.405s3 I37.70S.9 39,154,7 40,967.2 42,83.2 a. Public 5,711.5 6,455.1 6,862.1 7,366.1 7,932.1 8,396.9 8,783.3 9,052.1 9,320.0 9,50S. 1I 22,458.1 22,752.0 23,045.9 23,292.5 b.OtherPrivate&Services/d 3,000.3 3,180.2 3,298.6 3,422.1 3,569.8 3,790.8 3,980.8 4,1894 4,497.2 4,896.5 1 35,250.8 16,402.7 17,9213 19,530.7 Gross Domeatic Product 77,622.8 8082,0 90.080.5 94,517.9 99.981.5 107.436.8 115,217.3 123225.2 1313184.8 139,707.1 II 329,775.9 354,640.7 383,767.8 413,769.0 Preliminary figures. Very preliminary figures. /a In 1996, the Govemment released national accounts series using a 1993 base, based on an up-dale of the 1990 Input-Output Table and refined estimates of some sub-sectors. hb. Includes the former smailholder and estate food crops under the National Accounts with 1983 base. /c. Using I983 base, this line refers only to Ownership of Dwellings. Using the new base, it includes Real Estates. Source: Central Bureau of Statistics. R. ;> INDONESIA COUNTRY ECONOMIC REPORT Expenditure on GDP at Current Market Prices. 1983-1996 /a (Rp. billion) 1983 base 1993 base 1983 1985 1986 1987 1988 1989 1990 1991 1992 1993 1993 1994 1995 1996 ¢# 1. Private consumption 47,063.0 57201.4 63.355.3 71,988.9 81.045 3 88.752.3 106.312.3 125.035.8 135.880.3 158 342.0 11 192.958.4 221.514.0 264.888 7 308.469.2 2. Governmentconsumption 8,077.3 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 11 29.756.7 31.014.0 35.5842 40.695.3 3 Gross fixed investment 19.467.9 22.366.9 24.781 9 30.9802 36.8026 45.659.8 55.633.4 63.893,9 70,820.2 78.243.2 II 86.667.3 105.380.6 129.1770 155.125.0 4. Changes in stock 'b 2,793.5 4.836.7 4.2430 8,1658 8,006.9 13.171.0 15.071.5 16.8478 22.4049 28.2863 10,545.5 15.681.3 17,285.0 17.651 7 5. Exports of goods and nonfactorservices 19.847.0 21.533.9 20,009.9 29,874.3 34.665.6 42.5050 51,953.1 62,263.8 76.3844 85.454.3 88.230.9 100,503.7 119.5935 138.675.2 6. Less: Imports of goods and nonfactor services 19.6259 19.835.2 21.036.2 27,955.8 31.1714 38.601.0 50.945.7 61,375.7 70.3366 78.064.7 i 78.383 0 91.873.8 114.1475 131.659.9 Gross Domestic Product 77,622.8 96.996.8 102.682.6 124,816.9 142,104.8 167.184.7 195.597.2 227,450.2 259,884.5 302.017.8 11 329.775.9 382.219.7 452,380.9 528.956.4 Revised figures. Preliminary figures. /a. In 1996, the Government released national accounts series using a 1993 base. based on an up-date of the 1990 Input-Output Table and refined estimates of some sub-sectors. lb. Residuals. Source: Central Bureau of Statistics. CD 7 iNDONESIA COUNTRY ECONOMIC REPORT Expenditure on GDP at Constant Market Prices, 1983 - 1996 la (Rp. billion) 1983 base il 1993 base 1983 1985 1986 1987 1988 1989 1990 1991 1992 1993 II 1993 1994 1995 * 19961* 1. Privateconsumption 47,063.0 49.448.0 50.530.0 52.200.4 54.225.0 56.475.7 62,053.2 66.584.0 68.484.5 72.476.2 il 192.958.4 202.0375 221.701.3 242.107.5 2. Govemmentconsumption 8,077.3 8,991.2 9,241.3 9,225.7 9.924.3 10.965.3 11.317.3 12.112.7 12,819.0 12,829.7 29,756.7 30.442.6 30.850.6 32.027.6 3. Gross fixed investment 19,467.9 19,615.8 21.421.7 22.596.8 25,200.9 28,568.1 32,731.5 34.867.2 36.589.3 38,671.2 il 86,667.3 98.589,0 112.350.3 126.024.2 4. Changes in stock,b 2.793.5 6,641.3 6.332.8 5.049.1 1[119.9 1,417.1 3.302.8 1.990.4 2.314.2 3.403.7 10.545.5 17,063.2 18.312.1 16,493.8 5. Exports of goods and II nonfactor services 19,847.0 19,494.7 22.460.3 25.744.8 26,015.5 28,733.2 28.862.8 34.600 0 39.674.8 42.296.8 11 88,230.9 96.260.1 104,491.4 111.057.9 6. Less: Imports of goods and II nonfactorservices 19,625.9 19,109.1 19,905.6 20,299.0 16.504.2 18.722.9 23,050.3 26.929.1 28.697.0 29.970.5 il 78.383.0 89.751.6 103,937.9 113.941.9 Gross Domestic Product 77.622.8 85.081.9 90.080.5 94S517.8 99.981L4 107.436.5 115.217,3 123.225.2 131,184.8 139.707.1 l 329.775.8 354,640. 383,767.8 413,769.0 Rivised figures. Preliminary figures. /a. In 1996, the Government released national accounts series using a 1993 base, based on an up-date of the 1990 Input-Output Table and refined estimates of some sub-sectors. lb. Residuals. Source: Central Bureau of Statistics. It INDONESIA COUNTRY ECONOMIC REPORT Balance of Payments, 1983/84 - 1996/97 (US$ million) 1983/84 1984/85 1985 86 1986'87 1987,88 1988,89 1989/90 1990/91 1991/92 1992/93 1993:94 1994,95 1995/96 1996,97/c 1. Netoilexports/a 6.016 5.845 4.004 1.426 2.334 1 535 2.311 2.882 .158 1,327 319 1.372 1175 1,479 2. NetLNGexportsia 1,355 1.971 2.119 I 1.58 1.426 1.525 1.600 LO18 2.404 2.188 2.215 2.415 2.298 3215 3. Non-oil exports (netl -11 522 -9,784 -7.955 -663 5 -5.466 -4919 -5 510 9.751 8914 -6076 -5.474 -7.275 -10.460 -12809 Exports,fob 5,367 5.907 6,175 6,731 9,502 12,184 14.493 15,380 19.008 24,823 27,170 31.716 37.138 39,591 Imports, cif -14,346 -12.921 -11,186 -10,385 -11,763 -13,586 -16.478 -21.609 -24.066 -26,390 -25,410 -30.815 -37.597 -41,502 Services (nonfreight) -2.543 -2.770 -2,944 -2,981 -3.205 -3,517 -3,525 -3.522 -3.856 -4.509 -7.234 -8.176 -10,001 -10.898 4. Currentaccount(142+3) :ILj. 1968 182 4.05 176 -1.859 -1.599 - -.52 -2.561 - -3.488 -6.987 -8.115 5. Official capital disbursements 5793 3519 3432 5.472 4 575 6.588 5.516 5.006 5.600 5.755 6.195 5.651 5.730 5425 IGGI 4,255 3.189 2.751 3.978 4,368 5,603 4,698 4,929 5.292 5,567 5.795 5.651 5,380 5,025 Special assistance 0 0 0 0 0 2,169 1,807 1.542 1,069 886 556 314 205 290 Program aid 84 52 38 48 30 23 6 0 0 0 0 0 0 0 Projectaid 4,171 3,137 2,713 3,930 4,338 3.411 2,885 3,387 4,223 4,681 5,239 5,337 5,175 4,735 ODA 1,902 1.442 1.332 1,932 2,807 2,406 2,300 2.766 3,165 3,078 3.697 3.662 3,540 3.223 Non-ODA 2,269 1,695 1.381 1,998 1,531 1.005 585 621 1,058 1.603 1.542 1.675 1,635 1.512 Others 1,538 330 681 1,494 207 985 818 77 308 188 400 0 350 400 6. Amortization -.0 -1 .292 -1.644 -2.129 3049 -3.763 -3.686 -4.082 -4.182 -4.840 3 -5.546 -5.939 -6163 7. Othercapital(net) "91.1 499 572 1.232 1709 -211 575 5.856 4133 4.284 4.648 4.645 11.672 11.787 Direct investment 193 245 299 252 544 585 722 1,424 1.531 1.705 1,971 2,566 5,357 6,546 Others 998 254 273 980 1,165 -796 -147 4.432 2,602 2.579 2,677 2,079 6,315 5,241 8. Total (4 throueh 7) 1L!82 758 528 524 1529 755 806 3.039 1,199 2.638 2.771 1,262 4.476 2.934 9. Errorsandomissions 24 -91 -498 -1,262 . -1.432 -558 263 -218 -1199 -2.044 -646 -1.825 966 10. Monetary movements /b -2.00 -667 30 738 AM 677 -248 -3302 -981 1439 -727 -616 J-26 -3.900 /a Gross exports less imports of goods and services of the oil and LNG sector respectively. /b A negative amount refers to an accumulation of assets. - /c Preliminary figures. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Selected Non - oil Exports. 1986 - 1996 (US$ million) Value (US $ million) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1. Rubber 720 966 1,296 1,013 885 924 1,039 959 1.268 1:986 1,875 2. Coffee 830 550 560 488 372 355 236 333 750 622 593 3. Palm oil & Cernel 103 169 325 296 253 335 465 535 878 973 1,004 4. Rattan 96 147 119 153 275 275 307 333 354 374 318 5. Foodstuff 95 94 180 248 308 382 467 455 603 670 729 6. Shrimps, Lobster, Tuna 284 352 588 558 705 811 802 902 1,056 1,093 1,045 7. OtherAnimalProducts 83 115 169 231 293 354 445 465 557 585 605 8. Tin 139 147 355 291 176 146 148 92 121 240 300 9. Copper 158 154 233 316 400 146 687 646 879 1.551 1,387 10. Nickel 120 131 367 466 319 512 269 304 334 410 361 11. Aluminum 202 219 288 318 216 304 214 165 204 354 319 12. Iron Steel 83 219 372 424 367 172 381 464 454 522 602 1 3. Plywood 1,004 1,707 2,092 2,325 2,690 356 3,219 4,128 3,650 3,452 3.504 14. Textiles 279 415 597 779 1,084 2.772 2,470 2,311 2,517 2,908 2.626 15. Handicrafts 31 48 156 241 346 1,539 541 663 978 655 502 1 6. Electrical app. 65 48 81 162 237 379 1,017 1,301 1,774 2,724 3,563 1 7. Garments 527 614 822 1,248 1,570 2,203 3,212 3,395 3,096 3,324 3,086 18. Pulp and Paper 33 101 147 199 250 312 401 483 782 1,504 1,353 Others 2,261 2,991 3,844 5,612 5,832 8,292 10,916 12.025 13,493 17,093 16,958 Total Non-oil Exports U52 8,472 11k621 13.919 14,758 18.054 23.624 26,080 29,870 36.210 36,292 Source: Bank Indonesia INDNESI COUNTRY ECONOMIC REPORT Valke of Exoorts by Principal Country of Destination. 1986-1996 (US$ mlllon) 1985 1986 1987 198S 1989 1990 1991 1992 1993 1994 1995 1996 /a Awn 1.981 L 14 1.104 2.9 2.429 2.16 3.197 4.361 4.746 5704 6.070 56 Malaysia 77 82 94 184 220 253 342 488 586 738 987 920 Thiiand Sl 83 S7 151 234 189 267 353 468 401 703 675 Philippincs 199 108 71 87 149 161 168 181 285 365 590 560 Singapore 1,626 1,239 1,449 1,653 1,818 1,902 2,410 3,314 3,372 4,150 3,767 3,786 Brunei 0 2 3 4 8 II 10 25 35 50 24 20 Hongkgng 348 1 420 4 22 618 2 881 901 L321 L4657 1342 ma 8.594 6 .644 7393 l. 21023 10.726 1077 0.761 11.172 10.929 12.288 10-564 OtherdA lA15 L111 1.869 2 2.934 4.035 5.540 6.567 6.980 7.645 2.06 7,914 Afa 160 172 150 212 217 129 394 419 463 638 621 22 LIA 4.040 2.902 3.349 3.074 3.497 1.365 3 .509 4.419 5 230 5 .829 2.122 5.573 Lanad 446 _ 24 10.1 1a 122 122 212 304 322 122 322 OierAmeric 26 112 48 42 _ 102 14 328 469 5 759 640 Austria 142 159 1L 29 387 403 21 746 274 25 211 974 Otr Oceania 11 83 43 1 59 14 32 53 78 67 156 67 gefi 114 .341 L54O L2 2340 29 I.24M 4.144 L222 58124 6615 21.2 United Kingdom 191 197 212 349 384 517 654 844 1,005 1,038 1,129 985 Nethedands 392 453 493 646 681 723 838 1,100 1,086 1,324 1,452 1,373 West Germany 255 334 361 456 493 750 907 978 1,178 1,263 1,382 1,248 Belgium & Luxemburg 45 91 109 177 173 210 258 401 366 409 539 543 France 71 93 102 164 209 286 386 495 500 426 520 457 Denmark 3 6 13 20 36 54 74 97 98 110 III 98 Ireland 2 2 7 17 22 35 43 46 40 37 37 29 Italy 152 152 175 221 234 276 382 583 615 661 784 619 Greece 3 6 3 2 4 9 18 29 46 63 79 71 portgal 0 7 10 22 24 17 14 16 29 39 49 39 Spain 0 0 55 78 80 152 169 255 333 454 535 676 Soviet Uni 71 12 12 21 10 0 42 _ 125 21 124 1in ObeninEr 124 124 133 144 121 183 222 231 1 412 452 525 18.588 14-106 1713 1±211 22162 25.677 22145 36 36.826 40.054 4418 40676 /a As of October 1996 Soce: Cstal Burcan of Slasucs - 12 1 INDONESIA C'_ COUNTRY ECONOMIC REPORT Vaku of hmorts by Pdnclual Coal of Orlh. 1985-1996 1US* nillon) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996/a Awn 962 L120 1241 L1305 1766 2430 2465 2593 26031 22 2319 2.39 Malaysia 52 50 139 276 369 326 407 525 517 579 767 667 Thailand 48 72 75 96 210 183 279 345 235 407 737 982 Philippines 23 2S 82 36 63 649 St 52 57 65 81 S0 Singapore 839 969 947 896 1,122 1,272 1,699 1,670 1,793 1,877 2,368 2,227 Brunei 0.0 1.0 0.0 1.0 2.0 0.0 0.0 1.0 1.0 0.0 0.5 0.5 Hongkong 51 94 104 133 in 271 22 2 247 241 2 1 J88 2644 3.12 2.5912 3.3S6 3 767 5.300 6 327 j9j4 6.248 7 734 2217 7 201 Other Asia 1.727 1.681 .9 24 2.2 3.20 4633 5156 5.496 5972 6S70 8376 77273 Afllie 160 103 153 201 2 170 129 213 140 122 60S 496 L721 1221 .4S3 L 415 19 2218 252L 3.397 3 25522 32 5 3 594 4756 4.210 Canada 19S 214 303 274 in 407 354 459 410 497 Sll 659 Other Americ 191 174 211 224 455 519 597 488 625 755 1 088 1 Austraii 461 413 463 578 925 L1i6 Ill 1.413 1.399 1542 2.016 2.9OS OtherOceania 69 71 10 26 91 115 1I1 136 11 1186 206 2 1 705 .L796 23514 2511 u227 4.060 4705 5400 5651 52.7 7251 6475 United Kingdom 300 342 325 340 360 440 603 719 7S2 710 902 953 Netherlands 215 19 316 258 248 550 505 507 626 564 842 413 WestGermany 677 719 836 887 920 1,502 2,061 2,141 2,072 2,473 2,819 2,405 Belgium & Luxemburg 101 89 142 159 167 232 254 324 340 292 401 332 France 284 281 392 465 406 643 544 816 853 786 1,064 820.7 Denmark I8 26 26 22 31 61 49 124 158 106 105 150.7 Ireland 9 4 6 6 8 74 13 23 21 22 41 34.8 Italy 101 144 237 248 348 410 536 558 523 670 791 998.9 Greece 0 0 2 3. 6 5 8 12 26 61 59.6 Portugal 0 2 6 3 2 6 4 2 2 4 8 4.4 Spain 0 0 66 120 82 136 131 178 262 174 219 303 Soviet Union a 16 45 1 531 48 47 2 220 An 314 Othersin Euro1s 36 435 11 494 611 764 199 296 1517 L2L4 1.61 L2. lola! 109259 102717 12.372 132249 1635S 22443 25.S71 27.279 28325 31.990 408628 351450 /a As of October 1996 Source: Central Bureau of Statistics CD INDONESIA [ COUNTRY ECONOMIC REPORT Summary ot Public and Publicly Guaranteed External Debt. 1983-1995 (US$ million) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Disbursed and outstanding debt (DOD) ib 21.493 22.269 26,778 32.626 40_853 41.200 44.255 48.066 52122 53.958 57.461 63.848 65.347 Bilateral/multilateral 11.750 12.142 14.979 18,473 24,655 26,385 28.133 33.031 37.602 39,994 44.203 49.735 51.231 Other /c 9,743 10.127 11.799 14,153 16,198 14,816 16,121 15.035 14,520 13.965 13,258 14,113 14.116 Commitments 5,687 4.816 4584 4 104 5.995 6.20 7632 6.652 8.855 8035 8.200 7.234 11.147 Bilateral/multilateral 2.294 2.745 2.433 1.923 4.793 4.752 5.655 5.261 6.328 5.159 4.777 5,203 7.417 Other /c 3,393 2,072 2,151 2.182 1.202 1,468 1,977 1,391 2.527 2.876 3.423 2,031 3.730 Gross disbursements 4.980 3.890 3573 4239 5.440 6.502 7-044 5.069 7.101 7.966 7.072 7493 6.765 Bilateral/multilateral 1.734 1.932 1.625 1,900 3.655 4,196 4,276 3,972 5,105 5.013 4,484 4,759 4.239 Other /c 3,246 1958 1,948 2,338 1,785 2.307 2,768 1.097 1.997 2.954 2.588 2,733 Net disbursements 3688 2.290 1.229 R617 "2033 2.080 228 519 2.452 2734 1 225 1L580 1,048 Bilateral/multilateral 1.183 1.366 1.003 1.017 2,523 2.892 2,936 2.387 3.328 3,022 2,339 1,467 1.101 Other /c 2.506 924 225 601 -490 -812 -708 .1.868 -876 -288 -1.114 112 Net resource transfers 2455 661 -416 -455 239 -445 -549 -2.302 -468 -332 -2.030 -1.826 -2725 Bilateral/multilateral 735 804 310 96 1,449 1,592 1,550 799 1.545 1.007 89 -1,006 -1,567 Other /c 1,721 *143 -727 -550 -1.688 -2,037 -2.099 -3.101 -2.013 -1.339 -2.119 -821 Public debt senice 2.524 3.229 3.989 4,693 5.679 6.947 7 592 7,371 7.569 8.298 9.102 9319 9,491 Amortization 1,291 1,600 2,344 2,621 3,408 4.422 4,816 4,550 4.649 5.232 5,847 5,913 5,717 Interest 1,233 1,629 1,645 2,072 2,272 2.525 2,776 2,820 2,920 3.066 3,255 3,406 PublicdebtseVice 2524 3229 8 4693 5.679 6.947 7592 7371 7.569 8298 9.102 9.319 9491 Bilateral/multilateral 999 1,127 1,314 1,804 2,206 2,603 2.726 3,173 3.560 4.006 4.395 5,765 5,806 Other /c 1.525 2,102 2,675 2,889 3,473 4,344 4,867 4.198 4.009 4.293 4,707 3.554 /a Data in this sector refer to public medium and long term loans. Loans with a maturity of less than one year, credits for LNG expansion, LPG and paraxylene projects, and grants are not included, /b End of year. /c Suppliers' credits, loans from financial institutions, export credits, bonds and nationalization only. Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. .I ' 164 Statistical Annex Table 4.2 INDONESIA Page 1 of 2 COUNTRY ECONOMIC REPORT Exteral Public Debt Outstanding as of December 31. 1995 (US$ '000o Type of creditor/ Debt outstanding Major reported creditor country Disbursed Undisbursed Total new commitments Jan 1-Dec 31 1995 Bilateral Loan Australia 675,804 262,650 938,454 174,512 Austria 6,384 - 6,384 0 Belgium 103,132 38,410 141,542 2,904 Brunei 96,040 - 96,040 0 Bulgaria 456 - 456 0 Canada 419,522 163,287 582,809 31,162 China 40,183 9,489 49,672 7,122 Czechoslovakia 15,204 - 15,204 0 Denmark 61,315 581 61,896 0 Egypt, Arab Republic of 637 - 637 0 Finland - 3,618 3,618 3,618 France 1,087,292 163,390 1,250,682 0 German Dem. Rep. 12,504 - 12,504 0 Germany, Fed.Rep.of 3,474,913 1,742,526 5,217,439 1,057,162 Hungary 3,793 - 3,793 0 India 201 - 201 0 Italy 189,808 1,612 191,420 143 Japan 20,762,791 6,660,209 27,423,000 2,801,749 Korea, Republic of 57,467 62,428 119,895 27,219 Kuwait 46,375 8,219 54,594 0 Netherlands 1,067,333 13,561 1,080,894 0 New Zealand 461 - 461 0 Norway 1,355 25,999 27,354 0 Other 19,444 10,000 29,444 10,000 Pakistan 1,548 - 1,548 0 Poland 21,356 - 21,356 0 Romania 3,059 . 3,059 0 Saudi Arabia 57,917 23,222 81,139 0 Singapore - 500,000 500,000 Spain 214,157 82,058 296,215 17,600 Switzerland 36,353 - 36,353 0 United Arab Emirates - 0 0 United Kingdom 46,106 14,840 60,946 0 United States 2,449,244 355,784 2,805,028 227,671 USSR 222,831 - 222,831 0 Yugoslavia 25,597 - 25,597 0 Totalbilateralloans 31.220.582 10141.883 41.362.46 4.30.-B2 ExtCrLedits Austria 861,863 406,076 1,267,939 201,526 Belgium 207,830 103,605 311,435 1,955 Denmark 87,228 531 87,759 0 Finland 28,068 348 28,416 0 France 1,375,010 382,589 1,757,599 60,623 Germany, Fed.Rep.ot 73,962 - 73,962 1,797 Japan 56,834 23,908 80,742 26,855 Netherlands 242,631 274,194 516,825 221,779 Norway - 57,946 57,946 57,850 Singapore - 2,000 2,000 2,000 Spain 40,000 70,600 110,600 10,600 Sweden 81,247 - 81,247 0 Switzerland 388,505 310,695 699,200 0 United Kingdom 1,004,838 648,705 1,653,543 233,355 United States 469,142 73,838 542,980 0 JTQalexual1m2dits 4.917.158 2355,035 7.272.193 818240 Total external public debt 65.347.095 24.86B.750 90.231.672 10.646.611 Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. INDONESIA O COUNTRY ECONOMIC REPORT Service Pavnents Commitmcnt5 Disbursements and Outstanding Amounts of External Public Debt. 1980 - 2009 (US$ 0001 Debt outstanding at Transactions during period Other Changes end of period Disbursed Including Commit- Disburse- Service Payments Cancel- Adjust- only Undisbursed ments ments Principal Interest Total lations ment /a Actual 1980 20,937,697 30,420,359 4,277,373 3,245,505 1,632,494 1,451,811 3,084,305 128,422 1,343,066 1981 22,761,139 33,805,826 4,957,117 3,845,429 1,784,995 1,707,127 3,492,122 118,261 376,631 1982 25,133,280 38,847,056 7,067,267 4,410,336 1,942,084 1,914,070 3,856,154 163,286 -78,480 1983 30,229,384 44,069,191 5,686.879 6,392,696 1,798,027 1,943,231 3,741,258 5,472 1,530,951 1984 32,025,604 46,152,969 4,816,038 4,840,324 2,270,173 2,575,904 4,846,077 197,669 -435,379 1985 36,715,241 52,664,318 4,583,947 4,170,204 3,421,579 2,401,135 5,822,714 26,707 5,863,797 1986 42,916,411 60,291,399 4.104,406 4,829,475 3,285,238 2,698,512 5,983,750 514,815 6,992,912 1987 52,494,917 71,957,065 5,994,820 7,489,770 4,057,399 2,945,073 7,002,472 18,499 10,363,663 1988 54,078,473 72,944,387 6,087,.327 8,179,570 5,296,940 3,345,242 8,642,182 635,419 708,145 1989 59,401,728 77,914,712 7,512,623 9,008,916 5,993,871 3,839,209 9,833,080 307,264 3,758,836 1990 69,871,544 90,040,670 6,691,047 10,024,228 5,968,648 3,977,615 9,946,263 891,611 12,295,169 1991 79,517,725 99,921,005 8,811,206 11,757,797 6,857,802 4,617,488 11,475,290 2,102,942 10,029,874 1992 88,003,749 107,048,794 7,878,659 13,557,635 7,943,980 4,512,766 12,456,746 1,253,333 8,446,465 1993 84,147,604 109,534,010 8,135,208 8,064,247 9,143,545 4,951,472 14,095,017 408,651 3,902,204 1994 96.543,371 117,681,649 7,807.537 12,537,515 8,955,376 5,316,329 14,271,705 402,882 9,698,360 1995 107,831,414 132,715,990 11,146.612 13,728,365 10,199,312 6,219,486 16,418,798 571,506 14,654,262 Projected 1996 102,801.343 118,534,437 ' 8,084,915 13,114,986 5,123,397 18,238,383 1,066,566 1997 98,604,720 108,139,421 - 6.198,394 10,395,017 4,848,157 15,243,174 1998 92,258,825 97,854,850 - 3.938,678 10,284,573 4,495,739 14,780,312 - 3 1999 85.875,882 89,003.355 - 2.468,555 8.851,497 3,913,139 12,764,636 - 2 2000 79,190,974 80,861,357 1,457,110 8,142,018 3,486,292 11,628,310 - 19 2001 73,266,229 74,125,553 - 811,139 6,735,884 2,849,232 9,585,116 - 80 2002 68,119,732 68,501,247 - 477,975 5,624,472 2,339,866 7,964,338 - 167 2003 63,290,873 63,497,539 174,850 5,003,709 2,030,347 7,034,056 2004 58,804,214 58,931,857 - 5,422 4,565,688 1,765,724 6,331,412 -6 2005 54,049,682 54,171,901 - - 4,759,955 1,529,856 6,289.811 - 0 2006 50,189,487 50,311,698 - - 3,860,195 1,247,038 5,107,233 - -7 2007 46,822,702 46,944,891 - - 3,366,786 1,062,487 4,429,273 - -21 2008 43,806,072 43,928,243 - - 3,016,625 903,967 3,920,592 - -22 2009 41,047,621 41,169,790 - 2,758,451 765,692 3,524,143 -1 la This column shows the amount of arithmetic imbalances in the amount outstanding, including undisbursed, from one year to the next. The most common causes of imbalance are changes in exchange rates and transfers of debts from one category to another in the table. (D A) Source: 1BRD Debtor Reporting System, based on data provided by Bank Indonesia. Z5t I INDONESIA COUNTRY ECONOMIC REPORT Central Government Budget Summary. 1984/85-1997/98 (Rp. billion) ;. Actual Btidget 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1. Domesticrevenies 15.931 20,939 17,385 21.731 23.414 31,504 42.193 42.582 48.863 56.113 61,370 66,265 78.203 78,203 2. Routine expendittires/a 9,406 12,006 13,717 17.341 20,935 24.335 29.121 29.050 33.605 40.290 43,180 47,241 56.114 56,114 3. Govermnentsaving(1-21 6.525 8933 3.669 4390 2,479 7.169 13,072 13532 15 257 15.823 18J190 19,025 22.089 22.089 4. Development expenditures 8,375 11,740 9,091 9.770 12.317 15.394 18.251 23,075 26.906 28.428 29.163 30,784 34.503 34.504 5. Balance (3-4) -1849 2 -5.423 -5.380 -9.838 8225 -5.179 -9.542 _1649 -12.605 10973 -11.759 -12.414 2415 Financed by: 6. Program aid 69 69 1,791 685 2,666 966 1,347 1,386 517 0 0 0 0 0 7. Projectaid 1.711 2.760 3,722 4.871 7,458 7,365 7.035 8.590 10,581 10,753 10.983 11.759 12.414 12,414 8. Change in balances (- = increase) 69 -22 -90 -176 -286 -105 -3.203 -433 551 1,852 -10 0 0 1 /a Includes debt service payments. Source: Ministry of Finance INDONESIA COL'NTRY ECONOMIC REPORT Central Government Receipts. 1984/85. 1997/98 (Rp. billion) Actual Badget 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 Taxes on income 12.850 1I.461 9.832 13.460 14,58 19.932 26.992 26.040 290 29.030 3.684 34.757 40-.675 47.126 Income tax 2,042 2,071 2.603 2.876 4,432 5,755 8.250 9.727 12,516 14,759 18,350 19.239 23,708 29,118 Corporate tax on oil/a 10,430 12,925 6.687 10,083 9.536 13,381 17.740 15,070 15,331 12,503 13.399 13.276 14,120 14.871 IPEDA/property tax /b 213 165 239 212 362 604 786 944 1.107 1.485 1,632 1.923 2,277 2,505 Others/c 165 301 303 289 256 191 217 299 252 283 303 319 570 633 Taxes on domestic consumption 1.746 3.071 3.988 4222 5.778 7468 9919 11.061 12.984 16.569 17.088 19.954 25,821 22.038 Sales/value added tax 874 2.191 2.986 3,826 4,367 5,986 8,119 9.146 10,742 13,944 14,087 16,655 21,788 24,601 Excises 873 880 1,003 1,105 1,410 1,482 1,800 1,915 2,242 2.626 3,001 3,299 4,033 4,436 Taxes on international trade 627 723 1.350 i 622 1.517 2.066 2.840 2.888 3.232 3.569 L3a 3.588 3,611 32 Importdtities 541 674 1,269 1,442 1,376 1,892 2,800 2,871 3,223 3.555 3,218 3.543 3,451 3,322 Exporttax 86 48 80 180 141 173 40 17 9 14 120 44 160 tOO Nontax receints 708S1.685 2.216 1.717 1533 2.039 2442 2.593 3.440 6.945 726 7.966 7268 8,226 Domestic revenue 15.930 2093 17.385 1.731 23.414 3504 42.193 42.582 48.863 6113 61370 66265 77.375 87.812 Develooment funds 1,781 2.830 Li.51 5556 10.124 8.330 8.382 9.975 11.098 11.193 10983 11 759 12.414 i2M6 Program aid 69 69 1.791 685 2,666 966 1,347 1,386 517 441 0 0 0 0 Projectaid/d 1,711 2,760 3.722 4.871 7,458 7,365 7,035 8,590 10,581 10.753 10.983 11,759 12,414 13,026 Total revenues 17.711 M2UM 2 2 3 3 5 5.57 59.961 6 ,253 78.024 S9.789 100,8 /a Since 1984/85. witholding tax eliminated as separate category atid coinbined witlh income tax. /b Since January 1986, Ipeda replaced by land and building tax. /c Classification changed to other tax (included in niscellaneous levies wvhich consist of other taxes and stamp dtity). Jd Includes commercial bank and suppliers' credits for development projects. Source: Ministry of Finance. (P INWONESIA1 COUNTRY ECONOMIC REPORT Cantrd Govemment Expenditures. 1984/85 -1997/98 *Rp. billion) Actual Budget 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1990/92 1992/93 1993194 1994/95 1995/96 1996/97 1997/98 Personnel expenditures 3141 3930 4.438 4 5489 6206 7088 8.166 9.554 1.14S 13.069 15.347 18.281 18.281 Wages and salaries 2,259 3,005 3,459 3.499 4.209 4,829 5,598 6,352 7.595 9.145 10.490 12.416 14.763 14.763 Rice allowance 416 393 415 447 569 589 643 930 891 834 1,038 1,140 1.194 1.194 Food allowance 287 294 288 296 359 373 384 393 479 493 801 835 1.122 1.122 Other too 158 177 177 203 243 265 281 315 418 396 511 710 710 External 79 S0 100 127 149 172 199 211 274 255 344 445 492 492 Material expenditures 1165 1.3 .311 1.296 227 1.704 I842 2.8 929 3032 4.29Z 4745 6589 6589 Transfers to regions 1.787 '496 2769 2811 3.011 3.577 3 888 .76 5.384 6.909 7.18 809 849 I_0.2 103012 Debt service payments 2776 3d323 5Z08 8157 11040 1l924 1.2. 16 12838 14524 17.163 18422 18.215 2027 20227 Internal 30 20 0 0 78 149 239 240 275 121 204 319 291 291 External 2.746 3,303 5,058 8,157 10.962 11.776 12.577 12.598 14.249 17,042 18.218 17,896 19.936 19.936 Oil_subsidv 508 450 Q 402 82 707 3.306 930 692 L?80 0 0 0 0 Others 30 457 140 129 86 217 182 411 524 761 204 524 1,005 1.005 Routine expenditures 9.406 12.006 132717 17341 20.935 24,335 2231 i 29050 33.605 40.290 43 180 47.241 55.109 55.109 evelopment expenditures/a 8.375 11740 9.091 9770 11 15.394 j 23075 26.906 28428 29163 30784 56114 56114 Total expenditures 17781 23.747 22.808 27.11 33.252 39.729 47.372 52124 60.512 68.718 72.343 78024 111.222 111.222 /a For details see Tables 5.4. Sourcc: Ministry of Finance. INDONESIA 0 COUNTRY ECONOMIC REiPORT ; Development Expenditures. 1984/85.- .199LBi lRp. billion) * - Actual Budget 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1. Deparanments/a 2,680 4.861 2660 3151 2365 3154 5134 7.484 10.033 10916 9.47 10.910 12.722 14.915 2. General INPRES programs 540 563 567 656 S01 721 LQ62 1,414 I.89 2.049 4l34 4,22S 5.268 6.095 Subsidiesto provinces 253 280 293 281 325 319 482 582 700 741 1.318 1,277 /b 1,424 1,662 Subsidies to Regencies 195 185 188 262 361 270 400 583 802 916 2.554 2.525 /c 2,905 3,484 Suibsidies to villages 93 99 86 113 116 132 181 249 326 392 432 426 939 949 Sectoral INPRES oroerams 824 746 760 2812 29 530 981 1 840 224 21.34 949 868 I 121 1536 Primarv schools 565 572 536 498 241 130 100 515 645 595 538 499 /d 595 928 Health 71 94 109 93 90 10! 174 267 316 340 412 370 526 608 Markets/e 26 5 11 3 4 8 13 5 2 3 0 0 0 0 Replanting'reforestration /f 61 4 30 34 16 16 33 74 96 III 0 0 0 0 Roads/a 101 71 74 184 175 274 661 979 1.165 1-084 0 0 0 0 4 P1B 166 117 215 169 '-7 543 688 859 923 1334 1485 1.750 2.072 2280 5. Irian Ja%a and East Timor 3 24 7 5 6 0 0 0 0 Q 0 0 0 0 Total (2-5) = Transfer to local covetnments 1.534 1.449 1.550 1.642 1660 1.794 2730 4113 5036 5 516 6.738 6.847 8.461 9.910 6. Ferilizersubsidy 732 917 467 763 2QQ .L5 265 300 75 175 4 14.3 137 12 7. GoCensme tcapital anicipation(PMPI 208 762 232 25 177 85 644 988 138 381 205 50 55 177 8. Others 1.502 1.0_7 498 293 5_7 1 07 2173 1 600 93 689 905 601 714 763 Total(I -8) 6.655 9.016 5.407 5.874 4.974 8.060 10.946 14.485 16.325 17.676 17.783 18.551 22.089 25902 9. Proiect aid 1.781 2830 5513 5,556 0L24 8, 33 8382 9.975 11.098 1073 1093 11.759 12.414 13.026 Total (I -91 8.436 11845 10.920 11.429 15.098 16.390 19.328 24460 27.423 28.428 28.766 30310 3 38.928 10. Residual ballance /b -61 -105 129 .1659 -2.781 -996 -1.077 1.U86 -517 Q 397 474 2 -424 ( - = increases) /a Inclsided Defence Agency /b Included subsidies for operational fund and irrigation maintanance (provinces). /c Included subsidies for Planning, Development Control and Rehabilitation of Community Health Centre /d Excluded subsidies for preliminary school reconstruction (accomodated to subsidies to regencies). /e Since 1994i1995 subsidies for market is accomodated to subsidies to Regencies /f Since 1994 1995 subsidies for replanting is accomodated to subsidies to regencies. and for Reboisation accomodated to subsidies to Villages /g Since 1994/1995 Road subsidies are accomodated to Province and Regency subsidies CA /h Differ enice between total development expenditure in this table and total indicated in Central table 5, I! Source: Ministry of Finance (isS Statistical Annex 171 Table 6.1 INDONESIA COUNTRY ECONOMIC REPORT Money Supply (M1). 1983 - 1996 (Rp. billion) End of Total Currency Demand deposits Change over period Period Amount (%) Amount (%/0) Amount (%) 1983 7,569 3,333 44 4,236 56 448 6.3 1984 8,581 3,712 43 4,869 57 1,012 13.4 1985 10,104 4,440 44 5,664 56 1,523 17.7 1986 11,677 5,338 46 6,339 54 1,573 15.6 1987 12,685 5,782 46 6,903 54 1,008 8.6 1988 14,392 6,246 43 8,146 57 1,707 13.5 1989 20,114 7,426 37 12,688 63 5,722 39.8 1990 23,819 9,094 38 14,725 62 3,705 18.4 1991 26,342 9,346 35 16,996 65 2,523 10.6 1992 28,779 11,478 40 17,301 60 2,437 9.3 1993 36,805 14,431 39 22,374 61 8,026 27.9 1994 45,374 18,634 41 26,740 59 8,569 23.3 1995 52,677 20,807 39 31,870 61 7,303 16.1 1996 64,089 22,487 35 41,602 65 11,412 21.7 Source: Bank Indonesia. 172 Statistical Annex Table 6.2 INDONESIA COUNTRY ECONOMIC REPORT Changes in Factors Affecting Money Supply. 1983-1996 (Rp. billion) Public Sector Claims Net claims on official Total change in Broad Net on entities Claims on Net Money Supply (M2) tund of' foreign Central & public business & other Amount Percentage period assets Government enterprises individuals items (%) 1983/a 1.180 -1,286 -42 2,183 1,553 3.588 32.4 1984 3,531 -3,359 190 3,646 -734 3,274 22.3 1985 1.750 -214 511 3.333 -165 5,216 29.1 1986 /b 1,870 469 252 4,547 -2,630 4,508 19.5 1987 2.444 1,538 728 6,245 -4,732 6,224 22.5 1988 -549 247 659 11,069 -3,313 8,113 23.9 1989 409 -1.175 1,444 22.131 -6,104 16,707 39.8 1990 -2,171 -3,877 -921 35.809 -2,914 25,925 44.2 1991 7.430 -1.356 105 20.263 -12,013 14.429 17.0 1992 7,013 -1.292 492 15,257 -1.475 19,995 20.2 1993 -934 731 1,505 30,230 -5.383 26.149 22.0 1994 -4,428 -4,686 -485 37.845 1,064 29.310 20.1 1995 7.354 -7.472 1,305 47.504 -565 48,126 27.6 1996 18.015 -2,757 4,626 51,768 -5,658 65.994 29.6 /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. /h Includes revaluation adjustment due to devaluation on September 12, 1986. Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Consolidated Balance Sheet of the Monetary System, 1983-1996 (Rp. billion) Endofperiod 1983/a 1984 1985 1986/b 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Net forcian assets 8837 12,368 14.119 15-989 18,433 17,884 18.293 16J122 23.621 30.634 29,700 25.272 32.627 50.641 Domestic credit 9.744 10345 14.325 19.323 26729 39.802 62.131 93.118 110-285 126.612 158.934 191.629 233.088 286.725 Claims on public sector Central govemment -5,739 -9.098 -9,319 -8.798 -8.366 -7,036 -8.309 -12,202 -13.581 -14,873 -14,142 -18.828 -26,300 -29.057 Claims on official entities and public enterprises 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 15,581 Government-blocked account -240.0 -116.0 -52.0 -81.0 -84.0 -66.0 -40.0 -24.0 0.0 0.0 0.0 0.0 0.0 0.0 Claims on private enterprises and individuals 10.683 14.329 17.662 22.209 28.454 39.523 61.655 97.440 115.858 132.984 164.799 202.432 4 843 3 300.201 Assets = liabilities 18,581 22.713 28.444 35.312 45.162 57,686 80,424 109.240 133.906 157.246 188.634 216,901 265.715 337.366 Import deposits 242 218 268 402 424 684 632 1,048 966 890 1,699 1,540 1,779 2,099 Netotheritems 3,676 4,558 5,291 7,651 11,277 15,688 21,087 23.562 33.881 37,303 41,733 40,849 41,298 46,635 Monev and quasirmonev 14 663 17,937 23,153 27.661 33.885 41998 58.705 84,60 99,059 119.053 145.202 174.512 222638 288,632 Money 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 64.089 Currency 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 22,487 Demand deposits 4.236 4,869 5.664 6,339 6,903 8,146 12,688 14,725 16,995 17,301 22.374 26,740 31,870 41,602 Quasi money 7,094 9.356 13,049 15.984 21,200 27.606 38.591 60.811 72,718 90.274 108.397 129,138 169,961 224,543 /a Includes changes resulting from the exchange rate adjustment of March 30, 1983 from Rp. 702.5010 Rp. 970 per US$. /b Includes changzes resulting from the exchange rate adjustment on September 12. 1986 from Rp 1,1 34 to Rp 1,644 per US$. Source: Bank Indonesia. INDONESiAt COUNTRY ECONOMIC REPORT Banking System Credits by Economic Sector. 1983-1996 /a (Rp. billion) Sectors 1983 /f 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993/h 1994 1995 1996 Agficuluire 1.226 1318 1.656 2.097 657 3648 5.350 350 8.465 10.281 12.057 13.860 15.525 17.630 In rupiah 1,226 1,318 1,656 2,097 2.631 3,610 5,281 5,281 7,979 9,173 10,368 12,026 13,661 15,158 In foreign exchange 0 0 0 0 26 38 69 69 486 1.108 1,689 1,834 1,864 2,472 Mining /b 806 384 258 394 381 144 591 591 743 762 777 799 913 1.693 In rupiah 806 384 258 394 371 124 456 456 614 605 416 359 434 716 In foreign exchange 0 0 0 0 10 20 135 135 129 157 361 440 479 977 Manufacturingindusuyv/c 5.207 6667 7592 9.005 10.912 14956 20.333 20,333 33.131 37.458 51]432 60.211 7.088 78.850 Inrupiah 4.595 6.205 7.069 8,839 10.503 13.994 17,654 17.654 24.828 26.197 36.334 42,236 48,476 51,984 In foreign exchange 612 462 523 166 409 962 2,679 2.679 8.303 11.261 15,098 17975 23.612 26,866 Traded 51.22 6344 7.255 8.399 10.247 13.888 20.109 20.109 33.049 32.944 37.794 44372 54.224 70.586 In rupiah 4.781 6.299 7,214 8,329 10.065 13,682 19,342 19,342 28,842 28,100 31,470 36,840 43.608 55,763 In foreign exchange 351 45 41 70 182 206 767 767 4.207 4,844 6,324 7,532 10,616 14,823 Servicerenderingindustry/e 2277 3.169 4.18 4.345 5.460 7.382 I1424 10.424 20,066 25.899 35.824 50.8 66.584 91.655 Inrupiah 2,253 3.088 4,047 4,130 5,151 6,917 9,600 9,600 16.683 21,979 30.167 42,453 57,432 78,392 In foreign exchange 24 81 136 215 309 465 824 824 3.383 3.920 5,657 8,353 9,152 13,263 Others 651 931 i 213 2.162 3.187 3.721 L 866 I 866 17.371 15.574 12.387 18.832 25277 32.507 In rupiah 651 929 1,210 2,156 3.143 3.667 1,709 1,709 16.326 14,653 12.374 18.824 25.265 32.478 Inforeignexchange 0 2 3 6 44 54 157 157 1.045 921 13 8 12 29 Total 15.299 18813 22.157 26,402 32,844 43.739 58.673 58.673 112.825 122.918 150,271 188.880 234.611 292.921 Inrupiah 14,312 18,223 21,454 25,945 31,864 41,994 54,042 54,042 95,272 100,707 121,129 152,738 188.876 234.491 In foreign exchange 987 590 703 457 980 1.745 4,631 4,631 17,553 22,211 29.142 36,142 45,735 58.430 /a Credits outstanding end of period. Includes investment credits. KIK and KMKP. Excludes interbank credits, credits to central government and to nomesidents, 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 International Standard Industrial Classification (ISIC 1968). Starting 1980. credits for construction which were previously included in manufacturing industry are now included in service-rendering industy. /d Includes credits for food procurement and hotel projects. /e Credits for electricity, gas and water supply are included in service-rendering industry sector. /f Includes foreign exchange revaluation amounting to Rp. 251 billion. /g Includes revaluation adjustment due to the devaluation of September 12, 1986. cr _ Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC REPORT Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks. 1984 - 1996 la (Rp. billion) 1984 1985 1986 /b 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Bank IndonoA direct credits /c 680 94 1.144 1.347 1.547 696 718 783 771 158 130 71 26 In rupiah 870 964 1,144 1,347 1,547 696 718 783 771 158 130 71 26 In foreignexchange 0 0 0 0 0 0 0 0 0 0 0 0 0 State commercial banks /d 13-345 15.374 17.782 21-676 28.631 39579 55.826 59861 68.236 71.760 80010 93.480 108.925 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 93,051 In foreign exchange 386 449 71 451 1,017 2,428 5,178 7,233 10,103 11,805 11,925 14,086 15,874 National Private Banks/e 3.552 4.746 6.272 8.423 11.910 20.216 34.975 44.452 45.352 63.995 90.504 116.886 156 412 Inrupiah 3,480 4,631 6,061 8,175 11,536 18,955 31,458 39,467 39,685 55,076 76,506 99,466 130,194 In foreign exchange 72 115 211 248 374 1,261 3,517 4,985 5,667 8,919 13,998 17,420 26,218 ForeignBAnks L046 1.073 L204 1.406 1 91 3.115 6.177 8.512 2933 14.733 18.366 24.245 27.584 In rupiah 914 934 1,029 1,122 1,559 2,173 3,039 3,177 2,889 6,315 8,147 10,016 11,245 In foreign exchange 132 139 175 284 354 942 3,138 5,335 6,441 8,418 10,219 14,229 16,339 Total i88 22.157 26.402 328 44.001 63606 299 113.608 123.689 150.429 189,010 234.682 292.921 In rupiah 18,223 21,454 25,945 31,869 42,256 58,975 85,863 96,055 101,478 121,287 152,868 188,947 234,490 In foreign exchange 590 703 457 983 1,745 4,631 11,833 17,553 22,211 29,142 36,142 45,735 58,431 /a Credits outstanding at end of period. Includes investment credits, KIK and KMP. Excludes interbank credits, credits to Central Govemment 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. Source: Bank Indonesia. 0' 1°I uI INDONESIA COUNTRY ECONOMIC REPORT Investment Credits by Economic Sector. 1984-1996 la (Rp. billion) Endofperiod 1984 1985 1986 1987 1988 1989 1990 1991 /c 1992 1993 /d 1994 1995 1996 Credits outstanding/b 3.802 5.471 6.486 7.635 10422 14,292 19.961 25.748 35.994 42.713 47.136 59274 71.419 Agriculture 555 948 1,292 1,690 2,284 3,357 4,361 5,450 7,050 8,730 9,865 10,564 11,737 Mining 178 224 367 342 372 358 372 459 459 310 196 256 405 Manufacturing industry 2,102 2,781 3,098 3,567 4,817 6,424 8,866 10,484 15,416 17,371 19,516 23,159 24,248 Trade 168 396 443 435 632 1,022 1,859 3,372 4,099 7,192 6,154 8,468 11,891 Service rendering industry 770 1,098 1,215 1,560 2,249 3,010 4,060 5,032 7,896 9,110 11,405 16,827 22,162 Others 29 24 71 41 68 121 443 951 1,074 0 0 0 976 /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 credits to the Central Government 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. 0% INDONESIA i COUNTRY ECONOMIC REPORT Outstanding Bank Funds in Rupiah and Foreign Exchange by Group of Banks. 1984-1996 Ia_ (Rp. billion) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Deposits State Banks 10,035 12,916 15,193 18,111 22,527 29,731 40,638 41,812 52,600 61,684 64,283 75,920 90,434 Private Banks 3,020 4,550 5,435 8,040 11,167 19,655 33,951 43,143 51,079 67,542 88,926 117,451 164,979 Regional Development Banks 700 825 797 954 1,300 1,674 2,550 3,228 3,697 4,773 6,183 7,812 8,522 Foreign Banks 1,743 1,883 2,086 2,226 2,516 3,315 6,016 6,935 7,474 8,681 11,015 13,581 17,783 Total 15.498 20 174 23.511 29.331 37.510 54375 83155 95.118 114,850 142,680 170.407 214.764 281,718 Share in Total Deposits State Banks 64.8 64.0 64.6 61.7 60.1 54.7 48.9 44.0 45.8 43.2 37.7 35.4 32.1 Private Banks 19.5 22.6 23.1 27.4 29.8 36.1 40.8 45.4 44.5 47.3 52.2 54.7 58.6 Regional Development Banks 4.5 4.1 3.4 3.3 3.5 3.1 3.1 3.4 3.2 3.3 3.6 3.6 3.0 Foreign Banks 11.2 9.3 8.9 7.6 6.7 6.1 7.2 7.3 6.5 6.1 6.5 6.3 6.3 Annual Growth Rate in Deposits State Banks 19.7 28.7 17.6 19.2 24.4 32.0 36.7 2.9 25.8 17.3 4.2 18.1 19.1 Private Banks 42.5 50.7 19.5 47.9 38.9 76.0 72.7 27.1 18.4 32.2 31.7 32.1 40.5 Regional Development Banks 40.6 17.9 -3.4 19.7 36.3 28.8 52.3 26.6 14.5 29.1 29.5 26.3 9.1 Foreign Banks 24.7 8.0 10.8 6.7 13.0 31.8 81.5 15.3 7.8 16.1 26.9 23.3 30.9 ToIal 2& 302 16 i 24 2 451 52 14 2412 12A 2419 312 /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. INDONESIPA." COUNTRY ECONOMIC REPORT Interest Rates 1985-1996 la 1% p.a) Time Deposits Year SBI's SBPU's Interbank Discount Discount State Bank Private National Bank /a Call Money Rate Rate Lessthan 3 6 12 24 Less than 3 6 12 24 /b /c /c 3 mos /d mos mos mos mos 3 mos /f mos mos mos mos 1985 n.a n.a n.a 13.4 14.6 16.0 17.8 18.3 15.6 17.2 18.9 20.8 21.8 1986 n.a n.a n.a 13.3 14.2 14.7 15.2 16.0 15.4 16.1 17.0 18.3 21.6 1987 n.a n.a n.a 15.5 17.0 17.3 17.0 17.4 17.8 19.2 20.1 19.8 20.5 1988 14.22 n.a n.a 15.8 16.2 18.2 17.8 16.8 20.8 20.5 21.0 20.9 21.2 1989 12.02 12.10-14.90 n.a 15.1 16.2 17.2 18.1 18.8 17.5 18.3 19.3 20.2 20.8 1990 21.20 17.45 20.54 21.2 20.6 19.4 18.1 18.5 22.6 21.4 20.5 19.8 21.0 1991 14.91 17.37-20.17 18.75-25.74 20.0 21.3 22.3 22.5 21.0 21.8 22.6 23.3 23.4 18.6 1992 11.95 13.00-17.00 13.50-18.50 17.4 18.6 19.8 20.9 21.0 19.2 20.4 21.2 21.7 18.7 1993 8.74 7.99-12.00 10.09-13.39 11.2 10.8 14.3 15.7 18.5 14.8 15.8 16.6 17.1 17.4 1994 9.74 7.65-11.48 11.00-15.50 9.7 9.9 11.6 12.1 14.1 13.6 13.8 13.8 14.0 17.8 1995 13.56 11.81-13.53 14.89-15.75 14.4 13.9 14.8 13.9 14.0 17.4 17.4 17.2 16.0 16.2 1996 14.06 11.76-13.00 15.30-15.75 15.3 15.0 16.3 16.0 15.2 17.5 17.8 17.7 17.3 16.6 /a Weighted average rate of interest at selected banks. lb Ovemight interest rate on Interbank Call Money transactions recorded at the Jakarta Clearing House. /c Seven days Money market securities (SBPUs) and Bank Indonesia Certificate transactions /d One month time deposit rate used as representative rate. Source: Bank Indonesia. O Z 00 P INDONESIA COUNTRY ECONOMIC REPORT Principal Agricultural Products by Subsectors. 1983-1995 ('000 tons) Product 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 /a t Food cEops Rice/b 35,302 38,134 39,033 39,726 40,078 41,676 44,726 45,179 44,689 48,240 48,181 46,642 49,744 Corn 5,087 5,288 4,330 5,920 5,155 6,652 6,193 6,734 6,256 7,995 6,460 6,869 8,246 Cassava 12,103 14,167 14,037 13,312 14,356 15,471 17,117 15,830 15,954 16,516 17,285 15,729 15,441 Sweet potato 2,213 2,156 2,161 2,091 2,013 2,159 2,224 1,971 2,039 2,171 2,088 1,845 2,171 Soya beans (shelled) 536 769 870 1,227 1,161 1,270 1,315 1,487 1,555 1,870 1,709 1,565 1,680 Groundnuts (shelled) 460 535 528 642 533 589 620 651 652 739 639 632 760 Saltwater fish 1,682 1,713 1,822 1,923 2,017 2,170 2,272 2,370 2,505 2,692 2,886 3,080 3,275 Freshwater fish 533 548 573 607 653 711 765 793 807 851 909 900 921 Meat and dairy Meat 650 742 808 860 895 937 971 1,028 1,099 1,239 1,378 1,493 1,564 Eggs 319 355 370 432 452 443 456 484 510 572 573 689 729 Milk /c 143 179 192 220 235 265 338 346 360 367 388 427 433 Cash crops Rubber 1,007 1,033 1,055 1,109 1,130 1,176 1,209 1,275 1,284 1,399 1,476 1,499 1,535 Palm oil 979 1,147 1,243 1,350 1,506 1,800 1,965 2,413 2,658 3,266 3,421 4,008 4,350 Coconut/copra 1,604 1,750 1,920 2,114 2,075 2,139 2,208 2,332 2,337 2,455 2,606 2,649 2,690 Coffee 305 315 311 339 380 386 401 413 419 437 439 450 455 Tea 110 126 127 136 126 137 141 155 159 154 165 139 155 Cloves 41 49 42 55 58 61 55 66 84 73 67 78 77 Pepper 46 46 41 40 49 56 68 70 69 65 66 54 54 Tobacco 109 108 161 164 113 116 81 156 161 112 121 130 133 Cane sugar 1,628 1,810 1,899 1,894 2,176 1,918 2,108 2,119 2,253 2,307 2,330 2,454 2,354 Cotton /d 14 12 45 53 48 39,731 38,374 32,857 13,443 12,670 13,772 14 19 Foresty / Teakwood 718 758 777 798 689 725 725 780 778 780 745 805 902 Othertimber 24,180 27,716 24,277 27,403 28,255 28,485 24,409 25,312 23,892 28,267 26,848 24,027 24,796 /a Preliminary figures. /b Paddy production starting 1983. /c In million of liters. /d In tons. Starting 1994, in thousand tons. S /c In '000 cubic meters. Source: Supplement to the Presidenrfs Report to Paliament, August 16, 1996. _1 180 Statistical Annex Table 7.2 INDONESA COUNTRY ECONOMIC REPORT Productlon of Major Crops by Type of Estate. 1984-1995 ('000 tons) Product 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 a SmAUhode Rubber 704 720 763 795 839 853 913 919 1,030 1,102 1,139 1,156 Coconut/copr 1,737 1,905 2,098 2,055 2,117 2,193 2,313 2,317 2,426 2,558 2,601 2,639 Coffee 291 288 316 359 362 377 384 390 409 410 422 426 Cloves 48 41 53 57 59 53 64 82 70 66 76 75 Tea 24 30 31 25 26 25 31 32 32 37 30 34 Sugar 1,397 1,450 1,417 1,744 1,499 1,621 1,609 1,610 1,653 1,685 1,673 1,620 Tobacco 104 156 159 110 113 77 152 157 110 119 128 130 Pepper 46 41 40 49 56 68 70 69 65 66 54 54 Cotton 12 45 53 48 40 38 33 13 13 14 14 19 Palm oil 0 0 0 0 0 0 0 0 0 0 0 0 Palm kernel 0 0 0 0 0 0 0 0 0 0 0 0 Private estat Rubber 121 124 150 135 143 141 145 146 163 166 172 173 CoconutVcopra 13 15 16 20 22 15 19 20 29 30 27 30 Coffee 9 10 10 8 10 11 13 13 11 12 11 11 cloves I 1 2 1 2 2 2 2 2 2 2 2 Tea 18 17 18 21 23 26 29 30 28 33 31 35 Sugar 83 106 106 109 103 181 204 257 178 251 272 277 Tobacco 0 0 0 0 0 0 0 0 - ' ' - Pepper 0 0 0 0 0 0 0 0 Cotton 0 0 0 0 0 0 0 0 Palm oil 329 339 385 352 435 597 789 884 1,077 1,370 1,597 1,773 Palm kernel 69 71 73 76 87 119 179 181 172 209 296 318 Govermentestate Rubber 208 211 196 200 194 215 217 219 205 208 18S 201 Coconutlcopra 0 0 0 0 0 0 0 0 0 0 0 0 Coffee 15 13 13 13 14 13 16 16 17 17 18 18 cloves 0 0 0 0 0 0 0 0 0 0 0 0 Tea 84 80 87 80 88 90 95 97 94 95 78 S6 Sugar 330 343 371 323 316 306 306 386 476 394 509 458 Tobacco 4 5 5 3 3 4 4 4 2 2 2 2 Pepper 0 0 0 0 0 0 0 0 0 0 0 0 Coonon 0 0 0 0 0 0 0 0 0 0 0 0 Palm oil 818 904 965 1,154 1,365 1,368 1,624 1,774 2,189 2,051 1,572 1,573 Plm kernel 178 187 193 243 273 274 325 370 388 393 339 341 Total Rubber 1,033 1,055 1,109 1,130 1,176 1,209 1,275 1,284 1,399 1,476 1,499 1,535 Coconut/copn 1,750 1,920 2,114 2,075 2,139 2,208 2,332 2,337 2,455 2,588 2,628 2,669 Coffee 315 311 339 380 386 401 413 419 437 439 450 455 Cloves 49 42 55 58 61 55 66 84 73 67 78 77 Tea 126 127 136 126 137 141 155 159 154 165 139 155 Sugar 1,810 1,899 1,894 2,176 1,918 2,108 2,119 2,253 2,307 2,329 2,454 2,354 Tobacco 108 161 164 113 116 81 156 161 112 121 130 133 Pepper 46 41 40 49 56 68 70 69 65 66 54 54 Cotton 12 45 53 48 40 39 33 14 13 14 14 19 Palm oil 1,147 1,243 1,350 1,506 1,800 1,965 2,413 2,658 3,266 3,421 3,169 3,346 Palnkemel 247 258 266 319 360 393 504 551 559 602 634 659 /a Preliminary figures. Source: Supplement to Presidenf s Report to Parliament, August 16, 1996. Statistical Annex 181 Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Area Harvested. Production and Yield. 1982-1996 Area Average Paddy Rice Year harvested yield output output /a Growth ('000 ha) (tons/ha) ('000 tons) ('000 tons) (%) 1974 8,509 2.64 22,464 15,276 1975 8,495 2.63 22,331 15,185 -0.6 1976 8,368 2.78 23,301 15,845 4.3 1977 8,360 2.79 23,347 15,876 0.2 1978 8,929 2.89 25,772 17,525 10.4 1979 8,850 2.97 26,283 17,872 2.0 1980 9,005 3.29 29,652 20,163 12.8 1981 9,382 3.49 32,774 22,286 10.5 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 1995 11,439 4.35 49,744 32,334 6.7 1996 /b 11,520 4.39 50,575 32,874 1.7 /a Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and a factor of 0.65 for the years 1989 and following. /b preliminary figures Source: Central Bureau of Statistics. INDONESIA _ COUNTRY ECONOMIC REPORT Index of Manufacturing Production by Selected Industry Group. 1986-1996 /a (1983 = 100) Code of Industry Description /b 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 /d Group 31121 Condensed and dried milk, creamery and processed butter, fresh and preserved cream (6) 87.5 94.0 123.3 122.5 142.2 154.1 160.6 215.6 132.3 156.5 153.4 31330 Malt liquorand malt (5) 94.4 113.2 116.4 117.2 146.8 160.1 142.0 173.5 115.5 137.8 143.2 31420 Clovecigarettes(80) 147.4 166.5 177.7 196.2 226.4 165.5 165.3 176.2 117.2 120.6 196.9 31430 Othercigarettes(13) 78.8 81.9 79.2 78.2 80.7 95.4 111.3 87.1 118.0 111.3 108.8 32111 Yarnandthread(53) 129.9 130.5 169.0 196.2 253.5 273.7 313.1 312.0 100.9 114.6 128.1 32114 Weaving mills (exceptjute weaving products (409) 130.7 144.3 172.9 187.6 216.9 215.0 238.2 236.3 104.1 108.2 106.8 32117 Batik(65) 95.8 81.8 83.9 111.1 144.0 218.5 190.0 176.5 141.8 140.5 163.4 32130 Knitting mills (73) 219.2 233.3 239.8 312.8 347.2 449.2 332.0 324.4 155.1 135.2 127.9 32411 Footwear (32) 113.1 91.5 111.2 184.9 208.2 230.4 324.5 355.2 95.6 88.4 101.9 33113 Plywood(40) 139.3 192.7 242.1 266.2 256.7 273.7 295.7 268.0 104.5 102.7 87.0 34111 Papermanufacture(allkinds)(23) 159.2 159.7 242.0 251.5 298.1 292.2 429.8 459.2 100.7 115.6 98.2 35110 Basicchemicals(exceptfertilizer)(50) 119.0 156.4 139.0 152.9 174.0 189.5 151.8 178.1 86.7 76.4 64.4 35120 Fertilizer(10) 166.0 121.8 129.7 143.7 158.1 158.1 152.1 153.6 108.6 98.2 91.6 35210 Paint, varnish, and lacquers (25) 135.6 126.5 91.2 129.9 136.6 127.2 182.6 283.7 101.6 95.7 108.3 35232 Matches(8) 108.7 142.3 175.5 154.4 167.3 178.5 216.0 113.6 99.7 104.3 95.1 35510 Tyresandtubes(22) 109.5 79.2 109.7 141.2 157.4 205.6 223.8 220.2 89.8 91.2 85.5 36210 Glassandglassproducts(21) 178.0 149.3 124.6 145.2 163.3 254.6 236.8 265.8 118.6 146.3 143.9 36310 Cement (7) 144.4 150.9 149.8 198.1 206.4 217.9 244.9 300.7 134.4 167.2 179.5 37100 Basic iron and steel industries(16) 154.9 147.1 167.4 199.0 259.1 476.5 427.1 552.6 110.5 86.5 75.7 38130 Structural metal products (59) 110.2 118.7 125.7 180.6 224.4 190.9 210.4 202.3 168.0 322.6 683.2 38312 Drycellbatteries(7) 123.9 115.5 158.6 179.1 192.6 158.7 174.1 190.8 104.5 116.4 120.4 38320 Radio, TVs, cassettes, other communication equipment and apparatus (23) 90.6 86.9 118.1 153.9 180.6 114.7 111.2 113.1 109.5 109.8 106.2 38430 Motorvehiclesassemblyandmanufacture(23) 114.7 126.8 115.8 132.5 200.0 212.9 116.0 98.0 153.8 1,239.6 59.8 38440 Motor cycles and three wheel motor vehicles, assemblyandmianufacture(1l) 98.0 81.3 76.8 106.0 104.9 187.5 252.1 322.7 157.5 152.1 128.1 Geueral index 1284 143.5 164.2 184.1 2094 2323 257.9 286 1176 130.8 INA /a The amnual figures shown here are calculated as the average of quarterly indices. /b Figures in brackets"( )" indicate the number of establishments covered in that group. /c Starting in 1994, the base year is 1993=100. /d First quarter 1996. Source: Central Bureau of statistics. 00 Statistical Annex 183 Table 8.2 INDONESIA COUNTRY ECONOMIC REPORT Production of Minerals. 1984 - 1996 Petroleum Tin Copper ore Nickel Iron sand Natural Year (min bbls) concentrate concentrate ore Bauxite Coal concentrate Gold /a Silver /a gas ('000 tons) (kg) 1kg) (mcf) l984 516.5 23.2 190.3 1,066.8 1,003.2 1,468.2 83.0 2,247 38,585 1,521.5 1985 483.8 21.8 223.4 961.9 830.5 1,942.1 130.9 2,604 38,075 1,580.0 1986 507.2 24.0 251.2 1,533.1 648.8 2,572.3 153.3 2,948 44,075 1,628.9 1987 479.0 26.1 259.8 1,825.7 635.3 2,813.5 194.0 3,117 49,046 1,732.1 1988 484.7 30.6 294.7 1,733.2 505.8 4,094.6 202.7 3,877 57,603 1,846.9 1989 514.2 31.3 331.5 2,020.9 862.3 9,246.7 142.7 4,625 63,597 1,968.3 1990 533.6 30.4 398.6 2,217.4 1,205.7 10,461.5 145.4 9,355 62,158 2,828.2 1991 581.2 30.4 656.5 2,300.3 1,406.1 14,143.0 173.2 13,889 77,897 2,461.8 1992 550.7 28.2 906.7 2,511.6 803.5 23,120.5 287.8 37,987 99,954 2,582.6 1993 547.4 30.4 928.2 1,975.8 1,320.4 27,605.3 341.3 42,097 90,301 2,661.9 1994 551.1 31.1 1,065.5 2,311.5 1,342.4 31,238.5 334.9 42,605 107,026 2,941.6 1995 547.0 38.6 1,516.6 2,513.4 899.0 41,516.7 348.4 62,818 265,222 2,999.3 1996 /b 366.0 33.0 1,116.9 1,760.5 470.4 30,505.1 263.1 51,164 159,406 n.a /a Since 1983, production of gold and silver including private enterprises. /b Until August 1996 Source: Central Bureau of Statistics. 184 Statistical Annex Table 8.3 INDONESIA COUNTRY ECONOMIC REPORT Crude Oil Production by Company. 1974-1995 ('000 bbis) Production Average Contract of work sharing Total daily PERTAMINA LEMIGAS Caltex C & T Stanvac Subtotal contract output 1974 40,143 362 329,907 1,959 16,626 348,492 112,840 501,837 1,375 1975 32,590 306 300,879 1,944 13,889 316,712 127,247 476,855 1.306 1976 31,333 268 304,616 1,803 12,787 319,206 199,512 550,319 1,504 1977 30,706 285 292,950 2,459 11,974 307,383 276,749 615,123 1,685 1978 31.271 195 275,349 2,266 11,853 289,468 275,763 596,697 1,635 1979 30,316 213 266,048 1,856 10,811 278.715 271,203 580,447 1,590 1980 29,891 205 258,325 2,046 11,578 271,949 274,971 577,016 1,577 1981 29,515 175 255,515 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 /b - 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 /b - 1,972 10,587 22,559 496,664 533,706 1,462 1991 24,989 /b - 1,462 8,845 10,307 545,937 581,233 1,592 1992 24,722 /b 1,401 8,136 9,537 516,409 550,668 1,505 1993 26,427 /b 1,327 5,304 6,631 517,567 550,625 1,509 1994 24,139 /b - - - 527,008 551,147 1,510 1995 21,129 /b - - - 525,848 546,977 1,499 1996/c 16,765 /b - - - 349,263 366,028 1,500 /a Since May 1983, contract of work data have been consolidated. /b Since 1988, Lemigas data have been included in Pertamina. /c Until August 1996 Source: Ministry of Mines and Energy, Directorate General Oil & Gas. Ab. INDONESIA COUNTRY ECONOMIC REPORT Domestic Sales of Petroleum Products. 1983-1996 la ('000 bbls) 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 /c Aviation gas 83 73 66 63 56 60 60 59 58 54.0 51.0 50 51 51 Aviation turbo 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 7,206 Premium gasoline 247 523 738 1,024 1,431 1,838 2,451 1,047 /b lb /b /b /b /b Regular gasoline 24,380 24,909 25,206 27.083 29,048 30,855 33,199 39,005 43,023 45,308 46,733 52,463 57,798 63,747 Kerosene 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 61,656 Motor diesel 49,790 48,567 47,682 47,421 54,075 59,143 64,508 72,950 80,837 92,061 104,460 100,730 106,755 119,138 Industrial diesel 9,978 10,285 10,329 8,855 8,319 8,809 9,515 10,720 10,806 11,318 11,445 11,174 10,069 8,679 Fuel oil 21,149 23,625 22,863 18,004 19,054 18,097 18,329 24,847 28,899 29,313 30,154 25,456 25,543 24,524 Tota 157,537 157.569 155 280 149.874 159.534 167.911 178,949 202.707 219.085 237.219 253.124 256.171 Z69,37 _28500 /a Excluding lubricating oil and similar products. /b Discontinued. /c Estimated Source: Ministry of Mines and Energy, Directorate General Oil and Gas. 01E 900 0 Co t 186 Statistical Annex Table 9.1 INDONESIA COUNTRY ECONOMIC REPORT Consumer Price Index. 1979 - 1996 /a lb (April 1977 - March 1978 = 100) End of Foodstuff Housing Clothing Others Total Change period (%) /c 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 1996 190.0 198.0 166.8 190.7 189.6 6.6 /a The consumer price index for Indonesia has been used commencing March 1979 to replace the Jakarta cost of living index. /b Starting 1989, using new base period (April 1988-March 1989 = 100). /c End-year basis. Source: Central Bureau of Statistics. INDONESIA COUNTRY ECQNOMIC REPOR Indonesia Wholesale Price Index. 1983-1996 /a (1983 - 100) Sectors /b 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Agriculture (441 100 113 118 128 145 163 177 191 206 225 251 298 355 365 Mining&quarrying(6) 100 109 117 125 132 143 156 169 188 201 218 237 266 296 Manufacturing (140) 100 103 115 123 143 156 166 176 194 206. 218 237 256 265 Imports (531 100 113 119 129 158 164 178 191 201 208 211 215 230 243 ExQorts 38 i00 114 12 85 11 118 131 159 2 153 1 157 157 178 20Q Excluding petroleum (34) 100 114 115 130 170 183 195 195 203 212 226 255 298 306 Petroleum (41 100 112 113 73 103 99 112 148 139 143 137 128 142 173 General index 1281) 10Q 111 116 11U 142 1492 72 t78 18Z 197 204 211 24 259 General index excluding exports (243) 100 111 117 127 149 160 173 185 199 210 221 235 261 292 General index excluding exportsofpetroleum(224) 100 110 116 125 146 161 172 182 198 211 227 250 285 295 /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. Source: Central Bureau of statistics. 1 INDONESIA COUNTRY ECONOMIC REPORT Domestic Prices of Petroleum Products.1984 - 1996 (Rp.Iliter) 1984/a 1985/b 1986 197 1988 1989 1990/c 1991 /d 1992 1993/e 1994 1995 1996 Aviation gas 300 330 250 250 250 250 330 400 400 420 420 420 420 Aviation turbo 300 330 250 250 250 250 330 400 400 420 420 420 420 Premium gasoline 400 440 440 440 440 440 1/f f If /f /f If /f Regular gasoline 350 385 385 385 385 385 450 550 550 700 700 700 700 Kerosene 150 165 165 165 165 165 190 220 220 280 280 280 280 Motor diesel 220 242 200 200 200 200 245 300 300 380 380 380 380 Industrial diesel 200 220 200 200 200 200 235 285 285 360 360 360 360 Fuel oil 200 220 200 200 200 200 220 220 220 240 240 240 240 /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 I11. /e Price increased on January 8. If Discontinued. Source: Ministry of Mines and Energy, Directorate General Oil and Gas. HD INDONESIA COUNTRY ECONOMIC REPORT Anoroved Foreign Investment by Sector. 1983-1996 /a (US$ milGion) Sector 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Agriculture 1Q Q 2 126 112 B.12? 117 14 66 138 Q 1.1531,3 Fomtrv 2 Q Q Q a 26 4 2Q 1 138 22 Q Q 136 Fishery 21 Q 11 4 12 46 47 2Q 11 21 Q 40 2,31 _Q Mining & Quaraying 0 Q Q Q Q Q Q 1 16 Q 2,312 Q 0 0 I.,9 Manufacturing l.Q02 67 57 8 52 3.828 4.246 5 822. 3970 5.629 3421 18.739 30.441 19.884 Food 83 77 6 34 54 231 223 99 382 213 141 1,235 1,332 691 Textiles&leather 12 1 7 9 118 213 581 1,094 532 591 419 396 471 515 Wood&woodproducts 13 0 0 32 45 104 106 218 62 34 50 68 263 101 Paper & paper products 722 0 25 47 109 1,506 211 730 822 686 202 5,120 2,540 2,907 Chemicals & rubber 183 96 338 294 209 1,544 2,512 1,991 923 2,342 1,171 7,743 19,368 7,362 Nonmetallic minerals 50 0 3 0 251 30 184 125 133 841 98 632 289 793 Basic metals 836 609 65 39 7 61 106 825 197 47 186 2,082 292 651 Metal products 716 210 244 82 57 129 292 460 856 863 1,114 1,423 2,258 2,939 Others 1 9 0 0 3 10 30 281 62 52 42 40 3,628 3,925 Construction 44 17 2 65 42 2 16 77 2a 41 97 22 2Q6 222 Trade & hotel 75 84 Q Q 196 405 9 8744.019 919 L1 8 430 1.029 I.62. Wholesale trade 0 0 0 0 0 0 0 0 0 0 693 87 31 45 Hotels 78 84 0 0 196 405 98 874 4,019 919 394 344 999 1,717 Transport & communications Q 4 a 7Q 2 a 5 80l 167 14 85 145 5.539 695 Real estate and businessservices 10 Q 2 25 20 117 181 902 51 136 3292 3.604 L1314 4.076 Total 2.882 1.107 859 826 1.457 4.435 4.719 8.750 8.778 10.323 8.144 23.724 39.915 29.931 /a Intended Capital Investment. Amount represents original approvals plus expansions minus cancellations. Source: Investment Coordinating Board (BKPM). O INDONESIA COUNTRY ECONOMIC REPORT Approved Domestic Investment by Sector. 1984-1996 ls (Rp bilrlon} Sector 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Agriculture, fisheries and livestock 2 9 1.879 2,885 2,698 3.418 6,442 3.468 1,952 2.835 2.835 8.621 16.026 Forestrv 19 37 21 640 487 2Z 59 31 534 2 2f 1.476 46 Minina a 3 2 O ill 94 155 1m2 22f 69 ZQ& 460 Manufaing 1.332 1632 1842 5518 94 12.931 39.850 27L624 19.079 24.037 24.037 431962 62.703 Textiles 127 97 263 1,289 2,309 3,563 12,561 3.646 2,546 3,539 3,539 7,177 3,366 Chemicals 272 928 773 2,047 3,039 4,062 7,894 8,425 3,299 7,689 7,689 8,740 13,335 Electrical goods 0 0 0 0 0 0 0 0 0 5 5 620 3,486 Other manufacturing 933 607 806 2,183 4,399 5,307 19,395 15,553 13,235 12,804 12,804 27,425 42,517 Constructn f 22Q 74 5 1 146 fLz z8 21 17 17 8 48 1550 Hotels 214 1 12 11 7 9 2 1265 4.703 3,895 3.115 32051 3.051 3.792 5019 Real estate 3 1 2Z 169 174 a4m 936 1.783 2563 36 3,049 3.049 4.659 8.688 Others 1 299 325 569 460 551 2.898 1L785 3.675 5 965 5.965 6.290 6,224 To.tal 1.949 3,750 4,417 10.265 14.916 19.594 56.511 41.078 29.342 39,450 39,450 69.853 100.715 /a Figures refer to intended capital investments, and represent original approvals plus approved expansion minus cancellations. Source: Investment Coordinating Board. z CL 0~~ ... ... ... .... MM':i ::S ::tD ::9 :S : ': :y <;F ; :t: AlC -fxte l ::St::0:itt::t