Report No. 5597-IND Indonesia Policies for Growth and Employment Part I -Economic Performance and Policv Priorities Part is-Employment Trends and Outlook April 23, 1985 East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their cfficial duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Before November 15, 1978 USgl.00 = Rp 415 Annual Averages 1979-84 1979 USg1.00 = Rp 623 1980 USt1.00 = Rp 627 1981 USS1.O0 = Rp 632 1982 US$1.00 = Rp 661 1983 USg1.00 = Rp 909 /1 1984 US$1.00 = Rp 1,026 April 23, 1985 USg1.00 = Rp 1,106 FISCAL YEAR Government April 1 to March 31 Bank Indonesia April 1 to March 31 State Batks January 1 to December 31 /1 On March 30, 1983 the Rupiah was devalued from USg1.00 = Rp 703 to US$1.00 = Rp 970. FOR OFFICLAL USE ONLY TITE : INDONESIA: POLICIES FOR GROWTH AND EMPLOYMENT COUNTRY : INDONESIA REGION : EAST ASIA AND PACIFIC SECTOR : COUNTRY ECONOMIC REPORT TYPE CLASSIFICATIONS MMIY LANGUAGE 5597-IN) CEM Official Use 04/85 English PIUBDATE : Apr il 1985 ABSTRACT : Part I of this report reviews recent economic performance against the backgrouad of the adjustment measures effected ower the past three years; assesses the country's economic prospects in the context of a ten year framework; and identifies some of the policy areas that are of key importance in meeting Indonesia's development goals. Part II focuses on the outlook for employment over the next decade, and analyzes the impact of alternative growth and policy scenarios on labor absorption and incomes. I This document has a restricted distnbution and may be used by recipients only in the performance of their offial duties. Its contents rnay not otherwise be disclosed without World Bank authorization. INDONESIA POLICIES FOR GROWTH AND EMPLOYMENT Table of Contents Page No. OVERVIEV viii SUMMARY AND CONCLUSIONS ix to xix PART I - ECONOMIC PERFORMANCE AND POLICY PRIORITIES CHAPTER 1-RECENT ECONOMIC DEVELOPMENTS . . . . . . . . . . . . . . . . 1 A. The External Setting and Adjustment: An Overview . . . 1 B. General Economic Trends . . . . . . . . . . . . . . . . 3 Availability and Use of Resources . . . . . . . . . 3 Growth of Domestic Output . . . . . . . . . . . . . 5 Inflation . . . . . . . . . . . . . . . . . . . . . 9 C. Management of Government Finances . . . . . . . . . . . 10 The 1984/85 Budget and Its Outcome . . . . . . . . . 10 The Tax Reform and Its Implementation . . . . . . . 12 The 1985/86 Budget: A Shift in Expenditure Policy 13 Measures to Improve Project Implementation Performance . . . . . . . . . . . . . . . . . . . 16 D. External T-rade and Payments . . . . . . . . . . . . . . 17 Reduction in the Current Account . . . . . . . . . . 17 Export Performance . . . . . . . . . . . . . . . . . 18 Decline in Imports . . . . . . . . . . . . . . . . . 21 Rising Import Restrictions . . . . . . . . . . . . . 22 Capital Inflows . . . . . . . . . . . . . . . . . . 22 E. Monetary and Credit Developments . . . . . . . . . . . . 23 Deposit Mobilization . . . . . . . . . . . . . . . . 24 Credit Availability . . . . . . . . . . . . . . . . 25 Interest Rate Developments . . . . . . . . . . . . . 27 Monetary Control and Management . . . . . . . . . . 29 This report was prepared in the World Bank's Jakarta Office under the direction of Javad Khalilzadeh-Shirazi. The contributors to Part I were Frederick Kilby, V!kram Nehru, Para Suriyaarachchi (Resident Staff in Indonesia) and Mark Baird (Indonesia Division). Part II was prepared by Michael Walton, Ho-Shik Kim (Indonesia Division) and Chris Manning (consultant). A drafL -,f tiae report was discussed with the Government in April 1985. - i: - Page No. F. Progress Towards Deregulation . . . . . . . . . . . . . 30 Simplification of Investment Procedures . . . . . . 31 New Customs Regulations . . . . . . . . .a. . . . . 31 Improvements in Ports and Shipping. . . . . . . . . 32 CHAPTER. 2 - DEVELOPMENT OBJECTIVES AND PROSPECTS . . . . . . . . . . . 33 A. The External Environment and Its Implications for Macroecono mic Manegemtnt . . . . . . . . . . . . . . . 33 Introduction . . . . . . . . . . . . . . .. . . . . 33 The External Setting . . . . . . . . . . . . . . . . 34 External Terms of Trade Prospects . . . . . . . . . 37 B. Medium Term Prospects . . . . . . . .. . . . . . . 38 The Base Case Scenario .. . . . . . . . . . . . . . 38 The Low Case Oil Scenario and the Impact of Lower Non-oil Export Growth . . . . .. . . . . .. 44 C. External Trade . . . . . . . . . . . . . . . . . . . . . 47 Export Prospects . . . . . . . . . . . . . . .a. .a. 49 Import Needs and Composition . . . . . . . . . . . . 52 D. External Financing Requirements and Borrowing Strategy . 54 Projections of Debt and Debt Service . . . . . . . . 58 CHAYTER 3 - SELECTED POLICIES FOR GROWTH AND STRUCrURAL TRANSFORMATION 60 A. introduction . . . . . . . . . . . . . . . . . . . . . . 60 B. Industrial Development and Trade Policy . . . . . . . . 61 Emerging Problems in the Manufacturing Sector . . . 61 Recent Developments in Trade Policy and Industrial Strategy . . . .. . . . . . . . . . . . 62 The Costs Associated with the Present Policy Environment: Some Evidence . . . . . . . . . 66 The Need for Change in Industrial and Trade Policy 69 Some Elements of Trade Policy Reform . . . . . . . . 71 C. Issues in Financial Intermediation . . . . . . . . . . . 73 Cost of Credit . . . . . . . . . . . . . . . . .. 73 Long Term Lending . . . . . . . . . . . . . . . . . 74 Institutional Development . . . . . . . . . . . . . 75 D. Public Investment: Issues and Priorities . . . . . . . 76 Resource Availability for Public Investment . . . . 76 Public Investment Priorities . . . . . . . 77 Investmpnt Planning . . . . . . . . . . . . . . . . 83 - {ii - Page No. PART II - EMPLOYMENT TRENDS AND OUTLOOK . . . . . . . . . . . . . . . 86 Summary and Conclusions . . . . . . . . . . . . . . . . . . 86 CHAPTER 4 - THE EMPLOYMENT PROBLEM .. .. . .. ..... . .. . .. . 91 A. The Current Situation . . . . . . . . . . . . . . . . . 91 The Nature of the Problem . . . . . . . . . . . . . 91 Growth in Employment and Labor Productivity - The Past Experience . . . . . . . . . . . . . . . 93 Past Government Policy and Employment . . . . . . . 97 B. Future Prospects for Employment . . . . . . . . . . . a 98 Labor Force Projections . . . . . . . . . . . . . . 99 Overview of Potential Labor Absorption under Alternative Policies . . . . .. . . . . . . . . . 100 Lower Oil Prices and Employment . . . . . . . . . . 104 CHAPTER 5 - SELECTED POLICY ISSUES AND EMPLOYMENT . . . . . . . . . . . 106 A. Agriculture . . . . . . . . . . . . . . . . . . . . . . 106 B. Manufacturing . . . . . . . . . . . . . . . . . . . 109 C. Public Expenditures . . . . . . . . . . . . . . . . 114 D. Transmigration . . . . . . . . . . . . . . . . . . . . . 117 E. Policy Towards the Urban Labor Market . . . . . . . . . 121 APPENDICES TO PART II APPENDIX 1 - PAST PATTERNS OF EMPLOYMENT AND INCOME CHANGE . . . . . . . 125 APPENDIX 2 - POPULATION AND LABOR FORCE PROJECTIONS . . . . . . . . . . 152 APPENDIX 3 - STATISTICS ON EMPLOYMENT AND INCOMES . . . . . . . . . . . 158 ANNEXES I. ANALYSIS AND PROJECTION TABLES . . . . . . . . . . . . . . . . . . 172 II. HISTORICAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . 181 - iv - Text Tables Table No. Page No. PART I Chapter I 1.1 Expenditure and Savings Ratios, 1981-1984 . . . . . . . . . . . 4 1.2 Growth in Sectoral Value Added, 1982-1984 . . . . . . . . . . . 6 1.3 Rates of Inflation, 1982-84 . . . . . . . . . . . . . . 9 1.4 Summary of Government Finances, 1982/83-1984/85 .li 1.5 The 1985/86 Budget . . . . . . . . . . . . . . . . . . . . . . . 14 1.6 Summary of Balance of Payments, 1982/83-1984/85 . . . . . . . . 19 1.7 Ncn-oil Export Performance, 1982/83-1984/85 . . . . . . . . . . 20 1.8 Non-oil Imports, 1982/83-1984/85 . . . . . . . . . . . . . . . . 21 1.9 Changes in Factors Affecting Money Supply and Liquidity, 1982:-84 ........................... 24 1.10 Growth of Bank Deposits, 1983-1984 . . . . . . . . . . . . . . . 25 1.11 Growth of Bank Credit, t81984-.984. . 26 1.12 Interest Rates of Commercial Banks, 1981-1984 . . . . . . . . . 28 Chapter 2 2.1 Selected Indicators of International Economic Activity, 1984-95 . . . . . . . . 35 2.2 Indonesia's Terms of Trade under Alternative Scenarios, 1981-1995 . . . . . . . . . . . . . . . . . . . 38 2.3 Growth and Composition of GDP under the Base Case, 1984-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.4 Growth in GDP by Expenditure Category under the Base Case, 1983-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 41 2.5 Summary Balance of Payments, under the Base Case, 1983/84- 1995/96 . . . . . . . . . . . . . . . . . . . . . .. . . . . 43 -2.6 Selected Economic Indicators under Alternative Oil Price Scenarios, 1986-1995 . . . . . . . . . . . .. . . 45 2.7 Selected Economic Indicators under Alternative Export Growth Scenarios, 1986-1995 . . . . . . . . . . . . . . 47 2.8 Projections of Merchandise Exports by Major Categories Under the Base Case, 1984/85-1995/96 . . . . . . . . . . . . . 51 2.9 Projections of Merchandise Imports by Major Category Under the Base Case, 1984/85-1995/96 . . . . . . . . . 53 2.10 External Capital Requirements and Sources, 1982/83-1987/88 . . . 55 2.U1 Commitments of Public Debt and Grants, 1980-84 .56 2.12 Projected Commitments of External Public Debt and Grants, 1985/86-1987/88 . . . . . . . . . . . . . . . . . . . . . . . 57 2.13 Disbursed and Outstanding Medium and Long Term Debt, 1981-95 . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Table No. Page No. PART I (cont.) Chapter 3 3.1 Implicit Annual Subsidies per Worker ln Selected Industries, 1984 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..... 67 3.2 Domestic Resources Used in Saving or Earning us$1 . . . . . . . 68 3.3 Projected Performance Indicators under Alternative Trade Policies, 1986-95 , . . . . . . . . . . . . . . . . . . . . 70 3.4 Sectoral Composition of Development Expenditure .' ....... 78 3.5 Import and Employment Coefficients. . . . . . . . . . . . . . . 79 3.6 Selected Development Indicators . . . . . ..... . . . . . . . . 81 Figures Figure 2.1 Debt-Service Ratios, 1983/84-1995/96 . . . . . . . . . . . . 46 Figure 2.2 Merchandise Exports, 1981/82-1995/96 ............ . 48 PART II Chapter 4 4.1 Employment and Productivity, 1971-80 . . . . . . . . . . 94 4.2 Java and the Outer Islands: Patterns of Employment and Productivity, 1971-80 . . . . . . . . 96 4.3 Regional Growth in Population and the Labor Force, 1986-95 . . . 100 4.4 Employment and Productivity Growth Under Favorable Policy, 1986-95 . . . . L a a . . . . . . a . . . . 102 4.5 Potential Labor Absorption under a Low Oil Price Scenario, 1986-95 . . .. . . . . . . . . . . .... . . . . . . . . . . . . 105 Chapter 5 5.1 Alternative Scenarios for Manufacturing Growth, 1986-95 ... .l1l 5.2 The Share of Small and Large Scale Firms in Employment and Value Added in Manufacturing, 1979.... . . . . . 113 5.3 Growth in Population and the Labor Force in Java and Bali under Alternative Transmigration Scenarios . . . . . . . 119 5.4 The Potential Impact of Transmigratioa on the Outer Islands, 1990-2000 . . . . . . . . . . . . . . . . . . . . . . 120 -vi- Table No. Page No. PART II (cont.) Appendix 1 1. Changes in Rural Employment, 1976-82.. ... ... . . . . . 3 2. Composition of Employment by Hours Worked, West Java Villages, 1976 and 1983 ........ a.......... 4 3. Wages in Agricultural and Non-agricultural Activities, Cimanuk Region, West Java, 1977-83 . . . . . . . . . . . . . . 5 4. Average Returns to Household Labor in Alternative Activities, West Java Villages, 1976 and 1983 . . . . . . . . 6 5. Average Per Capita Income, West Java Villages, 1976 and 1983 . . 8 6. Household Income by Economic Class, West Java Villages, 1976 and 1983 . . . . . . . . . . . . . . . . . . . . . . . . 9 7. Sources of Income Change by Economic Class, West Java Villages, 1976-83 . . . . . . . . . . . . . . . . . . . . . . 10 8. Price Indices and Terms of Trade for Javanese Farmers, 1976-83 ...... " * * ** .a11 9. Labor Income per Household from Farming, West Java Villages, 1976 and 1983 . .. . . . . . . . . . . . . . . . . . . . 12 10. Average and Marginal Budget Shares, Rural and Urban Java, 1981 13 11. Employment Effects of Average and Marginal Budget Expenditure, Rural and Urban Java, 1981 . . . . . . . . . 14 12. The Distribution of Non-agricultural Employment in Urban Areas, 1976-82 . . . . . . . . . . . . . . . . . . . . . . . 16 13. The Proportion of Urban Workers in the Formal Sector, by Educational Attainment, 1980 and 1982 . . . . . . . . . . . . 18 14. Overview of Civil Service Employment, 1969-84 . . . . . . . . . 19 15. Average Household Income by Occupational Status in Urban Indonesia, 1981 . . . . ...... . 20 16. Indicators of Public/Private Salary Differentials . . . . . 21 17. Minimum Wages for Three Provinces, 1977-84 . . . . . . . . . 22 18. Growth in Average Salaries of Civil Servants, 1969-85 . . . 23 19. Open Unemployment in Urban Indonesia by Educational Attainment, 1976 and 1982 ... 25 20. Job Seekers and Job Placements Recorded by the Labor Enxchanges, Indonesia, December 1983 and September 1984 27 Appendix 2 1. Urban and Rural Population Growth, 1986-95 . . . . . . . . . . . 1 2. Estimated Actual and Projected Labor Force Participation Rates, 1980 and 2000 . . . . . . . . . . . . . . . . . . . . . 2 3. Growth in the Urban and Rural Labor Force, 1986-95 . . . . 4 4. The Educational Composition of the Labor Force, 1971-90 . . . . 5 - vii - LIST OF ABBREVIATIONS AND ACRONYMS ASRRINDO - Asuransi Kredit Indonesia - State Credit Insurance Agency BAPINDO - Bank Pembangunan Indonesia - Development Bank of Indonesia BAPPENAS - Badan Perencanaan Pembangunan Nasional - National Development Planning Board BI - Bank Indonesia BKPM - Badan Koordinasi Penanaman Modal - Investment Coordinating Board BPS - Biro Pusat Statistik - Central Bureau of Statistics BRI - Bank Rakyat Indonesia - People's Bank of Indonesia BULOG - Badan Urusan Logistik - National Logistics Agency DIP - Daftar Isian Proyek - Project Expenditure Authorization IGGI - Inter-Governmental Group on Indonesia INPRES - Instruksi Presiden - Presidential Instruction (Local Public Works Programs) IRRI - International Rice Research Institute KEPPRES - Keputusan Presiden - Presidential Decree KIC - Kiedit Investasi Kecil - Small Investment Credit -KMKP - Kredit Modal Kerja Permamen - Small Permaent Working Capital Credit mm2 - Money Market Securities PERTAMINA - Pertambangan Minyak Nasional - National Petroleum Corporation PIN - Perusahaan Umum Listrik Negara - State Electricity Company PERUMTEL - Perusahaan Umum Telekomunikasi - State Telecommunication Company PUSRI - Pupuk Sriwijaya - Fertilizer Company REPELITA III - Rencana Pembangunan Lima Tahun ke III - Third Development Plan - 1979180-1983/84 REPELITA IV - Rencana Pembangunan Lima Tahum ke IV - Fourth Development Plan - 1984/85-1988/89 SAKERNAS - Survey Angkatan Kerja'Nasional - National Labor Force Survey SBI - Sertifikat Bank Indonesia - Bank Indonesia Certificate SEKNEG - Sekretariat Negara - State Secretariat SUSENAS - Survey Sosial Ekonomi Nasional - National Household Income and Expenditure Survey Note: The report uses the convention of denoting Fiscal Years (FY) with a "P while period averages are shown by a '--; i.e. 1983/84 refers to FY1983 and 1983-84 refers to the period 1983 and 1984. - viii - OVERVIEW Over the past two years Indonesia has made major progress in adjusting to the weakenaing of the international oil market. The stabilization and adjustment measures adopted in early 1983 have brought gains on a broad front, including a stronger balance of payments, enhanced domestic resource mobilization and reduced inflation. A particularly impressive achievement has been the reduction of the current account deficit from 8.5X of GNP in 1982/83 to an estimated 2.4% in 1984/85. At the same time, the adjustment has entailed some costs, particularly the declJne in fixed investment, sluggish recovery in manufacturing, and the faltering of the construction sector. However, a serious deterioration of the employment situation was prevented by a strong performance in agricultural incomes and non-oil exports. In the years ahead, Indonesia faces the major challenge of generating a pattern and pace of economic growth which would provide adequate employment opportunities and earnings for a rapidly expanding labor force. This challenge iwut be met in a less favorable international environment: Indonesia is likely to face adverse shifts in external terms of trade, with slowly growing and possibly volatile oil revenues in the remainder of this decade. There is a significant risk of a worsening of employment prospects, but the base case scenario of the report illustrates that the dual challenge of growth and employment could be effectively met, provided appropriate macroeconomic and employment policies are pursued. The external constraint, however, mandates continued restraint in external borrowing in order to ensure that the debt-service ratio remains within manageable limits. The medium term projections of Indonesia's economic outlook also underscore the importance of vigorous growth of non-oil exports. The report identifies some of the policy areas that are of key importance In meeting Indonesia's development goals. From the point of view of accelerating economic growth and structural transformation, ensuring external payments stability and enhancing employment prospects, it is essential to develop a broad-based and internationally competitive industrial sector through closer attention to efficiency issues on a broad front, including industrial and trade policy, the banking system and public investment. Efficiency improvements in production and distribution would reduce costs, lower prices, and expand the domestic market. Without this, the required growth of non-oil exports will be difficult to achieve. A key area deserving immediate attention is project implementation -- where slippages can often increase project costs and reduce benefits by delaying their realization. In addition to appropriate general economic policies, policy areas that can have a major impact on employment generation include: an appropriate pattern of public expenditure; continued priority for agricultural income growth, both on and off Java; careful implementation of the transmigration program, with close coordination of investments in resettlements, tree crops, irrigation and livestock to ensure sustainable incomes for transmigrant families; and a supportive environment for urban informal sector activities. The report stresses that in terms of their implications for government policy, there is a basic consistency among the objectives of growth, emplovment generation and external payments stability. - ix - SUMMARY AND CONCLUSIONS Recent Economic Performance and Policies The Background of AdJustment I. Over the past two years, Indonesia has made major progress in adjusting to a less favorable resource position stemming from the weakening of the international oil market and the decline in oil prices. During 1983, it initiated a set of decisive stabilization and adjustment measures, including the adoption of an austerity budget for 1983/84, a sharp reduction in subsidies, a drastic rephasing of its public sector investment program, a 28% devaluation of the Rupiah, a major reform of the financial sector, and an overhaul of the tax system. The Government's actions, aided by the recovery of industrial economies, brouglht about a remarkable improvement in economic performance in 1983/84: non-oil exports increased by 37%; imports fell by 12%; the current account deficit was reduced to 6.0% of GNP (from 8.5% in 1982/83); and the overall fiscal deficit fell to 1.9% of GNP (from 6.3% in the previous year). Recent Performance ii. This process of adjustment and consolidation was sustained during 1984, and a successful effort was made to prevent backsliding on the major reforms, particularly in the financial sector and in taxation. Performance in most macroeconomic areas was impressive in 1984/85: the current account deficit fell further, to an estimated 2.4% of GNP; government savings rose by 38%; and non-oil/LNG GDP increased by 4.4% (in 1981 prices). The inflation rate decelerated sharply after March 1984, to an annual rate of less than 4%. iii. The improvement in the external payments position in 1984/85 took place mainly in non-oil transactions. The non-oil import bill was significantly reduced, primarily due to lower imports of capital goods and food. While export earnings from oil and ING were essentially unchanged from the previous year's level, a $500 million increase in non-oil exports helped to raise total export earnings above the previous year's level. This rise in non-oil exports was broad based. Amongst manufactured exports, most of the increase originated from plywood (where substantial new capacity came on stream) and textiles. Total net foreign exchange reserves increased to about $10 billion, equivalent to over seven months' imports. iv. The authorities adopted a cautious, mildly expansionary fiscal stance in the 1984/85 budget, with a programmed overall budget deficit equivalent to almost 4% of GNP. However, World Bank staff estimates of the budget outcome indicate that the overall budget was in approximate balance. Total revenues are estimated to have exceeded the target by about 10% in nominal terms, but expenditures fell short of the target by about 8%. In particular, public investment outlays are estimated to have fallen due to project implementation problems. Thus, government savings rose by 38%. However, the 1984/85 budget's impact on the domestic economy was roughly the same as in the previous year, as the Government's net domes tic expeaditures, as a perrent of GNP, remained unchanged at 9.5%. v. Overall GDP growth in 1984 is estimated at 6.5% (in 1931 prices) with more than half of this growth stemming from oil, ING and refining. The non-oilWLNG GDP growth of 4.4X was equal to that in 1983, but still well below the average of 7.6% p.a. during the 1970s. There were continued impressive gains in agriculture, which grew at about 5%; rice production increased by 7%, .eading to self sufficiency - a milestone in Indonesia's agricultural development. The growth rate of manufacturing (excluding ING and refining) rer-overed to 4.7%, although in several subsectors there was a decline in, or stagnation of, output. Activity in the construction sector stagnated. vi. The stabilization and adjustment measures have caused some stresses in the economy, particularly in the manufacturing sector. Private fixed investment in manufacturing declined in 1984 for a variety of reasons, including widespread excess capacity and uncertainties associated with the implementation of some of the new policies. Recent additions to production capacity, installed on the basis of earlier expectations of continued rapid growth in domestic demand, remained seriously underutilized. Moreover, profit =argins were eroded by cost increases and higher debt servicing associated with the 1983 devaluation, sharply higher domestic real interest rates following the June 1983 financial sector reform, and sluggish sales leading to an accumulation of inventories. In certain subsectors, the financial status of some firms has been adversely affected. These developments have been a sigaificant factor in encouraging further protectionist measures in Indonesia, Including new quantitative restrictions and total bans on certain imports. vii. Despite the recent decline in overall economic growth relative to the performance of the 1970s, the available evidence indicates that the employment situation has not worsened to any significant extent over the past two years, primarily because of a strong recovery in agricultural incomes and non-oil exports. As discussed in Part II of this report, there had been an extended period of favorable employment absorption up to the early 1980s. Between 1971 sad 1980, employment increased by 13 million, absorbing a 30% increase in the labor force; and much of the labor force gained from shifts to higher productivity work, and, around the end of the decade, rises in real wages. Open unemployment remained low at only 2% of the labor force and the incidence of poverty was significantly reduced. This was facilitated by rapid GDP growth, a high degree of labor mobility between agriculture and non-agricultural sectors, and government policies which helped labor absorption through major public investments in irrigation, rural infrastructure and transmigration programs. Viii. In an attempt to stimulate the economy, the 1985/86 budget adopts a moderately expansionary stance relative to the 1984/85 budget. Overall governmnst spending is budgeted to increase by 20% in nominal terms and net - xi - domestic expenditures to rise to lIZ of GNP. The budget involves a shift in expenditure policy, with a larger share of resources allocated to current expenditures, particularly for increases in salaries. The budgeted growth in government investment expenditures can only be achieved with sigaificantly improved project implementation performance. ix. The implementation constraints on development budget expenditures, although partly related to limited capacity in the domestic construction and consultancy industries, largely reflect continuing regulatory, procedural and institutional problems. The Government is well aware of these issues and has undertaken several detailed internal reviews to identify and resolve them. Among the actions taken during the past year are measures to: ease procedural bottlenecks affecting procurement decisions and the disbursement of funds; provide additional training in project management and budgetary procedures; and improve inter-ministerial coordination of major projects (such as Bukit Asam) and programs such as transmigration and tree crop development. Other initiatives are underway to review the complex problem of land acquisition, and to assist in the development of the local consulting and contracting industries. It is too early to assess the impact of these procedural changes, but it is clear thsat this intensive effort will have to be sustained, in order to achieve the necessary improvements in project implementation performance. x. Progress Towards Deregulation. The Government has recently announced simplifications in the regulatory framework for private investment licensing, and bold and far-reaching reforms to reduce excessive regulation and high costs associated with customs and ports operations. With respect to private investment licensing, effective April 1, 1985, the Government simplified procedures for approval and implementation of investments and reorganized the Investment Coordinating Board (BMPW). In regard to customs procedures, new measures announced on April 4, 1985 (through Presidential Instruction No. 4 on Ports and Shipping and subsequent instructions and decrees) reduced the required import and export procedures to a bare minimum and provide for speedy release of cargo, with considerable savings in costs and time. The various instructions related to port operations seek to increase efficiency in cargo handling, ensure fair and equal treatment to all ocean-going vessels, simplify tariffs and reduce port charges. The implementation of these measures will be a major challenge; but given the Government's commitment to the reform, there are good prospects for a major improvement in customs and port operations in the near future. Development Objectives and Prospects Xi. 1-'Ith impressive progress made in stabilization, Indonesia new faces the challenge of generating a pattern and pace of economic growth which would provide adequate employment opportunities for a labor force expanding at 2.3% p.a. An estimated additional 17 million people will join the labor force in the next decade. High priority will also need to be given to increasing productivity and income levels of existing workers, particularly those in rural areas. - xii - xii. This challenge comes at a time when the external environment is beset with uncertainty and likely to be less favorable than the 1970s. Indonesia's success in meeting the employment challenge depends crucially on the skill with which it manages the transition from oil dependency to a more diversified semi-industrialized economy. The economic strategy and policies pursued over the next few years wlll have a significant bearing on the progress that may be achieved in bringing about the structural transformation to a more diversified pattern of growth, foreign exchange earnings and budgetary revenues that will be necessary in the 1990s. Against this background, Indonesia's economic prospects for the next ten years are examined under a base case and two alternative scenarios. Medium Term Prospects xiii. In the base case scenario, crude oil prices are expected to remain approximately unchanged at their first quarter 1985 levels through the end of 1986, increase in line with inflation in 1987, rise in real terms thereafter by about 1% annuially until 1990, and by 5% annually in the first half of the 1990s. In nominal terms, the oil prices assumed are $40/bbl in 1990 and $65/bbl in 1995. It is assumed that oil production will rise to about 1.63 mbd by 1990, but that the production rate will be reduced subsequently by 2% annually as real oil prices rise, so that reserves can be conserved. In these circumstances Indonesia's terms of trade would deteriorate by nearly 5% between 1984 and 1990, but improve by over 3% p.a. during the first half of the 1990s. xiv. In the next two years (1985-86), the GDP growth rate is likely to be below 4% p.a., given the demand prospects for oil . Combined with the anticipated decline in the terms of trade, gross national income (GNY) is anticipated to grow at about 3% p.a. in 1985-86. In the remainder of the decade, overall GDP is projected to grow at an annual rate of 4.5%, with non-oil/LNG GDP rising by 5% annually. Fixed investment growth is assumed to average about 5% p.a. in 1985-86 and rise to 5.6% p.a. during the rest of the 1980s. Underlying this pattern of recovery is the assumption that project implementation would improve considerably, and that private investment would gradually pick up. However, in view of the external resource constraints, it is assumed that there would be no general shift in the composition of investment toward relatively import intensive projects. A key assumption underlying this growth scenario is that non-oil exports (both from agriculture and manufacturing) would continue to increase rapidly (by about 7% p.a. in real terms during 1986-1995). xv. For the first half of the 1990s, overall GDP growth is maintained at about 4.3% p.a. with the non-oil/LNG GDP growth rising to 5.6%. With the anticipated improvement in the terms of trade in the early 1990s, GNY would rise by nearly 1% p.a. faster than GDP. On the external side, the base case implies a continued decline in the current account deficit in relation to GNP, from 2.4% in 1984/85 to 1.9% in 1990/91 and 1.5% by the mid 1990s. Reducing the deficit to the projected levels is essential for ensuring that the debt-service ratio in the 1990s remains at a satisfactory level. - xiii - xvi. The maintenance of these rates of growth of GDP is essential to the effective absorption of the growing labor force. Given the unfavorable prospects in the external environment, there is a risk of serious employment problems emerging, unless the Government makes a coucerted effort to foster a labor intensive pattern of growth in the economy. In many areas, there is a high degree of complementarity between employment needs and other development objectives, notably the need for shifts in Industrial and trade policy in favor of a more efficient and export oriented pattern of growth and continued priority to agricultural growth. However, additional policy measures, specifically oriented toward employment will also be necesarry, as discussed in Part II. xvii. on the other hand, if government policies were to be less favorable to employment generation, the employment situatioL would deteriorate. Such policies would reduce employment opportunities in agriculture and manufacturing by as much as 4-5 million over the next decade, force more workers to seek employment in residual services sectors, and create heavy pressures on the urban informal sector. This, In turn, could lead to stagnant or declining productivity and incomes in those sectors and increased open unemployment. It is possible that both rural and urban income distribution could worsen, and a significant proportion of the urban population could suffer a relative and absolute decline in their living standards. xviii. As an illustrative exercise, the report analyzes the implications for the Indonesian economy of a lower oil price scenario, i.e. with oil prices declining by $2/bbl In 1985-86, followed by a slow recovery to reach t33/bbl (in current prices) by 1990 and $46 by 1995. The scenario illustrates that, in such an event, the external debt situation would remain manageable, provided a cautious borrowing policy is continued. The implications for growth would depend on Indonesia 's success in expanding non-oil exports. With slightly faster non-oil export growth, and some additional restraints on import intensive projects, the GDP growth rate need decline by less than 1% to maintain a viable balance of payments position. The other alternative scenario, that of lower non-oil export performance, would have more serious consequences for growth and external payments stability over the longer term than the lower oil price case. Slower economic growth would also make the task of employment creation more difficult. Reduced resource availability would constrain government investment and could slow down agricultural growth and diversification. An even greater effort would then be necessary to encourage a labor intensive pattern of production in agriculture and manufacturing, combined with additional public expenditures in favor of relatively labor intensive and rural based activities. xix. Recognizing the uncertain price prospects for oil in the medium term, REPELITA IV attaches particular significance to the promotion of non-oil exports. The prospects for Indonesia's non-oil exports will, in large measure, depend on the success of its manufactured exports. As noted earlier, Indonesia has substantially increased these exports, particularly plywood and textiles, over the past two years. Unfortunately, textile products have - xiv - faced growing protectionism - in the form of both tariffs and non-tariff barriers. A rollback in these barriers and a reduction in tariffs for plywood would provide an important measure of additional support for Indonesia's adjustment efforts. At the same time, Indonesia should not lose sight of the fact that there is substantial scope for expansion in textile exports In categor'es not subject to quotas, as well as in other manufactured goods. Clearly, the problems Indonesia is encountering in the international textile and plywood markets underscore the need for diversifying the mix of its manufactured exports. xx. Given the uncertainty over oil prices, the projections highlight the need for a cautious external borrowing strategy over the next few years, so that future debt obligations remain manageable. In the near term, Indonesia's debt-service ratio wlll inevitably rise, given the recent fall in petroleum prices and market constraints on increasing oil exports. However, with continued prudent borrowing and further adjustment on the current account, the debt-service ratio should improve before the end of the decade. The report cautions against undertaking substantially more borrowing than is recommended in the base case. With higher borrowing there would be a risk that the debt-service ratio would deteriorate rapidly in the early 1990s, particularly if the recovery in oil prices is delayed or is more sluggish than envisaged in the base case. Selected Policies for Growth and Structural Transformation xxi. Prudent debt management in the near term needs to be supported by longer term measures to stimulate the growth of incomes and employment. In view of the uncertain and less favorable external environment facing Iudonesia, there is a need for an even more careful husbanding of resources, and new measures to strengthen the production base of the economy through efficiency improvements and judicious investments. In particular, a vital task will be to foster the development of a broad-based and internationally competitive industrial sector leading to a rapid and susrainable growth of non-oil exports. This is central to the objectives of improving the growth and distribution of income, creating employment opportunities and diversifying sources of export earnings. The report examines some key areas of development strategy and economic policy that can guide this process. It is argued that economic policies need to pay close attention to efficiency issues in industry and trade, in the banking system and in public investment. Additional areas of policy are also examined from the employment vantage. These include continued priority for agricultural income growth, an appropriate pattern of public expenditures, careful implementation of the transmigration program, and a supportive environment for urban informal sector activities. Industrial and Trade Policy xxii. The problems of excess capacity and financial stresses in industry are in part a reflection of the past and present industrial policy environment. This environment leads to high cost industries because it shelters manufacturing activities from International, and often also domestic, -xv- competition. It should, of course, be recognized that efficiency in the industrial sector, as In ;:he rest of the economy, depends not only on government economic policies. Efficiency is also profoundly influenced by the cost and quality of physical infrastructure - ports, laud transport, power, telecommnmications; the level of entrepreneurial and managerial talents, scale of production and the technology employed; and the skill level of the workforce. The Government's recent decisive measures on customs and ports, and the ongoing emphasis on education and management development, should help improve the efficiency of physical and human infrastructure. But an early rationalization of industrial and trade policy is also essential to the success of the campaign to reduce costs in manufacturing, so as to enhance its contribution to growth, incomes and export earnings. xxiii. Under the present industrial and trade policy environment, large implicit subsidies are provided to several production activities for the domestic market, the costs of which are borne by the domestic consumer. In some cases, domestic value added, when measured in international prices, is negative, indicating that in such activities the net contribution to the balance of payments is negative. By contrast, export oriented industries are disadvantaged by the present incentive structure, because they have to use higher cost, locally produced inputs. Indonesia's recent accession to the GATT Code on Subsidies and Countervailing Duties reflects the full recognition by the Government that unless the problem of high costs is tackled directly, Indonesia's non-oil export drive is unlikely to achieve the desired level of success. xxiv. In response to excess capacity and slow manufacturing growth, recent Government policy statements emphasize the need to encourage exports of manufactures. In April 1985, the Government reduced both the level and the range of import dutic_. A reduction in the cost of imported inputs should improve the competitiveness of a wide range of Indonesian industries. On the other hand, several other recent government actions are likely to be counterproductive to the export drive. In particular, quantitative restrictions on the imports of an increasingly wide range of products, and the nature and pace of deletion programs to increase the local content of a number of engineering goods, could encourage potentially costly and uneconomic upstream investments. Such investments create the risk of imposing a long run cost burden on downstream industries, thus jeopardizing the cost competitiveness of exportable products. xxv. During the 1970s, almost 90% of the growth of manufacturing output was sold in the domestic market, where domestic producers were protected from foreign competition by tariff barriers. Import substituting industrial projects can offer high economic rates of return and deserve high priority provided they are competitive rather than sheltered behind protective barriers. The overall thrust of industrial policy needs to emphasize a shift towards a more cost-competitive industrial structure oriented towards exports. This is important at this juncture for three reasons. First, as noted above, it is the only way of sustaining a sufficiently rapid growth of - rvi - non-oil exports - without which either growth, or balance of payments stability, may have to be sacrificed over the longer run. Second, lowering product costs and prices is the best means of stimulating the growth of domestic demand for manufactures; this in turn would improve overall capacity utilization and growth performance. Third, the resulting broadening of the manufacturing sector is central to the provision of more employment opportunities for the new entrants to the labor force. A clear enunciation of a policy that new industrial investments would be required to be efficient by international standards would help set a better framework for both private and foreign investment. xxvi. There are several industrial areas where Indonesia probably has a strong dynamic comparative advantage in international trade. One example is l-ight engineering products, which use relatively labor intensive techniques of production. Existing firms in this subsector already exhibit potential for international competitiveness. The mastery of the technology used in these subsectors could provide the necessary base Indonesia needs to undertake more complex production processes. This indicates a need for a shift in emphasis towards light engineering goods. Accordingly, changes in the policy environment and incentive structure are required. In addition, active government support is important for rationalizing existing industries so they can compete more effectively with imports without requiring high protection. xxvii. As noted earlier, the promotion of capital intensive producer goods industries, in addition to imposing immediate strains on the balance of payments, will substantially reduce the scope for creating gainful employment opportunities. Greater emphasis, therefore, should be given to encouraging the growth of industries which have a greater labor absorption potential, as well as to increasing efficiency and export orientation in manufacturing production. These are not necessarily conflicting objectives; indeed there can be a high degree of complementarity between an efficient, foreign-exchange earning pattern of industrial growth and a relatively labor intensive one. The shifts in the composition of industrial output under a relatively export oriented strategy can have significant employment benefits. Attention also needs to be paid to the relative role of small scale, as against large, production units. The experience of other countries indicates that the best way of sustaining the growth of small scale production units is to encourage a broadly dispersed pattern of demand growth and to remove favored treatment for large scale firms. xxviii. Trade policy reform is one of the most difficult tasks facing any government and the process must be carefully managed in order to minimize the problems of adjustment. However, the longer present policies continue, the more difficult and costly becomes the task of improving the efficiency and international competitiveness of domestic industry. The present report does not provide a detailed prescription for future policy changes; instead it suggests two areas which are fundamental to such an effort. First, it is important to refrain from introducing new bans and quantitative restrictions and begin to replace existing ones with tariffs. With the recent lowering of - xvii - tariffs, there may well be pressures to grant new quantitative restrictions. It would be advisable to firmly resist such pressures. Second, over the medium term, it would be essential to effect a further reduction and greater uniformity in tariffs. During the transitional period to a less protected environment, there would be a need for assistance to those industries which have the potential of becoming competitive in the medium term. xxix. The banking system can play an important supportive role in reducing investment costs and increasing competitiveness. Given Indonesia's open capital account and the close linkages between domestic interest rates and those abroad, it is difficult to bring down domestic deposit rates. However, the present high cost of credit can be reduced by improving the efficiency of banking operations through more efficient organizational and operational procedures, and improved credit analysis and loan recovery efforts. The banking system can also support the process of industrial and trade policy reform in two other ways. First, it can assist those firms that need to restructure, modernize and adapt their production structure by providing them with technical a sistance and financing. Second, banks can contribute to the development of an efficient industrial sector through sound appraisal of projects and the provision of technical assistance and advice especially to smaller businesses and new entrepreneurs. To achieve these goals, it is necessary that financial institutions themselves become more self-reliant, be able to operate independently, and strengthen their capacity for risk assessment. Public Investment: Issues and Priorities XXX. As half of all fixed investment in the economy is managed by the public sector, the planning and implementation of the public investment program has a crucial bearing on the goals of efficiency and employment creation. The report takes the view that the public investment priorities proposed for REPELITA IV are broadly appropriate. The planned reallocation of resources (compared to actual expenditures during REPELITA III), from industry and mining to the social sectors, should have a favorable impact an employment generation and foreign exchange use. Every Rupiah invested in the social sectors requires half as much imports, while generating three times as much employment as investments in industry, mines and energy. Given the overall resource constraints, care needs to be exercised to protect high priority investments, especially in agriculture and the social sectors. Within the priority sectors, some. shifts in spending would also be appropriate.. For example, the emphasis in education expenditures would need to shift from primary school construction to secondary and higher education development. Similarly, the nature of appropriate irrigation investment, especially in Java, needs to be reassessed, in view of recent success in rice production, while some reappraisal of the desirable and affordable level of power investment may be necessary. xxxi. The potential for altering the sectoral composition of public exDenditures is severely constrained by differences in project implementation - xviii - capacity between sectors. For example, in the tree crops sector, implementation constraints have kept actual plantings below planned levels - despite the sector's obvious importance to the domestic economy and exports. Similarly, implementation problems can adversely affect the optimal mix of completed investments; for example, the expansion of PLN's distribution system has been held up by procurement delays, which in turn has contributed to high transmission and distribution losses. The problems of project implementation cannot be solved easily, but they must be tackled if Indonesia is to succeed in meeting its sectoral investment goals. In the industrial sector, there is considerable scope for undertaking new projects. However, the uncertain economic outlook calls for a cautious attitude toward embarking on large, new investments (including those rephased in 1983). Their economic rates of return and, especially, the implications of a possible slowdown in the growth of domestic demand, would need to be carefully scrutinized. Particular care must be exercised concerning projects that would commit the country to high import requirements and additional external borrowing at a time when it faces uncertainty over resource availabilities. xxxii. Good investment planning based on sound project appraisal requires a strong central framework for ensuring intersectoral and macroeconomic consistency. BAPPENAS already plays a major role in this regard, but there is a need for better coordination and monitoring of line agency programs, and appropriate mechanisms and criteria ror adjusting the investment programs in the light of changing conditions of demand, implementation capacity and resource constraints. In addition, increased attention needs to be given to the recurrent cost implications of past and new investment. There is a case for financing more of these recurreat expenditures through cost recovery in public services. Cost recovery can also be improved by increases in interest rates for several credit programs (e.g. smallholder tree crops). Major public utilities, such as PLN and Perumtel, should be able to finance a more significant portion of their investment costs from internally generated funds and reduce their reliance on the government budget. In the case of PLN, there is also considerable scope for increasing revenues through improvements in efficiency, for example by reducing the presently high transmission and distribution losses. xxxiii. As noted above, the composition of public investment also has a significant impact on employment. Relative shifts toward less import intensive sectors, as reflected in REPELITA IV allocations compared with REPELITA III realizations, increase direct and indirect employment effects. There are many expenditure options with high economic rates of return that are relatively labor intensive: for example, construction and rehabilitatioa of tertiary canals, rural roads, as well as regular maintenance of infrastructure. While the employment objective should not be the sole determinant of sectoral investment priorities, care should be taken to protect labor intensive activities in the event of resource constraints or a worsening of the employment situation. It would also be desirable to subject investment proposals that require high investment resources per new job to special scrutiny to ensure that they are economically justified. Public expenditures - xix - on transmigration programs have a significant impact on the employment situation. The sponsored transmigration program, together with associated spontaneous flows, could provide employment for about 20% of the increase in the labor force in Java. However, to prevent destabilizing second round migration flows, careful site selection and design of economic activity and close co-ordination of investments in resettlements, tree crops, water-resource and livestock development are needed, in order to generate sustainable incomes for transmigrant families. This could lead to difficulties in achieving current targets. External Capital Requirements and Borrowing Strategy xxsiv. Under the base case scenario, Indonesia would require, on average, $5.2 billion annually in new commitments over the next three years to meet its public sector borrowing requirements. Official assistance (primarily concessional bilateral loans and grants and multilateral loans and grants from members of the Inter-Governmental Group on Indonesia - IGGI) has been the most important source of external finance for Indonesia. Loan commitments from these sources amounted to about $2.1 billion in 1984, comprising $0.5 billion in bilateral concessional loans and $1.6 billion in multilateral loans. In addition, Indonesia received an estimated $110 million in grants from the IGGI members. It is essential that IGGI members continue to provide a substantial share of Indonesia's external financing requirements in the years ahead. This is particularly important because, given the expected deterioration in the external environment over the remainder of the decade, it would be inadvisable for Indonesia to increase substantially its reliance on commprcial borrowing, in view of current real interest rates and maturities. It is, therefore, recommended that the level of IGGI assistance to Indonesia be at least $2.4 billion in 1985/86 (the same level as recommended and pledged for 1984/85), and that the level of commitments over the next three years average at least $2.5 billion annually. sxxv. A public sector borrowing program as outlined above implies an average growth of about 9% annually in the nominal value of outstanding public debt between 1984 and 1990, and a 7% increase during the first half of the 1990s. Medium and long term private debt is expected to rise more slowly, so that its overall share in Indonesia's total external debt would decline. At the projected levels of borrowing under the base case scenario, Indonesia's total debt-service ratio, including private debt, would peak at 24% in 1989. It would then stabilize and decline to 22% by 1995. Even under the alternative low oil price scenario, tighter macro economic management could hold the total debt-service ratio to a peak of 26% in 1989 with a decline to 23% by 1995. While debt service levels of these magnitudes are manageable for Indonesia, the uncertainties of the external environment mandate continued restraint in external borrowing. With prudent borrowing, maintenaance of a comfortable level of external reserves to guard against temporary strains on liquidity, concerted efforts to sustain a rapid growth of non-oil exports, and continued discipline in the public investment program, Indonesia should be able to retain its present high standing in international capital markets. CHAPTER 1 RECENT ECONOMIC DEVELOPMEWTS A. The External Setting and Adjustment: An Overview 1.1 Developments in the Indonesian economy in 1984 need to be viewed against the background of the previous two years, which were dominated by adjustment to the effects of the 1980-83 international recession. The recession severely affected the Indonesian economy in two ways. First, the weakening of the demand for oil in 1982 - which led to the price and quota reductions of March 1983 - reduced Indonesia's gross oil and LNG export earnings from nearly $19 billion in 1981/82 to $14.7 billion in 1982/83. Second, the demand for and the prices of the country's traditional non-oil exports (essentially agricultural commodities) declined, thus leading to a fall In non-oil export receipts from over $6 billion in 1979/80 to less than $4 billion in 1982/83. The sharp reduction in total export earnings created substantial pressures on the balance of payments, resulting in a current account deficit of $7.1 billion (equivalent to 8.5X of GNP) in 1982/83, compared to a surplus of $2.2 billion two years earlier. 1.2 The Government rapidly perceived that (a) the underlying weakness of the international oil markets was not a temporary phenomenon, and (b) current account deficits of the order experienced in 1982/83 could not be sustained. Accordingly, beginning in late 1982 the authorities initiated a set of decisive measures to cope with the immediate external payments difficulties and to address the longer-term structural weaknesses of the economy. The stabilization and adjustment measures included the adoption of an austerity budget for 1983/84 (embodying a sharp reduction in subsidies, especially for petroleum products); a major "rephasing" of the public investment program with anticipated foreign exchange savings of some $10 billion; and a 28Z devaluation of the Rupiah vis-a-vis the US Dollar in March 1983. While the devaluation was also expected to contribute to longer-term structural improvements in the economy, the authorities endeavored to increase domestic resource mobilization through a drastic overhaul of the tax system /1 and a major reform of the financial sector, which freed up deposit and lending rates of the state banks and removed credit ceilings. The Government also announced its intention to simplify the regulatory environment, so as to increase economic efficiency in both the public and private sectors. 1.3 These measures constituted a far-reaching response to the problem at hand. Their effectiveness was significantly aided by the recovery in the U.S. and Japanese economies which got underway during the latter half of 1983 and gathered considerable strength in 1984. The gains were impressive on a broad /1 The new income tax law went into effect in April 1984, but the implementation of the value added tax (VAT) was delayed until April 1985 to allow for the completion of the necessary preparatory work - paras. 1.26-1.31. - 2 - front. Non-oil exports increased by about 37% to nearly $5.4 billion in 1983/84. With stabilized oil and LNG earnings and total imports down by some 12%, the current account deficit was reduced to $4.2 billion (6.0% of GNP) in 1983/84. The overall fiscal deficit was reduced from 6.3% of GNP to 1.9% over the same period. The financial sector reform and the restoration of confidence in the Rupiah following the March 1983 devaluation contributed significantly to financial savings mobilization. Time deposits in the banking system increased rapidly by about 56% in the nine months following the June 1983 reform which triggered a significant portfolio adjustment by individuals and businesses. GDP, aided by favorable performances in agriculture and the petroleum/LNG sector, grew by an estimated 4.7% in 1983; inflation, as measured by the Consumer Price Index, was contained to an annual rate of 12% despite the sizeable devaluation and significant upward price adjustments for petroleum, power and public transport. 1.4 Broadly speaking, 1984 has been a year of continued adjustment and consolidation. The emphasis was on carrying through the difficult adjustment measures initiated in 1983 and preventing backsliding on the major structural reforms in the financial sector, taxation, and exchange rate management. The performance of most macroeconomic indicators was remarkably good. With strong growth in agricultural production, non-oil/LNG GDP is estimated to have increased by 4.4% in 1984 11, while domestic inflation moderated to 9%. The current account deficit was further reduced to $1.9 billion (2.4% of GNP) and Indonesia's net foreign exchange reserves rose to nearly $10 billion (7 months of imports). Government savings increased from 8.4% of GNP in 1983/84 to an estimated 9.8% in 1984/85. The impact of the budgetary operations was less expansionary than originally intended. While growth in rur2l incomes was strong, demand for manufacturing output was modest and construction activity faltered in 1984. 1.5 The stresses caused by the stabilization and adjustment measures were most evident in the manufacturing sector. Additions to production capacity, installed in earlier expectations of continued rapid growth in demand, lay seriously underutilized. In addition, increases in input costs and debt- service obligations (in local currency) associated with the 1983 devaluation, and sharply higher domestic real interest rates fopiowing the June 1983 reforms, eroded profit margins and inventories accumulated. These factors and uncertainties associated with the implementation of some of the new policies 'for example, the tax reform) also affected private fixed investment adversely. Further softening of oil prices and the strengthening of the US Dollar in international financial markets created new uncertainties toward the end of 1984. 1.6 The remainder of this chapter reviews the recent economic developments and policies in greater detail, while highlighting some of the near and longer term issues which would need to be addressed to ensure that the momentum of development can be strengthened. /1 On the basis of 1981 prices. The growth rate estimate for non-oil/LNG GDP on the basis of 1973 prices is 4.3%. B. General Economic Trends Availability and Use of Resources 1.7 Official data on income and expenditure for 1984 are not available. However, preliminary estimates have been prepared by World Bank staff, which form the basis of the assessment that follows. Indonesia's gross national Income (GNY) increased by an estimated 7.0% in 1984, reflecting a 6.52 increase in GDP (in 1981 prices) and some modest improvement in the terms of trade (para. 1.46). As noted below, over half of the growth of GDP in 1984 stemmed from oil, LNG, and refining operations (para. 1.11). While this helped to increase government revenues over budgeted levels, the authorities, in view of the continued need for prudent macroeconomic and foreign exchange reserves management, increased government financial savings with the banking system. Concomitantly, the external current account also improved by the equivalent of over 3Z of GNP during the year (para. 1.41). Thus, total resource availability increased by only about 3.8%, reflecting the reduced net flow of resources from abroad (Table 1.1). Effective domestic demand in real terms, as measured by aggregate expenditure flows (consumption and fixed investment), increased even less rapidly at the modest rate of 1.1 over 1983. The slow growth of effective demand was in part due to a substantial decline in private investment; also the Government's net domestic expenditures as a ratio of GNP remained unchanged at their 1983184 level, with the result that there was no rise in the stimulus to the economy, as had been intended by the budget. Government fixed investment expenditures increased slightly (by less than 1%) during 1984. At the same time, its current expenditures in real terms declined by 4X (Table 1.1). Although private consumption is estimated to have increased at 5.32 , this increase mainly took place in the rural economy (para. 1.8). Given the slow growth in demand in urban areas, particularly for manufacturing output, a substantial, largely involuntary, build-up of inventories took place. 1.8 Total consumption increased by an estimated 3.82 in 1984 with divergent movements in government and private consumption. Government consumption expenditures fell, in large part because of reduced subsidies for oil. This reflected price increases (noted above) and a welcome reduction in Pertamina's operating losses. On the other hand, private consumption grew about one percent faster than in 1983. Given the rapid growth of agricultural incomes (para. 1.13), this increase in consumption is likely to have taken place mainly in the rural areas, while consumption in urban areas appears to have stagnated or increased little. This is not surprising because: (a) the price adjustments made over the past few years generally affected basic goods and services which are consumed more in urban areas; and (b) incomes in the non-oil economy outside agriculture grew rather slowly in 1984, as compared to both 1982 and 1983. Moreover, profit margins in the industrial and trading sectors were generally squeezed due to sluggish sales, high interest costs and market resistence to higher output prices. In the manufacturing sector, real wages remained under pressure due to low profitability and measures taken to avoid lay-offs through reductions in shifts, working hours and overtime; and, although a 15% wage increase was given to civil servants as of April 1984, this increase only compensated them partially after two years of erosion of their real incomes. Table 1.1: EXPENDITURE AND SAVINGS RATIOS, 1981-1984 1981 1982 1983 1984 1982 1983 1984 X of GNY in 1981 prices annual growth rate (X) Gross national income (GNY) 100.0 100.0 100.0 100.0 -1.3 2.4 7.0 External balance /a 3.3 9.1 5.4 2.3 - - - Aggregate resource availability 103.3 109.1 105.4 102.3 4.2 -1.1 .3.8 Consumption 79.0 81.8 82.7 80.2 2.2 3.5 3.8 Government 15.1 ;: D i4. -6.7 -1.1 -Ti Private /b 63.9 67.5 68.9 67.8 4.3 4.4 5.3 Gross Investment 24.3 27.3 22.7 22.1 10.7 -14.7 4.0 Changes in stocks . 1 2. 0 3 3.7 -. 53T;! Fixed investment 22.2 24.4 22.2 18.9 8.5 -7.0 -9.0 Government (11.1) (13.5) (10.4) (9.7) (20.0) (-21.3) (0.5) Private /b (11.1) (10.9) (11.8) (9.1) (-3.0) (10.6) (-17.3) Memo items (in percent): Domestic savings/GDY 23.9 22.1 23.0 25.0 National savings/GNY 21.0 18.2 17.3 19.8 /a Current account balance, adjusted for terms of trade effect. 7b Includes expenditures by public enterprises financed from sources outside the Government budget. Source: World Bank staff estimates. The estimates for 1984 are preliminary. 1.9 Available data suggest that fixed investment by the Government increased slightly (less than 1Z) in 1984. Planned public sector investment over the past two years was drastically reduced through the rephasing of several major public sector projects. In addition, as discussed in Section C below, the execution of the 1984/85 development budget fell short of the target (para. 1.25). 1.10 The quality of available data on private fixed investment is not very good; but, a review of major subsectors in industry suggests that while weak market demand in the urban economy may have contributed to the decline in private investment, an even more important cause was the existence of substantial excess capacity in many manufacturing subsectors (such as cement, automobiles, motorcycles, tires, various textiles, etc.) due to heavy investments made over the past decade, particularly since the 1979 oil price increase. Clearly, past demand projections on which these investments were based were overestimated; and the slackening of domestic demand exposed the weaknesses in these forecasts, and caused the overextension of these industries. A further deterrent to private investment was the rise in investment costs and funding difficulties experlenced by investors. As noted, the 1983 devaluation substantially increased the costs of imported capital equipment and inputs and debt-service obligations on foreign currency loans, while the rising real costs of domestic borrowing strained the financial position of many business firms. In addition, the availability of longer term funds for invest mfent through the state banks, the development banks and the capital market appears to hawe been reduced (paras. 1.57-1.60). Finally, uncertainties emanating from the implementation of new tax legislation evidently led to some postponement of investment decisions, as investors adopted a 'wait and see- attitude pending the clarification and interpretation of the new tax laws./l Growth ol- Domestic Output 1.11 Non-oilILNG GDP is estimated to have grown at an annual rate of 4.4.% (in 1981 prices) in 1984, or at about the same rate as in the previous year (Table 1.2). The agricultural sector recorded impressive gains, while output in the Industrial sector as a whole recovered significantly, with a particularly sharp increase in oil refinig operations. However, as noted in para. 1.8, in mny industrial subsectors sluggish dome tic demand appears to have been a major constraint to the absorution of increased output. (Given continued excess capacity and the lack of competitiveness of many products in export markets, these developments raise important questions with regard to industrial development strategy which are discussed in Chapter 3.) Activity in the construction sector stagnated (para. 1.18). In contrast, the oil/LNG sector grew rapidly, paced by a sharp expansion in LNG production. The completion of the refineries at Cilacap, Ba^ikpapan and Dumal also substantially expanded domestic refining capacity. Consequently, overall GDP is estimated to have grown by 6.5% (in 1981 prices) in 1984, with about 53% of this growth originating from oil/LNG/refining operations. 1.12 Growth in the agricultura' secto- in pr..isionally estimated to have been about 5%, mainly due to significant production increases in food crops, particularly rice, smallholder cash crops and the fisheries subsector. The rice crop is estimated at a record 2.5.8 million tons, i.e. 7% more than the 1983 (previous peak) level. Compared to the situation ten years ago, this represents an impressive increase of 68% - clear evidence that the Government's strategy of achieving self-sufficiency in rice has been rewarded. Availability and expanding use of key inputs (fertilizer, insecticides and good quality seed), incentives provided through support prices, subsidies and bank credit for the purchase of inputs, and favorable climatic conditions /1 The Government subsequently took actions to clarify these rules and reduce these uncertainties; and the simplification of the tax code and the reduction of tax rates should help to encourage investors in the future; see paras. 1.26-1.31. -6- Table 1.2: GROWTH IN SECTORAL VALUE ADDED, 1982-1984 (in percent p.a. at 1981 prices) 1982 1983 1984 Sectoral Share of Prelim. shares increase in Est. in 1984 GDP in 1984 (Z of GDP) (in Z) Agriculture 2.1 4.8 5.0 25.5 20.0 Mining and quarrying -12.1 5.9 5.0 20.8 16.3 Oil (-15.7) (6.0) (5.6) (18.0) (WP'.8) Non-oil (3.5) (5.0) (1.0) (2.8) (3.5) Manufacturing 3.1 3.1 24.4 12.8 41.3 ING (9.2) (5.1) (52.6) (5.5) (_1.2) Refining (-2.9) (-10.5) (30.0) (1.3) (5.9) Other (0.8) (2.5) (4.7) (6.0) (4.2) Construction 5.2 5.5 0.0 5.8 ('.0 Services 5.5 4.3 4.0 35.2 22.3 Gross domestic product -0.2 4.7 6.5 100.0 100.0 Nou-oil/LNG GDP 3.8 4.4 4.4 76.5 52.9 Maeno item: GDP at constant 1973 prices /a 2.2 4.3 5.0 Non-oil/LNG GDP at constant 1973 prices /a 3.6 4.2 4.3 /a Official statistics use 1973 as the base year for real GDP growth calculations. The most important difference is the relative weight attached to the oil sector, which is much higher in 1981 than in 1973. As a consequence, changes in the level of oil output have a larger influence on overall growth at 1981 prices. Source: World Bank staff estimates and BPS data. contributed to the increase in rice production. Timely rains helped to increase acreage under rice by about 5%, while average rice yields increased by about 2% during the year. Favorable weather and support policies also helped to increase the production of secondary food crops such as corn, soya- bean and cassava. The production of cash crops by smallholders - particularly tea, coffee, rubber and sugar - increased significantly during the year; the first three export commodities continued to benefit from the stimlus of the 1983 devaluation and generally favorable export prices./l 1.13 As a result of the bumper rice crops of the past two years, BULOG - the state logistics board which operates the farm support price schemes - was holding rice stocks of nearly 2.5 million tons at end December 1984. Present indications are that the 1985 rice crop will also be good. Given BULOG's presently high stock levels, its capacity to procure and store substantial additional quantities may be strained; and physical losses and financial costs of such operations are likely to be considerable. Large scale export of rice is not an economic proposition for Indonesia given the relatively high costs of production and low quality. However, with iuvestments aimed at improving rice milling and grading facilities, it may be possible to export modest amounts of rice. 1.14 In the manufacturing sector, value added in activities other than LNG and oil refining recorded a 4.7Z increase, representing a significant improvement over the growth rates realized in the preceeding two years. However, several subsectors performed poorly. As discussed below, the relatively weak performance of these subsectors is reflected in widespread excess capacity and poor financial results. There was a 302 increase in value added in the oil refining subsector, following substantial expansion of domestic refining capacity in 1984. When oil refining is included, value added in the manufacturing sector is estimated to have increased by about 9% /2 in 1984. 1.15 As noted earlier, excess capacity in several industries is the result of the recent completion of a large number of public and private investments which were primarily directed at the domestic market and based on optimistic &-amand forecasts, coinciding with a sharp decline in economic activity. As a result, capacity in some industries far exceeds domestic demand. Some examples are: cement, where production capacity has risen from 5.8 million tons in 1980 to an expected 17.4 million tons in 1985, compared with expected domestic sales of slightly above 10 million tons in 1985; and car tire manufacturing, where installed capacity has risen from 2.7 million umits in 1978 to an expected 6.7 million units in 1985, compared with anticipated domestic demand of only about 4 m1ion units in 1985. Estimates by the Ministry of Industry show that in several other industries (for example, televisions, air conditioners, kraft paper, steel slabs, hot-rolled coils /1 In the case of rubber, export prices reached a peak in early 1984 and declined thereafter. /2 Excludes LNG. - 8 - and hand tractors) production ranged from 25-70% of capacity. Industries particularly affected by slack demand have been consumer durables, notably motor vehicles and home electronic products. The building and construction materials industry has been severely affected by the slowdown in construction activity. As a result of low capacity usage and continued sluggishness in the domestic market, many manufacturers have begun to look abroad for markets, for example in yarn, garments, steel rods, cement, tires and fertilizer. 1.16 Apart from the impact of excess capacity on unit costs, several other developments in 1983 and 1984 also contributed to rising production costs. These included the March 1983 devaluation, increases in domestic energy prices and the sharp rise in real lending rates. Coupled with the inability of manufacturers to pass on cost increases to consumers given present market conditions, this has weakened the financial position of some firms in a number of industries. There are also indications of widespread lengthening of maturities for receivables which is proving costly to finance. These factors have led to some failures in the textile and food processing subsectors, while the financial position of several firms in other subsectors is reported to be weak. 1.17 In contrast, several industries . particularly in the non-durable consumer goods sector (such as matches, kretek cigarettes and batik) experienced good growth in 1984. In addition, the fertilizer and basic chemicals subsectors fared well with the recent completion or expansioa of public enterprise plamts and increased demand from the agricultural sector for fertilizer and pesticides. Finally, the plywood and sawmilllng subsectors registered new export gains; but fierce competition among exporters of plywood threatened the survival of sereral small mills and prompted a government initiative to organize joint marketing boards to protect the financial viabillty of the Industry and the country's foreign exchange earnings. 1.18 Growth in the construction sector was adversely affected by the decline In Investment spending, although there were continued high levels of activity in building construction in Jakarta. Perform-nce in the services sector (on which concrete data are not available) reflected the trends in the major sectors noted above. The modern services sector comprising transport, communications and banking did well, the latter benefiting from the recent finan cial sector reform. The traditional services sector also experienced some growth; however, weak domestic demand, slow growth in the industrial sector and the red-ction in non-oil imports adversely affected the trading subsector. 1.19 Oil and LNG value added, which accounted for about 23% of overall GDP, rose by 14% in 1984, mainly due to a 53% increase in LNG output. Two new trains at Bontang, East Kalimantan were completed in 1983 with an additional two trains at Arun In 1984. These raised LNG production to about 753 million MMBTU in 1984 from 494 million MMBTU in 1983. -9- Inflation 1.20 Domestic inflation as measured by the Consumer Price Index for 17 cities (CPI) abated in 1984; other indicators, such as the Wholesale Price Index (WPI) and the Essential Commodities Index for rural areas, also confirm this trend (Table 1.3). On the supply side, increased agricultural production, particularly the excellent rice crop, played a major part in this improvement; on the demand side, tight demand management policies also contributed. As noted below, the money supply (Ml) increased by 13% during the year, adding little to price pressures. Table 1.3: RATES OF INFLATION, 1982-84 (in percent p.a.) CPI /a WPI /b Rural /c Jakarta 17 Agri- Manufac- General Java & Outer cities culture turing excl. Madura Islands exports 1982 9.0 10.0 9.5 11.7 10.5 25.6 21.6 1983 11.1 12.0 18.2 17.5 19.8 10.0 11.0 1984 11.2 9.0 8.6 9.8 8.3 4.2 6.9 /a Consumer Price Index. 75 Wholesale Price Index. TcW Combined index of wine essential commodities. Source: Biro Pusat Statistik. 1.21 The rate of inflation during most of 1984 was in fact much lower than that suggested by the fizures in Table 1.3. Most of the rise in all three price indices took place in the first two months of 1984. The dominant cause of this spurt was the substantial (37%) increase in domestic oil prices In January, and associated adjustments in electricity tariffs and transport fares which generally raised manufacturing, transport, and 'housing' costs in these indices. In all three cases, as the bumper rice crop was marketed in April/May, the food/agriculture components of the indices began to stagnate or even decline; at the same time, the manufacturing components of the price indices increased little as producers and traders, faced with weak demand and large inventories, refrained from raising prices and trimmed their margins. Thus, the point-to-point inflation rate from April to December 1984 was only about 3% for the WPI and about 2-3% for the essential commodities index for rural areas. In the case of the CPI, the increase in the index for the twelve month period from end-March 1984 to end-March 1985 was only 3.6%. - 10 - C. Management of Government Finances The 1984/85 Budget and Its Outcome 1.22 Given the major efforts by the authorities to adjust to adverse external developments in 1983, the budget was viewed as the most important instrument for further stabilization in 1984185. Thus, although Indonesia's balance of payments position had begun to improve and the external environment appeared to be more promising, the Government adopted a cautious, mildly expansionary fiscal stance. The overall fiscal deficit was budgeted to rise from 1.9% of GNP in 1983184 to 3.8% in 1984/85 and provide a modest stimulus to the domestic economy, with net domestic expenditures Increasing from 9.5% of GNP to 10.3% (Table 1.4)./1l A strong domestic tax effort and restraint on current expenditures were expected to help prevent a sharp reduction in public savings over the 1983/84 levels. 1.23 However, the implementation of the 1984/85 budget fell short of the target. The budget outturn, as estimated by World Bank staff, indicates that the overall budget was in approximate balance. Government investment /2 rose by about 10% in nominal terms to an estimated Rp. 7.8 billion (compared to a budgeted Rp. 8.5 billion), whereas government savings increased by about 38% in nominal terms, from 8.4% of GNP in 1983/84 to 9.8% in 84185. As a result, government savings with the banking system are estimated to have increased by Rp. 2.5 trillion in 1984/85. As a percent of GNP, net domestic expenditures amounted to 9.5% in 1984/85, largely unchanged from the level in 1983/84, but lower than the budget target of 10.3%. Thus, the 1984/85 budget's impact on domestic economic activity was roughly the same as in the previous year, but less than had been intended by the budget. 1.24 The sharp rise in government savings was essentially the result of three factors. First, oil and LNG revenues are estimated to have been 19% above the 1983/84 levels. Second, non-oil revenues are also estimated at i2X above the previous year's level. Third, domestic oil subsidies declined by about 45% in nominal terms primarily due to efficiency improvements in Pertamina's refineries; this helped to restrain the growth of current expenditures to only about 4X over the previous year's level despite higher personnel expenditures. /1 Net domestic expenditures measure the excess of government rupiah expenditures over government rupiah revenues, and indicate the net effect of the Government's budgetary operations on the domestic economy. It is defined as: Domestic content of current and investment expenditures less domestic non-oil revenues. /2 Government investment expenditures referred to here and in Table 1.4 are calculated by adjusting budgetary development expenditures for changes in government savings with the banking system, the fertilizer subsidy and for the recurrent component of the development budget. Table 1.4: SUMMARY OF GOVERNMENT FINANCES, 1982/83-1984/85 /a (Rp. trillion at current prices) 1982/83 1983/84 1984/85 /b 1984/85 Budget /c Total revenues 12.6 15.3 17.9 16.2 Oil aad ING ah; 6 10.4 Non-oil revenues 4.2 4.9 5.5 5.8 Current expenditures /d -8.3 -9.5 -9.9 -10.8 of which: Interest on debt -0.7 -1.2 -1.5 -1.4 Domestic oil subsidy -0.9 -0.9 -0.5 -1.1 Fertilizer subsidy -0.4 -0.3 -0.7 -0.5 Government savings 4.3 5.8 8.0 5.4 Goverment investment /e -7.8 -7.1 -7.8 -8.5 Qyerall balance C- = deficit) -3.5 -1.3 0.2 3.1 Financed by: Net project and program aid If 2.7 3.6 2.3 3.1 Asset drawdown a 0.8 -2.3 -2.5 Memo items (in percent): Total revenues/GNP 22.8 22.1 22.1 20.0 Total expenditures/GNP 28.9 24.0 20.6 23.8 Overall balance/GNP (-- deficit) -6.3 -1.9 0.2 -3.8 Net domestic expenditure/GNP /h 15.4 9.5 9.5 10.3 /a Excludes provincial government finances. 7- Provisional estimate. 77 Based on Nota Keuangan (the budget document). 7_ To arrive at current expenditures, routine expenditures are adjusted to exclude amortization payments and include both the fertilizer subsidy and the recurrent component of development expenditures. /e Government investment includes both direct government investment and transfers to public enterprises. /f Net disbursements of external debt. A negative sign implies asset accumulation with the banking system. Jh Net domestic expenditures is here defined as domestic content of current and investment expenditures less non-oil revenues. See footnote 1 to para. 1.22. Source: World Bank staff estimates. -12 - 1.25 Provisional results indicate that the shortfalls in government investment expenditures in 1984/85 were substantial, particularly on education, transmigration and housing and water supply. Cumulative unspent budgetary allocations are also substantial./l Transfers to the regions and local governments appear to be on target. However, a substantial proportion of these 'expenditures' actually represented unspent disbursements to kabupaten and village accounts; to that extent, in the short rnm they were merely financial transfers, and the impact of the budget as implemented is probably less than suggested by the data in Table 1.4 above. The Tax Reform and Its Implementation 1.26 In late 1983 the Government announced a major reform of the tax system comprising a new income tax law and a procedural law which came into effect in January 1984, and a value added tax law which went into effect in April 1985./2 The main objectives of the tax reform were to: (i) reduce the heavy dependence of government revenues on oil and ING corporate taxes by diversifying domestic receipts; (ii) improve the efficiency of the tax system in terms of coverage and collection rates, and streamline the tax administration; (iii) improve domestic resource mobilization and raise the buoyancy of tax revenues in relation to income growth; and (iv) enhance the elements of equity and social justice in the tax system. 1.27 The new income tax law is a drastic simplification of the earlier tax code. It replaces a complex set of tax rates with just three tax rates (15%, 25% and 35%) applicable uniformly to individuals and companies alike./3 Other major revisions include: a reduction of the average tax rate and higher exemption limits for individuals; the withdrawal of tax holidays, fiscal investment incentives and provisions for indefinite carry-forward of losses incurred in the first six years of operations (investors now benefit from lower marginal tax rates and more generous depreciation allowances); and ceilings on the extent to which interest payments and bad-debt provisions could be deducted from income. The new law also places considerable emphasis on withholding as a means of tax collection./4 1.28 A principal feature of the new procedural law is self-assessment of tax liability by the taxpayer, with tax authorities auditing a small selection of returns. Other important features of the new system include a system of /1 In particular, cumulative unspent budgetary commitments are large for education, transport and transmigration. /2 The value-added tax law was originally scheduled for July 1984 but was subsequently postponed to April 1985. /3 Under the old law, tax rates ranged from 5% to 50% with 17 intervening rates. These rates were applied subject to various adjustments and credits. Furthermore, the rates and allowable deductions were amended annually. /4 Thus, corporations are required to withhold 15% of domestic payments of dividends, interest, rents and royalties, and 20% of foreign payments. - 13 - appeals and refunds, with specific time limits for government action, and legal procedures for punishments and convictions. 1.29 The authorities envisage that a broader tax base and higher yields will augment tax revenues. To broaden the tax base, the Government announced that taxpayers registering by June 1985 could apply for a tax pardon for all previously underreported and undeclared income. According to the authorities, an estimated 820,000 individual and corporate taxpayers had registered by end-March 1984 (as compared to only 550,000 at the end of the previous fiscal year /1) and this number is expected to reach 1,000,000 by end-1985. The Government's efforts are also proving successful in increasing tax collections; although the new income tax law is barely a year old, revenue collections from the income tax in 1984/85 have exceeded those of the previous year. 1.30 Implementing an overhauled tax system has inevitably created a number of problems and ambiguities. Most of these have been resolved, but some still require clarification and/or modification. For example, the maximum allowable debt-equity ratio for the purpose of interest expense deduction was initially set at 3:1 for all types of businesses. This has now been rescinded and differential ratios will be set to take into account financing patterns in various sectors. In addition, the application of the provisions of the income tax law to new contracts in the oil sector needs clarification. Finally, there appears to be a shortage of qualified tax personnel to quickly clarify or resolve problems that have arisen during the early phases of implementation of the new laws. 1.31 The major remaining task confronting the Government in implementing the tax reform is the successful implementation of the value added tax and the sales tax on luxury goods. This represents a major overhaul of the existing indirect tax system, and implementation difficulties will inevitably arise. Judging by the experience of other (developed and developing) economies which have adopted VAT, it will take some time for the Indonesian economy to fully adjust to, and assimilate the procedures and implications of, the new system. To expedite the process, the authorities have been undertaking a major educational campaign. The 1985/86 Budget: A Shift in Expenditure Policy 1.32 Against the background of the slow pace of activity in some areas of the economy, the 1985/86 budget seeks to provide a fiscal stimulus without jeopardizing the hard-won recent gains in stabilizing the economy. Overall government spending is budgeted at Rp. 21.3 trillion, representing a 20% nominal increase over the 1984/85 projected outturn; but revenues are projected to rise by only 5% (Table 1.5). Consequently the cverall fiscal balance is projected to change from an estimated surplus of 0.2% of GNP in 1984/85 to a deficit of 2.9%; and net domestic expenditures to rise from 9.5% of GNP in 1984/85 to 11.0%. If the budget is implemented in full, there would be a sizeable stimulus to the domestic economy. /1 In 1980/81, less than 200,000 income tax returns were filed, of which 5% were correct assessments. Furthermore, over 40% of taxpayers who filed a return in one year failed to do so in the next year. - 14 - Table 1.5: THE 1985/86 BUDGET /a /b /b /c 1984fM3 1984/85 1985/8 1984185 - 1985/86 Budget Estimate Budget Nominal Real (Rp. trillion at Growth Growth current prices) % p.a.-- Total revenues 16.2 17.9 18.7 4.5 -3.1 Oil and LNG U02 1 1.2 -9.7 - Non-oil 5.8 5.5 7.5 36.3 26.3 Current expenditures /d -10.8 -9.9 -12.8 29.3 19.7 of which: Personnel -3.2 -3.1 -4.1 32.3 22.5 Regional transfers -1.8 -1.9 -2.6 36.8 26.7 Interest on debt -1.4 -1.5 -1.8 20.5 11.1 Subsidies -1.6 -1.2 -1.2 - - Gov.e-nment savings 5.4 8.0 5.9 -26.3 -31.7 Government investment le -8.5 -7.8 -8.5 9.0 0.9 Overall balance (- deficit) 0.21 -8.t -2.6 Financed by: Net project and program aid /f 3.1 2.3 2.6 Asset drawdown /& - -2.5 - Memo items (in percent): Overall balance/GNP (- - deficit) -3.8 0.2 -2.9 Government savings/GNP 6.7 9.8 6.5 Net domestic expenditure/GNP /h 10.3 9.5 31.0 /a Excludes provincial government finances. 7T From Nota Keuangan (the budget document). TW Compares the budget for 1985/86 with the estimate for 1984/85. Real growth rates were calculated using a deflator of 8%. /d To arrive at current expenditures, routine expenditures are adjusted to exclude amortization payments and include both the fertilizer subsidy and the recurrent component of development expenditures. /e Government investment includes both direct government investment and transfers to public enterprises. If Net disbursements of external debt. a Negative sign implies asset accumulation with the banking system. fh Net domestic expenditures is here defined as domestic content of current and investment expenditures less non-oll revenues. See footnote 1 to para. 1.22. Source: World Bank staff estimates. - 15 - 1.33 In comparison to the 1984/85 budget, the budgetary expenditure allocations in 1985/86 represent a shift in expenditure policy. In view of the perceived need to provide a fiscal stimulus to the economy and the weak project implementation performance in 1984/85, the authorities have allocated a larger proportion of the budget to current expenditures. Thus, for the first time, investment expenditures are budgeted below the level for routine outlays. This strategy also addresses the need to keep foreign borrowing within prudent limits. When compared to the estimated 1984/85 outcome, the allocations for current expenditures represent a 29% nominal increase, and investment expenditures a 9% nominal (or about 1% real) increase. Even this modest increase in budgeted investment expenditures may be difficult to achieve, unless there is some improvement in project implementation (see paras. 1.37-1.40 below). 1.34 Current expenditures include an average increase of 20% in net civil servants' salaries, a large increase in government pensions and a further rise in teachers' salaries. These Increases are expected to help develop a 'clear and authoritative" state apparatus by improving government employees' salaries and to compensate them for declining real incomes over the past three years. Despite these increases, civil servants' salaries will still not be above their 1982 levels./l There are two other noteworthy features in routine expenditures. First, external debt-service payments are expected to rise by 17.6% in nominal terms over the 1984/85 outcome. Second, the domestic oil subsidy is budgeted at Rp. 532 billion, roughly equal to the outcome for 1984/85. 1.35 With regard to development expenditures, /2 the sectoral priorities in the new budget are similar to those in last year's budget. In accordance with REPELITA IV objectives, education, transport and agriculture continue to receive the highest priority (over 40% of budgeted development expenditures), closely followed by industry, power and transmigration (25%). The health sector, which accounts for a small share of development expenditures, is the only sector to receive substantial additional funds. The fertilizer subsidy, normally included as a component of the agricultural budget, is also expected to rise by over 20% /3, although the price of fertilizer was raised by 11% from Rp. 90 per kg to Rp. 100 per kg in November 1984. Allocations of development expenditures to regional and local governments are budgeted to rise by 8.4%, with general and sectoral INPRES programs rising by 8.6% and /1 The average annual real growth of civil servants' salaries in the 1977-85 period has been only about 2.0-2.5%. /2 For differences between the Government's development expenditures and investment expenditures, see footnote 2 to para. 1.22. /3 This compares the 1985/86 budget with the 1984/85 budget allocations. However the fertiliser subsidy in 1984/85 is estimated at Rp 732 billion or 60% above the budgeted level. Thus, the Rp 558 billion budgeted for 1985/86 actually represents a 24% decline in nominal terms from the estimated outcome for i984/85. - 16 - 8.0X respectively. Meeting these targets will require considerable improvement in project implementation performance of line ministries and local governments. 1.36 An important feature in the new budget is its emphasis on domestic resource mobilization. Non-oil/LNG revenues are budgeted to increase by nearly 36% (in nominal terms) in part to compensate for an expected decline in oil and LNG revenues from their 1984/85 level. The introduction of VAT alone accounts for one third of incremental non-oil revenues. Of the Rp. 1,666 billion VAT target, about Rp. 531 billion are expected to be derived from domestic oil sales with another Rp. 358 billion from imports. These are reasonable targets, but the remaining Rp. 777 billion to be collected from the domestic manufacturing and construction sectors appears ambitious, particularly in the first year of the new tax. The Government also expects to increase collections from individual and corporate income taxes by 40% compared to 1984/85. Domestic revenues are expected to finance 88% of planned expenditures, with the balance coming from project and program aid. Measures to Improve Project Implementation Performance 1.37 The implementation constraints on development budget expenditures, although partly related to limited capacity in the domestic construction industry and consultancy services, largely reflect continuing regulatory, procedural and institutional problems./l A problem area that particularly affects externally aided projects is procurement. Efficiency in procurement is a generally acknowledged objective, the benefits of which are lower costs, speedier implementation and consequently earlier realization of investment returns. However, the desire to utilize local material and services to the maximum extent, which also has worthwhile benefits, has tended to result in protracted delays in finalizing contract awards and, in some cases, to higher costs and delays in their execution. This has been reflected, for example, in the choice of higher cost local steel instead of imported steel, in slow procurement caused by the efforts to find local contractors and consultants, and in slow implementation due to the limited capacity of local contractors. 1.38 The Government is well aware of, and concerned about, these problems. This concern has been expressed at the highest levels and, as a result, a number of actions were taken during the past year to help alleviate these problems. The first category of actions focused on the revision and issuance of decrees to establish new procedures to ease some of the procedural bottlenecks. These new procurement and fund utilization procedures provide clear guidance on government procurement policies (KEPPRES 29 and 30). In November, 1984, the Government issued instructions to project agencies to clear all important procurement parameters with the government committee which oversees procurement (Team 10), before discussing them with lending agencies and/or issuing tender documents. This change is intended to avoid /1 These problems were discussed in last year's economic report; see Indonesia - Policies and Prospects for Economic Growth and Transformation, World Bank Report No. 5066-IND, April 26, 1984. - 17 - delays later on in the procurement cycle. Secondly, the Government organized a number of meetings, workshops and discussions at department and inter-department levels and between senior officials, multilateral and bilateral agencies and project agencies on various aspects of implementation problems. These meetings undertook a project-by-project review of implementation problems, evaluated progress, proposed solutions, and instituted an implementation monitoring system with monthly progress reports to BAPPENAS. Immediate attention was given to critical procurement items, and where budgetary provisions were inadequate in priority projects, authorizations were increased. A third set of actions focused on procedures at the working level, particularly in finance and budgeting, with a view to simplifying complex interlocking structures of procedures and practices which have developed over time. Initiatives in this area include: reiteration and clarification of procurement procedures; the preparation and dissemination of a manual on budgetary procedures, and a course on the subject for project managers; greater flexibility in adjusting implementation targets and funds utilization within DIPs; budgeting for early acquisition of land at project sites; and the revision of procedures for disbursement of funds for approved and signed contracts (SK 395). 1.39 Other initiatives to improve project implementation are in progress. A committee chaired by the Minister for the Utilization of the State Apparatus is examining the complex problems of land acquisition with a view to making appropriate recommendations. Billing rates for foreign and local consultants are under review and, in the interim, the existing guidelines are being applied flexibly. Preparation of standard contract documents is under way. Registration of local consultants and the strengthening of the Local Consultants Association (INKINDO) is in progress, as well as training and other measures to strengthen the local contracting industry with support from the World Bank. 1.40 It is too early to assess the full impact of the procedural changes and instructions outlined above, because of difficulties experienced by project agencies In receiving, correctly interpreting and assimilating changes, particularly for projects initiated under previous procedures. The greatest difficulties occur in those areas where the instructions require or result in the creation of new or additional institutional structures. For example, a new decree (KEPPRES 30) requires the establishment of procurement committees in each department and agency, through which all tenders valued between Rp. 2UO million and Rp. 500 million must be cleared; and public enterprises ate also now required to clear the procurement of items within this range with these department-level committees. D. External Trade and Payments Reduction in the Current Account 1.41 A key objective of the adjustment strategy since late 1982 has been to strengthen the external payments position. As noted earlier, substantial progress in this respect was made in 1984/85 (Table 1.6). The current account - 18 - deficit was reduced to an estimated 2.4% of GNP, while official reserves increased significantly both in absolute terms and in relation to the country's import bill. The measures taken by the Government since 1983 to restrain aggregate demand, the postponement of public sector projects that would need large imports, the slowdown of Government's investment expenditures during the past year, and actions to increase non-oil exports by improving the relative profitability of exporting and through promotional activities all contributed to Indonesia's success in strengthening its external payments position last year. Export Performance 1.42 Although Indonesia's oil export earnings have fallen somewhat over the past two years as a result of declining crude and product prices, Indonesia was able to slightly increase its total 1984/85 export earnings in nominal dollars over the previous year's level. This was because earnings from LNG and non-oil exports increased substantially in volume and value terms. LNG exports increased by 37%, or almost $900 million, and non-oil exports rose by an estimated $500 million. 1.43 The expansion of non-oil exports over the past two years has been broad based. Exports of manufactures, in particular, doubled in value between 1982/83 and 1984/85, with a large number of new items, such as ferrous and 1.nr"-ferrous metal products and rubber products entering the export market for the first time. The existence of excess capacity helped to increase exports such as tires and cement. In the case of primary products, such as tea and coffee, and metAls (copper), the devaluation and continuing strong export prices made exporting more attractive. The Government has also acted to avoid a sigaificant erosion of the 1983 devaluation through a managed floating exchange rate policy. However, the task has been a difficult one given the rise in the U.S. Dollar against other major currencies. 1.44 However, the sharp increase in manufactured exports in 1983/84 (over 80% in constant prices) slowed down to an estimated ;5% - still an impressive rate -- in 1984/85. Much of the increase in the value of manufactured exports over the past year stemmed from plywood (where substantial new capacity came on stream) and textiles, despite tariff and non-tariff barriers in a number of industrial countries. As noted, plywood exporters are now facing difficulties (para 1.17). The rest of the manufacturing export bL.se is still quite small; and although several subsectors have substantial excess capacity, these are not competitive in export markets due to their relat: :ely high cost structure (see Chapter 3). The Government has very recently taken major steps to reduce some of these high costs through an extensive reform of customs and ports procedures (discussed in paras 1.70-1.73 below). As part of its non-oil export drive, the Government has also recently sought to expand market outlets by entering into trade agreements with several Eastern European countries. However, the potential benefits of these initiatives are yet to be realized. - 19 - Table 1.6: SUMKARY OF BALANCE OF PAYMEtTS , 1982/83 - 1984185 Ct billion at current prices) 1982183 1983/84 1984/85 Est. Gross merchandise exports 18.6 19.8 20.2 0O1 and LNG 14.7 14.4 14.3 Noa-oil/LNG 3.9 5.4 5.9 Gross imports of goods (cif) -20.6 -18.0 -16.0 Oil and LNG -4.8 -3.8 -3.1 Non-oil -15.8 -14.2 -12.9 Trade balance -2.0 1.8 4.2 Net non-factor services -1.7 -1.6 -1.6 Resource balance -3.7 0.2 2.6 Ne't factor services and transfers -3.4 -4.4 -4.5 Current accouat balance -7.1 -4.2 -1.9 (- indicates deficit) Net disbursements of public ML debt 3.1 3.7 2.2 Net other capital /a 0.7 2.1 0.6 Change in net official reserves 3.3 -1.6 -0.9 (-indicates increase) Memo items : Total net foreign assets /b 6.3 8.4 9.9 Net offifcial reserves /b 3.0 4.6 5.5 Current account balance as x of GNP -8.5 -6.0 -2.4 la Includes estimated oil and ING export credits, all debt transactions associated with LNG expansion, direct foreiga investment, all private capital flows, and errors and omissions. /b Net of outstanding drawings from the IMF's Buffer Stock and Compensatory Financing Facilities. These are treated as current external liabilities. Source: Bank Indonesia and World Bank staff estimates. 1.45 Over the past two years, non-oil exports have made a significant contribution to the reduction in the current account deficit. Following an exceptionally strong performance in 1983/84, non-oil exports are estimated to have risen by a further 10 per cent in value, or by about $50O million, to an - 20 - estimated $5.9 billion in 1984/85. Since average prices of Indonesia's non-oil exports appear to have declined by 2% over 1983/84 levels, the increase in real terms is about 12% (Table 1.7). Table 1.7: NON-OIL EXPORT PERFORMANCE, 1982/83 - 1984/85 $ million at % change % change current prices current $ constant 1981 $ 1982/83 1983/84 1984185/a 1983/84 1984/85 1983/84 1984/85 Primary commodities 2,400 3,080 3,230 28.3 4.9 5.4 5.2 Timber 580 580 480 - -17.2 -18.2 1.5 Rubber 610 980 990 60.7 1.0 10.9 5.9 Coffee 360 510 530 41.7 3.9 10.4 7.6 other agriculture 850 1,010 1,230 18.8 21.8 14.4 5.6 Manufactured exports 850 1,480 1,650 74.1 11.5 82.5 15.3 Plywood 320 580 660 83.3 13.8 79.0 23.7 Textiles /b 180 360 500 100.0 38.9 111.0 41.1 Elect. appliances 110 130 160 18.2 23.1 20.5 26.9 Other mmnufactures 240 410 330 /c 70.8 -19.5 94.7 -18.8 Metals and non-oil minerals 680 800 1,020 17.6 27.5 18.1 27.3 f.ta. 3.930 5,360 5,900 36.4 10.1 23.6 12. Memo item : Non-oil 93.9 103.8 101.9 export price index (1981-100) /a Preliminary estimates. 7- Includes handicrafts. 7T7 Decline in 1984/85 was mainly due to reduced re-exports of items with little domestic value added. Source: Bank Indonesia and World Bank staff estimates. 1.46 Despite the brisk expansion of OECD output and demand in 1984, world commodity prices did not improve significantly and the World Bank's weighted index of non-energy commodity prices rose by only one percent (from 90 to 91)./l The strength of the dollar led to declines in the prices of some of /1 1979-80 - 100 - 21 - Indonesia 's dollar-denominated exports. Average oil export prices fell by about 2Z during the year. Prices of some of Indonesia's major export products such as plywood, rubber and tin, registered sharp declines. There were, however, some bright spots, as coffee, tea, sawnwood and nickel prices rose. On balance the index of Indonesia's non-oil export prices declined somewbat. However, because of declines In the dollar prices of its imports, Indonesia's non-oil terms of trade improved slightly during 1984. Decline in Imports 1.47 Over the past two years, non-oil imports have declined by about 18Z in dollar terms, largely as a result of the stabilization and adjustment measures adopted since late 1982, most notably the rephasing of public sector investmpnt, the depreciation of the exchange rate, and restralnts on imports. As Table 1.8 indicates, more than 85Z of the decline in total imports has been in the capital goods category and the balance mainly in food imports. The rephasing of public sector investment in May 1983 resulted in considerable foreign exchange savings in 1984/85. Moreover, slortfalls in government investment expenditures in 1984/85 had a particularly pronounced impact on capital goods imports, as project aid-financed imports were reduced. In the case of food items, the decline in 1984/85 was due to a reduction in rice imports by about $200 mtllion, as increased domestic rice production obviated the need for imports. Although the dollar value of intermediate goods imports fell slightly In 1984/85, there was a small increase in real terms, mndicating that imported inputs for domestic production have not been as affected. Table 1.8: NON-OIL IMPORTS, 1982/83 - 1984/85 $ million at Z change Z change current prices current 5 constant 1981 $ 1982/83 1983/84 1984/85 /a 1983/84 1984/85 /a 1983/84 1984/85 /a Consumer goods 1,820 1,660 1,520 -8.8 -8.4 -11.0 -8.2 (Food) (1,270) (1,130) (940) -(11.0) -(16.8) (-15.0) (-15.9) (Non-food) (550) (530) (580) -(3.6) (9.4) (0.7) (10.7) Intermediate goods 4,860 4,660 4,600 -4.1 -1.3 0.1 1.5 Capital goods 9,140 7,920 6,750 -13.3 -14.8 -9.5 -12.3 Total 15,820 14,240 12,870 -10.0 -9.6 -6.8 -7.3 Price index 96.0 92.8 90.4 (1981=100) /a Preliminary estimates. Source : World Bank staff estimates. - 22- Rising Import Restrictions 1.48 There is some evidence to suggest that trade policy interventions have also reduced imports in some product groups. Since 1982, the Government made greater use of existing policies on import controls to protect the manufacturing sector from international competition in a slowly growing domestic market. This has been particularly evident in two instances. First, there has been an increase in the number of categories of goods subject to quantitative restrictions and import licensing requirements. In 1983, the Department of Trade issued decrees requiring that some products (iron and steel, paper, food and drinks, and road tires and tubes) could only be imported through state-owned trading companies; in addition, decrees were issued imposing quantitative restrictions on a number of products. In 1984, the list of goods subject to import licensing requirements and quantitative restrictions was further expanded./1 Second, the Government pressed ahead with the promotion of several engineering industries by imposing quotas oan imports of assembled engLneering products and, with a view to Increasing local content, introducing a program of progressive reductions in component imports through import bans. This approach, which had earlier been applied to automobiles and motorcycles, was extended in the past two years to diesel generating sets, heavy equipment parts, ear thmDving machinery, tractors and, more recently, machine tools. Thus, although the share of items subject to import restrictions in Indonesia's imports has been small, recent events show a strong trend towards a greater number of controlled items./2 However, in sharp contrast to these trends, the Government also introduced a major tariff change in April 1985, which reduces the level of nominal tariff rates and narrowed their dispersion (see Chapter 3). Capital Inflows 1.49 Indonesia has enjoyed continued access to the international capital arkets on favorable terms. In order to limit public sector borrowing abroad and protect Indonesia's creditworthiness, the Government in October 1984 imposed a ceiling of $1.5 billion on total public sector export credits to be contracted in 1984185. Moreover, such financing will be available only for those development projects which will be deemed eligible by the Government, and will be used to procure supplies in an effieient manner. 11 The additions include plastic basic materials, iron or steel pipe Joints, oriented polypropylene film, additional categories of heavy equipment and spare parts, a further 77 electronic products, steel sheets, hot and cold rolled coils and plates, cyclamate and explosives for commercial industries. /2 in addition to the restrictions noted above, as part of the Government's policy of developing the domestic shipbuilding industry, imports of new or second-hand ships are now banned. - 23 - 1.50 In 1984, Indonesia obtained $1.5 billion of new commitments for public sector borrowing from overseas commercial banks 'With commitments of import related credits (31.0 billion) and development assistance by the IGGI (*2.1 billion), total public sector commitments during the year amounted to $4.6 billion. In addition, Indonesia received about $110 million dollars in grants from IGGI members. In 1984/85, gross disbursements declined to $3.8 billion compared with $5.0 billion in the preceding year, partly as a result of slower than planned rates of project implementation, and the continued effects of project rephasing. In February 1985, Indonesia repaid SDER 115 million to the IMF under the ter= of the Buffer Stock and the Compensatory Financing Facilities. 1.51 In 1983, following the devaluation and ;'ncreased confidence in the Rupiah, there was a significant reflow of private funds; the exact magnitude of this reflow is difficult to gauge, given Indonesia's liberal foreign exchange policies. However, this reflow appears to have tapered off in 1984. Indonesia's net official reserves Increased by t0.9 billion during the fiscal year to reach $5.5 billion at the end of March 1984. The net foreign assets of the banking system as a whole rose to about *10 billion, or 7.4 months of total imports of goods. E. Monetary and Credit Developments 1.52 The financial sector reform of June 1983 is an important elemnt of the Government's adjustment strategy. It is viewed as a major instrument for Increasing financial savings and encouraging the evolution of an efficient financial system over the longer term. The reform has already had beneficial effects on financial sector development. Nevertheless, several transitional aspects, discussed below, need to be addressed further to enhance the sector's coontribution to growth and development. 1.53 The improvement in the balance of payments, noted earlier, helped to significantly increase net foreign assets held by the banking system. However, the monetary consequences of this increase were almost c-apletely offset by a rise in net government depoqite with Bank Indonesia. Bank credit to the private sector increased sharply, at an annual rate of 34% (Table 1.9). But, since credit growth to public enterprises was kept down to 42, and time deposits with banks increased rapidly following the reform, money supply (Ml) Increased at the rate of 13%, somewhat below the increase in nominal GDP. Broad money (W2), however, increased by 22%. - 24 - Table 1.9: CHANGES IN FACTORS AFFECTING MONEY SUPPLY AND LIQUIDITY, 1982-84 (Rupiah billion) Annual Growth In Z Changes in 1982 1983/a 1984 1982 1983 1984 Net foreiga assets -1,528 3,031 2,767 -23.0 59.1 33.9 Net government deposits 530 -1,293 -2,471 -11.7 32.3 46.6 Credit to public enterprises 732 61 190 17.2 1.2 3.8 Credit to private sector 2,218 2,371 3,646 36.4 28.5 34.1 Net other assets -593 -582 -858 - - - Time & saviugs deposits /b -723 -3,140 -2,262 22.4 79.4 31.9 Money supply (MI) 636 448- 1,012 9.8 6.3 13.4 Currency (377) (399) (379) (14.7) (13.6) (11.4) Demand deposits (259) (49) (633) (6.6) (1.2) (14.9) Domestic liquidity (M2) 1,359 3,588 3,274 14.0 32.4 22.3 Memo item: M27GDP ratio 18.2 19.9 20.8 /a Includes changes resulting from the exchange rate adjustment on March 30, 1983. /b Includes foreign currency deposits. Source: Bank Indonesia. Deposit Mobilization 1.54 Considerable progress has been made in the past 18 months towards the objective of increasing deposit mobilization by banks; rupiah time and savings deposits held by banks increased by 74Z in the year following the reform (Table 1.10). The sharp rise In nominal and real deposit rates, which followed the reform (see below), led to a shift in the asset preferences of individuals and enterprises from demand deposits and currency to time deposits. In addition, renewed confidence in the Rupiah (which led to some reflow of capital), the modest rate of domestic inflation, a strong foreign exchange reserve position and, finally, favorable tax treatment on interest income /1 all helped increase time and savings deposits. As a result, the ratio oTfbroad money to GDP, at current prices, increased from 18% in 1982 to about 21Z in 1984 (Table 1.9). /1 Interest income from time deposits with maturities of one nonth and longer are exempt from income taxes for an unspecified 'temporary- period. - 25 - Table 1.10: GROWTH OF BANK DEPOSITS, 1983-1984 (Rupiah billion) 1983 1983 1984 1984 Nominal Growth June Dec. June Dec. Jun 83- Jun 84- Jun 84 Dec 84 -% p.a.- Demand deposits 4,148 4,177 4,095 4,817 -1.3 35.3 Time & savings deposits 3,344 4,694 5,831 6,387 74.4 19.1 State banks /a (1,531) (2,593) (3,132) (3,228) (104.6) (6.1) Private banks/a (780) (1,072) (1,421) (1,744) (82.2) (45.5) Foreign currency deposics 2,044 2,289 2>398 2,944 17.3 45.5 Total deRosits - all banks 9536 1L160 123?4 14J48 29.2 2 /a Rupiah time deposits. Source: Bank Indonesia. 1.55 In the last six months of 1984, the growth of rupiah time and savings deposits slowed down to an annual rate of about 19%, while growth of foreign currency (dollar-denominated) deposits accelerated sharply to an annual rate of 46%. Some slowdown in rupiah time deposits was to be expected as portfolio shifts are essentially completed. The pronounced shift from rupiah time deposits to dollar-denominated deposits was, however, probably due to expectations of continued depreciation of the Rupiah against the US Dollar, given the softening of oil prices and the strengthening of the Dollar abroad. 1.56 The changing pattern of deposit growth is a potential source of pressure on bank liquidity and domestic interest rates. Indonesian banks, for reasons of risk aversion, generally redeposit foreign currency deposits abroad; therefore, these funds are not usually available for domestic lending. The slowdown on rupiah deposit growth may thus put pressure on domestic lending rates; it may also make it difficult for private banks to mobilize additional resources to repay maturing liquidity credits and short term loans from Bank Indonesia. The authorities are aware of this problem and have already taken some actions to deal with it (paras 1.64-1.67). Credit Availability 1.57 The rapid growth of deposits following the reform enabled banks to increase credit by 23% during 1984, with credit to the private sector recovering strongly (Table 1.11). Private and foreign banks, increased their combined share of total bank credit from 15X in March 1983 to 22% in December - 26 - 1984. However, the lending by state banks did not pick up from the previous year's re-duced levels. The state banks now seem less disposed to provide term lending A1, given their reduced access to Bank Indonesia's liquidity credits. As a result, approvals aad disbursements of term loans for Investment have declined noticeably since June 1983 (Table 1.11). Finally, as state banks accumulated excess liquidity in the early part of 1984, private banks borrowed these funds to expand their lending and a sizeable inter-bank money market developed. Table 1.11: GROWTH OF BANK CREDIT, 1981-1984 (percent change per anmum) 1981 1982 1983 1984 1983 1984 1984 June - Dec. /a Jan.-June Jul.-Dec. Total bank credit 29.0 28.5 17.5 23.0 23.3 21.7 21.9 State banks 36.7 36.6 Zl.9 ]2" =ii:T li.: 19.6 Private banks 47.3 43.5 57.4 61.6 69.5 60.7 47.8 Foreign banks 32.4 21.5 29.3 21.3 53.9 41.3 1.3 Investment credit Disbursed and outstanding 37.4 42.7 33.9 22.0 26.7 21.2 20.5 New approvals 34.4 41.1 38.4 15.1 29.4 5.4 24.2 Memo items: Total bank credit to: Public enterprises 16.2 17.2 1.2 3.8 12.7 -9.2 17.5 Private sector 40.4 36.4 28.5 34.1 25.4 37.2 26.0 /a Change over end-May 1983, as the financial sector reform became effective on June 1, 1983. Source: Bank Indonesia. /1 State banks (including BAPINDO) provide almost all of the term lending at- present. As of December 1983, state commercial banks provided 76X of loans with maturities of over 3 years and BAPINDO another 18%. - 27 - 1.58 - The deceleration of the state banks' term lending may also in part be due to depressed demand for term loans. As discussed above, private fixed investment has fallen (para 1.11). High real interest rates which emerged with the rise in nominal rates and the deceleration in the domestic inflation rate over the past year have probably contributed to low investment activity. (Real interest rates on state banks' term loans are now about 10 p.a. compared to -6% in early 1983 and real interest rates on short term working capital loans now range from 10-15% p.a. for state banks and 15-20% for private banks - Table 1.12). In addition, state banks have become less willing to provide term loans, given the increased cost of funds and increased exposure to loan risks in the current economic situation. Fi-idlly, it appears .that the 18% term lending rate of the state banks is not sufficient to cover the increased costs and risks of term lending. 1.59 Much of the recent credit growth has taken the form of short term working capital loans to the industrial, trade and services sectors. A part of the credit growth has probably been used for financing involuntary inventory accumulation and for additional working capital, in view of increasing delays experienced by many firms in the industrial and trade sectors in regard to repayments of trade credits by their customers. In addition, the sharp increase in interest rates (discussed below) has increasad debt servicing requirements of borrowers. These developments call for closer monitoring of credit use and more effective banking supervision by the authorities to avoid potential portfolio problems for weaker banks. 1.60 The developments in the financial sector since June 1983 have also affected the availability of long term funds for investment from the development banks and the capital market. Development banks are now faced ,with funding problems as they find it difficult to attract low cost funds from the market, given their portfolio problems and the high commercial bank deposit rates. This last factor and the favorable tax treatment of bank deposits have also eroded the attractiveness of the capital market. Since interest and dividend income from capital market instruments are not tax-exempt, companies need to offer gross yields of at least 28-30% p.a. to potential holders of capital market instruments to provide returns comparable to those on bank deposit3; at these rates it is no longer attractive to companies to raise funds from the capital market. (These issues are discussed in Chapter 3 below.) Interest Rate Developments 1.61 An important consequence of the financial sector reform has been the rise in domestic deposit and lending rates. Initially there were some expectations that deposit and lending rates would come down as state banks accumulated more deposits and adjusted to the new competitive environment. However, this has not happened; indeed deposit and leLding rates in Indonesia increased further, particularly in the second half of the year (Table 1.12). - 28 - Table 1.12: INTEREST RATES OF COMMERCIAL BANKS, 1981-1984 (percent per annum) 1981 1982 1983 1983 1984 December December March December December Nominal deposit rates /a State banks 10.2 8.6 9.5 14.8 17.1 Private banks 17.4 17.1 17.4 17.4 20.7 Real deposit rates /b State banks 2.7 -1.3 -3.2 2.5 7.4 Private banks 9.4 6.5 4.8 4.8 10.7 Nominal lending rates /c State banks 13.5-21 13.5-21 13.5-21 17-23 18-24 Private banks 16-28 16-28 16-28 18-28 24-30 Real lending rates Id State banks 5-13 3-10 (-)6-1 (-)2-3 1D-15 Private banks 8-20 5-16 (-)4-8 (-)2-8 15-20 /a Nominal rates on 3 month time deposits. 7b Deflated by the Consumer Price Index for the relevant year. Tc Nominal rates on working capital and term loans. 7d Deflated by the Wholesale Price Index for the relevant year. Source: Bank Indonesia and World Bank staff estimates. 1.62 The June 1983 reform eliminated restrictions on domestic deposit rates in Indonesia. As a result, and given the open capital account, domestic interest rates are now more closely related to interest rates abroad and the expected rate of depreciation of the currency. Generally domestic nominal deposit rates were in line with interest rates abroad and the rate of depreciation of the Rupiah vis-a-vis the US Dollar until about mid 1984. However, in the second half of the year, the rapid appreciation of the US Dollar against other currencies and the softening of oil prices appears to have adversely affected domestic market expectations. This in turn seems to have increased the premium required for holding rupiah deposits and the differentials between domestic deposit rates and those abroad (see below). Finally, given these high deposit rates, the relatively high intermediation costs of Indonesian banks have raised domestic lending rates in Indonesia above international lending rates adjusted for the market operations currency depreciation. 1.63. Against this background, the tightening of money market conditions in Indonesia due to domestic developments put further pressure on interest rates in the second half of 1984. An unexpected build up of net Government deposits with Bank Indonesia of some Rp. 1.8 billion took place during March-August 1984. This led to a tightening of reserve money (which declined by about 4% - 29 - over the same period) and bank liquidity, at a time when the private banks continued to expand credit rapidly, borrowing large amounts from the inter-bank market. At the same time the demand for funds in the inter-bank market increased sharply. The Indonesian authorities, in an effort to maintain the competitiveness of the Rupiah in view of the strengthening of the US Dollar in international aarkets, allowed the Rupiah to depreciate at a somewhat faster pace during July-August than they did earlier in the year./l This, given the developments discussed in para 1.62, heightened expectations of a sigtificant depreciation of the rupiah and led to speculative portfolio shifts; consequen:ly, inter-bank rates rose to about 80-90 p.a., and in turn put pressure on deposit and lending rates. Although actions by the authorities (para 1.66) eased bank liquidity, domestic deposit and lending rates are still above their pre-August 1984 levels. Monetary Control and Management 1.64 These developments have highlighted the need for continued flexibility on the part of the authorities in managing the growth of reserve money and bank liquidity, and for closer coordination of monetary and fiscal policies in order to ensure orderly market conditions. As the September episode in the inter-bank market demonstrated, the Government's fiscal operations can lead to significant shifts in bank liquidity and put pressure on interest rates. Hence, offsetting actions by the monetary authorities are required. Bank Indonesia is aware of these needs and has already taken several steps during the past year to deal with the changing priorities of monetary management. 1.65 An initial concern of the authorities in early 1984 was how to mop up prevailing excess liquidity of banks, given the lack of government paper and other securities for conducting open market operations. Accordingly, in February 1984 Bank Indonesia introduced Bank Indonesia certificates (SBIs) with 15-90 day maturities aimed at absorbing excess liquidity. These certificates are issued weekly and carry interest rates determined on an auction basis. However with the tightening money market conditions later in the year, the stock of SBI's reached only Rp. 369 billion by end 1984. Bank Indonesia also introduced two new discount windows, at market rates, in February 1984: a standard lender of last resort window with basic access for a two-week period to assist banks in day to day management of funds, and a long term window providing credit for two to four months to encourage term lending. These facilities, however, were little used, as the banks were strongly encouraged to resort to the inter-bank market first before approaching Bank Indonesia. 1.66 As market conditions tightened, Bank Indonesia set up a temporary "special facility' in September to provide liquidity to banks at market rates; this was used by several private banks who borrowed about Rp. 300 billion. Bank Indonesia also limited each private bank's borrowing from the inter-bank market to 7.5% of deposit liabilities; and to halt the speculation against the Rupiah, slowed down the rate of managed depreciation of the currency. /1 In 1984, the Rupiah depreciated by 8% against the U.S. Dollar. - 30 - These measures succeeded in improving bank liquidity and calming down the inter-bank market. Subsequently, as net government deposits with Bank Indonesia continued to increase, Bank Indonesia increased its lending to banks to ensure adequate liquidity. 1.67 More recently, Bank Indonesia announced a new instrument - Money Market Securities (MMS) - in order to inject liquidity into the banking system by purchasing promissory notes -from banks and non-bank financial intermediaries (NBFIs). Under this new scheme, which became effective on February 1, Bank Indonesia will buy MMS directly from banks and NBFIs or through designated security houses (presently FICORINVEST only). Three types of MMS are eligible for discounting: promissory notes issued by banks and N4BFIs in borrowing from the interbank market; those issued by customers of banks and NBFIs based on lines of credit from such institutions; and trade bills based on underlying transactions issued by third parties and endorsed by banks and NBFIs. The MMS have a maturity range of 30-90 days, while the discount rate is set by Bank Indonesia according to market conditions; (at present, the discount rate on MMS is 20.5% p.a.). There is evidence that the new scheme has already had a major salutary effect on money market conditions by providing banks and NBFIs access to Bank Indonesia resources at market rates and by encouraging direct trading among banks themselves. As of end-March 1985 total net purchases of MMS made by Bank Indonesia and FICORINVEST stood at Rp 205 billion, mainly from private banks and foreign banks. 1.68 As discussed, monetary and credit developments during the past year have highlighted a number of issues, some of which have been already addressed by the authorities. Others, such as the high real cost of credit and the reduced availability of term lending, could be ameliorated through institutional and efficiency improvements discussed in Chapter 3 below. In addition, the authorities will need to monitor closely the monetary impact of the Government's fiscal operations and developments with regard to the growth of rupiah time deposits of banks noted earlier, in view of their possible impact on bank liquidity and interest rates. F. Progress Towards Deregulation 1.69 While the Government's macroeconomic strategies have met with considerable success, it has recognized the need for actions at the sectoral and subsectoral levels as key elements of the adjustment process over the longer term. In particular, significant improvements in the regulatory framework and reductions in the structure of domestic costs are essential to the development of an efficient, competitive and dynamic industrial sector in the medium to long term. The use of extensive, and often contradictory, licensing and regulatory requirements has impeded private sector activity in the past, particularly in the manufacturing sector. Similarly, complex regulations which govern customs procedures have entailed considerable delays in the clearance of imported goods through the ports, impeded the flow of non-oil/ING exports and generally added to costs. In addition, transport - 31 - costs, which are currently high in Indonesia, have been an important element of high costs. The maritime transport system is particularly costly owing to the cumbersome port and customs precedures noted above, regulations governing shipping services, the system of shipping route allocation, limited managerial manpower for port operations, underutilization of available ship capacity mnd deteriorated port structure. These problems have been long-standing and deep-rooted, given the large and powerful bureaucracies which have evolved in the customs and port operations. The Government is fully cognizant of these problems, and has taken major steps very recently to deal with them. Simplification of Investment Procedures 1.70 With respect to private investment licensing, effective April 1, 1985, the Government simplified procedures for approval and implementation of investments. First, in the case of new investment projects, it is no longer mandatory to obtain temporary approval. Applications which are complete can now be considered for "permanent approval" (in the case of new domestic investments) and for "Presidential approval" (in the case of new foreign investments) without first requiring temporary approval. Second, the maximum period within which BKPM approval has to be given to such projects has been reduced to six weeks, compared to a minimum of three months earlier. Third, the application forms for new investment, as well as for expansion, projects have been simplified and reduced in scope. Finally, a number of requirements which had to be fulfilled earlier before submission of an application to the Investment Coordinating Board (BKPM) or for obtaining temporary approval have been eliminated. These changes are expected to simplify the approval process, reduce the frequency of communications between BKPM and potential investors in obtaining investment approvals, and expedite the approval process. Underlining the increased focus on the promotion of investment, a major internal reorganization of BKPM has recently been effected. New Customs Regulations 1.71 In order to reduce excessive regulation and bring down costs associated with customs and ports operations, on April 4, 1985 t1.e Government announced, through the Presidential Instruction No. 4 on Ports and Shipping, bold, far-reaching and sweeping reforms. This decision was followed shortly thereafter by a full set of implementing instructions/decrees/regulations. These reforms profoundly affect all aspects of foreign trade procedures, particularly customs, ports and shipping operations. 1.72 In regard to customs, the new measures drastically reduce the required import and export procedures to a bare minimum (i.e. import certification report by a Government appointed surveyor, bills of lading and proof of payment of duty). Export goods are no longer subject to regular customs inspection; exports subject to export certificates, however, will be inspected by Government-appointed surveyors at the ports of destination. Imports, on the other hand, will be inspected at points of origin by Government-appointed surveyors, who would also certify type, quality and volume of goods, prices at points of origin, tariff category and appropriate import tariffs. Under the new procedures, the involvement of the Indonesian - 32 - customs will be limited to ensuring that documents noted above are completed, and cargo wlll be promptly released from Indonesian ports. Assessment of import duties and other taxes will now be made by importers/exporters themselves (on the basis of surveyors' certification), who will make duty payments to designated banks. The new regulations thus provide for speedy release of cargo, simplification of document processing and improved valuation procedures, and should result in savings of cost and zime. Improvements in Ports and Shipping 1.73 The various instructions related to port operations seek to ensure fair and equal treatment to all ocean-going vessels, simplify tariffs and reduce port charges. With res,pect to port charges, a multiplicity of prevailing charges (e.g., piloting, mooring, stowing, small-boat, harbour-master fees) are to be simplified or eliminated, while other charges such as loading and destination port charges and storage charges at port warehouses are to be reduced. To improve cargo-handling, responsibility for unloading/loading operations on a three shift 24 hour basis will be transferred, within one year, from shipping companies to firms established for this purpose. Port labor wages will be increased and stevedoring fees reduced. To facilitate foreign trade, the General Agency certificate required for foreign flag vessels to call at Indonesian ports has been abolished and other related procedures greatly simplified and reformed. To facilitate inter-islands goods transport, the various requirements imposed on inter-island freighters such as inter-island freight documents, fiscal statements and tax-payment receipts in respect of such vessels are also being removed. To improve handling of goods and documentation, such functions now can be undertaken not only by appointed clearing agents but also by forwarding companies, importers and exporters themselves. Finally, the Presidential Instruction also vests more authority in the newly established Port Administrators who are expected to coordinate and improve port operations. In the main ports, the Administrators will be responsible for all port-related services and report directly to the Minister of Communications. 1.74 The drastic and far-reaching nature of the reforms proposed are a clear indication of the Governments 's determination to remove administrative and procedural impediments to achieving a smoother flow of goods (imports as well as non-oil/LNG exports), reducing costs and increasing efficiency in maritime operations. The implementation of these measures will be a major challenge; but given time and the Government's commitment to the reform, there is little reason to doubt that significant progress is likely to be achieved in improving customs and ports operations. - 33 - CHEPTER 2 DEVELOPMENT OBJECTIVES AND PROSPECTS 2.1 This chapter presents the main elements of the macroeconomic framework employed in the report for assessing Indonesia's immediate and medium term prospects. The analysis begins with an overview of the external environment confronting Indonesia and its implications for macroeconomdc management in the medium term. Section B examines the medUum term prospects, against the background of these external conditions. Section C discusses the implications of the analysis for Indonesia's external trade. Finally, the chapter concludes with a discussion of Indonesia's external capital requirements, in the light of the preceding analysis. A. The External Environment and its Implicati4:ns for Macroeconomic Management Introduction 2.2 Indonesia's ability to achieve its goals of sustainable growth with equity in the coming years will depend crucially on the skill with which it manages its transition from oil dependency toward a more diversified semi-industrialized economy. The current magnitude of Indonesia's reliance on oil and LNG resources means that only modest progress can be expected in the Present decade. Nevertheless, the economic strategy pursued over the aext five years will in large measure determine its ability to make significant Progress in this area in the 1990s. In order to bring out these issues more clearly, the present chapter explores the prospects for the economv in the context of a ten-year horizon. 2.3 The current uncertainties in the oil market again underscore the vulnerabiMlty of the Indonesian.economy to changes in international oil prices. This factor has to be taken into account, particularly in terms of external debt management. Borrowing strategy over the next few years has to recognize that there is only limited scope for increasing external indebtedness. Providing bo--rowing levels - particularly in the next few years - are kept within prudent levels, Indonesia could maintain a reasonably healthy growth rate even with substantially lower oil prices. 2.4 From the point of view of longer term plannilng - on the basis of known oil reserves - it is prudent to assume that Indonesia's exportable oil surplus will eventually begin to decline. The assumption made in the present report is that oil producticn would reach a plateau during the present decade, and may e-en decline somewhat during the l990r. Even with a vigorous program to promote energy diversification and its efficient use, rising domestic oil consumption would, therefore, gradually cut into export volumes. Thus, while many observers agree that in the longer term oil prices are likely to rise in real terms, Indonesia cannot rely exclusively on such an increase to fuel its long term growth. Consequently, as the Government recogaizes, concerted efforts will be required to accelerate the growth of non-oil exports, not only - 34 - to ease the immediate foreign exchange constraints facing Indonesia during REPELITA IV, but to provide a stable alternative source of income and employment growth in the longer term. 2.5 The simultaneous pursuit of external adjustment and domes tic growth is not aa easy course, as recent experience in Indonesia clearly demonstrates. As noted in last year's report, however, it is possible to meet these objectives given appropriate domestic policies. First, a high rate of growth of non-oil exports is essential. This will require continued investment and timely implementation of projects in traditional exporting activities such as rubber, palm oil and other commercial tree crops, where Indonesia has a clear comparative advantage. But Indonesia must also seek out new export opportunities. Perhaps the most difficult task facing Indonesia today is to shift to a more export oriented pattern of industrial growth. Second, Indonesia must continue to be selective in its investment policy by giving greater encouragement to labor intensive and less import dependent investments. In this context, public enterprise investment (which is less sensitive to market signals) needs to be carefully managed. Moreover, the incentive system for private investment should not be undermined by selective measures of protectionism that encourage uneconomic forms of import substitution. As discussed in Chapter 3, this will require a continuous reassessment of trade policy to ensure that it provides both sufficient incentives for export growth and rewards for international standards of efficiency. The External Setting 2.6 Indonesia's economic fortunes have become increasingly tied to conditions in the world economy. Of particular importance is the situation in the world oil market, since oil and ING currently account for 71% of the country's exports and 69% of budget revenues. While the outlook for oil prices dominates any projection of the economy, Indonesia's longer term prospects will also be conditioned by the price prospects for other primary commodities, the growth of world trade and real interest rates. Accordingly, the present section provides a brief overview of the key external assumptions employed in this report as a basis for the analysis of Indonesia's economic prospects. 2.7 During 1984, the OECD area as a whole experienced its best performance in some years, largely as a result of the vigorous growth of the US and Japanese economies. Output growth (5%), and world trade growth (9%), were the most rapid since 1976, while inflation (at 5%) slowed to its lowest rate since 1972. For 1985, it is expected that the US economy will not grow as strongly as in 1984, although the Japanese and European economies are forecast to continue to grow at about last year's rate, so that overall OECD growth should average about 3%. The outlook for 1986 is less clear, and will in large measure depend on the fiscal and monetary policy mix adopted by the industrial economies in 1985. The outlook for interest rates is also difficult to gauge for the same reason. However, for the purposes of the medium term projection, it is assumed both real and nominal interest rates will decline somewhat. Table 2.1 summarizes the key assumptions about the future growth of the world economy and certain other key variables which underlie the assessment of Indonesia's prospects. - 35 - Table 2.1: SELECTED INDICATORS OF INTERNATIONAL ECONOMIC ACTIVITY, 1984-95 1984 1985 1986-90 1991-95 Estimate Projected Growth and trade OECD growth (Z p.a.) 4.8 3.0 3.0 3.5 World trade (Z p.a.) Ia 9.0 5.0 4-5.0 5-6.0 1985 1990 1995 Projected Commodity prices (1981=100) Index of 33 commodities (excluding energy) in constant dollars lb 92.8 89.8 95.9 96.9 Index of manufactured unit values 91.4 96.0 140.4 179.2 The oil market World demand for oil (mbd) /c /d 46.1 46.7 49.5 53.6 OPEC output (mbd) /d 18.5 18.5 21.5 27.0 I-nternational oil price C*/bbl) /e Base case - at 1981 prices 31.1 29.1 28.5 36.3 - at current prices 28.4 27.9 40.0 65.0 Low case - at 1981 prices 27.1 23.4 25.8 - at current prices 26.0 32.9 46.3 Interest rates LIBOR If 11.0 10.0 9.0 8.0 ia Total exports of goods and non-factor services are used as a proxy for world trade. /b Nominal price index deflated by the World Bank's Unit Value Index of Manufactured Goods (the MUV index). /c Excluding centrally planned economies and China. 7T[ Includes natural gas liquids and condensates. 7W OPEC sales weighted by member country output. 7f 6 Month London Interbank Offered Rate. Source: World Bank staff estimates and projections. 2.8 There are considerable uncertainties about the evolution of the world economy. For the longer term, the growth of the international economy will largely depend on policies pursued by the OECD economies. While it is possible that the pexformance of the industrial economies will not improve over past levels, the scenario adopted in the present report assumes that there will be a modest improvement in OECD growth over the rest of the decade, - 36 - and a continued improvement in the 1990s. The scenario adopted here lies between that of the high and low cases of the World Development Report 1984, with OECD growth averaging about 3% and world trade expanding by between 4-6%. Exports of manufactures from developing countries are assumed to grow by 8-9%. Given Indonesia's very small share in developing country exports, Indonesia should, with appropriate policies, be able to do significantly better. 2.9 Given the turbulence in the world oil markets in the past nine months, the course of international oil prices is extremely difficult to predict. OPEC's ability to defend its price structure came under severe pressure during 1984. Changes in the pattern of crude oil demand upset traditional differentials between different types of crude, and the strength of the US dollar meant that the official OPEC price rose sharply in non-dollar terms during 1984. The impact of these forces was most readily apparent in the spot market, where lighter crudes were traded at a discount. This prompted a revision in the OPEC price structure in January 1985. 2.10 While most observers do not expect a major change in oil prices, it is likely that the OPEC price structure will continually be tested over the next few years. Looking to the longer term, world demand for oil is now forecast to grow more slowly, as a result of continuing pressures toward conservation, and a slight downward revision in the OECD growth forecast. Oil prices could, therefore, fluctuate within a fairly wide band. Given this uncertainty, in this report we examine the implications of two oil price scenarios. 2.11 In the base case oil price scenario - which Is considered the most likely outcome - average crude oil prices are expected to remain approximately unchanged from their current levels until end 1986. In 1987, oil prices are expected to increase in line with international inflation. From 1988 until 1990, oil prices are projected to increase by 1% p.a. in real terms./l Using the World Bank's Unit Value Index of Manufactured Exports (the MUV i*dex) as a measure of international inflation yields a nominal oil price of t40/bbl in 1990 at current prices. In the 1990s, oil prices are expected to increase significantly, rising by 5% annually in real terms. Assuming a 5% annual inflation rate, this implies an oil price of $65/bbl in 1995. There is a possibility that oil price developments may be less favorable for Indonesia than assumed under the base case. A conceivable scenario would be a dramatic break in oil prices, but, given the economics of the oil market, it is very unlikely that oil prices would remain so depressed over a number of years. A more plausible low case scenario would be a further modest decline in nominal oil prices at some point over the next two years, followed by real oil prices rising more slowly than in the base case. Under the low case scenario employed in this report, it is assumed that oil prices decline to t26/bbl duriug 1985-86, remain constant in real terms in 1987, and rise by 2% in real terms for the remainder of the projection period. This implies an oil price of t32.9/bbl in 1990 and $46.3/bbl in 1995 in current dollars. /1 Accordingly, real oil prices (in 1981 dollars) are now projected to decline from $31.1/bbl In 1984 to $28.5/bbl by 1990, compared with an estimate of $31.3/bbl in 1990 employed in last year's report. - 37 - 2.12 The outlook for non-energy commodity prices i6 mixed. The World Bank's overall index of 33 non-energy commodities is projected to decline in real terms in 1985 and 1986 before rising to about 3% above its 1984 level in 1990. This is substantially less than the 13% rise projected a year ago for the same period. Commodity prices are expected to remain unchanged in real terms between 1990 and 1995. External Terms of Trade Prospects 2.13 The outlook for oil and non-oil commodity prices mea.ns that Indonesia's terms of trade are expected to fluctuate markedly during the ten year period analysed in this chapter. In the base case scenario, the terms of trade are expected to deteriorate by about 3% annually (from 95.2 to 88.9) over the next two years, as Table 2.2 shows. This implies an annual loss in Gross National Income (GNY) of nearly one percent during 1985 and 1986. Subsequently the terms of trade are expected to begin to impr owe from this level. The base case oil price projections imply a sharp improvement in Indonesia's terms of trade in the 1990s. Between 1990 and 1995 the terms of trade are expected to improve by 3.5% annually. This is equivalent to an additional 0.8% increase in GNY annually during this period. The uncertainty ower oil prices means that Indonesia's terms of trade outlook could be less favorable than these figures suggest. Under the low case, Indonesia's terms of trade would decline by 5% annually, over the next two years, and fall further over the rest of the decade. In the 1990s, Indonesia's terms of trade would improve, but the low case projection for 1995 would still be worse than 1984. 2.14 Given the high proportion of oil/LNG exports In Indonesia's total exports, the country's terms of trade position is largely determined by movements in oil prices./1 However, the outlook for non-oil commodity prices is also important. Thi8will affect export revenues and the profitability of exports and hence influence the pace at which Indonesia can diversify its export structure. During 1985 and 1986 non-oil export prices are expected to grow more slowly than import prices, so that the terms of trade for non-oil exporters would deteriorate. Moreover, during the second half of the 1980s the prices of coffee, palm oil, sawnwood, metal and tin - which are all of considerable importance to Indonesia - are expected to decline in real terms. Indonesia would only be partly sheltered from these declines by expected increases in plywood and rubber prices, as well as by a shift toward manufactured exports in the composition of its exports. Overall, the non-oil terms of trade would deteriorate during 1985-90 by about 5%. In the 1990s, the terms of trade of non-oil producers would again improve, but would not return to their estimated 1984 levels before 1995. /1 ING prices are linked to oil prices under long term supply contracts. - 38 - Table 2.2: INDONESIAS Ti;BH OF TRADE UnDER ALTERNATIVE SCEABRIOS, 1981-1995 (Index: 1981 - 100) 1984 1985 1986 1990 1995 Estimate Projections The base case Oil/LNG export price Index 80.2 78.8 80.2 113.0 183.6 Export price index 86.3 87.6 90.7 126.5 191.4 Import price lndex 90.7 94.9 102.1 140.0 178.8 Terms of trade index 95.2 92.3 88.9 90.4 107.1 The low case Oil/LNG export price Index 80.2 73.4 73.4 92.8 130.8 Export price index 86.5 85.1 87.6 114.5 163.5 Terms of trade index 95.3 89.7 &5.8 81.8 91.4 Memo items: Non-oilLDNG export price index 101.9 104.6 112.7 149.3 193.1 Non-oil terms of trade Index (a 112.7 110.8 110.9 106.8 108.0 /a Non-oil export prices in relation to non-oil import prices. Source: World Bank staff estimates and projections. B. Medium Term Prospects 2.15 The present section provides an assessment of a feasible ten year growth scenario for Indonesia, against the background of the key assumptions about the growth of oil prices and the world economy reviewed above. The base case scenario shows a feasible growth path for the Indonesian economy, provided Indonesia implements the policy measures discussed in Chapter 3. The implications of two alternative scenarios - lower oil prices and lower non-oil exports - are examined subsequently. The Base Case Scenario 2.16 Economic Growth. Under the base case, non-oil/LNG output is expected to increase slightly faster in 1985 and 1986 than in 1984, as a result of the fiscal boost being given to the economy by the 1985/86 budget. However, real GDP is projected to grow more slowly overall, due to an anticipated decline In the volume of crude oil output in 1985. For the reminder of the decade, as Table 2.3 shows, real GDP growth is projected to expand at an annual rate of 4.5% with non-oil GDP rising by 5.0% annually. For the first half of the 1990a, real GDP growth is maintained at about this level, but a further shift towards non-oil/LNG based growth is shown, with non-oil/LNG growth increasing to 5.6% p.a. - 39 - Table 2.3: GROWTH AND COMPOSITION OF GDP UNDER THE BASE CASE, 1984-1995 (at 1981 prices) Rates of Growth (X p.a.) Shares in GDP (X) 1984/a 1985-86 1987-90 1991-95 1984 1990 1995 - Projected Est. -Projected- Agriculture 5.0 3.7 3.7 3.7 25.5 24.7 24.0 Mining and quarrying 5.0 -0.4 2.1 -1.5 20.8 17.5 13.1 Oil (5.6) (-0.8) (2.2) (-2.2) (18.0) (15.1) (10.9) Other mining (1.0) (2.5) (1.4) (2.5) (2.8) (2.4) (2.2) Manufacturing 24.4 6.3 6.2 6.4 12.8 14.3 15.8 ING (52.6) (6.6) (4.0) (1.8) (5.5) (5.6) (5.0) Other /b (9.2) (6.0) (8.0) (9.0) (7.3) (8.7) (10.8) Construction 0.0 5.2 5.5 6.0 5.8 6.1 6.7 Other services 4.0 5.0 5.5 6.0 35.1 37.4 40.4 ___ _ 4.3 100.0 100.0 4. Memo items: Non-olILNG GDP 4.4 4.6 5.0 5.6 76.5 79.3 84.1 GDP growth at 1973 prices 5.0 4.4 5.1 5.4 /a Provisional estimate. 7,b Includes refiniug. Source: World Bank staff estimates and projections. 2.17 The growth of value added in agriculture is projected at a trend rate of 3.7% per annum. As noted in Chapter 1, the sector has enjoyed two successive bumper years with rice output reaching new peaks. However, this very success raises important questions for economic policymakers. Over the last 18 months the financial and economic costs of holding substantial rice reserves have become more apparent. It would appear that if production growth remains on trend, rice stocks in Indonesia will continue to grow. Clearly one immediate question is whether it is desirable to increase domestic rice stocks to 5 million tons as programmed under REPELITA IV, or whether less costly approaches to the important goal of national food security are viable. A second, but related, question is the long term role of rice in Javanese agriculture. Over the past 15 years, the expansion of irrigation systems, the adoption of improved strains of rice, and the greater use of fertiliser and pesticides have led to a dramatic increase in production and rural incomes. However, as noted in Part II of this report, with the likely gradual emergence of demand constraints on rice, agricultural income growth in Java will depend on the successful expansion of other crops which can offer improved incomes to farmers and supply Indonesia's emerging agro-industries with products for the domestic market and exports. In some areas this may mean shifting from rice production to new higher valued crops, in others more diversification into secondary crops. In both cases, however, the challenge wiU be to develop - 40 - efficient alternatives to rice monoculture. Clearly, an appropriate pattern of input and producer prices will be a necessary element in such a transition. 2.18 Off Java, the challenges for agricultural policy are equally complex. Indonesia has a clear comparative advantage in tree crop production and, as noted below, excellent export prospects, providing that new planting can be boosted. Here the Government faces multiple objectives. Smallholder development projects have been given top priority on equity grounds. In established areas, the focus is on replanting and rehabilitation. In other areas, tree crops programs are being used to provide opportunities for transmigration. However, both types of schemes face implementation problems. They also place a heavy burden on the government owned estate crop enterprises to provide assistance to smallholders, in addition to their other responsibilities. And while the schemes themselves offer high economic rates of return, the credit system employed does not recover costs fully and is expensive in financial and administrative terms. As the area covered by the tree crop program - currently the largest in the world - expands, these strains could intensify. In addition, the Government wishes to encourage greater private sector investment in the tree crop sector. This will require a satisfactory incentive framework for investors which will enable them to earn an adequate rate of return and provide a greater certainty in respect of export taxes and domestic marketing obligations. A major policy and institutional challenge will be to develop a clear definition of the respective roles of Government estates, extension services, rural financial institutions and private sector investors. 2.19 The non-oil/ING sector is likely to be the main source of growth of output and employment in the coming years. Accordingly, the manufacturing sector (excluding ING) is given a particularly important weight in the projections. For 1985 and 1986, manufacturing value added (excluding ING) is projected to grow at an annual rate of 6% rising to 8% p.a. over the remainder of the decade and 9% p.a. in the 1990s. This will require a marked shift in Indonesia's industrial and trade policies, as discussed in Chapter 3, so that the projected orientation of the manufacturing sector towards exports can be realised. Finally, construction and other services are both projected to grow at average rates of over 5% during the projection period, more rapidly than the rest of the economy. These two sectors are the least import dependent activities in economy, other than agriculture. Balance of payments considerations are, consequently, less of a constraint than in the other sectors. Together, they accounted for 51% of employment in 1981, and, as discussed in Part II, they are likely to account for the bulk of the new jobs created during the projection period. 2.20 For the oil sector, it is assumed that crude oil production will rise to about 1.63 mbd by 1990, but that the production rate is reduced in the 1990s by about 2% annually as real oil prices rise, so that reserves can be conserved. It is estimated tnat, with a success ratio of 20%, over 250 exploration and appraisal wells must be sunk annually in order to "prove up" sufficient reserves to replace the projected production. In 1984, however, only 204 wells were sunk and the agreed work program calls for 233 new wells in 1985. Although the success ratio in the past two years has been about 30%, this pattern cannot be assumed to continue. Consequently, continued efforts will be required to stimulate exploration, and the development of new fields, - 41 - so that the projected production rate can be assured. Indonesia possesses vast natural gas reserves. These can help diversify Indonesia's energy exports, and it is assumed that additional LNG trains and Liquid Petroleum Gas (LPG) facilities can be brought into operation during the 1990s. 2.21 Investment and Savings. Table 2.4 sets out the expenditure side of the base case scenario. Fixed investment is estimated to have declined in 1983 and 1984. But it is shown as rebounding during 1985 and 1986. This would require a significant improvement in project implementation performance, and a modest revival in private investment activity. From 1987 onwards, fixed investment is assumed to pick up further, with a shift toward private sector investment in manufacturing. The scope for increases in capital goods imports is very limited. Consequently, this revival in overall Investment activity is predicated on the assumption that the future composition of investment follows the pattern planned under REPELITA IV, and that there are no reallocations of investment from the less import dependent sectors such as health, education and other social sector activities, toward the more import dependeat sectors, such as industry (see Chapter 3). Table 2.4: GROWTH IN GDP BY EXPENDITURE CATEGORY UNDER THE BASE CASE, 1983-1995 (in percent at 1981 prices) 1983 1984 /a 1985-86 1987-90 1991-95 Projected Real growth rates TX p.a. at 1981 prices) Consumption 3.5 3.8 4.4 4.2 5.0 Fixed investment -7.0 -9.0 5.1 5.5 5.5 Exports /b 14.2 3.5 3.9 3.4 1.0 Imports 7' -8.6 -7.5 2.5 2.7 4.3 GDP 4.7 6.5 3.8 4.5 4.3 GNP 3.5 6.5 4.1 4.0 4.4 GNY 2.4 7.0 3.2 4.8 5.2 1986 1990 1995 - Projected - Share of GNP (Z at current prices) Gross domestic investment 23.6 21.8 19.9 20.4 21.5 Financed by Foreign savings 6.2 2.4 3.1 1.9 1.5 Gross national savings 17.4 19.4 16.8 18.5 20.0 Private (9.7) (9.6) (9.6) (9.9) (10.4) Government (7.7) (9.8) (7.2) (8.7) (9.6) /a Provisional estimate. T7 Includes goods and non-factor services. Source: World Bank staff estimates and projections. - 42 - 2.22 The pursuit of external balance of payments stability means that the share of foreign savings available to support domestic investment will sharply decline. Consequently, to meet its investment needs, Indonesia will have to place greater emphasis on a domestic resource mobilization effort, to boost both public and private savings. Government savings are projected to decline in the near term, but then grow faster than GNP for the rest of the scenario period to reach almost 10 of GNP by 1995, as the impact of the new tax regulations will be to improve the buoyancy of fiscal receipts./l This increase will, however, require successful implementation of the new tax legislation as well as the gradual removal of domestic oil and fertilizer subsidies, and increased cost recovery on public services. Private savings will need to rise from 9.6% of GNP in 1984 to 10.4% of GNP by 1995. The financial sector reform of June 1983 is conducive to further strong growth in financial savings. The distribution of these savings between bank deposits, shares and bonds will, as discussed in Chapter 3, largely depend cm tax policy measures influencing the rate of return on these different types of investment. 2.23 Balance of Payments. As noted in para. 2.13, Indonesia's terms of trade are expected to deteriorate over the remainder of this decade. ThiF means its export growth rate will have to exceed the growth of imports, if continued progress is to be made in external adjustment. For 1985, oil exports are expected to remain flat (although there will be a rise in LNG exports) and the overall rate of growth of exports will, again, largely depend on the strength of non-oil exports. Oil exports are projected to increase in volume in 1986. During 1987-90, total exports are projected to rise by 3.4% p.a. with non-oil exports rising at an annual rate of 6% annually and oilILXG exports increasing by 22 p.a. As discussed in section C, non-oil export growth of this magnitude is well within the capabilities of the Indonesian economy, but will require vigorous efforts on the part of the Government to create the right climate for exporting in both agriculture and industry. In the 1990s, it is assumed that oil/LNG exports will decline by over 2% annually, so that even with an 8Z non-oil export growth rate, total exports will increase at an annual rate of only 1X. In the base case scenario, import growth is projected at slightly less than 3% annually during 1985-90. However, the projected improvements in the terms of trade (associated with rising oil prices) will mean that Indonesia will be able to increase imports by over 42 annually in the 1990s whilst securing further reductions in the current account deficit in relation to GNP. /1 As noted in Chapter 1 the major factors underlying the high level of rupiah public savings in 1984/85 were the unanticipated increase in oil revenues, lower than expected oil subsidy payments, and lower current expenditures. On the assumption that this combination of circumstances is unlikely to repeat itself next year, and also given both the slow growth of oil revenues and the sharp increase in current expenditures in 1985/86, puolic savings would decline in 1985/86 before rebounding in 1986/87. - 43 - Table 2.5: SUMMARY BALANCE OF PAYMENTS UNDER THE BASE CASE, 1983/84-1995/96 (t billion at current prices) 1983/84 1984/85 1985/86 1990/91 1995/96 Est. - Projected -- Gross merchandise exports 19.8 20.2 20.8 36.3 57.5 Oil and LNG 14.4 14.3 7 23.9 33.6 Non-oil 5.4 5.9 6.5 12.4 23.9 Gross imports (cif) and NFS -19.6 -17.6 -19.1 -31.6 -49.7 Oil and LNG -3.8 .1 -3.8 -6.5 _31.0 Non-oil -14.2 -12.9 -13.6 -22.5 -34.9 Net non-factor services -1.6 -1.6 -1.7 -2.6 -3.8 Resource balance 0.2 2.6 1.7 4.7 7.8 Net factor services and transfers -4.4 -4.5 -4.4 -7.2 -10.9 Current account balance -4.2 -1.9 -2.7 -2.5 -3.1 (- iudicates deficit) Net disbursements of public MIX debt 3.7 2.2 3.0 2.3 3.2 Net other capital /a 2.1 0.6 0.1 0.5 0.2 Change in net official reserves -1.6 -0.9 -0.4 -0.3 -0.3 (- indicates increase) Memo items: Total net foreign assets /b 5.6 7.4 7.1 5.7 4.5 (as months of imports oTfgoods) Current account balance as % GNP -6.0 -2.4 -3.3 -1.9 -1.5 Debt-service ratio (gross) /c 17.8 21.1 21.1 23.8 22.1 /a Includes estimates of oil and LNG export credits, all debt transactions associated with LNG expansion, direct foreign investment, and all private capital flows. /b Net of outstanding drawings from the IMF's Buffer Stock and Compensatory Financing Facilities. These are treated as current external liabilities. /c The ratio of total debt service to gross exports of goods and services. Source: World Bank staff estimates and projections. 2.24 Table 2.5 shows the balance of payments outcome of the above scenario. Three important assumptions influence this projection. First, that Indonesia's current account deficits do not increase significantly in nominal terms. This implies a continued reduction in the current account in both real - 44 - terms, and in relation to GDP. Second, it is assumed that Indonesia will strengthen its non-oil export performance. Accordingly these exports are projected to account for 42% of gross merchandise exports by 1995, compared with less than 30% in 1984/85. Lower non-oil export growth could lead to a significant deterioration in Indonesia's debt-service ratios, as the lower non-oil export growth scenario in the following section illustrates. Third, disbursements of public medium and long term debt are assumed to provide the bulk of the capital inflows necessary to finance the projected current account deficits and the build up in official reserves. The Low Case Oil Scenario and the Impact of Lower Non-oil Export Growth 2.25 The base case presents a scenario for growth and external payments stability based on the asnumptions about the external environment outlined above and appropriate domestic policies. There are two main sources of uncertainty in the analysis. The first concerns the trajectory for oil prices both in the near and longer term. The second relates to Indonesia's future non-oil export performance. 2.26 The Low Case Oil Scenario. As discussed in para. 2.9, there is considerable uncertainty over the future course of oil prices. Accordingly, it is essential for economic policymakers to take into account the possibility that oil prices may be lower than projected in the base case scenario. By way of illustration Table 2.6 shows the implications of a lower oil price scenario for Indonesia - the low case - in which the oil price declines to $26/bbl during 1985-86, increases in line with international inflation In 1987 and then rises by 2% in real terms for the remainder of the projection period. Under such a scenario, the oil price in current dollars would reach $33/bbl in 1990 and $46/bbl in 1995 compared with $40 and $65 respectively in the base case (para. 2.11)./l 2.27 In these circumstances, Indonesia's total export earnings, and hence its debt-servicing capacity (in absolute terms), would be considerably reduced. This, in turn, would reduce Indonesia's ability to import./2 It is estimated that the non-oil/LNG GDP growth rate would be about 1% lower than in the base case. Provided Indonesia acted promptly to reduce investment expenditures and hence investment related imports, annual external borrowing over the next 3 years could be kept to the same level as in the base case, and over a longer time period gradually reduced. Thus, by 1990 the value of total debt outstanding and disbursed would be $0.6 billion less than under the base case and debt would rise more slowly in the 1990s. Inevitably, in the near term the aggregate debt service ratios would rise more rapidly than in the /1 In 1981 prices, the low price scenario assures an oil price of $23.4 in 1990 compared with $28.5 in the base case; in 1995 the oil price would be $25.8 and $36.3 respectively. /2 Lower oil prices would increase real aggregate demand in industrial countries, thereby improving Indonesia's non-oil export prospects. Indonesia could therefore partly offset the impact of the decline in oil prices by increased exports. - 45 - base case; but the position would gradually improve. In 1990 the aggregate debt-service ratio would reach 26% compared with 24Z in the base case but by 1995 the debt service ratio would decline to 23% (compared with 22% under the base case). Similarly, the difference between the ratio of total debt outstanding and disbursed to total exports under the two scenarios would also narrow markedly in the 1990s. Table 2.6: SELECTED ECONOMIC INDICATORS UNDER ALTERNATIVE OIL PRICE SCENARIOS, 1986-1995 Average Real Growth (% per annum) Scenario I Scenario II Base Case Low Case 1986-90 1991-95 1986-90 1991-95 GDP 4.6 4.3 3.9 3.3 Non-oil/LNG GDP 5.0 5.5 4.0 4.4 Exports of goods and non-factor services 4.0 1.0 4.3 1.5 Imports of goods and non-factor services 2.6 4.4 1.1 4.2 Non-oil exports 5.9 8.3 7.0 9.2 1990 1995 1990 1995 Selected indicators Oil price $/bbl /a 40.0 65.0 32.9 46.3 Total debt ($ billion) /b 46.9 64.9 46.3 59.9 Debt-service ratios (%) - Public (net) /c 29.8 27.1 32.9 27.7 - Total (gross)T7d 23.8 22.1 25.6 22.8 - Total DOD/Exports /e 117.9 104.9 125.5 108.7 Current account deficit (as % GNP) -1.9 -1.5 -1.6 -1.1 /a In current dollars. Th Public and private medium and long term debt outstanding and disbursed. 7& The ratio of public debt service to net exports, i.e. total exports of goods and services less imports of goods and services of the oil/LNG sector. /d The ratio of total debt service to gross exports of goods and services. 7T The ratio of total outstanding debt to gross exports of goods and services. Source: World Bank staff projections. - 46 - 2.28 Lower Non-Oil Exports. Scenario III employs the same oil price and output assumptions as the base case, but explores the implications if non-oil export growth does not improve relative to Indonesia's actual performance during the past 10 years. For this scenario, non-oil exports are shown as growing by their historical rate of 4.5% during 1986-1995, rather than the 7% rate projected under the base case. This scenario indicates that, over the long term, Indonesia's economic position could be more adversely affected by lower non-oil export growth than the lower oil prices assumed under the low case scenario. In the 1986-90 period, the impact on growth and the balance of payments would be fairly modest, because of the currently small share of non-oil exports in total exports. However, over time, the shortfall in export earnings relative to the base case scenario would rapidly climb. In current dollars this would imply a drop ln exports of $1.2 billion in 1990 and $5.6 billion in 1995. Over the period 1986-1995, the cumulative loss of export earnings would amount to $23.6 billion. This would have serious implications for the economy. Even with lower imports and GDP growth than in the base case scenario, the current account would not improve relative to GNP. The aggregate debt-service ratio in the 1990s would exceed that under the low oil price scenario and show no sign of improvement, as shown in Figure 2.1. At the same time, Indonesia would remain more heavily dependent on oil/LNG export revenues, and hence potentially more vulnerable to the adverse effects of lower than projected oil prices. To avoid such a scenario, the most critical area for policymakers is the expansion of manufactured exports, since the future growth of these exports will depend on further changes in trade policy discussed in Chapter 3. FIGURE 2.1 DEBT-SERVICE RATIOS, 1981/82-1995/96 CALTERNATIVE SCENARIOS) _-_____-SCENARIO m 26- / r ~~. > , __> ~~~~LOW CASE BASE CASE losise 1400i1 100S/rn - 47 - Tatle 2.7: SELECTED ECONOMIC INDICATORS UNDER ALTERNATIVE EXPORT GROWTH SCENARIOS, 1986-1995 Average Real Growth (% per annum) Scenario I Scenario II Scenario III Base Case Low Case Lower Non-oil Ewports 1986-95 1986-95 1986-95 Non-oll exports 7.2 8.0 4.5 GDP 4.5 3.6 3.7 Non-oi!I.G r-GP 5.3 4.2 4.4 Exports of goods and non-factor services 2.5 2.9 1.5 Imports of goods and non-factor services 3.5 2.7 2.6 1995 Selected indicators Oil price $/bbl /a 65.0 46.3 65.0 Total debt C$ billion) /b 64.9 59.9 71.3 Debt-service ratios (Z) - Public (net) /c 27.1 27.7 34.5 - Total (gross) 7d 22.1 22.8 26.4 - Total DOD/Exports /e 104.9 108.7 127.0 Current account deficit (as Z GNP) -1.5 -1.2 -2.5 Total net foreign assets in months of imports of goods 4.5 4.5 4.5 /a In current dollars. Th Public and private medium and long term debt outstanding and disbursed. 7-c The ratio of public debt service to net exports, i.e. total exports of goods and services less imports of goods and services of the oil/LNG sector. /d The ratio of total debt service to gross exports of goods and services. 7;e The ratio of total outstanding debt to gross exports of goods and services. Source: World Bank staff projections. C. External Trade 2.29 The preceding section provided an overview of the macroeconomic framework employed in preparing the analysis of Indonesia's economic prospects. The present section reviews the implications of this analysis for - 48- the country's external trade. The analysis presented in this section suggests that a key macroeconomic question facing Indonesia is whether it will succeed ln improving its trade performance, so as to permit sustained growth over the next 10 years. This report takes the position that it can do so. However, this is not to deny that Indonesia faces an enormous challenge. As Figure 2.2 shows, under the base case scenario, a major shift in the composition of exports is projected, with non-oil/ING exports substantially increasing their share in total export earnings over the next ten year,-. Two tasks emerge for the future. One is that Indonesia will have to substantially boost its non-oil export growth rate. Its traditional agricultural based exports continue to offer good prospects. But the projections above clearly indicate that it is vital for Indonesia to promote its manufactured exports, which, given the appropriate policies (described in Chapter 3 below), have the potential to become a major source of foreign exchange earnings. The second, related, challenge will be to expose its economy to greater competition from imports, so as to create pressures to lower domestic production costs and enable exporters to compete more effectively in foreign markets. FIGURE 2.2 'MERCHANDISE EXPORTS. 1981/82-1995/96 CTHE BASE CASE) 4a NON-OI _a44 a 1S8tt2tS;9 SMTl1#D - 49 - Export Prospects 2.30 Oil and LNG. Since 1981 the share of oil and ING in Indonesia's expoit earnings has declined from over 80% to 71% in 1984/85. But even at this reduced level, the economy's export base remains highly dependent on energy revenues. Given the potential volatility of world oil prices discussed above (para. 2.10), as well as the uncertain prospects for major additions to oil reserves, Indonesia will need to make substantial further adjustments in the pattern of its export earnings to maintain the momentum of economic - growth. Nevertheless, Indonesia is expected to continue to derive more than 60% of its foreign exchange receipts from the oil/LNG sector during the projection period. 2.31 The base case oil export forecast assumes that crude and condensate output during 1985/86 will remain basically unchanged from the 1984/85 level. Oil production, including condensates, is then assumed to rise at an annual rate of 4% during the remainder of REPELITA IV to reach 1.6 mbd in 1988. In order to stretch reserves as far as possible, production is assumed to be maintained at about this level In 1989 and 1990. For the 1990s it is assumed that Indonesia reduces its oil output by about 2% annually, which, allowing for modest increases in domestic consumption and the projected increase in oil prices, would enable it to maintain the value of oil export revenues in real terms. 2.32 Indcuesia has made significant strides in controlling domestic oil consumption.. Since 1981 domestic oil prices have been substantially increased each year, and with the exception of kerosene and industrial, diesel oil, domestic prices have been aligned with international prices. It is estimated that as a result of this effort, oil consumption in the last fiscal year was only slightly higher than in 1981/82, despite an increase of 10% in real -DP during this period. The imposition of VAT on fuel and products, together wi:t further reductions in budgetary subsidies, and efforts already underway toward fuel substitution should help to keep domestic oil consumption under reasonable control. Accordingly, domestic oil consumption is expected to increase by only 2.5% over the remainder of REPELITA IV. The efficient use of energy is extremely important for the economy. For example, if domestic consumption of oil were to rise 1X faster than assumed in the base case, with an unchanged OPEC quota cumulative oil exports during 1985/86 to 1990/91 would decline by $1.4 billion. Consequently, it is essential that the Government take additional steps to promote efficient energy use over the longer term, so as to keep domestic oil consumption to a minimum. Without such an effort, domestic oil consumption will bite into oil earnings during the 1990s when world demand and real prices are expected to rise. 2.33 The role of LNG has increased significantly in Indonesia's overall energy picture. Indonesia is currently the world's largest LNG exporter. Two new trains at Arun began production during 1984/85, boosting LNG revenues by almost $900 million or 37%. During 1985/86, LNG output - which is exclusively for exports - is contracted to reach approximately 770 million MMBTU, an increase of 1% over 1984/85. A sixth train is under construction at Arun for export to Korea. It is scheduled to be completed towards the end of 1986. With the completion of this train, Idonesia's capacity will reach 900 millioa MOBTU. Other markets for LNG are being explored, and with the country's vast - 50 - reserves, LNG is expected to comprise a rising share of Indonesia's energy exports. Accordingly, it is assumed that a further round of LNG expansion will take place during the 1990s, bringing Indonesia's production capacity to about 1 billion MMNTU by 1995. At this level, LNG would account for about one quarter of oil/ING exports compared with about one fifth currently. From the point of view of technical production potentials, Indonesia is capable of exporting a substantially higher volume. The major constraint it faces is to obtain secure long term markets for these valuable energy resources. Owerseas markets for LPG are also be ng actively explored. 2.34 Non-oil Exports. Recognizing that the price prospects for oil are unfavorable in the medium term, the REPELITA IV plan attaches particular significance to the promotion of non-oil exports. It sets an impressive target of $10.8 billion for non-oil exports in 1988/89 which would, on the basis of the REPELITA IV projection, raise the share of non-oil exports in total goods exports from 27% in 1983184 to 34.5Z. Given the outlook for the international economy outlined above, demand should not prove a constraint to the achievement of this goal, providing that Indonesia does not encounter an increase in protectionism. With the exception of plywood, where Indonesia is the world's largest supplier, as well as tin and coffee (where Indonesia is bound by international marketing agreements), Indonesia's export share generally constitutes a small fraction of total developing country exports. Consequently, it will be Indonesia's own ability to increase exports, rather than external demand considerations, which will determine its success in attaining these goals. The recent measures to deregulate customs, ports and shipping, discussed in Chapter 1, can be expected to significantly improve Indonesia's prospects in this regard. 2.35 As Table 2.8 indicates, non-oil exports are projected to grow strongly under the base case, rising to $12.4 billion in 1990 and reaching t23.9 billion in 1995. Indonesia's agricultural products - chiefly rubber, coffee, tea, palm oil and shrimp - which accounted for an estimated 46% of non-oil exports in 1984/85 - are expected to make a substantial contribution towards this growth. It possesses a clear comparative advantage in these products, due to its relatively low labor costs, a favorable climate, and the availability of large tracts of land (off Java) suited to tree crop production. Consequently, with continued investment in this sector, the export prospects are favorable for these commodities as a whole. Nevertheless, the projected growth of agricultural exports cannot be taken for granted and will require strenuous efforts as part of the overall non-oil export drive. The immediate outlook for tree crop exports is, of course, largely determined by past investment, since these plants have gestation periods of 4-8 years. Indonesia's tree crop expansion program is the largest in the world, and wlll lead to significant increases In tree crop exports in the 1990s. However, the very scale of the program has led to implementation difficulties. As a recent Bank report notes, it is clearly important for the Government to address the institutional constraints which are impeding these new investments, so that the growth of output which will be needed in the 1990s can be assured./l /1 Indonesia - The Major Tree Crops: a Sector Review, World Bank Report No. 5318-IND, April 15, 1984. - 51 - Table 2.8: PROJECTIONS OF MERCHANDISE EXPORTS BY MAJOR CATEGORIES UNDER THE ASE CASE, 1984/85-1995/96 ($ million at current prices) Growth Rate (Z p.a. at 1981 prices) 1984/85- 1986/87- 1991/92- 1984/85 1990/91 1995/96 1985/86 1990/91 1995/96 Est. - Projected - Oil and products L1,050 17 ,800 22,800 -4.0 2.9 -4.6 LNG 3,290 6 100 10 800 18.4 3.7 1.7 Fo-Oil/ING products 5 900 23!900 9.8 5.9 8.3 Agricultural products 5,200 9000 4.0 2 5.2 Timber 480 700 1,400 -6.9 7.6 8.5 Minerals and metals /a 1,020 1,700 2,500 15.7 2.7 2.8 Manufactured goods /b 1,650 4,800 11,000 18.7 8.4 12.5 (of which plywood) (660) (1,700) (4,098) 13.6 9.6 13.5 Total20,20 36,300 57,500 2.2 4.0 Capacity to import /c 22,890 26,800 33,300 1.7 3.5 4.5 it Iucludes aluminum. 7b Includes plywood, textiles, handicrafts, electrical appliances, cement, fertilizer and other manufactures. IC Exports deflated by the import price Index in 1981 prices. Source: World Bank staff estimates and projections. 2.36 Timber exports - which consist of sawnwood and logs - are projected to decline In 1985!86 due to a tightening of restrictions on log exports. Sawnwood exports are, however, projected to continue to rise, so that by 1990 the value of sawnwood exports alone wlll exceed the combined value of log and sawuwood exports in 1984/85. The prospects for metal and mineral exports are not particularly bright. World Bank projections indicate that the real prices of tin, nickel and aluminum (which are of importance to Indonesia) are likely to decline over the remainder of the decade. Consequently, Indonesia can only expect modest increases in earnings from this subsector, until the world demand situation improves in the 1990s. 2.37 Market Access. As the REPELITA IV plan correctly stresses, Indonesia's overall non-oil export prospects will, In large measure, depend on the success of its manufactured exports. Between 1980/81 and 1984/85 the value of these exports virtually doubled - to reach an estimated t1.7 billion in the latter year. The task facing exporters is to more than double these - 52 - exports again by the end of the REPELITA IV plan. This will require concerted efforts on the part of the Goveranment, as well as by exporters themselves. The prospects for plywood, which accounted for almost 40X of manufactured exports in 1984/85, are favorable and some rebound in plywood prices is foreseen during 1985. As stressed in last year's report, Indonesia faces high tariff barriers in Japan and Australia and, although exports to the EEC are entitled to enter duty free up to an amount set by a GSP quota, exports above this level face a tariff. (In 1984, for example, Indonesia's GSP quota for plywood exports to the EEC was used up in two months). Indonesia has invested very substantial sums in recent years to Improve the quality and range of its plywood exports. Reductions of plywood tariffs would provide a well deserved and very important measure of support for these efforts. Given favorable demand conditions abroad, plywood export volume could increase by over lOX annually over the rest of the decade without hitting capacity constraints. 2.38 The textile and handicraft industry has also scored major successes in boosting exports from $180 million in 1982/83 to an estimated $500 million in 1984/85. Honever, partly in response to this increase, Indonesia has encountered an increase in non-tariff barriers. In particular, in the last three years Ireland, France and the United Kingdom have imposed new restrictions, including specific limits, and bans of indirect imports via other EEC countries, and surveillance on several textile items from Indonesia. In 1983, the USA introduced additional criteria for protective actions in respect of textile imports not subject to quotas. So far 8 items from Indonesia have been affected by this legislation./l The MFA is scheduled to expire in 1986 and its future is still uncertain. Textile exports are a sensitive matter but an agreement which takes into account the importance of providing market access to developing countries, such as Indonesia, which have a clear comparative advantage in textile production is to the advantage of al sides. At the same time, Indonesia should not lose sight of the fact that there is tremendous scope for expansion of textile exports in categories not subject to quotas, as well as for other manufactured goods. Its ability to do so will depend on whether it can contlaue to improve the competitiveness and quality of its exports and develop new markets. Import Needs and Composition 2.39 Indonesia's balance of payments prospects suggest that the growth of imports needs to be restrained over the medium term. The current high level of rice stocks means it should prove possible to reduce food imports further in real terms in the coming years. However, the very modest share of non-food consumpr goods in total imports suggests there is not much scope for further import savings in this area. The forecast levels of oil and LNG imports are tied closely to the growth of output in this sector, and for both technical /1 In November 1984 the GAIT Textile Surveillance body ruled that 2 of these itlls should be withdrawn, one is justified and five require further consultations. - 53 - and contractual reasons, this item is not amenable to reduction. Consequently, the major trade-off that Indonesia faces is between non-oil Intermediate and capital goods imports. 2.40 This trade-off has major implications for the conduct of economic policy. Capital goods imports are important, since they are essential for long term growth. Intermediate goods, on the other hand, are necessary to maintain existing production, and to provide vital inputs to new projects, as these come on stream. This report takes the view that for the remainder of the decade the relative priority will be intermediate inputs. Accordingly, the base case projection assumes that capital goods imports will increase by only 1% annually in real terms during this period. This implies that it will be important to ensure that new investment projects are selected very carefully. As discussed in Chapter 3, trade policy has aa important role to play in this regard by ensuring that investment incentives reward projects which earn export revenues, or save foreign exchange, without raising costs for other producers in the economy. And, as a corollary, public expenditures must support such a pattern by concentrating investments in less import intensive sectors, thereby making more resources available to import inputs for existing production activities. 2.41 In the aggregate, total imports of goods are projected to rise by 2.4% p.a. in real terms during 1986-90, with an increase of 4.3% p.a. envisaged for the first half of the 1990s, as the foreign exchange constraints facing Indonesia begin to ease. The projections of merchandise imports under the base case are shown in Table 2.9. Table 2.9: PROJECTIONS OF MERCHANDISE IMPORTS BY MAJOR CATEGORY UNDER THE BASE CASE, 1984/85-1995/96 Ct million at current prices) Growth Rate (% p.a. at 1981 prices) 1984/85 1990/91 1995/96 1984/85- 1986/87- 1991/92- Est. - Projected - 1985/86 1990/91 1995/96 Consumer goods Food 940 1,500 1,600 -8.3 -1.6 -2.6 Non-food 580 900 1,300 5.2 0.8 1.3 Intermediate goods (non-oil) 4,600 8,800 15,300 1.5 4.2 6.3 Capital goods (non-oil) 6,750 11,300 16,700 -5.6 1.4 3.0 Oil/LNG sector 3,130 6,500 ll,000 -1.5 3.3 5.7 Total 16,7000 29,000 45,900 2.4 4.3 Source: World Bank staff estimates and projections. - 54 - D. External Financing Requirements and Borrowing Strategy 2.42 Reduced Debt-servicing Capacity. The uncertain near term outlook for oil prices, coupled with the prospect of a deterioration In Indonesia's overall terms of trade, implies that Indonesia will have to carefully manage Its borrowing profile in the medium term. Prudence dictates that Indonesia's borrowing strategy must take full account of the uncertainty over oil prices. This implies a cautious approach to macroeconomic management, with particular emphasls on further external adjustment and careful debt marngemert. The simulation exercises undertaken for this report indicate that, while Indonesia's debt-service ratios will rise sharply over the next few years in the event of a decline in oil prices, this trend could be reversed over a slightly longer time period, providing that borrowing over the next few years is kept within the prudent levels showx under the base case. However, if Indonesia were to undertake significantly higher borrowing than the levels shown in the base case, the resulting debt service could prove unmanageable in the event of lower oil prices. In order to keep the level of borrowing within this limit, it would therefore appear advisable to reduce the current account deficit from its present level to about 2Z of GNP before the end of REPELITA IV. 2.43 By pursuing such a strategy, Indonesia can minimize the adverse effects of a possible decline in oil prices in the near term. And over the longer term, by reducing its dependency on oil revenues, Indonesia will be able to maintain the momentum of development in the event of lower than expected growth in real oil prices. If oil prices are lower than assumed under the base case this would, inevitably, call for lower growth in the near term. But, providing borrowing levels are contained, the country's debt-service obligations would remain manageable, and growth performance respectable over the long term, even with considerably lower oil prices than envisaged under the base case scenario - as the low case scenario described above, illustrates (paras. 2.25-2.37). 2.44 External Capital Requirements. Table 2.10 sets out Indonesia's exteral .rcquirzments in summary form for the next three years under the base case assumptions. For the next three years the projected level of gross borrowing is approximately equivalent to the servicing of external debt. Indonesia will also need to provide for a build up in the value of reserves (although the projected increase represents a decline in the ratio of reserves to months of imports of goods). A similar picture emerges for the longer term. For the 1985/86 - 1987/88 period $5.5 billion of gross disbursements of medium and long term public loans are required annually. Under the low case, the same average level of gross disbursements, i.e. $5.5 billion, is envisaged over the next three years. - 55 - Table 2.10: EXTERNAL CAPITAL REQUIREMETS AND SOURCES, 1982/83 - 1987/88 ($ billion at current prices) Annual Averages 1982/83-1984/85 1985/86-1987/88 /a Requirements 6.2 6.2 Current account deficit T 2.7 (of which interest) (2.0) (2.7) Amortization 2.0 2.8 Change in official reserves -0.2 0.7 Sources 6.2 6.2 Direct foreign investment (net) 0.3 0.3 Short term and other capital (net) /b 1.6 0.4 Public medium and long term loans /c 4.3 5.5 Official assistance (1.4) (2.2) Import related credits (1.8) (1.5) Commercial credits (1.1) (1.8) /a Refers to the base case. 7U Includes all flows in the oil and LNG capital account, and all net private capital flows. /c Gross disbursements. Source: World Bank staff estimates and projections. 2.45 External Borrowing Strategy. To generate this level of disbursements, and to establish a pipeline for its future needs, the Indonesian Government will require an average of $5.2 billion (including grants) in new commitments annually over the next three years. The projections also assume an improvement in project implementation performance so that the undisbursed outstanding commitments ($9.6 billlon) are used more rapidly. Traditionally, Indonesia has met its external public borrowlng requirements from three main sources: official assistance, import related credits, and internal borrowings from the commercial markets. The historical pattern of these commitments is shown in Table 2.11. - 56 - Table 2.11: COMMITMENTS OF PUBLIC DEBT AND GRANTS, 1980-84 ($ million at current prices) 1980 1981 1982 1983 1984 Est. IGGI 2 417 1,871 2 125 2 337 2,197 . . . . * ,~~~~~p - , Multilateral concessional 189 - 58 __ Multilateral nonconcessional 857 1,175 1,348 1,637 1,574 -IBRD (572) (837) -(977) (1,210) (987) -ADB (285) (338) (371) (427) (587) Bilateral concessional 1,141 548 555 557 513 Grants 230 148 164 143 110 Import related credits 994 2,798 4,140 1,730 961 Bilateral nonconcessional 453 749 637 259 :37 Suppliers' credits 122 1,251 1,713 907 418 Buyers' credits 419 798 1,790 564 186 Commercial credits 1 097 745 961 1,901 1,529 Bonds 45 4 116 - Syndicated loans and untied borrowings 1,052 700 921 1,785 1,529 T.o__ _50 5,414 7,226 5,6 ,8 Source: Bank Indonesia and World Bank staff estimates. 2.46 Official assistance, primarily composed of concessional bilateral loans and grants as well as multilateral loans and grants from members of the Inter-Governmental Group on Indonesia (IGGI), has been the most important source of external finance for Indonesia comprising 46% of public debt outstanding at the end of 1984. Commitments in 1984 amounted to about $2.2 billion, comprising i513 million in bilateral concessional loans, $1.6 billion in multilateral loans, and $110 million in grants. This support is making a highly va:Lued contributioa to the Government's development efforts during a period of adjustment to a more difficult external situation. 2.47 It is essential that official assistance from IGGI members continue to provide the core of Indonesia's external financing requirements in the years ahead. Given the expected reduction in Indonesia's terms of trade over the remainder of the decade, it would appear inadvisable to seek substantial increases in commercial borrowing at current real interest rates. It is therefore recommpnded that the level of IGGI assistance to Indonesia be at least $2.4 billion in 1985/86 (the same level as recommended and pledged for 1984/85), and that, as shown in Table 2.12, the level of commitments over the next three years average at least *2.5 billion annually. - 57 - Table 2.12: PROJECTED COMMITMENTS OF EXTERNAL PUBLIC DEBT AND GRANTS, 1985/86-1987/88 ($ million at current prices) 1985/86 1986/87 1987/88 Official assistanee 2 410 2,520 2,600 - Loans 2,40 - Grants 110 120 125 Import related credits 1 300 1,300 1 300 Untied borrowing 1,200 1,300 1,700 a 4,910 5,120 5,600 Memo item: Private external borrowing 650 650 800 Source: World Bank staff estimates and projections. 2.48 Import related credits (IRCs) and commercial loans will both have an important part to play in helping to meet Indonesia's external financing needs during the remainder of the plan period. The terms on Import related credits have improved markedly in recent years, as suppliers of capital goods have provided an increased grant element within these loans. There is, at present, some $2.1 billion outstanding in IRC commitments. Given the projected continued shift away from import intensive public sector projects and the projected slow growth of capital goods imports, these outstanding commitments, together with annual new committments of $1.3 billion, should prove sufficient for the needs of the public investment program. In recent years, Indonesia's borrowings from commercial sources have been used as a tool of balance of payments and reserve management, rather than to finance specific projects. This is a trend which can be expected to continue. In 1984 commercial syndications and other commercial placements amounted to $1.5 billion. Thlese issues were well received by the market, indicating the confidence placed in Indonesia's macroeconomic policies and prudent debt management record. Indonesia can be expected to tap the commercial markets for additional resources to meet its external financing needs. However, given the high level of real interest rates which are expected to prevail during the life of these loans, the extent of this borrowing will need to be carefully controlled with a view to its impact on the debt-service ratio. On balance, it would appear that commercial borrowing over the next three years should not exceed a total of $4.2 billion. - 58 - 2.49 As a consequence of Indonesia's liberal foreign exchange system, which provides for full convertibility of the Rupiah, It is difficult to obtain a clear picture of the extent of private non-guaranteed debt. However, based on BIS data and other creditor country reports, external private debt to banks abroad at the end of 1984 is estimated to have been about $6.5 billion. Of this, medium and long term debt is thought to amount to about *3.8 billion. With the high levels of domestic interest rates - which on an inflation adjusted basis axe higher than those prevailing abroad - there could be substantial demand on the part of the private sector for additional external borrowing. This should be carefully monitored, since these borrowings are generally made on less favorable terms than public sector debt. At the same time, it is important to recognise that this debt represents part of the total obligations of the country. Such borrowing must be kept within reasonable limits, and - as stressed in Chapter 3 - used for economically sound projects. Projections of Debt and Debt Service 2.50 Indonesia has followed a very prudent debt management strategy over the past decade. As a result it continues to enjoy favorable access to the international capital markets, despite the uncertainties in the oil price situation. The rate of growth of overall debt has been moderate and private debts constitute only a small proportion of its total outstanding external debt. The total level of outstanding and disbursed public external debt (including LNG expansion) is estimated at $24.6 billion at the end of 1984. An additional amount of *9.6 billion of previously committed external public debt remains to be disbursed. The average maturity of public medium and long term (MLT) debt is estimated at 14 years, while debt at variable interest rates accounted for less than one quarter of the total. 2.51 The public sector borroving program outlined above implies an average annual growth of about 9% annually in the nominal value of public debt outstanding and disbursed between 1984 and 1990, and a 7% increase during the first half of the 1990s. Private MLT debt is expected to rise more slowly, so that its overall share in Indonesia's total external debts will decline slightly. In terms of the composition of public MLT debt, as Table 2.13 indicates, the share of official assistance and commercial credits are projected to rise significantly over the rest of the decade, while import related credits will decline. In the 1990s, it is expected that the share of import related credits will continue to decline, while the share of commercial credits will correspondingly increase. - 59 - Table 2.13: DISBURSED AND OUTSTANDING MEDIUM AND LONG TERM DEBT, 1981-95 ($ billion at current prices) Total debt Shares (%) 1981 1984 1990 1995 1981 1984 1990 1995 Projected Projected Public debt Official assistance 9.3 11.4 21.5 29.3 47.7 40.1 45.8 45.2 Import related debt on commercial terms 3.4 6.2 7.8 9.3 17.4 21.8 16.7 14.3 Eurocurrency and other untied borrowings 3.2 5.3 10.9 18.2 16.4 18.7 23.2 28.0 LNG expansion - 1.7 1.2 0.7 - 6.0 2.6 1.1 Subtotal 15.9 24.6 41.4 57.5 81.5 86.6 88.3 88.6 Private debt 3.6 3.8 5.5 7.4 18.5 13.4 11.7 11.4 Totl 28..446r.9 64.9 100.0 100.0 100.0 Memo item: Debt-service ratios (%) - Public (net) /a 14.4 25.1 29.8 27.1 - Public (gross)7b 8.2 14.9 19.1 17.6 - Total public and private (gross) 10.4 21.1 23.8 22.1 /a The ratio of debt service to net exports, that includes gross merchandise non-oil exports and net oil and ING exports (i.e. gross exports less imports of goods and services of the oil/LNG sector). /b The ratio of debt service to gross exports of goods and services. Source: World Bank staff projections. 2.53 Under the base case scenario, at the projected levels of borrowing Indonesia's total public and private debt-service ratio, on a gross basis, would peak at 24% in 1989. It would then gradually decline to 22% by 1995. The public debt-service ratio, on a gross basis, would rise steadily from 15% in 1984 to 19% in 1989. After 1990 it would decline continuously to less than 18% in 1995. On a net basis, the public debt-service ratio would rise from 25% in 1984 to nearly 30Z in 1989, before declining to 27% in 1995. While debt-service levels of these magaitudes are manageable for Indonesla, its borrowing policies will clearly require continued careful attention. With continued prudent borrowing, maintenance of a comfortable level of external reserves to guard against temporary strains on liquidity, concerted efforts at export promotion, and continued discipline in the public investment program, Indonesia should be able to retain its present high standing in international capital markets. - 60 - CHAPTER 3 SELECTED POLICIES FOR GROWTH AND STRUCTURAL TRANSFORMATION A. Introduction 3.1 The preceding chapters have highlighted (i) the significant progress Indonesia has made over the past two years in adjusting to a less favorable international oil market, and (ii) the challenge It faces in generating adequate economic growtlh and structural transformation over the next decade. As argued in Part II of this report, success on these fronts is essential for providing employment opportunities for a rapidly growing labor force. The challenge that lies ahead comes at a time when the external economic environment is beset by uncertainty and is likely to be, at least for the remainder of the 1980s, less favorable to Indonesia than it was in most of the previous decade. In particular, as discussed in Chapter 2, the country is expected to face adverse terms of trade as well as slowly growing and possibly volatile oil revenues. Under this postulated scenario, development strategy and policies would need to be carefully formulated with a long term perspective in mind. While it is beyond the scope of this report to provide a comprehensive discussion of the issues involved, in this chapter selected key areas of development strategy and economic policy are examined. The principal theme running throughout the chapter is efficiency. In an era of resource stringency, this is a natural focus, for without considerable strengthening of the productive base of the economy through efficiency improvements and judicious iuvestments, future growth is bound to be lower than under the scenarios developed in Chapter 2. It is with higher growth that equity objectives - a cornerstone of social policy in Indonesia - can best be served. 3.2 Against this background, Section B focuses on the inter-related issues of industrial development and trade policy. The development of a broad-based and internationally compe' tive industrial sector is essential for raising incomes, contributing to employment creation and reducing the economy's dependence on a narrow and vulnerable source of foreign exchange earnings. The recent major policy actions on customs and ports operations, discussed in Chapter 1, should contribute to reducing costs in the industrial sector, and indeed in the economy as a whole. However, without early rationalization of the industrial and trade regime, there are considerable risks that the economy will become increasingly locked into a high cost structure and that the tasks of economic management and structural transformation will become exceedingly difficult. Section C deals with financial sector policies needed to reduce intarmedia.Lon costs and improve the range of services offered to private investors so as to lower investment costs and increase competitiveness. The final section of the chapter examines selected issues related to efficient utilization of public resources for high priority investments in order to enhance their contribution to overal economic and social development. - 61 - B. Industrial Development and Trade Policy 3.3 As noted in Chapter 1, there has been a significant slowdown in the pace of private investment activity in Indonesia over the past year, particularly among medium and large scale enterprises in the manufacturing sector. Market saturation, sluggish domestic demnnd growth and high real interest rates were cited as the principal contributory factors. These, coupled with uncertainty over oil prices, and hence the future growth rate of the economy, have created a mood of greater caution, and perhaps even some pessimism, amongst the business community. Policy responses to this situation, however, are constrailed by tighter external resource avallability and greater uncertainty in the external env 5ronment. Consequently, it would not be appropriate for the Government to encourage major new capital intensive investment initiatives in the private sector or, for that matter, amongst public enterprises, in areas where there are doubts as to their economic viability. Nor would it be advisable to reactivate the major investment projects rephased or rescheduled in early 1983. 3.4 The task confronting the authorities, therefore, is to develop a strategy for influencing private investment decisions uhich reflects the country's comparative advantage and takes full cognizance of the difficult and uncertain external trade situation faciLj the country. In this respect the role of industrial and trade policy would need to be carefully eamined with the objective of encouraging efficiency improvements in existing investments and guiding nev investments into areas of comparative advantage. This section reviews the emerging problems in the manufacturing sector and the costs associated with current trade and industrial policies and then discusses the need for reform of the present incentive structure for investment in manufacturing. It should, of course, be recognized that efficiency in the industrial sector, as in the rest of the economv, depends not only on government economic policies. The cost and quality of physical infrastructure - ports, land transport, power, telecommunications - entrepreneurial and managerial talent, the scale of production and the technology employed, and the skill level of the workforce also profoundly influence efficiency. The Governmet's recent decisive measures on customs and ports regulations, and the ongoing emphasis on investment in education and training at all levels should help improve the efficiency of both physical and human Infrastructure. However, it is the argument of this section that a reform of industrial and trade policy is essential to the success of the campaign to reduce costs in manufacturing so as to enhance its contribution to growth, incomes and export earnings. Emerging Problems in the Manufacturing Sector 3.5 Indonesia'E manufacturing sector value added grew at an impressive rate of U1.5Z p.a. between 1967 to 1982. This growth occurred in essentially two phases. In the first phase before 1975, relatively labor intensive consumer goods industry grew at a rapid rate of 16.5- p.a. As the -easy' possibilities of import substitution were steadily exhausted, the need to maintain the growth momentum in the sector and to widen its base led to the import substitution of technologically complex upstream products. In the - 62 - second phase after 1975, intermediate goods production increased at the rate of nearly 18% p.a. on the strength of domestic demand and protection from foreign competition. Towards the latter end of the period, there were major increases in the productioa of capital goods. with the bulk of the output destined for the home market behind high levels of protection, production costs for many products were high by international standards. Accordingly, exports of manufactures were relatively narrow-based and did not grow appreciably in the 1970s, although, as noted in Chapter 1, slack demand conditions in the domestic market in the past two years have led to the emergence of new export products. 3.6 As discussed in Chapter 1, excess capacity is particularly pervasive in the cement, steel, tires, televisions, automobiles, motorcycles, textiles and plywood industries. Most of these sectors bad developed rapidly under the protection of import quotas or complete bans, but the unexpected slowdown in demand after 1981 compelled reductions in output. In several other cases, however, optimistic market forecasts also contributed to the present glut in capacity. For example, it is unlikely that cement demand in 1985 would have reached the capacity level of 17.4 million tons even with uninterrupted growth over the past few years./l Similarly, continued growth in the demand for tires would still not have been sufficient to raise tire sales to the present capacity level of 10.6 million units in 1985. In these two subsectors, as in others with excess capacity, export prospects will be limited owing to high production costs and international market conditions./2 Consequently, excess capacity is likely to remain a persistent problem until the end of REPELIT& IV. Recent Developmeats in Trade Policy and Industrial Strategy 3.7 The pattern of industrialization that has emerged over the past two decades in Indonesia has been profoundly influenced by a range of government policies. These policies have been introduced to serve a number of objectives, among which are the deliberate creation of a broad industrial base, generation of cmployment, promotion of exports, regional development and provision of support to the economically weaker sections of society. The two most important policy instruments employed have been: Ci) the protection of domestic industry from foreign competition through tariffs, quantitative restrictions, outright bans on some imports, local content regulations and, more recently, importer licensing 13; and (ii) the close regulation of business activity through a complex licensing system, and the promotion of investment in government-designated priority sectors by recourse to a variety of tariff exemptions and other concessions granted by the Investment /1 Demand in 1985 is expected to be slightly higher than 10 million tons. /2 In the case of cement, manufacturers are being encouraged to convert to coal-fired systems which could reduce costs by upto 12%. /3 Import check prices and, before the introduction of VAT, the import sales tax were two additional measures used to provide protection to domestic industries. - 63 - Coordinating Board (BKPM)./l With respect to the choice of protection instruments, while reportedly the Government has not had a preference for quantitative restrictions, it has often accepted the industry's argument that tariffs alone are not sufficient because of the ineffectiveness of the customs administration. With the introduction of the recent reforms on this front, the rationale for quantitative restrictions should now be less compelling. 3.8 The Reduction in Import Tariffs. Recent goveranment policy statements and actions continue to emphasize the need for increasing non-oil exports. The January 1982 export decree and the March 1983 devaluation went some way towards increasing incentives to export. In March 1985 the Government announced a major reduction in the range and level of nomi&al import tariffs. Nominal tariffs have been reduced from a range of zero up to 225%, to a range of zero to 60%,/2 and most products have had their nominal tariffs reduced by between 50, to 35Z. The reduction in the dispersion of nominal tariffs will also introduce greater uniformity in production incentives across different industries. In addition, in an important step towards greater simplification, the number of tariff levels has been reduced from 25 to 11. The tariff changes, coupled with the new customs, ports and shipping regulations, should enhance the cost competitiveness of a wide range of industries. 3.9 Quantitative Restrictions and the Deletion Program. However, a number of other recent actions of the Government have served to promote some potentially costly and uneconozic investments which could prove counterproductive to the export drive. There are two areas of such actions particularly worth noting: (i) the increase in the categories of pr-^ducts subject to importer licensing accompanied by quotas and/or baus; and (ii) regulations requiring increased local content in final products accompanied by a 'deletion program". 3.10 With the onset of international recession and the slowdown in the expansion of the domestic market in the early 1980s, Indonesian producers faced increased competition from imports. In respoase to this and the pressures on the balance of payments arising from the weakening of the oil markets, the Ministry of Trade issued a decree in late 1982 providing general authority to regulate the importation of a range of products through licensed importers. New decrees have since been issued for an increasing number of product categories limiting the number of importers to two or three, often state-owned trading companies; the Ministry of Trade also retains the authority to decide import quantities, which in the case of manufactures is based on advice from the Ministry of Industry. 3.11 The expressed purposes of this scheme are to increase importer specialization, save foreign exchange, prevent dumping from abroad and promote /1 As discussed in Chapter 1, the admainistrative reauirements for investment licensing were simplified beginning April 1985. The 1984 tax reform eliminated the tax incentives which BKPM could previously offer. /2 Except for 19 product groups, or less than 0.5% of the total number of product groups, which still have tariffs above 60%. - 64- the use of domestic industrial products, particularly those for which there is substantial excess capacity. Another stated rationale for the introduction of these policies is to promote domes tic interlinkages. Strengthening industrial interlinkages, particularly backward linkages, can help transmit growth from one sector to the rest of the ecouomy. However, interlinkages administratively forged by government policies can rua the risk of raising production costs and lowering competitiveness. In the presence of a widespread use of trade barriers it is inevitable that industries with strong backward linkages, while supporting the growth of uncompetitive upstream industries, are bhadered in their own development by having to pay higher costs than imports. 3.12 For example, steel imports are controlled by a few trading companies./l This policy was introduced to increase capacity utilization in steel production but in effect gives very heavy protection to steel producers. Tariffs on steel and steel products range between only 1% and 5%,/2 yet domestic steel producers charge prices which are between 26% and 50% above landed international prices. 3.13 High steel prices, in turn, raise the costs of production in downstream industries. A conservative estimate suggests these high steel prices raise costs of production for structural metal products by 10%, metal furniture and fixtures by 9%, and cutlery, handtools and hardware by 7%./3 Many of these products are manufactured in small and medium firms by relatively labor intensive methods. High steel prices penalize these firms by raising their costs. This not only lowers the level of domestic demand for their products, but also reduces their competitiveness in international markets and curbs the growth of employment in manufacturing. 3.14 A further example of the impact of quantitative restrictions on domestic costs is provided by the television industry. The import ban confers absolute protection to television production. The industry now comprises a large number of small firms, served by 20 foreign brands, which cannot capture the benefits of cost reductions from scale economies. Televisions and other electronic consumer goods are therefore between 20% and 50% costlier in Indonesia than in international markets, despite the fact that the industry is well over a decade old in Indonesia. The import ban on televisions is accompanied by a 30% tariff on knocked-down assembly kits (CKD) and 40% on /1 P.T. Krakatau Steel, a public sector steel company responsible for the Silk of Indonesian steel production, is solely responsible for the import of scrap, slabs, billets, hot rolled coils, wire rods and rerolled sheets; P.T. Giwang Selogam, a private sector company, has a monopoly over imports of cold rolled sheets used extensively in the automotive sector; P.T. Timah, a public sector company, Is the licensed importer of tin plates; and two public sector trading companies, P.T. Kerta Niaga and P.T. Dharma Niaga, are licensed to import finished steel products. _- Other than wire rods, which is protected by a tariff of 20%. 13 These are estimates made on the basis of input-output coefficients given in the 1980 Input-Output Tables published by BPS. - 65 - electronic components./l This differential tariff structure has encouraged domestic producers to rely on CRD imports, rather than developing indigenous technology based on cheap components from alternative suppliers. In addition, electronic components can only be imported by a few licensed importers, adding another step to the import procedure and raising component costs yet further. Instead of enabling a free flow of components at lowest possible costs to stimulate the development of the electronics industry, the differential tariff structure has served to perpetuate the dependence of the industry on the technology embodied in high-cost CKD kits. 3.15 In a bid to accelerate the local manufacture of the component parts of completely knocked down (CKD) kits, the Government has, in several instances, introduced a deletion program designed to reduce gradually the number of parts that can be imported for assembly. Deletion programs have been a cornerstone of the Government's strategy for some time in the automobile and motorcycle industries. More recently, the Government introduced deletion programs for the production of tractors, heavy equipment, diesel generating sets, and machine tools. 3016 The diesel engine subsector is an example of how deletion programs administered by the Government may affect production and investment efficiency. The c.i.f. import price of CKD kits for diesel engines is often as high, if not higher than the c.i.f. import price of completely built-up (CBU) units. This is because international suppliers are not geared to supplying CKD kits which require special packaging and handling, the cost of which is higher than the assembling of the engine itself. As a consequence, assembly of diesel engines from imported parts does not appear to be an economically viable production activity, but owing to substantial differentials in tariffs for imported CKD kits and CBU units, the five domestic assemblers of diesel engines supplied 60% of total market demand by 1982. The only way the industry could be made efficient is if low cost components could be produced domestically. This supplied the rationale for the diesel engine deletion program. One third of the required parts for diesel engine assembly are already produced in Indonesia as a result of the deletion program, and the Ministry of Industry projects the domestic content to increase to 80Z by 1990. 3.17 There are two problems that could arise from such a strategy. First, while there is little doubt that upstream integration is an essential aspect of the industrialization process, the manner in which it is implemented is critical to the final result. Thus, upstream integration in the diesel engine industry may be appropriate for Indonesia, but scale considerations suggest that this need not translate itself to upstream integration in every firm. Yet, given the difficulties of new investors in acqulring investment licences, the implementation of the deletion program has encouraged each manufacturer to set up captive component production facilities; this has discouraged the emergence of international-scale component manufacturers capable of simultaneously supplying a number of assemblers. This is compounded by the /1 Under the new tariff regulations, the concept of CKDs for electronics has been eliminated. Instead, the tariff rate on components is now 5%. - 66 - relatively small size of the Indonesian market by world standards (53,000 diesel engines were produced in 1983). The cost-raising effects of low production levels within each firm cannot be overcome without rationalization of the existing Industry and the creation of export markets that can support international scales of production. The second problem arising from a deletion program is that its forced pace has the effect of significantly raising costs of production, particularly as more and more complex parts, or parts requiring large scale production, are mandated to be produced domestically. However, production could proceed for several component parts that can already be produced cost effectively in Indonesia, and several more could be added to these after a reasonable learning period. The failure to increase production efficiency wili lead to the creation of a potentially high cost, low volumse diesel engine industry which rims the risk of imposing a cost burden on downstream users of the equipment. Greater attention, therefore, needs to be given in advance to the ultimate economic viability and timing of new investments, the optimal scale of production, and the level of local content that can economically be supplied from domestic sources. In essence, premature import substitution should be avoided, particularly when it imposes cost penalties on downstream industries. The Costs Associated with the Present Policy Environment: Some Evidence 3.18 Government policies designed to protect the manufacturing sector have contributed to the developmpnt of many inefficient industries which produce goods at higher cost than comparable imports. The extra cost to domestic consumers amouats to an Implicit subsidy to producers. In last year's economic report we cited the example of a few products (cement, steel, color TVs) for which the implicit subsidy per worker employed was very high./I Table 3.1 provides additional evidence indicating the implicit subsidy per worker for a number of other products. The wide range of production activities receiving implicit subsidies through the incentive system raises the important issue of whether Indonesia, given its present ard-- foreseeable resource constraints, can afford to continue such subsidies over a prolonged period without incurring a heavy penalty in terms of overall economic performance. 3.19 As important is the wide disparity in assistance provided to different industries. For example, the implicit subsidy per unit of value added in the production of non-alcoholic beverages is 23 times as much as that provided to wood and rattan furniture, and 40 times greater than finished textile products. Export oriented industries are disadvantaged by the incentive system because, though they obtain high-cost inputs from domestic suppliers, they have to sell their products on the international market on a competitive basis. This amounts to a tax on the production of these items, which in the case of garments can be as high as 20% for every unit of value /1 Indonesia - Policies and Prospects for Economic Growth and Transformation, World Bank Report No. 5066-IND, April 26, 1984, page 101. - 67 - added./l Potential exporters are consequently either uncompetitive in international markets or find it financially more rewarding to sell their products in the domestic market behind high protective barriers. Indonesia acceded to the GATT Code on Subsidies and Countervailing Duties in March 1985 and, in accordance with GATT provisions the Government has announced its intention to phase out certain types of export incentives. This underscores the Government's determination to improve the efficiency of the industrial sector and supporting services. Specifically, within the next two years, Indonesia will replace the export certificate scheme with a formal duty drawback system which would ensure that duty exemptions or rebates are provided only for the actual duties paid on imported Inputs. In addition, the Government has announced that preferential interest rates provided to exporters for short term export financing will be phased out over the next five years. Table 3.1: IMPLICIT ANNUAL SUBSIDIES PER WORKER IN SELECTED INDUSTRIES, 1984 Industry Total implicit Implicit annual annual subsidy /a subsidy per worker (Rp. billion) (Rp. million) Motorcycles 53.2 5.9 Cosmetics 67.1 4.7 Motor Vehicles 134.4 4.1 Glass 37.5 3.1 Sugar 137.6 1.6 /a The volume of output multiplied by the difference in value added at domestic and international prices. Source: World Bank staff estimates. 3.20 In addition to substantial transfers from consumers to producers, the high protection of manufactures also tends to encourage uneconomic production activities. Table 3.2 presents estimates of the value of domestic resources (labor and capital) used in saving one US Dollar (for imports) or earning one US Dollar (for exports) for selected manufactures./2 In the case of some manufactures (e.g. AC generator sets, color TVs and shock absorbers), the import cost of components is greater than the import price of the completely built up unit. The domestic production of these items actually results in /1 Other manufacturing activities which are taxed in this menner by the present incentive system include the production of some textile products, some industrial chemicals, meat canning and chocolate. /2 The estimates of domestic -esource costs used here suffer from data limitations, and hence should be viewed as broad orders of magx2itude. - 68 - foreign exchange losses to the economy in addition to the domestic resources used in their production. In the case of other selected manufactures shown in Table 3.2, efficiency In the use of domestic resources varies considerably. At an exchange rate of US$1 - Rp. 1,100, about US$5 worth of domestic resources go into the production of sheet glass and tires to save Ustl in imports, a loss of US$4 to the economy. Similarly, for motorcycles, US$2 worth of domestic resources are used to save US$1 in imports, a loss of US$1. These estimates provide prime facie evidence of the high social cost of such activities. On the other hand, the two export oriented activities in the sample, palm oil refining and rubber processing, earn foreign exchange efficiently. Table 3.2: DOMESTIC RESOURCES USED IN SAVING OR EARNING US$1 (FOR SELECTED MANUFACTURES, 1985) Production Sector /a Domestic resources used Implicit subsidy of (IS-Import substitute) in saving or earning per unit of CEO-Export oriented) US$1 (in Rp) value added /b AC generator set IS .. NVA /c Color TV IS .. NVA Shock absorber IS .. NVA Sheet glass IS 5,370 3.87 Tires IS 4,720 0.92 Bajaj IS 3,390 0.62 Motor cycle IS 2,100 0.65 Polyester cloth IS 1,770 0.60 Shirt IS 1,370 0.17 Refined palm oil ED 870 -0.36 Processed rubber ED 762 -0.49 Not applicable /a Export orieated Industries are defined as those which export more than 5% of their output. /b The figures are the effective rates of protection expressed as a ratio. They are net of taxes and any other transfer payments. /c Negative domestic value added at international prices. This indicates that the cost of imported components is greater than the international price of the final product. Hence, the contribution of the activity to the balance of payments is negative. Source: World Bank staff estimates. 3.21 It must be stressed, however, that import substitution activities pr se need not be uneconomic, provided they are competitive with comparable imports, after allowing for a reasonable learning period. But the assured erection of high protective trade barriers tends to encourage investments - 69 - which are not internationally competitive and utilize domestic resources uneconomically. The evidence presented in Table 3.2 tends to support the conclusion that the more the protection accorded to a manufacturing activity (measured as the implicit subsidy per unit of value added), the greater are the domestic resources required in earning or saving one US Dollar. The Need for Change in Industrial and Trade Policy 3.22 The macroeconomic framework in Chapter 2 projects the mnnufacturing sector to grow at 8% p.a. between 1985 and 1995 compared to 4% p.a. in the first four years of the 1980s and 14% p.a. in the 1970s. Unlike the 1970s, future industrialization would now need to be achieved in an environment of resource stringency. As a consequence, not only would new investments in the manufacturing sector need to be more efficient, but greater efficiency would need to be achieved from existing investments. In the short run, providing demand conditions permit, the efficiency of existing investments would increase as capacity utilization rises. However, even at full capacity, many firms in various industries would not be capable of reaching international levels of competitiveness owing to problems of scale, old technology or other inefficiencies. On the other hand, cost reductioas would lead to lower prices, thereby effectively expanding the domestic market as well as enhancing export coylpetitiveness. 3.23 Rapid industrial development in the coming years will also need to be achieved in an environment of slower growth in incomes and domestic demand than In the past. Achieving high manufacturing growth in the face of lower domestic absorption requires a shift in emphasis towards exports. The base case projections in Chapter 2 indicate that to achieve a 5% non-oil GDP growth rate, the manufacturing sector would need to grow by 8-9% p.a. over the next ten years. The narrowing scope for efficient import substitution implies that exports of manufactures would need to rise by almost 11% p.a. (in real terms) to meet this target. Given Indonesia's low base of exports of manufactures, and provided that the mix is diversified, a rate of expansion of this order is unlikely to face external demand constraints. 3.24 During the 1970s, only about 10% of the growth in manufacturing output on average was accounted for by export expansion; for the period 1986-90 this would need to rise to 12%, and thereafter to 14%./l Such a shift in the patteru of demand is deemed essential for achieving the growth targets for manufacturing and (YDP as a whole. Generating the requisite export growth calls for a policy environment which induces domestic manufacturers to accept the challenge of selling their products in the international as well as the domestic market. /1 The sources of growth are measured as the percentages of the increment in manufacturing gross output, and add up to 100%. Other than export expansion, the sources of growth are domestic demand expansion, import replacement -and technological change. - 70 - 3.25 The recent government initiatives in streamlining customs procedures, reducing port costs and lowerlig nominal tariffs are important steps in this direction. But, as noted earlier, the growing importance of quantitative restrictions on imports, and a rigid application of local content requirements, run counter to the thrust of these important measures. Continuation of these trade barriers will adversely affect Indonesia's export performance, GDP growth and the external payments position. By way of an illustration, we have explored the implications of a lower export growth (i.e. 5% p.a.) of manufactures. In such a situation, total export earnings in 1995 would be $5.6 billion lower than in the base case. If confronted with this prospect, Indonesia has two possible options. First, the Government could seek to maintain balance of payments stability by reducing the growth rate; this was depicted as Scenario III in Chapter II. Lower growth would naturally have adverse implications for employment and incomes, a subject more fully explored in Part II of this report. In- this scenario, the debt-service ratio, though manageable, will also be higher than indicated by prudent debt management standards. Second, in order to attain a GDP growth rate of 4.5% p.a., the Government could borrow more from international capital markets to compensate for the export earnings shortfall. The consequences of such a strategy are depicted as Scenario IV in Table 3.3. It indicates that total external debt would rise to over $83 billion by 1995 compared to $65 billion in the base case, and that the total debt-service ratio would consequently rise steadily reaching a high level of 28% compared to 22% in the base case. It is unlikely that such levels of borrowing and debt servicing could be reasonably managed without affecting Indonesla's international credit worthiness. Table 3.3: PROJECTED PERFORMANCE INDICATORS UNDER ALTERNATIVE TRADE POLICIES, 1986-95 Base Case Scenario III Scenario IV 1986-95 1986-95 1986-95 Growth (in percent) GDP 4.5 3.7 4.5 Manufacturing GDP /a 8.0 6.2 8.0 Exports of manufactures 10.4 5.0 5.0 Gross investment 5.1 4.5 5.1 Other indicators 1995 1995 1995 Debt-service ratio (Z) /b 22.1 26.4 28.0 Total external debt ($ billion) 64.9 71.3 83.5 /a Excludes LNG. 7% The ratio of total debt service to gross exports of goods and services. Source: World Bank staff estimates. - 71 - 3.26 Both scenarios III and IV are unattractive outcomes for Indonesia and emphasize the importance of achieving rapid expansion of exports of manufactures. No doubt, there are marketing risks associated with an export-based growth strategy, particularly those arising from the increasingly protectionist measures adopted by industrial nations. But the present inward-oriented approach runs the more insidious risk of promoting a range of high cost industries that will impose a progressively heavier burden on the country's resources and make it increasingly difficult to accelerate the export of manufactures. The longer the present policies continue, the more difficult and costly becomes the task of improving efficiency and realigning domestic industry with the country's resource availability and dynamic comparative advantage. Some Elements of Trade Policy Reform 3.27 The previous paragraphs have argued that further Industrial development through increased protection and intervention would not be consistent with the objectives of promoting efficiency and growth. Future policies need to ensure that new investments are channelled into economically viable activities requiring little or no assistance in the form of protection or subsidies. There is also a need to render existing investments more efficient so that their contribution to economic growth could be steadily enhanced. The transition from the present system to one which places a premium on efficiency aad competitiveness iu both export oriented and import substituting Industries will require time and careful management. It is beyond the scope of this report to offer a detailed blueprint for the changeover; rather, some broad considerations with regard to trade policy reform are outlined below. 3.28 First, as we noted earlier, import bans /1, deletion programs, and quantitative restrictions have been an important contributory factor in raising production costs in manufacturing. The reduction of these costs will not only help to increase the competitiveness of non-oil exports, but also, by reducing domestic prices, help to expand domestic demand for mnnufactures. In the short run, refraining from the introduction of new bans and replacing the existing ones with tariffs should, therefore, have the highest priority. In shifting from bans and quantitative restrictions to tariffs, anti-dumping laws and a system of countervailing duties would need to be established to ensure that Indonesian manufacturers are not seriously affected by dumping from abroad. 3.29 Second, in the medium term, to reduce the bias against exports and to promote efficient investments (both public and private), it is essential to reduce the existing high levels of protection. A step in this direction has already been taken with the recent lowering of tariff rates. However, the tariff reductions may generate pressures to introduce new quantitative restrictions; such pressures should be firmly resisted. Moreover, in encouraging private investment activity, it would also be advisable to resist /1 Including the negative list used by BKPM which itemizes those capital goods that cannot be imported but must be procured lot-ally. -72- the temptation of offering a protected domestic market as an inducement to potential private and foreign investors. In the medium to long term this will only serve to promote and sustain inefficient indostrial investments and frustrate efforts at improving the efficiency of existing industries. The first priority, therefore, should be to improve efficiency in the industrial sector. An efficient industrial sector, in turn, could provide a strong incentive for foreiga investors to invest in Indonesia. Such investments, if made judiciously, would help to promote growth, diversify the structure of exports, and increase export earnings. Care should, however, be exercised to ensure that foreign investment is attracted to ecoaomically viable activities and areas. In addition, disparities in the rates of protection would need to be further reduced. The realignment of tariffs will impact differently on various industries and firms. Some subsectors wlll benefit but others will be negatively affected. In some negatively affected subsectors, firms will be able to adjust to the new circumstances with improvements in efficiency. In others, the short term effects could prove disruptive to production and employment; but, if their longer term viability caa be established, there is a case for providing temporary and time-bound government support for the adjustment process. The kind of government intervention required may differ from subsector to subsector and would need to be the subject of special studies on each. For example, in the pulp and paper subsector, restructuring would need to take the form of fewer, larger and more energy-efficient firms. Government assistance could be in the form of providing long term finance and technical assistance, particularly to help manufacturers adjust to a new prodact mix and new markets. 3.30 The engineering sector provides a useful focus to examine how trade and industry policies can be applied to promote efficient and dynamic development. It is a sector which holds significant development potential in Indonesia, but where strategic mistakes can also prove very costly. Until now the development of the engineering sector has closely followed the incentive structure that governs investment and production in the industry as a whole. High protection, often supported by import bans, has encouraged large investments in the manufacture or assembly of complex products such as motor vehicles, heavy plant equipment and large ships. The expectation has been that this would lead to the formation of a supplier network and generate upstream employment. On the other hand, unsupported by the policy environment, light machinery and equipment /1 production contribute a very small share of engineering sector output and comprise a large share of capital goods imports. Yet Indonesia appears to have a potential dynamic comparative advantage in these products, as they require fairly straightforward manufacturing and product technologies, and use relatively labor intensive techniques of production. Existing firms in this subsector already exhibit potential for international competitiveness. The mzastery of the technology used in these subsectors could provide the strong technological base Indonesia /1 For example: cables, springs, gears, engine cams, metal containers, cu lery, building products, simple fabrications, hand tools, water valves, bearings, sheet metal products, simple plate products, industrial pumps, industrial valves, light cranes, hoists, light agricultural machinery, light construction machinery, etc. - 73 - needs to enter more complex production processes. This argues for a shift in emphasis towards light engineering goods. Not only does this require changes in the policy enwir iment and incentive structure, but also active government support to rationalize existing industries so they can compete more effectively with imports without requirlug high protection. C. Issues in Financial Intermediation 3.31 The financial system has an Important role to play in supporting the changes in trade and industrial policies discussed above, and facilitating the structural transformation of the economy. Firstly, the financial system will need to mobilize and provide financial resources to the industrial sector as well as other borrowers efficiently and at reasonable cost. As noted, the cost of credit in Indonesia is quite high and this is causing considerable stress on the financial position of many firms; these costs will need to be reduced through increased efficiency of banks (see below). Secondly, the process of industrial and trade policy reform will inevitably hurt some industries, and force others to restructure, modernize and adapt their production structure in order to become competitive. The financial system will1 need to assist such industries to become competitive and efficient by providing technical assistance and financing packages to enable such enterprises to undertake financial restructuring as well as new iuvestment designed to restructure and adapt their physical production capacity. Thirdly, financial institutions can contribute to the development of an efficient industrial sector through sound appraisal of projects and the provision of technical assistance and advice, especially to smaller businesses and new entrepreneurs. To achieve these goals, it is necessary that financial institutions become more viable and self-reliant, are able to operate independently and have the capacity to assess risks and make good credit judgements. In addition, the development of institutions in the financial sector needs to be encouraged, so as to provide more financing sources and options to potential investors than is presently available. 3.32 As discussed in Chapter 1, the June. 1983 reform has cleared the way for the evolution of more self-reliant inscitutions in the financial sector and greater competition. As noted, however, a number of issues have also emerged. Among those which require further attention are: Ca) how to reduce the presently high cost of credit evem after adjustment for inflation; (b) how to increase the flow of term lending through commercial banks; and (c) how to strengthen institutions, particularly the development banks and the capital market. Cost of Credit 3.33 Given Indonesia's open capital account, the close linkages between domestic interest rates and those abroad and the complex factors influencing the formation of exchange rate expectations in Indonesia, particularly uncertainties with regard to future oil price movements, it is difficult for the Government to bring down domestic deposit rates. On the other hand, intermediation costs of state banks (which account for the bulk of term - 74 - lending in Indonesia) are relative Ly high; and actions by these banks themselves to improve their effici3ncy and reduce their intermediation costs could provide an important means of reducing lending rates over the medium term. This is an important task: if these high interest rates cannot be reduced, they could impede the structural transformation of the economy. 3.34 Intermediation costs of state banks presently average about 7-8 percentage points of the interest rates charged. They malnly reflect high administrative overheads and large write-offs. There is considerable scope for reducing intermediation costs through improvements in the organizational structure and operating procedures of the state banks and reduciug write-offs. In general, organizational restructuring, improving management controls, rationalizing personnel use, and improving credit review procedures could lead to a significant reduction in the banks' costs. 3.35 The state banks are keenly aware of these needs. They have begun to take steps to improve their operational efficiency in many of these areas; some have embarked on major organizational Improvements. But more needs to be done. Given the magnitudes of arrears and high write-offs, banks will also need to launch aggressive collection efforts to collect past due loans, and to strengthen their loan collection and recovery capabilities. In addition, in order to induce banks to Improve their loan collection efforts, present credit insurance arrangements /1 should be improved by reducing insurance coverage provided by ASKRRINDO and raising the premia paid by banks to reflect the nature of risks covered. 3.36 The high cost of credit could be also brought down somewhat by lowering the cost of funds of banks. Towards this end, banks will need to expand their base of low cost (particularly demand) deposits, for example by promoting the banking habit through such measures as opening of branches in urban residential and rural areas, setting up special rapid service windows for cashing checks, improving the quality of services and environment in bank offices and creation of savings accounts with unrestricted withdrawal rights. The banks' costs of funds could also be reduced somewhat if Bank Indonesia were to pay interest to banks (for example, close to the average costs of deposits of banks) on banks' reserves held with BI. At present these reserves earn no interest; and this adds about 1-1.5% p.a. to the effective cost of funds of banks. Long Term lending 3.37 On the supply side, state banks appear to be less inclined than before to provide long term loans, due to increases in their deposit rates and risks after the financial sector reform, informal restraints on lending rates, and the shortening of their deposit mix (see Chapter 1). In order to induce banks to increase term lending, long term lending rates of state banks will need to rise to reflect their costs and risks of lending. This would /1 At present, 75S of aUl priority loans of banks are automatically insured by the state credit insurance agency - ASKRINDO; the responsibiLlity of collecting bad loans is generalUy left to ASKRINDO and the government collection agency which is heavily overburdened. - 75 - initially raise costs to borrowers. But, if banks lend at variable rates, as interest rates decline, the average cost to borrowers could be reduced over time as compared to the cost under the present fixed long term rates. In addition, by capping debt-service payments, and if necessary, by extending the maturity of loans, it is possible to protect borrowers and match their debt-service payments with the cash flow of projects. In order to improve their deposit mix, banks will need to diversify the range of instruments offered to depositors and promote longer term CDs; the latter however, requires greater differentiation of deposit rates than is presently paid an 12 and 24 month deposits, particularly by state banks./l Secondly, if the Government were to continue to run surpluses with Bank Indonesia, the latter could place such funds as CDs with banks aad help improve their deposit mix; however, the extent to which this could be done wlll depend on the growth of government deposits and considerations of liquidity management. Institutional Development 3.38 An important area requiring the Government's attention Is the strengthening of development banks. These banks are already a major source of investment fimance; and they should be retained as a major source of term finance. These banks could also play an important developmental role through the appraisal and supervision of projects and technical assistance to smaller and new entrepreneurs. It is also desirable to strengthen these banks as specialized longer term financing institutions, since the commercial banks already provide an adequate supply of short term loans. 3.39 In order to make development banks more effective, it is necessary to build up their institutional capabilities and make them financially viable. A particularly serious problem facing these banks is the poor quality of their portfolios. qowever, this problem is not confined to the development banks. There are some signs that the por-folios of the commercial banks have also deteriorated in the past 12 months. To improve portfolio quality, (a) action plans should be drawn up to deal with problem loans (by writing off bad loans, rescheduling those which are likely to become delinquent, and making adequate provision for possible losses), and special loan recovery units should be set up to improve loan recoveries; (b) appraisal quality should be improved by consolidating operations, strengthenIng credit departmeats at head offices and inproving quality control and screening mecbanisms; (c) the quality and size of staff in loan appraisal and supervision work should be improved through hiring additional staff and staff training; (d) subsector restructuring programs, with government assistance, should be started to assist projects which have become delinquent due to changes in government policies concerning subsectors; and (e) finally, the legal system for recovery of loans and foreclosures should be streamliued. 3.40 To encourage the development banks to reduce their reliance on government funding over time, a three-pronged approach could be adopted: (a) long term lecding rates should be allowed to find their market equilibrium. This would enable the development banks to match their lending /1 Most state banks' deposit rates for 2 year deposits are currently below their rates for 12 month deposits. - 76 - rates with their risks and collateral and differentiate between borrowers according to such risks; Cb) the Government's equity contributions should be increased in order to build up the capital base of development banks, to enable them to keep down their average costs of blended funds and to borrow from the market; (c) encourage development banks to raise funds directly from the market.11 While such steps should enable development banks to cover the costs of their normal operations, the additional costs involved in providing technical assistance and promotional work to smaller borrowers should be financed by the Government. 3.41 While improvements in the efficiency of the banking system are the clear priority, givem the importance of bank debt financing in the economy, the capital market should be developed as an alternative source of investment finance. In particular this would also help improve the financial strength of enterprises by increasing their equity base and reducing their relanace on debt. Among the measures which are needed to revive the capital market the most urgent is the removal of discriminatory tax treatment. This could be done either by removing the tax exemption of time deposits, or by extending the same concession to capital market instruments. Given the risk of capital flight, the practical option may be to exempt interest and dividend income from capital market assets from income and withholding taxes. This is unlikely to lead to sigaificant revenue losses. Reform of the prevailing regulatory framework, and encouraging the growth of new financial instruments and institutions could also help to increase capital market activity levels. D. Public Investment: Issues and Priorities 3.42 The preceding section has stressed the importance of creating an environment which is conducive to improving efficiency and more judicious investment decisions in the industrial sector. Efficient utilization of scarce public resources for high priority investments is also essential for improving overall economic performance. In this section, we discuss the implications of this outlook for both the levels and composition of public investment. The discussion is organized around the following issues: (i) appropriate levels of public investment, given the projected availability of investible resources; (ii) key considerations that should guide public investment priorities over the medium term; and (iii) proposals for strengthening investment planning and project appraisal. Resource Availatility for Public Investment 3.43 The macroeconomic projections developed in Chapter 2 suggest that the availabiLity of foreign exchange resources for investment will remain tight. Against this background, we have projected total investment to remain at around 2OZ of GDP through 1990 and then to gradually rise in later years. The Government is keen to harness the private sector to this investment effort. /1 Through time deposits and CDs at competitive ratee, direct placements with pension funds and insurance companies at market rates and bond issues in the capital market. - 77 - However, for the time being the response is likely to be sluggish, given the existing business conditiocs of excess capacity and high real Interest rates. Public investment will therefore have to be sustai-ad at about 1OZ of GDP, roughly the average over the past decade. 3.44 The REPELITA IV public investment target only covers expenditures by the Central Government./1 Hovever, in projecting total public investment, we have taken account of the Government's commitment to move a larger share of public investment off the budget, by financing more projects from the internal funds of public enterprises aad domestic bank borrowing. On balance, we have projected such off-budget financing to account for about one qutater of public investment over the next few years. This share is somewhat higher than the estimate for 1985 but in line with historical expu rience. 3.45 In principle, a staller share of public enterprise investment financed through the budget is desirable: it helps encourage public enterprises to become more commercially viable and to be more selective in their choice of projects. Some public utilities, such as PLN and PERDMIEL, shouLd be able to finance a substantially larger share of their investments from internal funds. However, given the weak financial position of many public enterprises, especially those in the industrial sector, there is a danger that some public enterprises -ill be tempted to borrow beyond prudent limits. Continued caution will therefore have to be exercised, to ensure that the projects undertaken have adequate economic rates of return, and that overall levels of public investment and related import requirements remain within affordable limits. Public Investment Priorities 3.46 In the following paragraphs we explore some of the considerations which should guide public investment priorities over the next few years. Particular attention is paid to the following concerns: Ci) the impact of the tight and uncertain balance of payments outlook on public investment priorities; (ii) the need to provide productive employment to a growing and increasingly educated labor force; (iii) the importance of relating investments to prudent estimates of existing or emerging demands in the economy; and (iv) the constraints imposed by project implementation capacity. 3.47 In the light of these considerations, this report takes the position that the sectoral composition proposed for REPELITA IV is broadly appropriate. The proposed reallocation of resources (compared to actual expenditures during REPELITA TiI) from industry and mining to the social sectors - shown in Table 3.4 - should bave a favorable impact on the import /1 Development expenditures include two important components of public investment (direct government investment and budgetary transfers to public enterprises), as well as some recurrent expenditures (such as the fertilizer subsidy). The recurrent expenditures are deducted In deriving the public investment series used in this report. Development expenditures authorised but not spent, as reflected in the Government's cash balance with Bank Indonesia, are also deducted. - 78 - intensity of investment and employment generation, as well as make a major contribution towards human resource development. Indeed, given the overall resource constraint discussed above, additional efforts to protect high priority investments, especially in agriculture and the social sectors, may well be justified. However, at best, broad sectoral al locations can only highlight the major issues and trade-offs the Government will face in investment planning over the next few years. In the final analysis, investment decisions wil have to be taken in the context of well-form-flated sectoral programs and based on sound project appraisals. Table 3.4: SECTORAL COMPOSITION OF DEVELOP.MNT EXPENDITURE (in percent) REPELITA III REPELiTA IV Sector plan Actual Plan Budget /a Productive sectors 15.9 27.1 17.6 19.5 Agriculture /b 6.9 7.9 6.8 8.5 Industry Ic 7.1 12.0 7.5 8.4 Mines 1.9 7.2 3.2 2.6 E-onomic infrastructure 34.1 25.5 30.8 28.0 Irrigation 7. 4.5 5.9 5.0 Energy (Udc. Power) 11.6 7.9 12.2 9.7 Communications & Tourism 15.5 13.1 12.6 13.3 Social sectors 16.6 15.9 22.9 22.3 Education & Culture 1. a2F3 14.7 7T3 Health & Population 3.8 3.5 4.5 3.9 Housing & Resettlement 2.4 2.5 3.8 4.1 Other sectors 33.4 31.5 28.7 30.2 Total 100.0 100.0 100.0 100.0 /a For 1984/85 and 1985/86. 7% Includes fertilizer subsidy. 7W Includes government equity participation. Source: REPELITA III and IV, and Ministry of Finance. 3.48 Impact on imports and employment. The analysis presented in this report emphasizes the importance for Indonesia to follow a relatively labor intensive development path. Public investment plays a major role in this strategy, both through its influence on the pattern of growth (e.g., by promoting crop diversification in agriculture and the development of export oriented industries) and through its requirements for imports and labor. To help calculate the latter, we have estimated sectoral import and - 79 - employment coefficients for development expenditures. These coefficients, summarized in Table 3.5, take into accomt the direct impact of public investment on imports and employment, as well as the import and employment content of domestically produced goods used for public investmentJ1l Table 3.5: IMPORT AND ENPLOIMERT COEFFICIENTS /a Imports /b Employment /c Productive sectors 0.71 0.14 Agriculture 0.45 0.22 Industry 0.87 0.09 Mines 0.91 0.06 Economic infrastructure 0.69 0.23 Irrigation 0.50 0.31 Energy 0.79 0.16 Social sectors O. 0.45 ___________- 0.57 0.33 /a Aggregations are based on the plan allocations for REPELITA IV. 7h Coefficients shov the import requirements (in rupiah) per rup. h of development expenditures. ,c Coefficieats show the labor requirements (in man-years) per million rupiah of development expenditures (in 1980 prices). Source: World Bank staff estimates, using the 1980 Input-Output Tables and expenditure/final demand relationships developed by the ILO Employment and Income Distribution Project in the Ministry of Manpower. 3.49 As would be expected, there is a marked variation in the coefficients among sectors. Every rupiah invested in the social sectors, for example, requires half as much imports and generates three times as much employment as a similar investment in industry, mines or energy. Similarly, the coefficients suggest that government expenditures in the agricultural and irrigation sectors would have a greater employment effect and result in fewer imports than if a similar amount were invested in the industrial or mining sectors. The overall impact of alternative patterns of public investment on employment creation is discussed further in Part II of this report. 11 This is still a very partial analysis, which does not allow for the multiplier effects of investment expenditures, nor the impact of alternative project choices on sectoral coefficients. Nevertheless, the results are instructive. - 80 - 3.50 Ultimately, of course. all public investment projects should be subjected to thorough economic analysis at the appraisal stage, and only undertaken if the rate of return on full ecoaomic cost is considered satisfactory. For example, some capital intensive projects, such as the recently completed LNG projects, can have a very positive impact on both net foreign exchange earnings and income generation over the medium term. But there is still considerable scope for improving the import and employment impact of public investment through appropriate project selection and design. There is also a concern that large capital intensive projects can preempt an undue share of future resources, thereby making adjustments to changes in the external environment that much more difficult. In addition, there is compelling evidence to suggest that labor intensive techniques are often appropriate under Indonesian conditions. 3.51 Demand issues. The previous section noted the scope available for generating employment and conserving foreign exchange by varying the pattern of public investment. But changes in the sectoral distribution of public investment must also take into account the pattern of demand for economic and social infrastructure. As shown in Table 3.6, there are a number of key areas of economic and social infrastructure where Indonesia's development still lags behind other countries in the region, even allowing for income differentials. The relatively low ratios for electrification, secondary school enrollment and health services are particularly striking. These are all areas where public investment will continue to play an important role. In some cases, the level of achievement reflects the relatively low historical priority given to the sector in resource allocations. Education, for example, accounted for only 10% of development expenditure during REPELITA III; for other countries in the region, this ratio has been around 20% in recent years. Given the pressing need for skilled manpower, as well as the strong social demand for education, the case for relatively higher allocations to the education sector (as planned for REPELITA IV) would seem to be strong. Even so, care has to be exercised ln deciding on the use of these funds. At the primary level, for example, universal enrollment has almost been attained. As a result, the country's new primary school construction requirements are minimal, with investments during REPELITA IV being limited mainly to school rehabilitation and teacher housing for schools in remote areas. Demand for new primary teachers will also fall dramatically, such that many teacher training high schools will become redundant. Therefore, both facilities and resources couLd be freed up for an expanded program of secondary and higher education development. 3.52 More generally, demand assumptions for public services need to be carefully considered, with due consideration for cost recovery. A case in point is irrigation. Largely as a result of the major irrigation investments undertaken over the past decade, rice production has risen on average by 5.8% per annum since 1975. As noted in Chapter 1, net domestic production exceeded consumption in 1984 and stocks are at record levels. Barring unfavorable weather, it would appear that rice self sufficiency can be sustained (provided measures are taken to protect recent gains in yields). This implies a re-examination of the nature of appropriate irrigation investments, especially in Java. - 81 - 3.53 Another relevant example is provided by the power sector. As supply constraints are eased, the Government is expecting electricity sales to continue to grow rapidly. But recent trends suggest that the projected expansion of demand per consumer, in both the industrial and residential sectors, could be overstated. A lower sales growth rate of two to tbree percentage points could save up to 15% in the planned investment costs. The major impact on the composition of the investment program would be to delay construction on the Muang hydro-station and other new steam-coal plants. Table 3.6: SELECTED DEVELOPMENT INDICATORS /a Indicator Indonesia Thailand Philip. Malaysia Korea GNP per capita (US $) 580 790 820 1,370 1,910 Power Consumption per capita (kwh) 99 355 390 676 1,204 Electrification ratio (%) 12 41 43 61 95 Teleconmmnications Telephone density (per 100) 0.4 1.1 1.2 6.3 n.a Education Gross enrollment ratios (Z) - Primary 97 96 84 96 99 - Secondary 27 29 55 65 84 -Higher 4 4 21 4 22 Health Infant mortality rate (per '000) 102 51 51 29 32 Population per physician ('000) 11.5 7.1 8.0 7.9 1.4 /a Most indicators are for 1981 or 1982. Otherwise, tie latest available data are used. Source: World Bank staff estimates. 3.54 Project implementation capacity. The potential for altering the composition of public investments is limited by problems in project implementation. As documented in last year's economic report, these problems Include delays in procurement and consultancy approvals, complex budget and finance procedures, difflculties in land acquisition and shortages of skilled -nnpower. Resultant implementation slippages often increase project costs and delay the realization of benefits, thereby reducing rates of return and possibly undermining the economic justification for the project. A case in point is the tree crops sector, where Indonesia has a clear comparative - 82 - advantage in expanding production for both domestic consumption and exports./l The potential benefits in terms of employment and regional development are also recognized by the Government. Yet, for the three major tree crops - rubber, oil palm and coconut - implementation constraints kept actual plantings to only 0.5 million hectares during REPELITA III, about 30X below planned levels. The Government is presently working on an action program to address existing problems in a number of areas affecting the tree crop development program: land acquisition, manpower training, the coordination of government agencies, particularly agriculture and trans migration, and the management/planning capacity of public estates. 3.55 Similar arguments apply to the telecommunications sector. Here PERUNTEL had originally proposed to add more than one million exchange lines during REPELITA IV. However, once again the binding constraint is implementation capacity. As a result, BAPPENAS has adopted a lower target of 750,000 new lines and, without substantial strengthenIng of implementation capacity, actual performance could be significantly lower. PERUMTEL is, however, fully aware of the need to improve its implementation capacity and has made this a key objective for REPELITA IV. Some recent actions, such as the introduction of turnkey contracts and a program of technical assistance for project impLementation and contracting arrangements, coupled with revenue raising measures (including tariff Increases), should considerably improve PERUMTEL's implementation capacity over the medium term. 3.56 Implementation and financial constraints can also adversely affect program composition. A case in point is PLN's investment program during REPELITA III, when 69Z of the planned generating capacity was added but only 36% of the planned extension of the distribution network was completed. Two factors account for the relatively large shortfall on distribution investments: (a) their smaller size and shorter implementation schedule makes them more vulnerable to budget cuts; and (b) they are subject to greater procurement delays due to the emphasis given to using local suppliers./2 These tendering delcys harTe contributed to the recent increase in PLN's transmission and distribution losses. 3.57 As discussed in Chapter 1, the Government is fully aware of the need to effect rapid improvements in project implementation and has initiated several measures. Two classes of actions need to be stressed. First, the method and pace of implementation of worthwhile objectives, such as the increased utilization of domestic products, need to be carefully examined to ensure that there are few deleterious, unintended effects, and that the substitution of domestic for foreign products is economical, and contributes to the objective of developing efficient domestic industries and contractors. /1 See Indonesia - The Major Tree Crops: A Sector Review, World Bank Report No. 5318-IND, April 15, 1984. /2 The extent of these delays is illustrated by the implementation profiles for power distribution investments in the West Java Region during the final three years of REPFLITA III, when the ratio of actual to planned tenders fell from 89Z-92% (in 1982/83) to zero to 5% (in 1984/85). - 83 - For instance, local inputs priced above international levels put Indonesian contractors and suppliers at a disadvantage in international tendering; similarly, delays in procurement and implementation in order to increase local content, although not always easily assessed, are, nevertheless, often costly. Second, it is important to con:inue to examine the regulations carefully, prune unnecessary and counterproductive procedures, institute simpler and more efficient systems, and improve management and monitoring of projects. We understand the Government is considering the formation of a Standing Inter-Agency Committee to direct and oversee the development and execution of the measures necessary for speeding up implementation. The secretariat of the committee would be located in BAPPENAS, and staffed by individuals from BAPPENAS, SEKNEG and major line agencies. Investment Planning 3.58 The previous discussion focused on considerations which should guide the sectoral allocation of public investment. However, the key to good investment planning is sound project selection and design. In Indonesia, greater use of project appraisal techniques, with adequate provision for central review and quality control, could help to strengthen investment planning in three areas. First, the economic justification of projects could be subjected to closer scrutiny. For REPELITA IV, there are a number of investment proposals that warrant more careful analysis regarding their size (e.g., the program of primary school construction) and timing (e.g., the proposed introduction of mobile car radio telephones). Other investments, such as the proposed mining projects in tin and bauxite, may simply not be justified given present world market conditions. Second, there are areas where investment proposals could be better designed and possibly expanded. A case in point is the health program. Compared to REPELITA III, the subsector share for health centers falls from 31% to 17%, while only a meager allocation is provided for communicable disease control. The size of these programs would seem to be inconsistent with the priority given in the plan to reducing infant mortality. Third, cost estimates - including overall costs, time phasing and the breakdown of local and foreign costs - could be improved.l/ 3.59 Sound project appraisal is the key to good investment planning. However, without a strong central framework for ensuring intersectoral and macroeconomic consistency, the effort is unlikely to bear fruit. BAPPENAS already plays a major role in the preparation of the five year plan and annual budget decisions on development expenditures. However, decisions are not always made on the basis of comprehensive and up-to-date sectoral investment programs, detailing specific project proposals, multi-year cost projections and total (not just budget) financing requirements; while the links to annual budget decisions are weak. This is an area where BAPPENAS could usefully guide and support the efforts of line agency planning units. BAPPENAS also /1 A Bank review of the REPELITA IV irrigation program, for example, indicated that total costs are expected to be only Rp. 4.5 trillion, 30% less than allocated in the plan. A major factor in this discrepancy is the recent sharp decline in world bids for civil works contracts. - 84- needs to establish clearer mechanisms and criteria for adjusting the investment program in response to a changing resource environment. Decisive action was taken in mid-1983, when a number of large and import intensive projects were cancelled or rephased to keep the import bill within manageable limits. However, a more continual monitoring and adjustment process is also required. One mechanism for doing this, as suggested in last year's economic report, would be to identify a core program of high priority projects, to be protected against resource shortfalls and implementation delays. The Government has already adopted this approach in the power and telecommunications sectors. However, preparation of a broader core program, reflecting intersectoral priorities as well, would be desirable. 3.60 Finally, increased attention needs to be given to the impact of past and new investments on recurrent financing requirements. For budgetary purposes, guidelines should be agreed between BAPPERAS and the line agencies on appropriate unit costs for recurrent items such as salaries, materials and overheads, in relation to the existing capital stock (e.g. per hectare of irrigated land or per primary school)./l BAPPENAS should also examine closely the recurrent cost impact of new proJects. This can often be substantial, especially in the social sectors. For example, World Bank staff estimates suggest that for every Rp. 100 invested in education during the 1980s, an additional Rp. 31 should be added to annual requirements of recurrent expendttures./2 This is almost double the actual budgetary impact of education projects implemented during the late 1970s. Increasingly, these recurrent costs could be covered by user charges at both the central and local levels. However, given the backlog of underfunding that already exists, it is inevitable that further real increases in budget allocations, whether as routine or development expenditures, will be required. At the margin, this may mean sacrificing some new investments. But the benefits, in terms of improved utilization of existing assets and the provision of higher quality services, is likely to be well worth the costs. 3.61 There is also a case for financing more of these recurrent expenditures through cost recovery on public services. There are of course valid social reasons for wanting to limit the burden of cost recovery, especially on the poorer segments of society. Yet the potential benefits, both for resource mobilization and to avoid waste, cannot be dismissed lightly. 3.62 In the irrigation sector, direct cost recovery through land tax (IPEDA) and water charges is very low (generally around 10%-15X of farmers' net profits and 5% of the incremental earnings from irrigation investments). Higher water charges may not always be appropriate, given that many beneficiaries are close to the absolute poverty level. One alternative /1 The Directorate of Irrigation has proposed such guidelines for operation and maintenance expenditures on main irrigation systems. However, these norms have not as yet been approved by BAPPENAS and actual budget allocations have been substantially lower. /2 See Oey Meesook, Financing and Equity in the Social Sectors in Indonesia, World Bank Staff Working Paper No. 703, 1984, p. 14. - 85 - approach would be to modify the present IPEDA system, to provide for better land valuations and to earmark a portion of the revenues for operation and maintenance expenditures on irrigation system./l General Increases in IPEDA are also appropriate for improving municipal finances and funding the development of urban services. 3.63 Direct cost recovery can also be improved in certain subse_tors, such as housing, and increases in interest rates for other credit programs (e.g. smallholder tree crops) would also seem to be justified on "ability-to-pay" grounds. Major public utilities, such as PLN and PERUMTEL, should be able to finance a more significant portion of their investment costs from internally generated funds, while also contributing to general revenues. For example, in the case of PLN there is considerable scope for reducing transmission and distribution (TMD) losses. Although F4N's T&D losses decreased from 24.1% in 1974/75 to 18.7% in 1982/83, they were much higher than those in neighboring countries (Malaysia 7.6%, Thailand 9.9%, and Korea 6.8%, all in 1982/83). Moreover, the declining trend of PLN's T&D losses was reversed in 1983/84 when they rose to 21%, mainly due to increases in unauthorized/unaccounted for consumption and shortfalls in the implementation of distribution projects. /1 The Government is planning to study alternative institutional arrangements for such a scheme in the West Tarum irrigation area. - 86 - Part II - 'MPLOYMENT TRENDS AND OUTLOOK Surmary and Conclusions I. The second part of the report is devoted to the employment problem in Indonesia, with the primary focus on the labor absorption issue. Although there have been significant improvements in the past, the employment problem is still serious. The absorption of an expanding labor force in a period of tighter resource constraints presents a difficult challenge for the country in the next ten years. The analysis indicates that a serious deterioration in the employment situation could occur, unless the Government makes a concerted effort to implement policies conducive to a labor intensive pattern of growth. This will involve both the appropriate macroeconomic policies discussed in Part I, and additional policies with a specific employment orientation. The Employment Problem ii. The employment problem currently manifests itself in two forms: in low return work for a significant proportion of the workforce, and in open unemployment. Low returns to labor, and associated household poverty, are most extensive in rural Java, especially amongst the landless and small farmers. But low incomes are also a feature of the rural Outer Islands and urban Indonesia. Open unemployment is almost exclusively an urban phenomenon, and is primarily a problem for first job seekers, the young and the educated. iii. Past trends in employment and productivity suggest a favorable process of change between the early 1970s and the early 1980s. There was a significant shift in the composition of employment from low productivity food crops to higher productivity activities in other agriculture, manufacturing, trade, and other services. The available evidence also indicates significant wage increases in both agricultural and non-agricultural activities since the end of the 1970s. The process of change has been most rapid in Java, where employment in agriculture declined during this period. This does not mean that agriculture was unimportant: rapid growth in agricultural incomes, supported by buoyant public expenditures, was central to a quite favorable pattern of rural development. Village level studies suggest that economic diversification by households, and a reasonable degree of labor mobility, facilitated a fairly wide participation in this income growth. In the Outer Islands, both rural and urban wages and incomes are higher, but the economies are comparatively less diversified than Java. The agricultural sector has played a much larger role in the direct absorption of labor than in Java. iv. Aggregate trends in open unemployment have also not been unfavorable: the national unemployment rate of 2%, and the urban unemployment rate of about 6X, have been stable. However, there were some worrisome signs in the 1976-82 period: unemployment rates for general upper secondary school leavers (in Part II draws upon background work by Yusuf Saefudin, M. Husein Sawit (Center for Agro Economic Research, Bogor) and Ray Byron (consultant). - 87 - the 20-24 age group) rose from 32-33% to 37-38% in this period, and unemployment rates also rose for most categories of women and for new entrants with tertiary educational qualifications. v. The overall trends in employment and incomes were good, but this occurred in a period of rapid economic growth. National income and non-oil output grew at 8-10% p.a. in the decade or so to 1982. Government policy has in the past played an important role in supporting a favorable pattern of growth for employment - agricultural income growth was given high priority, public spending was both sectorally and spatially diversified, and the transmigration program was beginning to provide land and employment for significant numbers of the rural poor in Java. The financial sector reform of June 1983 also led to the removal of most subsidized interest rates in the system, that constituted a significant bias in favor of capital intensive investments prior to this. However, where employment concerns did not coincide with other aims, the latter were often given priority, for example in the preferential treatment for large industry, restrictive policies on the informal sector in some cities, and, amongst the range changes in the 1984 tax reform, the introduction of accelerated depreciation appears to have a bias toward capital intensive choices. Since 1983, the Government has, of necessity, given first priority to short term stabilization, and a serious deterioration in the employment situation was probably only prevented by a significant recovery in agricultural and non-oil export incomes. As overall growth prospects are expected to be favorable than in the 1970s, particular attention will now be needed to ensure an adequate growth in employment opportunities. Future Prospects vi. The labor force is projected to grow at about 2.3% p.a. between 1985 and 1995, with no slowdown in growth until the second half of the 1990s. This implies an increase of almost 1.7 million people a year over the next decade. Growth of the labor force by region will be heavily influenced by migration, and with moderate to high levels of transmigration, over half of the increment will be on the Outer Islands. There are some uncertainties over future labor force participation rates, and the Government's projection involves a higher labor force growth, with a rising share of women. If this were to occur, the conclusion of this report on the urgency of the employment problem would apply with even greater force. vii. If a deterioration of the employment situation is to be prevented, the key requirement is substantial labor absorption in the commodity producing sectors, I.e. only moderate increases in the capital intensity of production. A projection corresponding to the base case of Part I indicates that the economy has the potential to absorb the growth in the labor force, and sustain steady growth in productivity and incomes in all sectors of the economy. However, this will require both appropriate macroeconomic and sectoral policies, notably for industry and agriculture, and specifically employment oriented measures, including policies on agricultural mechanization, public expenditure, transmigration and the urban informal sector. As in the past, the service sectors would be important sources of employment growth. A relatively labor intensive pattern of growth can also help ease the foreign - 88 - exchange constraint, since the spending of lower income households is characteristically biased toward domestically produced goods. Sharp contrasts are likely between Java and the Outer Islands: on Java a continued gradual decline in agricultural employment, but a much larger role of manufacturing, is projected; in most of the Outer Islands, agricultural employment will have to expand significantly to absorb the rapid growth of the rural population, especially in destination areas of transmigration. viii. Two less favorable scenarios were also explored. The first, corresponding to the low non-oil export case of Part I, shows the potential risks of less supportive policies, and of a failure to correct some existing biases in policy. This assumes the same external environment - and so the same level of resources from oil and LNG - but a less labor intensive pattern of growth. Slightly slower agricultural growth, combined with excessive rates of substitution of capital for labor in agriculture and manufacturing, could lead to substantial labor displacement, especially of the landless, in rural Java and insufficient growth of agricultural employment in the Outer Islands and of industrial jobs on Java. Over the next tan years, this could result in the need for 4-5 million more jobs in other sectors of the economy. This would mean either a fall in returns to labor in the urban informal sector and the low wage end of the formal sector, or higher unemployment, or both. This would present a very difficult employment problem, with risks of worsening urban poverty and social dislocation. The second scenario examines the implications of slower growth as a consequence of lower oil prices. The employment problem again worsens, and presents a more difficult challenge over the medium term. Selected Policy Issues ix. The scenarios developed in this report are only indicative of alternative pattens of future growth and labor absorption. There are, however, a number of policy areas in which the Government can significantly increase the probability of realizing the more favorable scenario. x. The continued growth of agriculture will be central to a favorable evolution of the employment situation both on and off Java. On Java, growth in aricultural incomes will be essential to the overall state of the rural economy, and in particular to the continued expansion of the non-farm sector. The two main ingredients for this are the maintenance of expenditures in agricultural infrastructure and a favorable pricing environment. However, because of the apparent emergence of demand constraints for rice in 1984, agricultural diversification will be necesary to continued growth, and high priority should be given to the analysis of options in this area. Policy towards agricultural mechanization wil also be important. Agricultural mechanization can be significantly labor displacing, and current evidence suggests that the economic case for it is weak, at least for tractors in Java. In this context, a cautious approach would be appropriate, with no use of subsidized credit. The encouragement of domestic production by small scale producers is likely to be particularly beneficial to fostering the appropriate adaption of techniques and local repair maintenance facilities. Similar principles on agricultural policy apply to the Outer Islands, but here the scale of required agricultural labor absorption wlll necessitate more - 89 - extensive investment in agriculture. The effective implementation of two major programs, in tree crops and water resource development, will be central to meeting the demand for additional jobs. Fiually, in view of the relative scarcity of labor in most area, a more rapid rate of agricultural mechanization would be expected, but there is still not a case for subsidized credit. id. The most important role for the maufacturng sector in the next ten years will need to be the provision of foreigm exchange earnings or savings to finance the overall growth of the economy. However, there is a high degree of consistency between an efficient, relatively export oriented manufacturing sector and a labor intensive pattern of future growth. Scenarios of manufacturing growth show that. under an export oriented policy (thouga still with some import substitutioa) the sector could absorb 20% of the increment to the labor force in the early 1990s (and over 30% on Java), but that with a bias toward import substitution in producer goods this drops to below 10%. This provides strong support for the argumenats in Part I on industrial policy. Also important is the relative role of small scale firms, since these now accouat for the bulk of manufacturing employment. Past growth has been good, despite a bias in past government policies towards large scale firms. The experience of other countries iudicates that the best way of sustaining this growth is to encourage a broadly dispersed pattern of demnd growth and to remove favored treatment for large scale firms. Special schemes, such as credit for small scale enterprises in both industry and service sectors, can also play a useful supportive role. xii. Public expenditures have a dual role: in supporting a labor intensive pattern of growth in the commodity producing sectors, for example through investmeats in rural infrastructure, and through the provision of direct and indirect employment in the implementation phase. For public expenditures to continue to provide an autonomous source of income and employment growth, there is a case for sustaining a moderate rate of growth in the domestic component of the budget. This is affected by the share in total expenditures of sectors and projects with a high domestic content. As discussed in Part I, the shift in composition from the REPELITA III realization to REPELITA IV plans favors such sectors, though if the employment situation were to deteriorate, further shifts could be justified. Although some of these programs, such as INPRES Sekolah Dasar, are not likely to grow as rapidly in the future, there is good evidence of extensive productive investment opportunities in relatively labor intensive activities, such as rural roads and local irrigation. Increased allocations to regular maintenance, instead of periodic rehabilitation, of economic infrastructure can also increase employment effects aad reduce imports. A balanced investment program should continue to have both capital and labor intensive activities. However, in view of their much larger use of scarce resources, it would be appropriate to subject projects with unusually high investment costs per job to more rigorous project appraisal to ensure they effectively contribute to the country's economic development. xiii. Policy on transmigration will have a large influence on the distribution of the growth in the rural labor force; this program can make a - 90 - major contribution to the central welfare issue of reducing rural povery on Java. The geographic orientation of the program is having to change from Sumatra and Sulavesi, that are rapidly running out of new sites, toward Kalimsm tan and Irian Jaya. This not only makes implementation more difficult, but also raises costs. Preliminary analysis of farm models in these ars suggests that transmigration can have an adequate economic rate of return to the country and provide reasonable incomes to the farmers, provided that there is some form of second stage agricultural development, in tree crops, irrigation or livestock. This is of importance for the labor market, since relatively unsuccessful rural development in transmigration areas could lead to destabilizing second round migration flows, and, for example, unmanageable urban growth in areas such as Kalimantan and Irian Jaya. To realize such a favorable outcome, the linkages with the tree crops and water resource development programs are essential. Owing to implementation (and resource) constraints for these programs, and the competing claims of existing low income farmers in the Outer Islands, there may be difficultiles in achieving the Government's current targets for trAns igration. xiv. Finally, although most of the poor will continue to be rural dwellers, the urban labor market will be particularly sensitive to changes in the aggregate employment situation. Youth and educated unemployment is 3ikely to persist, and may worsen with the rapid growth of secondary school leavers. Specific policies oriented toward the unemployed, such as improving the labor exchanges and vocational training, are not likely to have much impact on unemployment rates, though they are valuable in their omn right. Policies toward the informal sector could have a much wider impact in urb> - aas. Present trends toward a more restrictive attitude, especially in Jakarta, could have major costs in employment, for limited benefits. Other cities, notably in East and Central Java, have been more supportive of the informal sector. A tolerant attitude in the short run, and a supportive policy in the medium term, for example through planning enough space for informal sector activities in public areas, will be important if this sector is to continue to play its role In the macro picture of labor absorption. Apart from this, two areas of general policy wllU influence the evolution of the urban labor market: the degree of success of rural development, through its impact on rural-urban migration rates, and the labor intensity of manufacturing, through the impact oc the growth in urban wage employemnt and wage differentials. With a favorable policy environment in these areas, only moderate increases in urban unemployment and continued growth in incomes amongst poorer urban households appear to be feasible. without such a supportive environment, there is a risk of a serious deterioration in the urban labor market, with potentially high social costs. - 91 - CHAPTER 4 THE EMPLOYMENT PROBIEM 4.1 Over the past fifteen years, employment has received increasing. emphasis in policy statements by the Government. While REPELITA I and II placed most weight on the maintenance of stability and support for economic growth, both REPELITA TTT and IV place great emphasis on the equitable distributioa of employmeat opportunities. Since the slowdown In economic growth in 1982, the issue of the provision of employment for a growing labor force has had a high profile in public debate. In this chapter we first present a summary analysis of the current employment situtttion and then fous on the labor absorption problem over the next ten years, both in relation to government policy choices, and to alternative views oan the state of the international oil market. A. The Current Situation The Nature of the Problem 4.2 Two specific issues drive the current concern with employment: the pressure on land and the associated rural poverty in Java; and the high unemployment rates amongst the young, and especially the educated young, in urban areas. A significant proportion of the 65 million members of the labor force now in Indonesia are working in such low return work that their households are living in absolute poverty. 11 Over the next ten years the labor force will increase by about 17 mllion people. The employment problem faced by the Government in this period involves both increasing the productivity of those now in the labor force and the effective absorption of new entrants into work. 4.3 Rural areas account for a large part of the problem of low return work. About 80% of the labor force, and a higher proportion of households living in poverty, are rural dwellers. The bulk of these are involved in agriculture, but non-farm activities are also important, often as a secondary source of income and employment. Access to land is the primary determinant of economic class, and on Java over a third of rural households lack access to sawah land, but poverty is as extensive amongst smallholders as amongst rural laborers. Average incomes in urban areas are much higher than in rural areas /1 The definition of absolute poverty is always somewhat arbitrary. In this report we use a standard based on calorie requirements aad observed household budgets. The latest systematic assessment is for 1980; it is estimated that almost 40Z of the total population fell below the poverty line, of vhich over 60% lived in rural Java in that year. See Indonesia - Policies and Prospects for Economic Growth and Transformation, World Bank Report No. 5066-IND, April 26, 1984, Chapter 5. Preliminary results for 1981 indicate a somewhat lower, but stili significant, poverty incidence. See Appendix 3, Tables 5-7, for estimates of incomes and the distribution of poverty in 1981. - 92 - - by 70% in Java in 1981 - but many households still suffer from low incomes. Poor urban households appear to be roughly equally divided between those dependent on wage labor and those working in self-employed activities or family enterprises in the informal sector. 4.4 Open unemployment is primarily an urban phenomenon. It is only weakly related to poverty in Indonesia, since poor households can rarely afford to be unemployed. Although the overall urban unemployment rate, of about 6%, is not high by developing country standards, it is highly concentrated amongst young new entrants to the labor force, and especially recent graduates of secondary schools. Men and women with upper secondary school qualifications in the 20-24 age range experience unemployment rates of 30-40%. For this group unemployment is predominantly associated with better paying wage employment in the formal sector: it reflects an imbalance between the supply and demand for such jobs. and a wlllingness to wait in the queue for preferred employment. 4.5 Underemployment, in the sense of low hours of work per week, is more extensive than unemployment. About 352 of the total labor force works less than 35 hours per week. This is much more pronounced in rural areas, and is especially associated with agricultural workers. However, it is of less importance than the general problem of low productivity work, since only about 7% of rural workers appear to be underemployed against their will. There are also large numbers in the work force who work long hours. /1 4.6 The view taken on the workings of the labor market has an important impact on the interpretation of the present and future employment problem. /2 The following is a brief summary of the conception used in this report. There is a hierarchy of both wages and labor productivity levels in Indonesia, that stretches from very low return activities in rural Java to high wage urban sector employment in large industrial and other corporations. This is associated with a hierarchy of labor market segments, with varying degrees of mobility between segments. Within rural areas, and between rural areas and both the urban informal sector and low wage formal sector employment, there is a reasonably high degree of mobility: workers can, over a period of time, move between these segments, and wage differentials are not excessive. However, movement into relatively high wage employment in the formal sector is not /1 About 35% of the total (rural and urban) work force works more than 45 hours a week. See Appendix 3, Tables 9 and 10 for underemployment statistics. 43% of the rural work force worked for less than 35 hours per week in 1982, but only 16% of these should probably be classified as wanting to work longer hours. This gives a figure of 7% of the total rural work force that were underemployed against their will. 12 The conception of the labor market is largely based on the previous World Bank report on employment, with the exception that recent evidence now indicates a higher degree of mobility within the rural labor market in Java than was concluded in that report. See Indonesia - Wages and Employment, World Bank Country Study, 1985, and Appendix 1 paras. 2 and 23. - 93 - free: significant wage differentials are maintained and total employment in these sectors is largely determined by other factors, including production or service technology in the case of industry and finance, and policy and budget considerations in the case of public employment. There is also imperfect inter-regional mobility; this is of particular importance for moves between rural areas in different islands. Growth in Employment and Labor Productivity - the Past Experience 4.7 The employment experience from the early 1970s to the early 1980s was good, and this appears to have had a significant impact on the welfare of low income households throughout the country. Table 4.1 summarizes the pattern of change between 1971 and 1980./1 In this period the total labor force Increased by 30%, or about 13 million people, almost entirely as a consequence of increases in the size of the working age population - there was no change of significance in the overall labor force participation rate. 4.8 Food crops form the largest single sector of employment in both 1971 and 1980, and also has the lowest labor productivity./2 Households that are mainly dependent on this sector for work constitute the largest single poverty group. The most promising development in the period was the combination of a rapid increase In productivity growth within the sector, and a sharp reduction in its importance in providing new employment. The children of many households in the food crops sector, as well as other new entrants to the labor force, were able to find employment in other, relatively high productivity sectors. The most important of these were other agriculture (18% of the incremental labor force) manufacturing (18%) and trade (17%), followed by other services, transport and construction. All services accounted for over 40% of the employment of the increaental labor force. However, the story on productivity growth was mixed for these expanding sectors. Manufacturing and other services enjoyed reasonable productivity growth, but all the other major recipient sectors experienced stagnant or declining productivity. 4.9 Table 4.1 shows that the overall unemployment rate was low and stable in the 1970s. Analysis of the more recent 1976-82 period confirms this picture: the more important urban unemployment rate remained at 6%. However, a more detailed review of trends in this period presents a less sanguine picture, with an increasing concentration of unemployment amongst the young and educated, and rising unemployment amongst women./3 Graduates of upper /1 The comparisons of sectoral employment between 1971 and 1980 in the report are based on the Input-Output Tables for these two years, adjusted to make the assumptions on aggregate employment consistent with each other. The primary source for the employment data used in the Input-Output Tables is the population census of the same year. /2 Throughout this chapter labor productivity is defined as value added per worker in a specific sector. /3 See Appendix 1, paras. 37 to 41, for an account of unemployment trends from the national household surveys in 1976 and 1982. - 94 - secondary schools accounted for 40% of all urban unemployed in 1982; and the unemployment rate for both male and female graduates of academic upper secondary schools in the 20-24 age group rose from 32-33% in 1976 to 37-38% in 1982. There is also a general rise in the rates for graduates of tertiary educational institutions. The proportion of women amongst all unemployed increased from 23% to 36%, with a more than doubling in the absolute number in the six year period. Finally, unemployment rates are also significant (at 10% or more) amongst the less educated young (in the 15-24 age range), five to ten years after most would have left school. For all categories, une-mployment rates decline sharply amongst older groups in the labor force, -.n both 1976 and 1982, indicating a process of slow absorption of new labor fot_e entrants into works. However, the rise in rates amongst the key groups suggests that the queue for jobs was growing longer in this period, despite the high rate of economic growth in urban areas. Table 4.1: EMPLOYMENT AND PRODUCTIVITY, 1971-80 Employment Labor productivity /e Share of Composition increment Increase Average 1971 1980 1971-80 1971-80 level, 1980 _ - X (Z p.a.) (Rp'000/worker) Agriculture 66 57 28 3.6 370 Food crops (60) (49) (11) (3.9) (230) Cash crops (3) (4) (7) (-1.2) (1,027) Other /a (3) (5) (11) (-3.4) (1,343) Maaufacturing 7 9 18 3.9 940 Construction 2 3 6 1.8 1,669 Trade U 12 17 0.3 992 Transport 2 4 7 -2.0 1,121 Public admin. 3 4 4 7.6 1,245 Other services /b 7 8 13 5.7 518 Miscellaneous Ic 0 1 4 -3.4 2,086 Total employment /d 98 98 98 4.1 663 Unemployed 2 2 2 n.a. 0 Total labor force 100 100 100 n.a. n.a. /a Livestock, forestry and fisheries. 7T Social, community, household and personal services. 7E Non-oil mining, electricity, gas and water and finance. 7d Ex-luding oil and LNG. Th Annual value added per worker (at 1980 prices.) Source: World Bank staff estimates based on the reports on the 1971 and 1980 Input-Output Tables and Population Ceasuses by BPS. - 95 - 4.10 There are important differences between the various regions of Indonesia. Even with Indonesia divided simply between Java and the Outer Islands, significant contrasts emerge. These are summarized in Table 4.2. The relative labor abundance in Java leads to lower average labor productivity in almost all aectors, but the structural shift in employment out of agriculture is more advanced than in the Outer Islands and has been proceeding more rapidly. There was a decline in the numbers of people employed in agriculture, /1 while manufacturing (at 24X), trade (26%) and other services (34%) accounted for the bulk of the incremental labor force in this period. The rising importance of non-farm activities is as much due to changes within rural areas as to rural-urban migration, and became even more marked in the 1976-82 period. Evidence from villages in West Java (see Appendix 1, paras. 6 to 14), suggests that it was part of a positive process of income growth. Many households were becoming more diversified, and while incomes from rice cultivation continued to be an important source of household income growth for many, non-rice agriculture and non-agricultural incomes were of rising importance. These income gains were widely distributed in the villages studied: farm laborers were major gainers from the growth in non-agricultural incomes, and small scale farmers (with initial cultivation areas of less than 0.25 ha) gained especially from agricultural income growth. As a consequence, the overall distribution of income appears to have remained stable, and the incidence of poverty was significantly reduced in this period of rapid growth. In urban Java the distribution of employment was fairly stable: manufacturing accounted for around a fifth of both average and incremental employment, and trade, transport and other services accouated for about three quarters. 4.11 In the Outer Islands, growth in non-agricultural employment has also been rapid, but most regions continue to be both less urbanized and less economically diversified than Java. Agriculture accounted for over two thirds of total employment and three quarters of rural employment at the beginning of the 1980s, and has been the largest single source of new employment. 4.12 There are three principal factors behind the broadly favorable pattern of labor absorption up to 1980. First, there was rapid growth in agricultural incomes, especially in the rice sector, associated with the expansion of irrigation, intensification and technical innovation, as well as some increase in cultivated area in the Outer Islands. Second, there was very rapid modernization of the economy, in particular in Java, with buoyant growth in the secondary and tertiary sectors - over 10% p.a. - and a large increase in the flow of manufactured and other consumer goods within the economy. Some of this can be linked to multiplier effects of spending by households in both rural and urban areas. Third, there appears to have been a reasonably high degree of labor mobility, between the agricultural sector and low wage and self-employed non-agricultural activities, in both rural and urban areas. This was facilitated by the 'transport revolution- - the major increase in transport services, especially in Java, in the 1970s. /1 This refers to the primary sector of employment of labor force members: as discussed in Appendix 1, para. 6, there was, at least in some areas, an increase in total agricultural employment in terms of hours worked, but this was largely taken up by the existing farming population. -96- Table 4.2: JAVA AND THE OUTER ISLANDS: PATTERNS OF EHPILOBENT AND PRODUCTIVITY, 1971-80 Java Outer Islands Employment Labor pro- Employment Labor pro- ductivity ductivity Compo- Share of Level, Campo- Share of Level, sition increment 1980 sition increment 1980 1980 1971-80 (Rp. '000/ 1980 1971-80 (Rp. '000/ (Z) (X) worker) (Z) (Z) worker) Agriculture 51 -8 324 68 29 433 Manufacturing 11 24 889 6 12 1,102 Construction 4 12 1,880 2 8 1,193 Trade 15 26 893 8 18 1,290 Transport 3 6 773 3 4 1,906 Public admin. 4 34 1,193 4 24 1,225 Other services U1 413 6 833 Miscellaneous /a 1 6 2,100 1 6 2,065 Total /b 100 100 628 100 100 724 /a Non-oil mining, electricity, gas and water, and finance. WE Excluding oil and LNG. Sourte: World Bank staff estimates, derived from reports on the provincial production accounts, the 1980 Iaput-Output Tables, and the 1971 and 1980 Population Censuses, by BPS. 4.13 The pattern of development outlined above clearly continued until 1982. There is no aggregate information since then, but the 1983 oil price reduction, the need for major stabilization measures and the sharp slowdown in growth in the non-oil economy, have proavided a much less favorable enviroament for employment growth in the past two years. Fortunately the general slowdown coincided with good agricultural performance, notably in the rice sector, both on and off Java, and the micro evidence from Java indicates that rural wages have so far maintained the real gains of the 1980-81 period. Agricultural producers in the Outer Islands, and, to some extent, manufacturers in Java, also benefited from the major improvement in the market for non-oil exports In 1983/84. In other sectors the picture is less good, though not yet serious; the principal change compared with the past appears to have been a much weaker contribution to labor absorption by the manufacturing sector - if past rates of labor productivity growth were maintained, this sector accounted for a negligible proportion of incremental labor absorption between 1980 and the present. This put greater pressure on the service sectors, especially in the urban informal sector, to absorb the growing labor force. The limited available macro and micro evidence suggests there was sufficient growth in - 97 - employment opportunities to prevent significant declines in incomes in these sectors. In the formal sector, wages appear to have held up in real terms following the devaluation, partly because of a low inflation rate in the past two years. Past Government Policy and Employment 4.14 How far has the Government's expressed concern resulted in policies that are favorable to employment creation? Indonesia enjoyed substantial benefits from the two oil windfalls of 1973-74 and 1979-80. The Government's use of these resources was conducive to diversified growth, and compares favorably with many other oil exporters. Good general economic policy often supported the favorable pattern of employment creation described in the previous section. First, high priority was given to agricultural development, in the form of a favorable pricing environment, major investments in improved water availability, the dissemination of new varieties, and the encouragement of fertilizer aad pesticide usage. This supported the growth in output and productivity in food crops shown in Table 4.1. Moreover, the buoyant growth in agricultural incomes, and especially rice incomes in rural Java, was central to the expansion in non-farm incomes and employment and the positive pattern of rural-urban linkages. Second, the distribution of public expenditures has had beneficial direct and indirect effects. Development spending was expansive, and its distribution was both sectorally and spatially diversified. Some public investment was, of course, capital intensive. But the emphasis on irrigation, local roads, kampung improvement, primary schools and health centers led to a major increase in construction throughout the economy; in Java and Bali this made use of the pre-existing tradition of labor-intensive construction methods. Although the overall role of construction as a source of permanent employment was not large (6X of incremental employment between 1971-80, shown in Table 4.1), it became a widespread source of supplementary employment and incomes and accounted for a high fraction of incremental employment in rural Java since the mid-1970s. As with agricultural incomes, the multiplier effects of the income increases were important to the expansion of non-farm employment. There was also a special labor intensive public works program, Padat Karya, but this was small relative to overall expenditures. Third, the Government has given high priority to supporting the transmigration of households from rural Java to the Outer Islands. It is toe early to form an overall assessment of this program (see Chapter 5), but it has clearly made a contribution to relieving the pressure on the labor market in Java through the provision of land and agricultural employment to the landless or near landless. 4.15 In the area of industrial policy, however, the record is more mixed. The protection of domestic industry certainly helped the major increases in output in the 1970s, but the sectoral biases within the sector were not favorable to employment. The structure of protection favored relatively capital intensive sectors, and the system of regulations and preferential credit terms from the formal financial system was largely oriented toward providing favored status to medium and large scale firms. The Investment Coordinating Board (BKPM) has guidelines to encourage labor intensive industries, but there is little evidence that these have been effective. - 98 - Fortunately, the small scale sector proved quite resilient and grew rapidly in response to the high and dispersed growth in demand. But this was in spite of the general thrust of government policy./l In the case of financial policy, the system prior to the June 1983 reforms, that included the extensive use of subsidized credit facilities, was biased in favor of capital intensive investments. While the 1983 reform had many objectives, the removal of this distortion was clearly beneficial from the viewpoint of employment. Finally, there have been moderate interventions in the area of labor policy, including legislation on conditions of employment and a minimum wage that has generally followed market conditions in the formal sector. This has provided some protection to the workforce in medium and large scale firms, but has not had a major impact on the overall employment situation. 4.16 While the overall impact of medium term policy on employment was quite good, this appears to have been largely a consequence of general economic performance. Where employment considerations have come into conflict with other objectives, the latter have often received priority. Examples are preferential treatment for large scale industry, restrictive policies on the urban informal sector in some cities, and support (in principle) for agricultural mechanization. Amongst the range of measures in the 1984 tax reform, the introduction of accelerated depreciation appears to provide unwarranted incentives for capital intensive investment choices. In the period since 1983, the Government has, of necessity, given first priority to economic stabilization and adjustment, as discussed in Part I. Despite the less favorable macroeconomic envorinment than in the past, it appears that the employment situation did not deteriorate to a sigaificant extent, primarily as a consequence of the rapid growth in agricultural incomes and the recovery in non-oil export incomes in this period (see para. 4.13). B. Future Prospects for Employment 4.17 The pattern of growth over the next decade will have a significant impact on the employment situation. There is considerable uncertainty over both macroeconomic resource availabilities and the actual impact of government measures on the pattern of growth, but it is important to have some framework for analyzing future options. In this section we use a simple framework of intersectoral allocation of the labor force, both to develop a picture of likely medium term changes in the structure of employment and to illustrate the potential impact of government policies in selected areas. 4.18 The framework used is based upon the conception of the national labor market outlined in para. 4.06. Employment absorption in the commodity producing sectors is treated as being predominantly determined by technological choices in the production process. Similarly, employment in both public administration and finance is expected to follow an independent underlying rate of growth, a function of recurrent budget availabilities and the size of the financial system. This leaves a residual increase in the /1 The Government has introduced some measures to encourage small scale industries - see para. 5.15 - but these were of minor significance relative to the general thrust of industrial policy. - 99- labor force that is assumed to enter service employment, in trade, transport, social and personal services. Aggregate income in these sectors is projected to be a function of growth in the commodity producing sectors, so that the effect of new entrants is to spread the available income over a larger number of workers. There is a high degree of simplification here, but it is consistent with both the macro evidence of past developments discussed in Section A and various micro studies on Java. It also provides a useful index of the degree of pressure in the overall labor market in the form of the growth in labor productivity (i.e. total income per worker) in these service sectors: the greater the growth in employment relative to total income the slower the growth in productivity. Stagnant or negative growth in productivity indicates a serious employment problem, that would be expected to be reflected in lower labor incomes and wages. A crucial assumption in this conception is reasonably free entry to these sectors: if this does not hold, the residual labor force would be forced into open un.mployment or marginal activities in both urban and rural areas. This possibility is also examined. Labor Force Projections /1 4.19 The growth in the labor force is determined by the growth in the population and changes in the age structure and labor force participation rates. Population growth slowed in the second half of the 1970s, and is projected to continue to decline in the future, as fertility rates come down in response to the spread of family planning, growth in incomes, and Increased education; the demographic assumptions used here are close to those used by the Government. As a consequence, the overall population growth rate declines from 2.3% p.a. in the 1970s to 2.1% p.a. in the 19808 and 1.8% p.a. in the first half of the 1990s. As shown in Table 4.3, the decline occurs throughout Indonesia, but some inter-regional variation in demographic assumptions is maintained. The regional distribution of population is also influenced by migration, and government policy is a major factor here. Table 4.3 reports the results under the intermediate transmigration scenario (see para. 5.27). This leads to significantly higher rates of population growth in the Outer Islands than in Java and Bali. By way of comparison, if there were no migration at all, population growth in Java and Bali would be 1.7% p.a., instead of 1.3% p.a., in 1986-90, and that in Kalimantan would be 2.3%, instead of 4.4% p.a., in the same period. 4.20 Although the new entrants to the labor force over the next ten years are all already born, there is some uncertainty over the future evolution of labor force participation rates. The analysis that underlies this report indicates a decline in the overall labor force participation rate (on the basis of the population aged ten and over) from 53.5% in 1980 to 52.5% in 1990, followed by a small rise to 52.9% in the year 2000./2 The implications /1 Appendix 2 presents a summary of the methodology and results for the demographic projections. /2 The approach differs Rwn-awhat from that used by the Government, that projects more rapid overall growth in the labor force - of 2.8% p.a. in the second half of the 1980s - and a larger share of women, as compared with this report. See Appendix 2 for a brief discussion of the alternative assumptions. - 100 - are summarized In Table 4.3. This shows two important results. First, after declining from 2.7% p.a. in the first half of the 1980s, the rate of growth of the labor force is constant, at 2.3% p.a., in the next ten years; the effects of the decline in population growth are not felt until the 1996-2000 period. Second, as a consequence of migration, the annual increment to the labor force is higher for the combined Outer Islands than for Java and Bali, and it rises for all areas in the 1990s. If migration were to continue at the 1971-80 pace, the situation would be reversed, and the growth in the labor force in Java and Bali would be 1.9% p.a. between 1986 and 1995, with an annual increment of 850,000, over half the all Indonesia total. Table 4.3: REGIONAL GROWTH IN POPULATION AND THE LABOR FORCE, 1986-95 /a Labor Force Population Annual growth Annual increment 1986- 1991- 1991- 1986- 1991- 1990 1995 1990 1995 1990 1995 -- Z p.a. - -- % p.a. - ---- '000 Java-Bali 1.2 1.0 1.5 1.5 640 680 Sumatra 3.1 2.7 3.5 3.2 480 540 Kalimantan 4.8 4.4 4.9 4.5 180 210 Sulawesi 2.9 2.4 2.9 3.0 120 140 Eastern Islands 3.1 3.2 3.2 3.6 140 200 Outer Islands 3.3 3.0 3.6 3.4 920 1,090 Indonesia 2.0 1.8 2.3 2.3 1,560 1,770 /a This is under the intermediate scenario for transmnigration, see para. 5.27 and Appendix 2. Source: World Bank staff projections. Overview of Potential Labor Absorption under Alternative Policies 4.21 Projections of potential labor absorption over the next ten years show that the current employment problem could worsen, with adverse effects on the distribution of income and potentially serious social consequences, unless the Government makes a concerted effort to adopt policies that support a labor intensive pattern of growth. Unlike the past period of buoyant income growth in the economy, it is unlikely that employment will take care of itself in the future. However, with the combination of appropriate macroeconomic policies - 101 - that underly the base case of Part I, plus some additional measures specifically oriented toward labor absorption, the employment problem is potentially manageable./l 4.22 Two scenarios were developed to illustrate the impact of the policy environment on labor absorption and productivity. The first is based on a set of policles favorable to employment. It falls within the macro policy and growth framework of the base case of Part I. The achievement of sustained growth rates over the medium term, through the implementation of policies that will ensure the efficient use of scarce resources in both the public and private sectors, is essential to a favorable outcome for employment. In particular, the required shift in industrial and trade policy, to encourage the development of an efficient and more export oriented industrial sector, will also help foster a more labor intensive pattern of production. However, additional measures, specifically oriented toward employment, will also be required. These include a cautious approach to agricultural mechanization on Java, the avoidance of excessively capital intensive public expenditures, and a tolerant attitude towards urban informal sector activities. Transmigration also plays an important role in providing employment for the poorer segments of the Javanese labor force. Each of the policy areas is discussed in Chapter 5. 4.23 Table 4.4 summarizes the consequences of favorable policy. Under this scenario agriculture absorbs a significant proportion of additional labor, but the share of the sector in total employment declines to below 50% by 1995. This is consistent with continued productivity growth in the sector and a reduction in poverty amongst smallholders. Owing to slower growth in output than in the past, there is little scope for raising the share of manufacturing employment in the short run, but it accounts for 16% of new employment over the ten year period (and 20% in the early 19909). The residual service sectors would have to provide over 40% of new employment in the 1980s, but this is consistent with moderate growth in productivity (and average incomes), of almost 2% p.a. in the remainder of the 1980s and 3% p.a. in the 1990s. 4.24 While appropriate macroeconomic policies are essential if the employment problem is to be manageable, it is also worth stressing that a labor intensive pattern of growth can also support macroeconomic objectives. Growth in incomes amongst poorer segments of the population tends to be spent on home produced rather than imported goods. It is expected that the structure of dempnd amoagst both rural and urban households will shift away from staple foods toward relatively preferred foods, manufactured consumer goods and services /2, but these sectors still have relatively low import requirements, and will be the main sources of non-oil output growth over the next decade, supplemented, of course, by rising exports. /1 The conclusion on the urgency of the employment problem is based upon a projected growth in the labor force of 2.3% p.a. If the Government's projection of higher labor force growth were to occur, the labor absorption problem would be even more difficult, especially for women. /2 See Appendix 1, paras. 19 to 21. - 102 - Table 4.4: EMPIWYMENT AND PRODuCrIVrTY GROWTH UNDER FAVORABLE POLICY, 1986-95 Employment Productivity Share of Composltion increment Growth Levels /d 1980 1995 1996-lW5 1§86-1995 1985 31995 -- Z -- -7 - Z p.a. - Rp.'O000worker Indonesia Agriculture 58 48 24 2.6 430 550 Manufacturing 10 10 16 4.2 1,150 1,740 Constructiom 3 4 7 1.2 1,750 1,970 Services /a 24 30 41 2.5 870 1,110 Miscellaneous /b 5 8 12 1.4 2,010 2,320 Total /c 100 100 100 3.2 760 1,030 Java-Bali Agriculture 51 40 -15 3.0 390 520 Manufacturing 11 13 27 4.0 1,090 1,620 Constructio 4 5 11 1.0 1,980 2,180 Services /a 29 35 60 3.0 780 1,050 Miscellaneous /b 5 7 16 2.3 2,110 2,640 Total /c 100 100 100 3.8 740 1,080 Outer Islands Agriculture 68 58 47 2.0 480 580 Manufacturing 6 6 9 4.2 1,350 2,050 Construction 2 3 4 2.0 1,310 1,590 Services /a 18 24 29 1.4 1,060 1,210 Miscellaneous /b 6 8 10 0.3 1,880 1,940 Total /c 100 100 100 2.3 770 970 /a Trade, transport, social and personal services. 7i Non-oil mining, electricity, gas and water, finance and public administration. /c Excludes oil and ING. 7;r At 1980 prices Source: World Bank staff estimates and projections. - 103 - 4.25 The regional distribution of growth is also important to the evolutioa of the employment situation. Table 4.4 also provides the results for Java (aCd Bali) and the Outer Islands, based upon the pattern of growth in the labor force shown in Table 4.3./i Sharp differences are projected: agriculture sheds labor on Java, but provides a high fraction of new employmeat on the Outer Islands; mufacturing is of muh greater relative Importance is Java, and accounts for over 30% of all ne employment in the first half of the 1990s, but is relatively unimportant in the Omter Islands; residual services are also much more Importaat in Java, but this is consistent with productivity growth of 3.0Z p.a. in these sectors. As a consequence there is a significant narrowing in the gap between sectoral labor productivities between Java and the Outer Islands over the ten year period. 4.26 A second scenario was developed to examine the consequences of unfavorable policy. Thds clearly shows the potential seriousness of the employment problem. It corresponds to the low non-oil export case of Part I. The most sigifLant differences from the previous scenaio apply to the commodity producing sectors. Agriculture grows slightly more slowly (at 3.2Z p.a.): in the short rua as a consequence of a less favorable investeat and pricing environment, and more genera.Uy a failure to tackle the difficult problen of agricultural diversifcation; iu the longer term also as a consequence of slower aggregate growth reducing the growth in deumd for food. This is compounded by somewhat faster capital-labor substltution tbrough excessive Incentives to mechanize agricultural production. The maufacturing sector also follows a more capital intensive and less export oriented path, as a consequence of a failure to correct existing biases in the incentive environmet and investment policy./2 These effects would be exacerbated by an iusufficiemtly rural bias to public expenditure policy, and excessive share of relatively umeconomic, capital intenive investments. Lower export growth, and l-ager resource requiremets for inestmet, also leads to a slowdown in the growth of manufacturing output and employment. 4.27 The pattern of labor absorption would be very different from the favorable policy scenrio. By 1995, there would be about 2.6 million less peopl e working in agriculture and 2.1 million less in maumfacturing than under the favorable scenario. Although the higher average labor productivity growth in agrictlture would have some beneficial effects for farmers, the main beneficiaries would be those that could afford to mechanize, predominantly larger farmers. The loss In potential employment opportunities would primarily affect the households, and especially the children, of landless laborers and small farmers with inadequate access to land to provide employment. There could thus be 4-5 million additional people looking for /1 In the projection model Java-Rali and the Outer Islands are actually the pojection units, and Indonesia an aggregation. The results In Table 4.3 are based on the intermediate tran ation scenario described in Chapter 5, para. 5.27. /2 See Chapter 5, paras. 5.10 and 5.11 for a description of the alternative manufacturing scenarios. - 104 - work in the residual service sectors over the ten year period, with heavy pressure on the urban informal sector. If these sectors could absorb these numbers, this would lead to stagnant or declining labor productivity (and average incomes) for most of the period. The situation would be exacerbated if the Government Implemented restrictive policies on relatively good informal sector work (such as street vending), as is now occuring in Jakarta. Under these circumstances many new entrants would be forced into open unemployment or more marginal service activities. 4.28 Under this scenario there is a high probability that income distribution and poverty would worsen, in both rural and urban areas. In rural areas slower agricultural growth and more rapid labor displacement would tend to lead to lower agricultural wages and Incomes of small farmers, with a higher proportion of any gains accruing to larger farmers. In urban areas the combination of slow growth in wage employment in manufacturing and relatively limited access to higher return informal sector activities ;,ould lead to much greater downward pressure on labor incomes at the lower end of the informal sector and in low wage activities. Since it is possible tiat this would co-exist with faster growth in wages at the upper end of tie formal sector, owing to the shift toward more capital intensive (and higber labor productivity) techniques here, overall disparities in incomes could rise substantially. The employment situation would be a nstter for serious concern uader these circumstances, and this provides a compelling case for adopting policies that could increase the probability of realizing 'he favorable scenario. Lower Oil Prices and Employment 4.29 The above discussion focused on the impact of alternative policies under the same external environment. We now look at the implications of a worsened external environment, using the low oil price scenario developed in Part L Lower resource availability reduces the secular growth rate of non-oil GDP to close to 4.2% p.a. and of manufacturing to 7.3% p.a., and, because of demand constraints, feasible agricultural growth is reduced to 3.2% p.a. Since the GDvernment's resource situation would be tighter, it is assumed that the affordable size of transmigration would also be reduced (to the low case described in para. 5.27). If labor productivity growth were the same as in the favorable policy case, there would be a significant reduction of future employment in the commodity producing sectors: agriculture aud manufacturing would together employ 2.3 million less in 1995 than under that scenario. This would lead to a difficult employment situation - either stagnant or declining incomes in the residual service sectors or a sharp increase in unemployment. If this were also combined with policies unfavorable to employment the situation could be very severe. To avoid this occuring even higher priority would need to be given to employment. 4.30 Table 4.5 presents the results of a scenario in which the employment situation would remain manageable, through the maintenance of a higher degree of labor intensity in agriculture and manufacturing. This would be more difficult to achieve than in the favorable policy scenario, though the areas - 105 - for policy intervention wuld be the sam as dicussed above. The maintenance of a supportive environment for agriculture would again be crucial, but it my now be necessary to introduce stronger dlsincentives to mecbani e and to aim for the widest possible participation in new investment programs (such as rubber development). In public expenditure, deeper cuts in the capital intensive sectors would probably be necessary to protect expenditures in social and local economic lnfrastructure. There would also be a case for an expansion in Special labor intensive programs, such as the Padat Karya program, without changLng the policy of geographic targeting of its activities, since there may be many local areas with a severe lack of employment opportumities. Whlle the same overall policy stance on manufacturlng would be appropriate, there would be a case for a uore careful review of the relative role of small and large scale production, since the costs of displacement of household and suan enterprise production would be proportionately greater with lower overall growth of the sector. Table 4.5 shows that with such a concerted effort to spread growth evenly, the increase in the labor force could be absorbed into employment with a gradual rise in sectoral labor productivities. This resut Should not be interpreted as implying that the employment problem could be easily tackled in an environment of low oil prices. It would probably require a major effort on the part of the Government in the above areas to realize such a scenario. Table 4.5: 2OTENTIAL IABOR ABSORPTION UNDER A IOW OIL HRICE SCENARIO, 1986-95 Employment Iabor productivity Share of Composition increment Growth Levels /d 1980 1995 1-986-1995 1986-1995 1985 1995 - Z - - Z - - Z p.a. - Rp.'OO0/worker Agriculture 58 51 37 1.6 430 500 Manufacturing 10 10 15 3.3 1,150 1,590 Construction 3 3 4 1.4 1,750 2,010 Services /a 24 29 32 1.5 870 1,010 Miscellaneous /b 5 8 12 0.5 2,010 2,110 Total /c 100 100 100 2.0 760 930 /a Trade, transport, social and personal services. 7i Non-oil mining, electricitv, gas and water, finance and public administration. /c Excludes Oil and ING. 7T At 1980 prices. Source: World Bank staff estimates and projections. - 106 - CHAPTER 5 SELECTED POLICY ISSUES AND EMPLOYMETI 5.1 The previous chapter concluded that there is a potentially serious employment problem, but with a concerted effort to support a labor intensive pattern of growth, the problem is potentially manageable. There will be a need both for the effective absorption of new entrants into the labor force and a continued rise in labor productivity and incomes of exi stig members of the workforce. The general economic policies to sustaln growth through the efficient use of resources in both the public and private sectors, that were discussed in Part I, are essential to this, but there will also be a need for specifically employment oriented measures. In this chapter we survey the impact of five areas of government policy on employment. This is not a comprehensive review of policies related to the labor market, but covers the key areas that can influence the fundamental labor absorption problem. A. Agriculture 5.2 Although the relative role of agriculture in total employment is expected to continue to decline, growth in agricultural incomes is still central to a favorable employment picture, both on and off Java. To avoid excessive rates of rural-urban migration, there will need to be continued growth of jobs for rural households. The growth of the rural labor force is likely to be relatively high in the Outer Islands - around 3% p.a. under the intermediate transmigration scenario (para. 5.27) - but some growth in rural employment on Java, of the order of 1S p.a., will also be necessary. The performance of agriculture will be crucial to this scenario and to the continued improvement of the rural labor market both on and off Java. 5.3 In Chapter 4 we sa that the process of structural change was most advanced in Java. The numbers of people primarily dependent on agriculture declined in the 1970s, to about half of the total workforce at the beginning of the 1980s. However, agricultural income growth has been buoyant right through to 1985, as a consequence of favorable movements of the terms of trade for farmers and significant productivity increases. There have been particularly beneficial links between agricultural income growth, the expansion of the non-farm rural economy, and rural-urban flows of people and goods./l This pattern of growth would be threatened by worse agricultural prospects. Neither public spending nor rural manufacturing are likely to be sufficiently large sources of autonomous income growth to compensate for a major slowdown in agricultural income growth. Even if agriculture continues to shed labor on Java, the growth in agricultural incomes will be essential to further increases in non-farm employment. On the Outer Islands the role of agriculture will be even more important, since it will have to directly absorb /1 For an account of past patterns of agricultural and non-agricultural income growth, see Appendix 1, paras. 8 to 21. - 107 - a significant proportion of the growth in the labor force if the employment situation is to improve. This will require somewhat higher agricultural production increases and some shift in relative priorities in favor of the Outer Islands, though not to the neglect of the agricultural sector on Java. With respect to policy, two of the essential ingredients are a favorable pricing environment, i.e. no, or only gradual, shifts in the terms of trade for agriculture /1, and continued improvements in agricultural infrastructure. The major opportunities for new water resource development are In the Outer Islands, but even in Java there is still scope for increased cropping intensity through modernization of traditional irrigation systems, improved operation of existing schemes, and investments in water storage. The other major agricultural investment program is in the tree crops subsector and this is primarily oriented toward the Outer Islands. 5.4. Continued agricultural growth could, however, be threatened by the emergence of domestic demand constraints for food. As noted in Part I, there is evidence of supply exceeding demand for rice in 1984. The scope for continued growth in production of rice and other staples is likely to be much more limited than in the past. Agricultural diversification Into products with better demand prospects will be essential on Jarva. The Government is proposing to shift its priorities toward support for other agricultural activities, such as coru and soya, vegetables and livestock. Micro evidence f-rom West Java indicates that this process of diversification was already taking place in the 1977-1983 period, in response to rising demand (see Appendix 1, paras. 13 to 17). However, support for this process could be a much more complex matter than the government measures supporting rice production in the 1970s. An appropriate policy package is as yet unclear, and priority should be given to analysis of this issue In the near future. 5.5. The other agricultural issue relevant to employment is the pace of technological change.,/2 Existilng agricultural practices are highly labor intensive, especially in Java, and there is the technical potential for substantial labor displacement through tractorization and other forms of mechanisation. The existing stock of agricultural machinery is very low, but /1 In practice this implies only a gradual increase in real fertilizer prices, as argued in Indonesia - Policy Options and Prospects for Major Food Crops, World Bank Report No. 3686b-IND, April 4, 1983, though there may be a need to reappraise the difficult trade offs in this area if a significant rice surplus emerges. /2 The results in this section are mainly based upon papers collected in Faisal Kasryno et al, ed., Consequences of Small Farm Mechanization in Indouesla, 1984; see in particular Yusuf Saefudin, The Comparative Advantage of Mechanized Rice Production. The data is largely for 1979-80. For preliminary analysis of more recent data (from less mechanized villages) see Faisal Kasryno, Efficiency Analysis of Rice Farming in Java, 1977-83 (draft), Center for Agro Economic Research, Bogor, March 1984. This suggests some economic advantages of tractorization, but this does not change the argument in the text on an appropriate Incentive policy, in view of the potential employment effects. - 108 - it has been increasing rapidly, with a fourfold increase in the numbers of tractors, and even larger increases in threshers, pumps and dryers between 1978 and 1981. Studies in West Java, where ownership of hand tractors has been growing most rapidly, indicate that farmers using tractors for cultivation use about 20% less labor per season in wet rice cultivation. Similar results were found for South Sulawesi. These micro studies suggest that the main effect is to reduce the share of labor and increase the share of capital in value added. Yield effects were negligible, and there were little or no additional economic gains from tractorization./l Even the direct financial effects were limited, partly because of high tractor prices (significantly above international prices) and inadequate repair and maintenance facilities. There were, however, significant advantages to large farmers, who were the main purchasers, through the reduced effort and uncertainty over organizing labor and the high premium on speed of cultivation. The limited available evidence suggests that threshers and dryers can have economic benefits, brLt again at the cost of some labor displacement. 5.6 In this context a cautious policy on mechanization is appropriate, at least for Java. Tractor prices are high now, owing to high production and distribution costs, but there is a risk that a sharp reduction in the cost to the farmer of purchasing tractors could lead to an acceleration of the existing process of change, for limited economic benefits. In particular, this implies that there should be no use of subsidized credit facilities: tractors are attractive to lenders since they provide their own collateral and involve large loans. Tractors may form a useful part of BRI's portfolio, but there is no economic case for the use of special programs, such as KIK, for this purpose./2 Under these conditions the very moderate rate of decline of the agricultural workforce on Java shown in the favorable policy case of Chapter 4 is plausible. More rapid mechanization, or slower agricultural production growth, could lead to the release of far more landless laborers than the rural non-farm economy or the urban informal sector could effectively absorb. It should be stressed that this is a complex area, and there is a strong case of additional studies of the situation to update our knowledge. 5.7 In the Outer Islands the situation is somewhat different. In most areas there are shortages of labor and draught animals, and this suggests a stronger case for mechanization than on Java. Conditions vary from area to /1 An economic analysis at efficiency prices showed that rice production makes good economic sense with both mechanized and manual land cultivation, but that there were no additional benefits from mechanization, see Yusuf Saefudin, 22. cit. The phenomenon of negligible yield effects of mechanization is a general one, see Hans Binswanger, Agricultural Mechanization - A Comparative Historical Perspective, World Bank Staff Working Paper No. 673, 1984. /2 Tractors have been financed by the KIK program in the past, but the village evidence indicates that the bulk of past purchases have been financed by suppliers' credit and own resources. - 109 - area. In South Sulawesi the impact of tractorization appears to have been comparable to West Java, with a reduction in labor use, but limited economic advantages. However, in West Sumatra there has been a rapid and successful growth in the use of locally produced threshers, and to a lesser extent, hand tractors, that has been to the benefit of both equipment producers and users.fl In Aceh it is reported that the costs of manual cultivation have become so high (three to four times that on Java) that farmers are moving directly to the use of large four wheel tractors; this may be because of the lack of availability of or information on small tractors. Given this diversity the Government's current policy of selective mechanization in specific geographic regions is appropriate. There is still no case for subsidized credit facilities, and the main instruments of this policy should be extension advice to farmprs and provision of information to producers. 5.8 Appropriate industrial policy is also of importance to agricultural mechanization. Although sharp price reductions (of hand tractors, at least) could have undesirable effects on employment, a gradual decline in real prices through increased efficiency of production and distribution would be beneficial. This is best fostered by the encouragement of domestic and international competition. The development of small scale productioa in the region of use is also important. Appropriate agricultural implements vary substantially according to local economic and agronomic conditions. International experience indicates that small producers can be a major source of innovation and adaptation, since the engineering requirements are low.12 The encouragement of local producers and relatively simple technologies, as in the Government's pilot schemes in West Sumatra, is likely to be much more effective in this regard than attempts to replace existing imported models with large scale production. This approach has the additional important benefit of facilitating the development of local repair and maintenance facilities. B. Manufacturing 5.9 The manufacturing sector has both a direct and indirect impact on the employment situation. The most valuable macroeconomic contribution of the sector in the next ten years could be the provision of incremental foreign exchange, througgh an efficient pattern of growth, to compensate for the relative decline in oil earnings. This is essential to the consistency of the overall growth path with macroeconomic resource constraints. The sector's major contribution to employment could be through this indirect mechanism, and direct employment creation should not take priority over measures to foster the efficient industrial production that is a prerequisite to the performance of its macroeconomic, foreign exchange earning role. However, as indicated in Table 4.4, manufacturing does have the potential to become a major source of new employment in its own right, at least on Java. If achieved, this would put Java closer to the pattern of long term growth and structural change that /I See the Sam H. Johnson et al., Evaluation of IRRI-DITPROD Small Scale Agricultural Equipment Extension Project, January-February 1985. /2 See Hans Binswanger, op. cit. - 10 - other major East Asian rice economies have passed through./l Moreover, there can be a high degree of complementarity between an efficient, foreign exchange earning pattern of industrial growth and a relatively labor intensive one. 5.10 Government policies can have a major influence on employment in manufacturing in Indonesia through the impact on the composition of industrial output and the relative role of large and small scale production. There is a wide variation in the degree of labor intensity of different subsectors, and policies that encourage faster growth in labor intensive sectors raise total industrial employment. This is closely related to a more export oriented policy. The employment implications of the alternative scenarios for industrial growth discussed in Part I are summarized in Table 5.1./2 The first scenario corresponds to the base case of Part I. It assumes a shift in industrial and trade policy to support the growth of an efficient and more export oriented industrial sector (see Chapter 3). There is relatively gradual import substitution (the overall share of imports in final demand for manufactures declines from 35% in 1980 to 27% in 1995), but with a proportionately higher reduction in consumer goods. Manufactured exports grow at 11% p.a. in the 1986-95 period and value added at about 8% p.a. Under this scenario, that forms part of the favorable policy case of Chapter 4, total employment in the sector increases by almost 50%, or by 2.5 million people over the ten year period, and accounts for 16% of national incremental employment. This scenario is particularly beneficial to Java, that is the natural location for labor intensive industries. By the early 1990s, the industrial sector could account for over 30% of new jobs created each year on Java. 5.11 The other scenarios explore the implications of the continuation of the present industrial policy framework, with a bias toward import substitution in relatively capital intensive producer goods sectors. To isolate the effects of varying labor intensity, the second scenario assumes that growth in manufacturing value added could still be about 8% p.a. The share of imports in final demand drops from 35% in 1980 to 22% by 1995, but exports only grow at 5% p.a. As a consequence, total employment only rises by 26% over the ten year period, and there are 1.3 million fewer workers in the sector in 1995 than in the labor intensive scenario. These workers would be forced to look for work in the residual services sectors, leading to a worsening employment situation, especially in urban areas, as outlined in /1 See Chapter 4 of Indonesia - Wages and Employment in Indonesia, 22. cit. This would be closer to the Japanese pattern of an extended period of change, rather than the rapid shifts in employment from agriculture to manufacturing in countries such as Korea. /2 The analysis was conducted on the basis of the 1980 Input-Output Tables, at the 66-sector disaggregation, that has 24 manufacturing subsectors. The same elasticities of domestic final demand with respect to national income were assumed for all scenarios, and only minor differences in labor productivity growth at the subsector level. Thus, the main differences are due to different patterns of subsectoral growth. - ill - Chapter 4. However, even this is probably too optimistic. Lower export earnings, combined with the higher investment costs of the capital intensive investment would tend to lower the affordable rate of growth, if the debt service burden is to remain manageable (see para. 3.25). The third scenario illustrates the consequences of a growth in industrial value added of 6X p.a. in 1986-95, as in the low non-oil export scenario of Chapter 2. In this case the sector makes a very small contribution to labor absorption, and by 1995 there are 2.1 million le6s industrial jobs than under the labor intensive scenario. Table 5.1: ALTERNATIVE SCENARIOS FOR MANUFACTURING GROWTH, 1986-95 Share of national Growth in value incremental added Total emplo ent employment 1986-95 l985 995 1986-95 X p.a. - '000 -- --- % Labor intensive /a Consumer goods 7 3,900 5,600 11 Producer goods 10 1,400 2,200 5 Total 8 5,300 7,800 16 Capital intensive/high growth Consumer goods 6 3,900 4,500 4 Producer goods 11 1,400 2,000 4 Total 8 5.3OO 6,500 8 Capital intensive/low growth /b Consumer goods 5 3,900 4,200 2 Producer goods 7 1,400 1,500 1 Total 6 5,300 5,700 3 /a This correponds to the base case of Chapter 2, and the favorable policy scenario of Chapter 4. /b This corresponds to the low non-oil export case cf Chapter 2 and the unfavorable policy scenario of Chapter 4. Source: World Bank staff estimates and projections. - 12 - 5.12 In addition to the varying direct effects shown in Table 5.1, the labor intensive scenario is likely to have more beneficial indirect effects. First, demand linkage effects would be stronger under this scenario - the relatively faster expanding sectors have a higher share of wages in value added, and expenditure analysis of the use of incremental income indicates that this could be a significant source of demand for domestically produced goods and services./l Second, if past patterns of wage determination continue, a relatively labor intensive pattern of industrial production would be associated with lower wage differentials. This would tend to reduce disparities within the urban labor market, and would thereby lead to a lower rate of unemployment. 5.13 The degree of labor intensity of individual subsectors is often closely related to the share of small scale firms in production. The above scenarios assume that there will not be a major shift in the degree of labor intensity of individual subsectors; a continued role for the small scale sector will be important to this. Small scale production can usefully be divided into household (cottage) and small enterprise activities./2 As shown in Table 5.2 the small scale sector accounted for the bulk of employment, but a fraction of value added, at the end of the 1970s. Productivity is very low, especially for the household sector. However, the growth experience was good, with both the household and small enterprise sectors growing slightly faster than the large scale sector. Micro studies of two major industries in Java, rice milling and weaving, do indicate some displacement of existing small scale activities (and labor) with the introduction of new technologies, but, In both the subsectors studied, the traditional highly labor intensive production technique was not the appropriate economic choice, despite the low economic cost of labor in Java./3 In neither case is the new preferred technique very capital intensive. Moreover, the loss in employment in these specific areas appears to have been more than compenAted by the general expansion in non-farm employment in this period. /1 Analysis of the 1981 SUSENAS shows that the bulk of incremental consumption is allocated to housing, education, health, transport, domestically produced manufactures and a variety of foodstuffs, in both rural and urban areas. See Appendix 3, Tables 10 and 11. /2 BPS defines the sectors by number of employees: household (cottage) 1-4; smnll 5-19; medium 20-99; large 100 and above. /3 See Peter Timmer, 'Choice of Technique in Rice Milling in Java", Bulletin of Indonesian Economic Studies, Vol. IX, No. 2, July 1973, and Hal Hill, The Economics of Recent Changes in the Weaving Industry', idem, Vol. XVI, No. 2, July 1980. - 113 - Table 5.2: THE SHARE OF SMALL AND LARGE SCALE FIRMS IN EMPLOYMENT AND VALUE ADDED IN MANUFACTURING, 1979 No. of Shares in 1979 Growth in value emplovees Value added Employment added 1974-79 /a % ---- (% p.a.) Household 1-4 12 63 11.9 Small 5-19 7 18 11.9 Medium and large 20 + 81 19 11.6 Total n.a. 100 100 11.6 /a There was a change in the definiton of employment between 1974 and 1979 to exclude part-time workers, rendering employment comparisons unreliable. Source: Census of Industry 1974/75 and Survey of Small Scale Industries, 1979, BPS. 5.14 The pattern of the 1970s was similar to that in many other Asian economics. At Indonesia's stage of industrial development other countries experienced the parallel expansion of small and large scale enterprise production, as well as a decline in the relative importance of household production./l This experience also s"ggests that the most effective way of sustaining this increase is through general rather than specific policies. Two factors have a dominant influence: first, a spatially dispersed pattern of growth of final demand, especially in rural areas; and second, the avoidance of preferential treatment, through credit subsidies, licensing, etc., to large scale firms. In Indonesia the set of policies designed to maintain agricultural income growth on the one hand, and to increase the competitiveness of industry (outlined in Part I) on the other, can also support the expansion of the small scale sector. 5.15 Is there an additional role for special measures to support small scale industries? The Government has introduced a program to encourage subcontracting by large to small firms under the bapak angkat system. This is of particular relevance to the engineering sector. An overall assessment of this policy is not feasible in this report, but some results on the issues are available for the vehicles industry, where one of the instruments for /1 See Dennis Anderson, Small Industry in Developing Countries, World Bank Staff Working Paper No. 518, 1982. Although the results in Table 5.2 suggest a buoyant growth in value added in the household sector, micro evidence from West Java indicates a decline in importance of some categories of very low return household industries, such as mat or string weaving. - 114 - effecting the policy is mandatory subcontracting for specific parts./I There have been a few cases of successful partnerships developing, notably in the production of hand tractors, but for most firms surveyed, subcontracting has predominantly been with other large scale firms, on the grounds that this was easier and more efficient for the parent company. While the program could have beneficial effects, it would be unwise to have high expectations of its impact on employment creation in manufacturing. Companies may often consider it disadvantageous, because of technical difficulties of supervison and the risk of higher production costs. 5.16 Finally, in the area of credit policy, there is a potential role for special credit programs (though not at subsidized interest rates), since banks tend to be excessively risk averse in their dealings with small scale firms. The KIK/KMKP program is the most important example in Indonesia. Although experiencing some problems of management and poor collection performance, it is, in two respects, well designed: it lets market demand largely determine the shares of working capital and investment loans, and it does not preclude service sector firms. The provision of credit to the small scale trading sector is an effective way of facilitating the transmission of final demand for manufactures to small scale producers. C. Public Expenditures 5.17 The level and distribution of public expenditures has a powerful influence on the demand for labor tlrough the growth effects of productive iuvestment and the direct and indirect impact of investment demand on employment in the implementation phase. Certain expenditures are relatively favorable to labor demand, and, although employment may not be the primary objective of public expenditures, it is important that it also enter the analysis of intersectoral and project choices. 5.18. The primary focus here is on the expenditure phase of public investments. There are three effects: direct employment in development projects; employment in other sectors whose production increases as a consequence of the public investment demand; and demand-side multiplier effects from the increased household income, especially labor income, created by the public expenditure. All three were significant to the past favorable pattern of growth in output and employment, and there is a case for the maintenance of a moderately expansionary domestic component of public expenditure over the medium term, to support the continuation of this pattern. Demand-side multiplier effects are discussed further for rural Java in Appendix 1 (paras. 19 to 21). They are probably at least as important as the other two effects. 11 See Thee Kian Wie, Subcontracting in the Engineering Subsector in Indonesia, A Preliminary Survey, preliminary draft report, LEKNAS-LIPI, September 1984. - 115 - 5.19 As discussed in Part I, the composition of investment can influence both the import bill and total employment creation since import and employment coefficients vary by sector (see Table 3.5). To the extent that the Government can effectively switch the composition of investments in favor of less import intensive activities, a higher aggregate level of investment can be implemented. Programs in sectors with low import intensity, for example in the social sectors, regional development (local infrastructure) and trausmigration, are less costly in terms of the overall foreign exchange constraint. Employment considerations nicely complement the objective of minimizing import requirements, since investments with a high domestic content characteristically have relatively large direct and indirect employment effects. 5.20 In REPELITA III it is estimated that the direct and indirect effects of development expenditure provided the equivalent of permanent employment for at least 1.9 million people. It was concluded in Part I that the changed sectoral composition in REPELITA IV (compared with the REPELITA III realization) was reasonable and that this would lead to a somewhat more labor intensive pattern of expenditure. This would generate a growth in direct and indirect employment from development spending roughly in line with the growth of the labor force. The relative emphasis on agriculture and local infrastructure in Repelita IV is also supportive of a more labor inteusive pattern of growth in the longer term. From the viewpoint of employment, it is of great importance that the Government maintain the composition of expenditure planned for REPELITA IV and resist any pressures to increase the relative allocation to capital intensive sectors. This will probably require a major effort to improve the implementation performance of the less capital intensive programs, notably in the education sector anr. amongst the INPRES programs. Some increase in support to lower levels of Government may be necessary to achieve this. The institutional capability of local government is often weak, yet, in the oil boom period, kabupaten offices demonstrated their ability to handle sharp increases in the size of construction programs reasonably effectively. In the event of a worsening in the employment situation, it would be appropriate to consider the case for further expenditure switching away from capital intensive sectors to ensure the maintenance of a moderate growth in employment intensive expenditures, especially in rural areas, when this is economically justified and can be effectively implemented. 5.21 The overall intersectoral composition of expenditure is only one aspect of the employment effects of public expenditure. There are also significant variations in labor intensity of expenditures within sectoral programs, and even for the same activity. A systematic analysis of this issue is beyond the scope of this report, but some examples can show the importance of evaluation of the labor intensity of alternative expenditure choices. In the irrigation sector, both rehabilitation and tertiary canal construction are more labor intensive activities than primary canal construction, and much more than dam construction. They also have high economic rates of return. This need not imply that the composition of irrigation expenditure should be adjusted primarily to increase employment; the current program appears to be fairly well balanced. However, in the event of a tighter resource constraint, - 116 - or a worsenaing employment situation, there may be a case for protection of the rehabilitation and tertiaries programs. In the transport sector, investments in rural roads are much more labor intensive than for highways or maritime developments. They also make good economic sense./l A balanced investment program will again include the whole range of activities, but it is important that some priority to rural road development is maintained, both in budget allocations and in efforts to improve implementation. A further area of relevance is the level of recurrent expenditures on infrastructure: in both roads and irrigation the most appropriate technique for regular maintenance is more labor intensive than for periodic rehabilitation, and much more than for replacement investment. It is again beneficial to choose the first option. Although this may require higher fiscal resources in the short run, it usually leads to lower demands on the budget in the medium term. 5.22 In view of the seriousness of the omnzlTyment situation, the impact on employment should also be one of the factors in the assessment of individual public investments. On the basis of the projected &vailability of resources for investment in the base case and the projected rise in the labor force, the average investment resources per new job will be of the order of US$12,500 (in 1985 prices) in the 1986-90 period. The choice of individual projects should, in the final analysis, depend on an evaluation of their economic contribution to the country's development, and there will be both capital and labor intensive pro4ects in a balanced investment program. However, because of their greater usage of scarce resources, there is a case for subjecting large scale and capital intensive projects to special scrutiny. Currently, full economic analyses of projects do not appear to be carried out in a systematic fashion. It is suggested that projects requiring investment resources per job substantially in excess of the indicative figure of US$12,500 be more carefully evaluated for their overall contribution to the country, through the rigorous use of techniques of economic appraisal. 5.23 Finally, there may be alternative choices of technique in the design of an individual project, and a relatively labor intensive construction technique may be an economic option for the same task. Unlike many other countries, there is no general evidence to suggest that the choice of technique in construction is excessively capital intensive. Java and Bali in particular hav2 a tradition of labor intensive construction methods, and labor productivity is considered to be high by international standards./2 However, there are pressures for project manageric to get tasks done quickly and with minimal use of rupiah budget resources, and this could encourage the use of equipment intensive methods: in some areas there may be scope for changing existing practices. One example is the use of labor intensive techniques for land clearing; the Government is now shifting towards this approach in transmigration sites. This requires dif-arent organizational arrangements, and in particular the transport of transmigrants prior to land clearing, but case studies suggest that this is an eca -mic choice. /1 For Java economic rates of return for rural roads investments of the order of 25% have been estimated. See Indonesia - Rural Roads Development Project World Bank Report No. 3585-IND, December 10, 1981. /2 See Basil Coukis, ed., Labor-based Construction Programs, World Bank, 1983. - 117 - D. Trasrmigration 5.24 The government sponsored transmigration program involves the movement of poor, landless or near landless households from Java and Bali to land rich areas In the Outer Islands. The Government finances economic and social infrastructure in the transuigration site, as well as transport, initial subsistence supplies and agricultural Inputs. In addition to the sponsored program, there are substantial flows of 'spoataneous' transmigrants. Some of these flows are independent of the sponsored program, but there is also evidence of quite significant spontaneous flows that follow in the wake of the Government's program. Migrants frequently follow the path of relatives, who can provide informatiom on economic prospects and some initial support, as well as a more comfortable social envirnoment in a strange land. This means that the impact of sponsored transmigration on total population flows can be larger than the initial program. Site evaluation and investment planning needs to take account of this. Transmigration has the potential to reap substantial benefits. It can provide employment and land ownership to some of the poorest members of the labor force in Java. It also brings underutilized land into intensive cultivation, raises agricultural production and contributes more broadly to economic development in the Outer Islands. 5.25 Transmigration has played a large role in the total picture of inter-island population movement in the past. The impact on provincial population in 1980 is shown in Appendix 3, Table 4. 220,000 households were moved between l999 and 1978, and, by 1980, 3% of the total population in the Outer Islands were there as a consequence of sponsored transmigration. If we exclude the two special cases of Lampung and North Sunatra, this was almost half of the total population of Inner Islands' stock living in the Cuter Islands./l In REPELITA, III the program accelerdted, with a total of 320,000 households moving under the sponsored program./2 The Government estimates from registration statistics that an additional 150,000 families moved spontaneously in RE3MIITA. III, but this probably uaderestimates the true number. This implies that total migration to the Outer Islands has been providing employment to of the order of 170,000 people p.a., equivalent to 20X of the total increment to tie labor force in Java and Bali (and about 30Z of the increment to the rural labor force). To a large extent it is providing more productive employment to existing members of the labor force, but this is an equally valuable objective on welfare grounds. /1 There was a transmigration program to Lamptmg in the colon' l period, and there have been major moverments of Javanese labor to the North Sumatra tree crop estates - again government sponsored. /2 This excludes officially recorded local transmigrants within Lampung, and a number from the REPELITA II program that moved in 1979. There is also some uncertainty over the extent of local movement in the figure of 320,000. The Government is now aiming for a figure of 10% of transmigrants coming from within the province: in the projections below, the REPELITA InT level was reduced by this proportion, for consistency with the treatment of REPELITA IV targets. - 118 - 5.26 The program does, however, carry risks for the evolution of the labor market. It results in a large increase in the population and labor force in parts of the Outer Islands and also potentially increases the mobility of part of the labor force. If living conditions and incomes do not match the needs or expectations of transmigrants, there is a possibility of significant second round flows of either the original transmigrants, or, after a period, their children. This could involve either a reflow back to Java or to urban centers in the Outer Islands. Either could be destabilizing for the labor market - but because of their relatively small initial size, urban centers in the Outer Islands could face the greater difficulty in labor absorptioa. To avoid a potentially difficult labor market problem, it is essential that the program be designed to ensure adequate permanent incomes for transmigrant households. Of course, some increase in rural-urban migration in the Outer Islands is unavoidable; indeed, an expansion of the urban economy to complement the rapid rural growth is a desirable development. This implies that, over time, increased emphasis should be given to investment in both urban facilities and productive (especially industrial) investment in these rapidly growing regions. 5.27 An overall assessment of the transmigration program is not feasible now. The two key ingredients for this are evidence on actual household incomes in established transmigration areas, and detailed evaluations of the agronomic and economic potential of likely future sites, and neither are now available.1l However, it is possible to form reasonable alternative views on the future size and direction of flows, and to assess the likely impact on the pattern of growth of the population and the labor force. In Repelita IV the Government plans to move 500,000 houeeholds under the sponsored program, and projects that a further 250,000 households will move spontaneously. The planned program represents an increase over achievements in REPELITA III of about 55%. In addition, there is a major change in the direction of movement. The bulk of feasible sites in traditional transmigration regions in Sumatra and Sulawesi have been filled, and the province of Lampung was declared closed to all new transmigration in 1980. Apart from some potential for flows directly associated with tree crops investments on land already earmarked for estate development in Sumatra, the majority of new transmigration sites will be located in Kalimsatan and Irian Jaya. Such sites are more remote, costs of movement and infrastructural investment are higher 12, and the logistics of implementation more difficult. The Governmentts target appears to be at the upper end of what could feasi ly be implemented given managerial constraints - it is termed the high case here - and a lower figure of 400,000 households uader the sponsored program in /l BPS is mounting a household income and expenditure survey in transmigration areas in mid-1985, financed from a World Bank loan for transmigration. /2 The World Bank estimates that the basic costs for on-site development in te REPELITA IV program will be at least $7,000 and quite possibly more per household, compared with t5,700 in REPELITA III (both figures in 1985 prices). - 119 - REPELIrA IV has been used as an intermediate case. /1 The implications of these two scenarios, as well as a low case of 300,000 sponsored transmigrant households in REPELITA IV, were explored through use of a demographic projection model 12. In each case it was assumed that the program would continue in REPEXIIA V and VI, and that there would be significant associated spontaneous flows. 5.28 The impact of the various scenarios on Java are summarized in Table 5.3. The effect on the labor force is relatively large since transmigrants usually come from groups with higher labor force participation rates. Under the Intermediate case total migration (including flows quite independent of transmigration) could provide employment for 30Z of the Increase in the labor force between 1985 and 1995. The overall effects of the transmigration program account for 20X alone./3 Under the low case the total contribution of migration to employment creatlon falls to 15Z of the growth in Table 5.3: GROWTH IN POPULATION AND THE LABOR FORCE IN JAVA AND BALI UNDER ALTERNATIVE TRANSMIGRATION SCENARIOS, 1986-95 Annual Increment to the Population growth labor force 1986-90 1991-95 1986-90 1991-95 Z p.a. '000 No migration 1.7 1.5 900 980 Past trends /a 1.6 1.4 810 900 Low case 1.6 1.4 750 860 Intermediate case 1.2 1.0 640 680 High case 1.1 0.8 590 540 /a This assumes migration continues at the same absolute levels as between 1971 and 1980. Source: World Bank staff projections. /1 As noted above, the transmigration program total includes some local settlers who join the program; it is projected that actual interprovincial flows would be 10Z below these aggregate figures. /2 See Appendix 2. The model takes account both of the direct effect of migration and of the impact on subsequent population growth. /3 This includes both transmigrants directly sponsored by the Government, and associated spontaneous flows. - 120 - the labor 4s-,ce. Despite the large size of the initial population, migration would have a significant impact on total population and labor force levels. As a consequence of migration since 1980, the 1990 population is 4% below what it would otherwise have been in Java and Bali under the intermediate case. This is equivalent to 4.7 million people, of which 4.1 million would be due to the direct and indirect effects of the transmigration program. By the year 2000 the reduction is 8%, equivalent to U1.8 million people, of which 10.6 million would be due to the program. 5.29 There is a much larger relative effect on the recipient areas in the Outer Islands, owing to the smaller initial population levels. This is given for the various scenarios in Table 5.4. This again only covers the effects of migration since 1980. The actual distribution of transmigrants between provinces is based on World Bank estimates of future land potential. The relative shift in favor of Kalimantan and Irian Jaya is clear, and it was assumed that any cutback in the program, as under the low case, would fall largely on these islands. The growth rate of the population rises significantly with transmigration (and of the labor force even more so), and even by 1990 a high proportion of the population is due to migration - 18% in Kalimantan and 26Z in Irian Jaya for the intermediate case. These would continue to rise in the 1990s if the program were maintained at the levels assumed. Under the intermediate case, migration would account for 32% of Kalimantan's and 55% of Irian Jaya's population by the year 2000. Table 5.4: THE POTENTIAL IMPACT OF TRANSKIGRATION ON THE OUTER ISLANDS, 1990-2000 Proportion of Population due to Population growth rates, 1990-2000 migration, 1990 No Past Inter- Inter- migration treads Low mediate High Low mediate High % p.a. X Sumatra 2.1 2.4 2.2 2.5 2.7 6 7 7 Kalimantan 2.1 2.4 2.6 4.0 4.8 13 18 20 Sulawesi 2.1 2.1 2.1 2.3 2.3 2 3 4 Irian Jaya 2.4 2.6 4.9 7.5 8.6 22 26 28 Other /a 2.2 2.2 2.2 2.3 2.3 2 2 3 Total /b 2.1 2.3 2.3 2.9 3.2 6 8 9 /a East Nusa Tenggara, East Timor and Maluku. 7h Excludes Bali and West Nusa Tenggara - source regions for transmigrants. Source: World Bank staff projections. - 121 - 5.30 The above figures show the potentially major contribution of the transmigration program to the key welfare issue of reducing rural poverty on Java. However, it would also involve a major commitment of public resources - at an estimated average cost of $8-10,000 per family, the intermediate case would require of the order of $3.5 billion at 1985 prices over a five year period./l If the program is to be viable, and if destabilizing second round migration flows are to be avoided, it is critical that the selection of sites and the desiga of economic activity be such that the settlers can generate adequate ouput and incomes. Preliminary analysis of farm models suggests that transmigration might only be justified to sites that also involve second stage agricultural development: either tree crops, wetland agriculture or livestock. The implementation capacity for this type of investment is lower than for a rainfed/subsistence package while the investment required is higher. Owing to these implementation and resource constraints, and the competing claims of existing low income farmers in other parts of the Outer Islands, there may be difficulties in achieving the level of transmigration in current government targets. However, even under the low case developed here, the employment impact is significant, though this would place a greater share of the reponsibility for job creation and income formation on rural and urban development within Java. E. Policy Towards the Urban Labor Market 5.31 There are two aspects of the urban employment problem: relatively high unemployment rates, especially amongst the young and educated; and low incomes in parts of the informal sector and the low wage end of the formal sector. These generally involve different households, since the openly unemployed are characteristically those who can afford the long waiting times for a preferred formal sector job. But both unemployment and low incomes will be quite vulnerable to the pattern of urban growth in the future. 5.32 A major influence on the urban labor market will Le the overall pace of urbanization, and, in particular the rate of rural-urban migration. The most important determinant of rural-urban migration over the next ten years is likely to be the degree of success in rural .developmeat and the extent of absorption of labor into both farm and non-farm rural employment. The priority to agricultural growth, and supportive public expenditures are the key policy areas here as discussed above. The population and labor force projections (see Appendix 2) assume fafrly moderate levels of rural-urban migration in the future, but tnis still implies rates of urban population growth of about 2.5% p.a. on Java and 4.9% p.a. in the Outer Islands (under the intermediate transmigration scenario)./2 This is associated with somewhat higher rates of urban labor force growth (3% in Java, rising to over 6% in the /1 This Includes the costs of second stage agricultural development. /2 Since lack of data makes explicit treatment of rural-urban migration flows exceedingly difficult, a steady differential between rural and urban population growth was assumed as a proxy for this relationship. - 122 - fastest growing island of Kalimantan). Java is projected to account for over 55% of the annual increment to the urban labor force of 600,000 over the next ten years, compared with 30Z of the growth in the rural labor force. 5.33 Both the formal and informal sectors wlll play a role in the absorption of this labor force growth in urban areas. A gradual increase in the share of the formal sector in urban employment would generally be expected in the process of development, but it is not at all clear that this will occur in the next few years, given the probability of slow growth in public sector and manufacturing employment in the near term. Thus the capacity for the informal sector to absorb new entrants to the labor force will be of particular importance. 5.34 Although there are constraints on the growth in formal sector employment in the short term, there is much greater potential over a ten year period As discussed in Chapter 4 and Appendix 1 (paras. 37 to 41), access to formal sector employment is central to the rate of unemployment amongst school leavers. The main area in which policy can infllence the level of employment is in the manufacturing sector. As discussed in Section B above, if Indonesia follows a relatively labor intensive pattern of growth in this sector, there is scope for a substantial increase in employment, of the order of 2.5 million new jobs over ten years, and many of these would be in urban areas. 5.35 The level of compensation in the upper segments of the formal sector is also a significant determinant of the rate of unemployment - this affects the incentive to wait for a better job. Unlike many other developing countries, government legislation on labor policy does not appear to be a major factor behind high wages at the top of the formal sector. Minimum wages, where they are regularly updated (as in Jakarta), appear to follow the bottom of the market in the medium and large scale sector and are substantially below the top of the market. They perform a useful role In this regard. Trade unions operate within the framework of tripartite discussions on working conditions, especially in negotiations over Collective Labor Agreements-, but these do not usually include wage rates. The explanation for high wages appears rather to lie in the perceived advantages to large scale firms of achiering a reliable, low turnover work force (see Appendix 1, para. 33). A relatively labor intensive pattern of growth within the formal manufacturing sector should help limit any tendency for a widening of differentials. 5.36 Even with a good employment performance by the manufacturing sector there is a risk of a rising disparity between the supply of and demand for formal sector jobs, and so increasing unemployment. Is there scope for specific interventions aimed at getting the unemployed into work? There are two relevant areas of current government policy: the improvement of labor exchanges and the extension of vocational education. However, in neither case is policy likely to have much impact on unemployment rates. First, the evidence on the workings of labor exchanges suggest that they are already capturing a substantial proportion of both the urban unemployed (and especially the educated) and vacancies in the formal sector, and a high proportion of vacancies are filled each month (see Appendix 1, para. 42). The key problem is not weak job matching or lack of information, but a shortage of - 123 - good formal sector jobs relative to the expectations of the unemployed. Second, the formal vocational training system does not now have the capacity to implement a broad based effort to upgrade the skills of the unemployed. The key problem is of low and variable quality, especially for the vocational training centers, and the Government has quite correctly decided to focus on upgrading the quality of existing establishments. This is, of necessity, a long term task. In any case, despite the existence of shortages of industrial skills, the potential demand for skilled manpower is small relative to the numbers of unemployed (or even the numbers of educated unemployed). 5.37 The urban informal sector currently has little relationship to educated unemployment, but it will continue to play a major role in labor absorption of less weli educated entrants to the urban labor force, especially from rural households. Although this is recognized in REPELIT& IV, some aspects of current government policy could limit this role. This is most evident in Jakarta, where informal sector activities have most frequently come into conflict with other objectives of urban development. Currently the two most important cases are becak (cycle rickshaw) drivers and street vendors, though these are only examples of a potentially more widespread issue. 5.38 Becak-free zones have been established for a number of years - and where this eases serious traffic congestion, it is often justified. However the DKI Jakarta government recently took the more drastic step of declaring that all of DKI Jakarta must be becak-free by 1985. This would affect about 40,000 becaks, that provide employment, through day and night shifts, for at least 60,000 drivers. Most are seasonal migrants who rent becaks from small scale urban entrepreneurs, and so rural households will bear the brunt of the income and employment loss./l Alternatives proposed by the DKI govervwent - joining the transmifration program, vocational training, rural works programs - are either less ..ttractive to drivers or would involve reduced opportunities for other job seekers. The costs could be significant and, since becaks are already excluded from all arterial roads, it is not clear that there would be major benefits in faster traffic flow. 5.39 Similar issues apply to street vendors, who form the largest informal sector group in Jakarta.l2 The DII government banned operations of vendors and hawkers from 142 'protocol' roads as early as 1972, and has selectively expanded the restricted areas since then, with varying degrees of success. Displaced traders are sometimes offered an alternative locale in new shopping complexes, but have in practice often been precluded from these by high costs./3 As with becak drivers, these restrictive regulations can lead both /1 See Nurul Fazrie, Sekitar Penghapusan Becak DKI Modernisasi Merenggut Kesempatan Operasi Mereka in Beca-Beca Coba Bawa Saya, Lembaga Studi Pembangunan, Jakarta 1984. /2 See Hazel Moir, The Jakarta Informal Sector, IEKNAS, 1977. /3 In one case monthly pre-payments of Rp 100-250,000 were required during the construction phase. See Kompas, February 2, 1982. - 124 - to a direct loss of income and employment, and indirect costs through the loss of a highly efficient service for low income consumers. 5.40 Policy in support of the informal sector can take two forms. First there is a strong case against an excessively restrictive policy. Indeed a more supportive environment has been characteristic of other cities, notably in East and Central Java. Any disruption to the modern sector economy is likely to be greatly outweighed by the employment and income benefits, and the gains from the efficient provision of goods and services by the informal sector, especially since a high proportion involve single circular migrants with relatively small demands on urban resources. In the longer term, this can be complemented by a more active urban planning policy, for example in the layout of roads, pavements and markets, that provides adequate space for these activities. A good example of effective urban planning in this area is Jalan Malioboro in Yogyakar a. 5.41 With favorable policies on rural development, manufacturing and the informal sector, a serious deterioration in the urban employment situation appears avoidable. A combination of reasonable prospects at the lower end of the market and little or no widening of wage differentials are important to facilitate the required adjustment in expectations of the better educated part of the labor force. Some rise in the overall urban unemployment rate could occur, especially in the next few years, but this would be relatively moderate (say to the 8-10% range at most). This scenario is also consistent with a gradual growth in incomes of low income urban households. 5.42 Under unfavorable policy there is a high risk of an exacerbation of the problem. Less successful rural development could increase rural-urban migration, and this effect could have the most severe consequences for the landless on Java and unsuccessful transmigrant households. If relatively good informal sector opportunities are restricted, these people would be forced into increasingly low return urban activities, depressing wages at the bottom of the wage sector (e.g. in small scale enterprises or domestic service) and reducing incomes in those parts of the informal sector still open to new entrants. A slgnificant proportion of the population in the low paid part of the services sector could suffer stagnant or declining incomes. A more capital intensive pattern of manufacturing growth would be associated with both low growth in wage employment and, if the past pattern of wage determination continues, higher wage rates at the top of the market. This combination of effects would widen the differential between good formal sector jobs and alternative employment opportunities. In addition to worse prospects for poor urban households, a substantial rise in open unemployment (say to above 10%), would then be a distinct possibility. The two most vulnerable areas under this scenario would be Jakarta, where the open uaemployme-at rate is already relatively high (and which would be hard hit by slower civil service growth) and certain areas in the Outer Islands, notably Kalimantan and Irian Java, where there is the potential for sharp increases in the already high rates of urban growth if rural development is weak. Although a majority of poor households would continue to live in rural areas under this scenario, the social costs of a deterioration in the urban labor market could be severe. - 125 - Appendix 1 Page 1 PAST PATTERNS OF EMPLOYMENT AND INCODME CHANGE 1. The analysis and policy conclusions in Part II of the report are, to a large extent, based upon a more detailed analysis of past developments in employment in Indonesia. Some of this is covered by the previous World Bank report on employment: in particular, much of the conception of the workings of the labor market is taken from that report./l However, the bulk of the analysis of changes in employment, productivity and incomes is based on new primary sources of data: the 1981 and 1982 national household budget surveys (SUSENAS) conducted by the Central Bureau of Statistics (BPS) and a series of surveys of the same households in six villages in West Java between 1976-77 and 1983-84, conducted by the Agro Economic Survey in Bogor./2 This Appendix presents a summary account of past developments from these and other sources. A. Labor Absorption, Wages and Incomes in Rural Areas 2. Rural areas accounted for 78Z of the population, 81X of the workforce and 85X of households living in poverty in 1980./3 The bulk of rural dwellers are involved in agriculture, but manufacturing and service activities are also important, often as a secondary source of income and employment. The primary7determinant of economic class is access to land, and especially wetland or sawah in Java. It is estimated that 37X of rural households had no operational holdings of sawah in Java in 1973./4 Although there is a wide range in returns to labor in rural areas, there appears to be a fairly high degree of mobility between alternative activities for similar kinds of labor; this appears to better represent the condition of the rural labor market in the early 1980s than the view of significant segmentation between different activities. 3. The analysis focuses on the period from the mid-1970s to the early 1980s. At the beginning of the period the outlook was not bright, especially in Java. The rural economy had recovered from the drought, rice shortages and /1 Indonesia - Wages and Employment, World Bank Country Study, 1985. The major difference in our analysis from the interpretation of the labor market in the previous report concerns the relationship between the rice and other parts of the rural labor market. More recent information, summarized in paras. 8-9 below, suggests that there is less general segmentation of the rural labor market than was previously concluded. /2 The 1983 resurvey was largely funded by the Ford Foundation, with some support from the World Bank. /3 Results of the 1980 Population Census, BPS, and Bhanoji Rao, Poverty in Indonesia, 1970-80, World Bank mimeo, January 1984. 14 See Ben White and Gunawan Wiradi, Pola-pola Penguasaan Tanah DAS Cimanuk: Beberapa Catatan Sementara, Working Paper No. 11, Agro Economic Survey, Bogor, 1981. - 126 - Appendix 1 Page 2 escalating prices of 1972-73, but prospects were not good - the new high yielding varieties had proved highly susceptible to the wereng pest and most village based researchers had concluded that poor rural households were not participating in the process of economic growth. The following years saw the withdrawal of the wereng in the face of new resistant varieties, a 60% increase in the rice crop between 1976 and 1983, and a major influx of government expenditures after the second oil windfall. The rural economy grew and changed rapidly in this period, and in Java, some village level researchers were observing significant increases in real agricultural wages and non-farm employment./l 4. The following presents a summary analysis of this process of change, based mainly on the new data sources listed in para. 1. The West Java case studies involved a series of surveys of the same households in 1976-77 and again in 1983-84. The villages are all predominantly wet rice communities and include both lowland and upland cases. They are quite characteristic of Java and provide invaluable complementary information to the macro statistics, though any implications for macro trends from a small sample have, of course, to be treated with caution. No comparable study is available for the Outer Islands, and so the focus here is on Java. This is a good focus, since this is where the changes were both more rapid and complex; it is also where the core of the poverty problem lies. Changes in Employment 5. Table 1 summarizes the overall changes in rural employment between 1976 and 1982 on the basis of the national labor force surveys. On Java the changes are dramatic. They represent an accentuation of the trends observed between the censuses (summarized for all Java in Table 4.2). Agriculture dlearly declines as an employer (though the extent may be partly due to changes in the definition of urban areas /2). The main new development in this period is the much larger relative importance of industry and construction - increased employment in mining, manufacturing and construction was equivalent to almost 90% of the increase in the labor force. 11 See William Collier et. al., "Acceleration of Rural Development in Java', Bulletin of Indonesian Economic Studies, Vol. XVIII, No. 3, 1982. /2 BPS changed to a (superior) definition of urban areas in 1980 - see Indonesia - Urban Services Sector Report, World Bank Report No. 4800-IND, June 25, 1984. Both an intercensal and inter labor force comparison show a sharper decline in agricultural employment in rural areas than in rural and urban areas combined. For some reason urban areas capture a higher proportion of the agricultural labor force with the new definition (3% in 1982, compared with 1% in 1976). - 127 - Appendix I Page 3 Table 1: CHANGES IN RURAL EMPIDYMENT, 1976-82 Java Outer Islands Share Annual Compo- Share of Annual Compo- of in- growth sition increment growth sition crement 1976-82 in 1982 1976-82 1976-82 in 1982 1976-82 (% p.a.) (Z) (M) (% p.a) (%} (Z) Agriculture -0.8 60 -42 4.8 75 70 Manufacturing 5.7 11 45 7.1 7 9 Construction 18.7 4 35 24.9 2 6 Trade 1.6 14 18 2.7 7 4 Transport 5.3 2 9 5.9 2 2 Other services 4.2 9 28 6.1 7 7 Miscellaneous /a 17.7 1 8 /b 27.3 1 2 Total 1.2 100 100 5.3 100 100 /a Mining, electricity, water and gas and finance. 7-b Predominantly in mining. Source: SAKFRNAS 1976 and SUSENAS 1982. 6. The results from the West Java villages are broadly consistent with the national survey results, but the more detailed information suggests, in some areas, a different interpretation of macro trends. A summary is given in Table 2. This portrays a picture of economic diversification, and rising importance of non-farm activities, especially in construction and transport labor. The main additional conclusions are as follows. First, most Individual households were economically diversified in 1976, and became more so by 1983./1 The vast majority of households (about 95% in both years) devoted some time to on-farm work, but a high and rising proportion (62% in 1976, 70% in 1983) also spent time on non-agricultural activities. Second, total agricultural employment in these villages, in term of hours worked per household, actually increased, by 2.5% p.a., over the seven year period. Much of this was associated with agricultural diversification into non-rice crops, fishponds and livestock. However, this increase was largely picked up by existing farming households and coexisted with a decline in agricultural wage labor. An increase in total employment time in agriculture can be quite consistent with a decrease in the number of people declaring agriculture as their primary occupatien, as shown in the macro data; therefore it would be wrong to infer from the latter that agriculture as a whole is of declining /1 The phenomenon of households being involved in a -multiplicity' of occupations was already observed in the early 1970s. See Ben White, "Population, Involution and Bnployment in Rural Java-, Development and Change, 1976. In the national censuses and labor force surveys the sector of employ- ment of an individual refers to the primary activity in the previous week. - 128 - Appendix I Page4 significance. Third, there is a sharp reduction in hours worked in household industry. This is also consistent with the macro data, since most household Industry in the sample is a secondary and low return activity. The reduction of labor use here was actually a reflection of better alternative activities. The main industry in this sample is string weaving from bamboo in Malausma; this activity absorbed a very large amount of time for very low returns in 1976. Manufacturing activities with a higher return (and so more likely to be a primary source of employment) increased their relative importance between 1976 and 1983. Table 2: COMPOSITION OF EMPLOYMENT BY HOURS WORKED, WEST JAVA VILLAGES, 1976 AND 1983 Average hours per household per annum S-ccLoral share Change 1976 1983 1976-83 CX) (Z) (Z p.a.) Agriculture 52 54 2.5 On-farm (28) (35) (5.4) Farm labor (24) (19) (-1.5) Non-agriculture 48 46 1.7 Manufacturing (21) (12) (-4.5) Trade (13) (13) (1.8) Non-agricultural labor /a (14) (21) (9.5) Total 100 100 2.3 Memo Average number of hours 1,909 2,216 /a Mainly construction and transport. Source: Rural Labor Market Surveys, West Ja-va, 1977 and 1984. 7. In the Outer Islands, growth in non-farm employment was even more rapid than in Java, with a very similar pattern of growth rates - construction, manufacturing and mining were again particularly buoyant. But initial employment levels were much lower, and these increases were swamped by a rapid growth in agricultural employment. This is related to another significant difference: the employed in rural Java work much longer hours than in the Outer Islands, an average of 45 hours per week in 1976 compared with 29 hours in the Outer Islands. This is partly a function of higher cropping intensities on Java (so less extreme seasonality of agricultural labor demand), but it is also consistent with less developed activities in the secondary and tertiary sectors, even as a supplementary source of employment. - 129 - Appendix 1 Page 5 Table 3: WAGES IN AGRICULTURAL AND NON-AGRICULTURAL ACTIVITIES, CIMANUK REGION, WEST JAVA, 1977-1983 /a Hoeing Planting Unskilled Skilled (male) (female) construction construction (male) (male) Hours worked per day 6-8 4-5 8-10 8-10 Daily wage (Rp) 1977 229 115 369 696 1980 411 220 709 1,254 1983 665 370 1,196 2,138 Daily wage index (hoeing - 100) 1977 100 50 161 304 1980 100 45 173 305 1983 100 56 170 322 Average increase, 1977-83 (Z p.a) Money wages 15.2 16.7 16.8 16.0 Real wages: Killed rice 5.3 6.6 6.5 5.8 deflator /b Cost of living 1.8 2.8 2.7 1.9 index deflator /c /a All data based *,n monthly observations. 7n Milled rice price in each village. 7c Cost of nine basic commodities in each village weighted by the shares in total rural consumption from SUSENAS 1980. Source: Agro Economic Survey, Village Data, 1977-1983. Wages and Returns to Household Labor 8. Previous work on agricultural wages in Java found no trend in real rice wages during the 1970s, despite rising agricultural productivity./I The village wage data from 1976 to 1983 suggest a significant change in the late 1970s and early 1980s./2 A summary is provided in Table 3. The data suggest /1 See Indonesia - Wages and Employment, op. cit., Chapter 3. /2 The source of information is the reported market wage (adjusted for in-kind payments) in the survey villages. The results are based on a detailed analysis in Dipak Mazundar and M. Husein Sawit, Trends in Rural Wages 1977-83: A Study of the Villages of West Java, draft, January 1985. - 130 - Appendix 1 Page 6 three conclusions. First, real wages of both agricultural and non-agricultural labor increased over the period. The bulk of this increase was concentrated in the 1980-81 period, in which a sharp increase in rice production coincided with a major expansion in public expenditure. Second, non-agricultural wages are above agricultural wages (even after allowing for longer hours of work), with a slight widening of differentials over the period. Third, there can be sigaificant fluctuations, including sharp drops, from season to season. 9. The wage labor market is only part of the story. Table 4 presents the results on returns to household labor in all activities, including family enterprises. Both agriculture (family enterprise) and farm labor recorded small decline in returns to labor, but this is due to changes in the composition of labor. In the case of agriculture it reflects an increased share of family labor in total agricultural labor use. Labor productivity in individual activities increased, as expected from the macro and wage data. In farm labor, it is due to a relatively large decline in labor time for better paid male workers in pre-harvest activities; this is again consistent with the observed wage increases. Outside agriculture, the rapid rise in returns to labor is clear and in 1983 earnings per hour for non-agricultural labor were 40Z above earnings for farm labor. The very rapid increases in the productivity of household industry were due to a decllne in hours worked in low return secondary activities, notably in string weaving in one village. Table 4: AVERAGE RETURNS TO HOUSEHOLD LABOR IN ALTERNATIVE ACTIVITIES, WEST JAVA VILLAGES, 1976 AND 1983 Labor income per hour worked /a Level Real increase 1983 1976-83 CRp/hour) (% p.a.) Agriculture /b 386 -0.9 Farm labor 173 -0.4 Non-agriculture Household industry 78 8.9 Trade 354 -0.4 Non-agricultural labor 244 2.4 Average 225 3.6 /a This is the average for households participating in the sector in question. 7T This is calculated as net household cash returns per hour of family labor input; the reason it is higher than for farm and non-agricultural labor is because of the inclusion of returns to land and management in this figure. Source: Rural Labor Market Surveys, West Java, 1977 and 1984. - 131 - Appendix 1 Page 7 Changes in Iacomes by Household and Economic Class 10. How were the chamges in production and employment distributed amongst households? Ihis is central to an assessment of the welfare benefits of the changes, and in particular to the fundamental objective of reducing rural poverty. This issue can be eramined for the six West Java villages. Since the same households were involved in both the 1976-77 and 1984 surveys, it is possible to trace the experiences of Individual households during this period of rapid econumic change. The general picture is of substantial overall increases in household income, but very wide inter-household differences. Table 5 presents some results. The average increase in village income per capita mas 33% over the seven year period, but, owing to much higher proportional increases among relatively poor households, the unweighted increase in household income per capita was llOZ This was associated with a significant reduction in poverty incidence, from 50% in 1976 to 30% in 1983./1 This overal pattern masks major differences between households. About 30X of all households more than doubled their per capita income, while a slightly smaller proportion recorded a decline. There was a high (negative) correlation between initial income and changes in income - poor households were disproportionately represented in the group that enjoyed major gains and vice versa. However, the losers were by no means solely iu upper income groups, and 9% of the whole sample actually moved into absolute poverty between 1976 and 1983. Overall, the patterns of upward and downward mobility appear to have broadly offset each other, since the distribution of income is stable. In both 1976 and 1983 the bottom 40% of households received 14% of total income, while the top 20% received 532 In 1976 and 52% in 1983. U. The large inter-household variation is in part because of the effect of transitory income. Households that are poor in any year are partly so because of their long term income and partly because of temporary occurrences such as harvest failure, sickness of key earners, windfall gains or losses in non-agricultural pursuito and so on. Whether the explanation lies in changes in transitory or permanent income, the pattern of mobility is, in one respect, reassuriag: it suggests that in this period of rapid growth in agricultural incomes and labor demand, poverty uas only a temporary phenomenon for many households. Not for all, of course: over 20% of all households were poor in both periods, but even this group experienced a 17% increase in per capita income. /1 This uses the estimated cost in 1983 of 30 kg. of milled rice per capita as a cutoff income, in line with the criterion used in Bhanoji Rao, 22. cit. - 132 - Appendix 1 Page 8 Table 5: AVERAGE PERt C&PITA IN1C)HE, WEST JAVA VILLAGES, 1976 and 83 /a Mean per capita income Mean per capita income by group Ilevel in 1976 % change, 1976-1983 Bottom 20%, 1976 Top 20%, 1976 (Rp '000) Per house- Per vil (Rp '000) (Rp '000) hold /b lage /c 1976 1984 1976 1983 lowland Wargabinangun 97 93 11 26 93 242 151 Ianjan 121 166 68 40 167 297 300 Upland Sukaambit 189 146 6 28 140 612 362 Gunungwaagi 131 84 44 47 146 272 306 Malausma 83 117 50 29 119 170 127 Cwangi 133 59 35 33 72 357 459 Allvillages 125 111 33 30 113 373 327 /a All 1976 income data is expressed in 1983 prices (data adjusted using index of nine basic commodities, rural Java). /b Unweighted mean of percent change for each household. ,c Weighted mean calculated from village income totals 1976 and 1983. Source: Rural Iabor Market Surveys, 1977 and 1984. 12. Analysis of the sources of change in per capita income shows that changes in labor and enterprise income were the principal determinants of overall changes, though for some households changes in dependency ratios and other income (gifts, remittances, earnings from land) were also important. To assess how changes In labor income were distributed between different economic classes, the survey households were divided by size of operational holding of sawah in the wet season of 1976; those with no holdings were divided according to primary source of Income, between farm laborers and non-agricultural households. Average incomes are given in Table 6. Farm laborers are the poorest group, with an income 40% below that of small farmers in 1976; average incomes of farmers rise substantially with size of holding, while non-agricultural households have, on average, comparable incomes to medium sized farmers. The average change in incomes between 1976 and 1983 is fairly uniform, though farm laborers, non-agricultural households and medium sized farmers did better than either small or large farmers. The large overall variatiom in the experience of individual households is also true of each economic class: every group had some large gainers and some losers in this period. - 133 - Appendix 1 Page 9 Table 6: HOUSEHOID INCOME BY ECDNONIC CLASS, WEST JAVA VILLAGES, 1976 and 1983/a Share of Average household households income /b Average growth in survey 1976 1983 1976-83 (Z) (Rp '000 p.a.) (X p.a.) Landless /c Farm laborers 10 224 310 4.7 Non-agricultural 5 461 642 4.8 Farmers Small (less than G.25 ha) 40 402 498 3.1 Medium (0.25-0.5 ha) 23 421 610 5.5 Iarge (greater than 0.5 ha) 23 710 884 3.1 All households 100 464 602 3.8 /a Excludes 21 extreme values. Tb All 1976 data are in 1983 prices. 7c Classified by major source of household Income. Source: Rural labor Market Surveys, West Java, 1977 and 1984. 13. The above pattern suggests that highly diverse household experiences overlay more gradual secular changes, in which general economic developments affected the fortunes of the different economic classes. It is the latter that is of primary policy concern. Table 7 gives the sources of income change for the various groups. It shows that the general picture of economic diversification into non-rice agriculture and non-agricultural activities was a phenomenon for all classes. Almost 90% of the farm income gains accrued to households with sawah holdings. Within this group, small farmers did relatively well; although they accounted for only 20% of total farm income in 1976, they secured 40% of the total increase. Inadequate size of holding was clearly not a constraint to agricultural growth in this period. Farm employment declined In absolute terms, and this was especially marked amongst the two groups most dependent on this income source in 1976 - landless farm laborers and small farmers. As already seen, for small farmers this was more than compensated by increased agricultural income; farm laborers, on the other hand, experienced a major shift into non-agricultural wage labor. FinaUy both medium and large farmers also moved significantly into non-agricultural work: for large farmers this represented a continuation of the 1976 pattern, while for medium farmers it marked a major change from the pattern of the mid-1970s. - 134 - Page 10 Table 7: SOURCES OF INCOME CHANGE BY ECONOMIC CLASS, WEST JAVA VILLAGES, 1976-83 (in percent) Landless Farmers Farm Non- All laborers agricultural Small Medium Large Households Composition of 1976 income Farming 17 6 29 67 66 48 Farm laboring 77 11 21 17 7 17 Non-agriculture 6 83 50 16 27 35 Total 100 100 100 100 100 100 Composition of incremental income 1976-83 Farming 57 43 83 42 46 55 Sawah rice (68) (38) (46) (16) (-12) (21) Other sawah/drylaad (-18) (2) (li) (27) (26) (18) Home gardens (1) (2) (10) (-14) (16) (3) Fishponds C-) (1) (5) (3) (5) (4) Livestock (6) (-1) (U) (10) (11) (9) Farm laboring -69 25 -18 4 6 -7 Non-agriculture 114 32 35 56 48 52 Trade (27) (-57) (-8) (38) (-1) (8) Home industry (9) (-9) (-7) (-4) (27) (5) Wage labor (78) (98) (50) (22) (22) (39) Total 100 100 100 100 100 100 Source: Rural Labor Market Surveys, West Java, 1977 and 1984. 14. The above is a highly sumury account of a complex picture, but it does provide additional support for the positive assessment of the process of development in rural Java in this period. All of the main economic classes appear to have participated in the process of income growth and diversification in the survey villages. The overall income distribution remained stable and the extent of poverty was reduced. Amongst poorer households, agricultural income growth was particularly important to small farmers, while improved non-farm opportunities were central to the improved welfare of landless farm laborers. Causes of Changes in Incomes and Employment 15. These beneficial developments in employment and returns to labor appear to be related to two factors: rapid increases in autonomous sources of income from agriculture and public expenditures, and mechanisms that channeled a high proportion of the multiplier effects to the benefit of rural households. - 135 - Appendix I Page 11 16. Agricultural Incomes. The success story on rice is familiar. Output increased by two thirds on Java between 1976 and 1983; comparable increases were achieved in the Outer Islands. This was due to the continued spread of new varieties, the extension of irrigation systems, increased use of agrochemicals, and favorable policies on output and input pricing./l A highly subsidized fertlLizer price (the domestic price of urea was estimated to be 44Z of the economic price in 1982 /2) has been perceived by the Government to be central to the maintenance of inTcentives and incomes for farmers in the past. For Java the net effects of this and other price developments between 1976 and 1983 are given in Table 8. The extent of change varies by province, but there is a common pattern of significant terms of trade gains. Low increases in fertilizer prices kept the production cost index dowa, but equally important were high price rises in non-rice crops, especially in fruits and vegetables. The rice price index is consistently below the consumer price index in 1983, but the overall index of producer prices received is consistently above it. Table 8: IRICE INDICES AND TERMS OF fADE FOR JAVANESE FARMERS, 1976-1983 1983 Price Indices, 1976 100 West Java Central Java Yogyakarta East Java Prices Received Food crops 258 344 320 351 Rice (233) (260) (210) (238) Palawija (255) (373) (295) (353) Vegetables (277) (599) (906) (1,010) Fruit (326) (375) (267) (366) Commercial crops 214 279 354 292 General index 255 335 323 339 Prices Paid Household consumption 253 264 265 288 Cost of production 205 245 221 285 Intermediate input (152) (170) (161) (184) Factor payments (230) (281) (254) (339) Capital formation (203) (250) (269) (253) General Index 238 259 256 287 Terms of Trade 107 130 126 118 Source: Indikator Ekonomi, BPS, September 1984. /1 See World Bank, Indonesia - Policy Options and Strategies for Major Food Crops, Report No. 3686b-IND, April 4, 1983. /2 Ibid, p. 57. - 136 - Appendix 1 Page 12 17. The effect on farm incomes of this favorable production and price situation is clearly seen in the village data. Some further results are given in Table 9. Rice income increased significantly in this period and still accounted for over 60% of total farm income, but the more striking results are the sharp increases in income from non-rice crops, fisheries and livestock (mainly poultry). Agricultural diversification was already an important source of agricultural income growth in this period. Table 9: LABOR INODHE PER HDUSEHOID FROM FARMING, WEST JAVA VILLAGES, 1976 AND 1983 Share of total farm income Income growth 1976 1983 1976-83 (Z) (Z) (Z p.a.) Savah rice 68 61 2.5 Other sawah/dryland 7 14 14.4 Home gardens 17 14 1.6 Fishponds 2 3 9.9 Livestock 5 8 11.9 All farming 100 100 4.3 Source: Rural Labor Market Survey, West Java, 1977 and 1984. 18. Public Expenditures. This second source of autonomous income growth in rural areas is less easy to analyze, since there is no rural-urban breakdown of government spending. However, there is good indirect evidence of the buoyancy of rural based spending. A nimber of programs in Indonesia's highly diversified development budget involve construction activity in rural areas or smnall towns: irrigation, primary schools, health centers, rural roads and, to some extent, inter-city roads. One good index of the increases in spending with an influence in rural areas is provided by the INERES programs. Estimated real spending increased by 14% p.a. on average between 1976 and 1983, though with a clear levelling off after 1981. This was an important source of the increased employment in construction shown in Table 1, and of the increased wages for non-agricultural labor shown in Table 3. (Investment in private housing was probably an additional significant source of rising construction work.) 19. Multiplier Effects. Increases in autonomous income can also have significant demand-side multiplier effects. To analyze this sytematically, we need to know how households allocate incremental income. A picture of long term trends can be obtained from a cross-sectional analysis of the distribution of household expenditures from the national household expenditure surveys (SUSENAS). The patterns of average and marginal budget allocations in - 137 -AppendiI Page 13 1981 are given in Table 10 for both rural and urban Java. They show a major shift ost of food into non-agricultural goods and services for incremental budget allocations. In rural areas the preferred sectors for new expenditures are personal and household manufactures (especially vehicles and durables), health and education, and transport. In urban areas housing is also of iportance. Table 10: AVERAGE AND MARGINAL BUDGET SHARES, RURAL AND URBAN JAVA, 1981 /a Average budget Marginal budget shares (X) shares (%) Rural Urban Rural Urban Food 42.3 41.7 22.1 31.4 Rice (14.8) (10.7) (2.9) (4.9) Other staples (1.2) (0.5) (-0.1) (0.4) Meat and fish, dairy (6.5) (9.1) (5.7) (10.5) Vegetables (8.6) (6.8) (4.3) (4.4) Fruits, oils, spices, etc. (6.2) (7.8) (5.5) (5.7) Prepared foods (4.1) (5.8) (3.2) (4.5) Other (0.9) (1.0) (0.6) (1.0) Beverages, tobacco 7.4 5.0 4.3 2.9 Housing 5.4 13.5 4.8 16.2 nnergy 8.8 5.7 3.5 4.0 Health and education 6.0 10.5 10.1 13.3 Transport 2.3 5.1 4.3 6.9 Clothing, footwears, etc. 8.6 9.1 14.6 10.1 Household durables 3.8 3.1 6.8 4.2 Vehicles, other durables 7.8 4.5 27.3 7.6 Recreation & others 0.5 1.8 1.2 2.2 Total 100.0 100.0 100.0 100.0 /a Obtained from econometric analysis of changes in expenditure for different income groups. Source: Analysis of SUSENAS 1981. 20. These changes in expenditure at the margin created the demand conditions for the expansion in non-farm production and employment. Although production accounts for Java are unavailable, the differential impact of incremental as against average expenditure can be illustrated by the use of the national Input-Output Tables. This is shown for rural and urban Java in Table 11; it presents the employment effects of the average and marginal composition of expenditures given in Table 10. As expected, there is a major shift toward manufactures of consumer goods, and services, though non-rice agricultural products continue to account for a high fraction of incremental - 138 - Appendix 1 Page 14 expenditure. Total employment creation is less at the margin, as a consequence of the higher labor productivity of non-agricultural activities, but household expenditure is still strongly biased toward home produced goods and services. Table 11: EMPLOYMENT EFFECTS OF AVERAGE AND MARGINAL BUDGET EXEENDITURE, RURAL AND URBAN JAVA, 1981 Expenditures with Expenditures with average shares marginal shares Rural Urban Rural Urban Total employment effect /a 1.52 1.35 1.22 1.21 Share of Enployment Effects (X) Agriculture 75.0 68.3 50.3 57.1 Rice (19.8) (16.0) (6.2) (8.8) Other good crops (45.3) (43.8) (34.8) (39.5) Cash crops (4.7) (3.6) (3.8) (2.8) Idvestock and others (5.2) (5.4) (5.5) (6.0) Manufacturing 15.4 14.2 28.7 17.7 Consumer goods (14.2) (13.2) (24.9) (16.1) Producer goods (1.2) (1.0) (3.6) (1.6) Services 9.6 17.5 21.0 25.2 Trade (2.5) (2.9) (4.0) (3.4) Transportation (1.6) (3.2) (4.0) (4.9) Public and social services (4.8) (9.7) (11.7) (14.8) Other services (0.7) (1.7) (1.3) (2.3) Total 100.0 100.0 100.0 100.0 /a Man-years of employment generated by expenditure of one mlllion rupiah. Source: World Bank staff estimates, based on SUSENAS 1981 and the Input-Output Tables, 1980, BPS. 21. The above analysis assumes that production will increase in response to increased demand. The evidence on rapid production and employment increases in Java provides support for this. Not all of this occurred within rural areas. In particular, the increased consumption of manufactures characteristically involves urban produced goods. Rural households were still major beneficiaries of this increased production and employment, both through actual increases in rural value added (notably via trade and transport margins associated with the consumption of manufactures) and through temporary migration to urban areas. Rural-urban linkages became much stronger during - 139 - Appendix 1 Page 15 this period, in terms of flows of both goods and people. This was facilitated by the 'transport revolution" - the vast expansion in transport services throughout Java since the early 1970s. A precondition for this was the major improvement in roads, through increased public expenditures in the transport sector. Equally important is the unusually high population density in Java, that greatly reduces transport times between villages and urban centers. These results are, of course, based upon limited statistics, but they do provide some important quantitative backing for the view taken in the main body of the report on the process of rural production growth and its employment effects. B. Iabor Absorption, Wages and Incomes in Urban Areas 22. The employment situation in urban areas is quite different from that in rural areas. The urban labor force is currently a small fraction of the total labor force (19% in 1980), but it is growing rapidly. It also has a much higher rate of unemployment. The structure of employment is dominated by the service sectors, with a subsidiary but important role for the manufacturing sector. Most sectors involve both "modern" activities, with regular salary anad wage employment, and large numbers of self-employed workers or very small scale enLerprises, of'-n termed the "informal' sector. Household incomes are characteristically higheL than in rural areas. 23. The framework for the analysis of the urban labor market follows that of the previous World Bank report on employment./l There is a wide range of production and service activities in urban areas, from small scale, self-employed ventures to large scale modern firms. Within this the formal/informal sector division is a useful abstraction. The dividlng line is blurred, but roughly half of total urban employment is in each sector. Ehtry to the informal sector is relatively easy and it has quite close links with the rural labor market via circular migration. As a consequence, the determination of returns to labor is quite competitive. Ehtry into formal sector employment is not free: wages for unskilled labor rise significantly with the size of firm and there is queueing for good jobs in public and private sector employment. Although government intervention Is much more extensive than either in rural areas or for informal sector activities, these do not appear to be the source of relatively high wages in large formal sector firms. The primary reason is rather that firms are prepared to pay for the advantages of a stable and known work force, with some acquired skills. Current Patterns of labor Absorption 24. Between 1971 and 1980 the population of urban areas increased at about 4% p.a., with roughly half of the Increase coming from natural growth of the 1971 population, and half from rural-urban migration./2 There was a wide variation by island, with Kalimantan and Sumatra growing much faster than /1 See Indonesia - Wages and Employment, 2p. cit. /2 See Indonesia - Urban Services Sector Report, op. clt., Chapter 1. - 140 - Apendix I Page 16 Java, as a consequenace of higher apparent rural-urban migration rates./l On the other hand there is considerable micro evidence of high and increasing levels of temporary migration in Java during this period, that explain its relatively low pace of urbanization. 25. The past experience in absorbing this rapid expansion in the labor force into employment has been good. The buoyant growth in public expenditure and the rapid modernization of the economy (in particular with respect to the large increase in the flow of manufactured goods) had a particularly beneficial effect on the demand for labor in urban areas. Overall open unemployment rates have remained low and stable at about 6% of the urban labor force (there was actually a small decline in the rate between 1976 and 1982). Table 12 shows the change in the sectoral distribution of non-agricultural Table 12: THE DIST RIBUTION OF NON-AGRICtJLTURAL EMPLOYMENT IN URBAN AREAS, 1976-82 /a Composition, 1982 Share of increment, 1976-82 Java Outer Indonesia Java Outer Indonesia Islands Islands - z -_ _ _ _ _ _ _ _ _~~~~~_ _ _- _ __ _ _ _ _ Manufacturing 18 l1 16 22 9 20 Construction 6 9 7 7 22 9 Trade 32 34 32 32 27 32 Transport 8 9 9 6 8 7 Other services 34 35 34 32 29 31 Miscellaneous /b 2 2 2 ' 3 2 Total 100 100 100 100 100 100 /a In 1982, agriculture accounted for 6% of employment in Java, and 10% in the Outer Islands. It has been excluded because the change in urban definition between 1976 and 1982 apparently changed the coverage of agricultural activities, and so distorts the pattern of incremental employment. /b Mining, electricity, gas and water, and finance. Source: SARERNAS, 1976 and SUSENAS, 1982. !i Since the 1980 Population Census only recorded Inter-provincial movements of migrants and the rural/urban character of the present, and not the previous residence, there are no firm estimates of rural-urban migration rates for Indonesia. - 141 - Appendix 1 Page 17 employment between 1976 and 1982. In contrast to rural areas, the employment structure is quite stable: manufacturing is relatively more important in Java, while employment in the urban construction sector was very buoyant in the Outer Islands in this period, but other differences and changes are very small. The service sectors accounted for around three quarters of both average and incremental employment. 26. The formal/informal division of the urban labor force cuts across production sectors. This division is actually an abstraction from a continuum of patterns of enterprise organization, but it is useful in analyzing the labor market. The employment structure -n 1980 is shown in Appendix 3, Table 3, using employers and employees as a proxy for formal sector employment. On this basis, 60% of total employment is in the formal sector, but with some small scale enterprises being closer to informal sector activities and the inclusion of temporary migrants, the proportion would drop to about half. Other services (that includes most civil service employment, health, education and domestic service) accounted for almost half of formal sector employment, while trade accounted for almost half in the informal sector. Women play a relatively large role in informal trade, household Industry and other services, and form a significant part of the work force in all sectors apart from construction and transport. 27. Educational attainment makes a difference to the sector of employment. For the production sectors these differences are not large, though workers with some education are more likely to be working in other services (including the civil service). Services accounted for 43% of total employment of those with secondary education in 1982, compared with 34% for the whole work force. The differences are more marked with respect to the formal/informal sector distinction. As Table 13 shows, 80% or more upper secondary and tertiary graduates are in the formal sector (wage earners, plus a few employers). It is slightly higher for vocational than general schooling, but with little difference between the sexes. This is an important feature of the labor market. It suggests that the availability of wage employment will be central to the prospects of the large number of new entrants to the labor force with secondary and tertiary education. 28. The civil service plays a special role in the formal sector. It has traditionally been the aspiration of the higher classes, and now of the educated, in Indonesia. A 1980 survey of students in general upper secondary schools found that almost half hoped or expected to become civil servants, as compared to less than a tenth with their eyes on the private sector; and if those looking to the army or teaching are also included, the share of students aspiring to public sector employment rises to over two thirds./l /1 See Waskito Tjiptosasmito and William Cummings, The Status of Deployment of Teachers in Indonesia, mimeo, August 28, 1981. - 142 - Appendix 1 Page 18 Table 13: THE PROPORTION OF URBAN WORKERS IN THE FORMAL SEC70R, BY EDUCATIONAL ATTAINMENT, 1980 and 1982 /a 1980 1982 Educational Attainment Male Female Total Male & Female Up to primary 50 40 47 48 Lower secondary General 67 55 65 63 Vocational 74 56 71 72 Upper secondary General 80 79 80 79 Vocational 87 90 87 88 Tertiary 92 91 92 94 All workers 60 48 57 59 /a This is the ratio of the number of employers and employees to total employment. Source: Results of the 1980 Population Census, Series S, No. 2, and SUSENAS 1982, BPS. 29. Table 14 presents some summary statistics on levels of civil service employment. There are currently almost three million public employees in Indonesia, about a quarter of whom are women./l After very rapid growth in the first half of the 1970s, growth slowed in the second half (to about the level of the total labor force growth) but then rose significantly in the early 1980s. Only about 40% of public employees work in central government offices, but many employees in local governmqnt are either seconded from or financed by the center; central government spending has fueled much of the recent expansion in employment. The share of total employment is low - only 4% for all Indonesia - but the expectations of students clearly have some basis in reality: of those in employment, a third of upper secondary school graduates and a half of the graduates of tertiary educational institutions had government jobs in 1980. For women the proportions are even higher. Finally, apart from some concentration of employment in Jakarta, where 12% of the workforce is in government employment, there is a fairly wide dispersion of employment throughout the country; overall, the share of the civil service in aggregate employment is somewhat higher in the Outer Islands than in Java (excluding Jakarta). /1 Roughly half of these employees are either teachers or health workers. - 143 - Appendix 1 Page 19 Table 14: OVERVIEW OF CIVIL SERVICE EMPIDYMENT, 1969-84 Share of civil No. of service in civil service aggregate Educational employees, Rate of growth employment Attainment March 1984 1980/81 ('000) 1969-75 1875-81 1981-84 Male Female Total ___- Z p.a. ----- Up to primary 605 n.a. -3 4 2 0 1 lower secondary 386 n.a. -1 3 13 18 14 Upper secondary 1,479 n.a. 10 16 29 46 33 Tertiary 277 n.a. 9 11 48 54 49 Total /a 2,784 22 3 11 5 3 4 /a Includes those for whom educational status was unknown. Source: BAKN/BPS for civil service employment, Results of the 1980 Population Census, BPS for aggregate employment. Wages, Incomes and Poverty in Urban Areas 30. Wages and incomes in urban Indonesia are characteristically above rural levels, as in most developing countries. The household budget surveys indicate an overall average per capita income differential of about 70% in Java and 40% in Sumatra in 1981 J1, but this masks an enormous diversity in income levels, especially in urban areas. Very little of this variation is due to the sector of primary activity, at least for the major sectors of manufacturing, construction, trade, transport and other services /2, but clear differentials are apparent by occupational status. Table 15 indicates that for the professional classes, incomes in Java are higher than in Sumatra, while for production and service workers they are lower. This is a consequence of Indonesia's relatively unusual spatial structure: Java is the center of Government and has been the recipient of much of the oil income and modern sector investment, but lower rural incomes has to some extent kept down the wages of urban unskilled workers. /1 See Appendix 3, Table 5. /2 Ibid. - 144 - Appendix 1 Table 15: AVERAGE HOUSEHOLD INCOME BY OXCUPATIONAL STATUS DN URBAN INDONESIA, 1981 (Rp. per capita per month) Java Sumatra Professional 26,200 24,200 Administrative 64,200 35,400 Clerical 24,200 21,200 Sales 17,600 23,600 of which street vendors 16,900 n.a. Service workers J.3,900 15,900 Farmers 10,900 12,900 Production workers 15,100 17,400 Average /a 16,400 18,500 /a This differs from the average reported in Appendix 3, Table 5, owing to slightly different samples. Source: SUSENAS 1981. 31. The existence of a wide range of urban wages makes generalizations on their behavior difficult. The one good long term data series, for coustruction workers, indicates a similar pattern to that observed in rural Java: no clear trend in wages until the end of the 1970s, and then a rise around 1980-81. Appendix 3, Table 8, presents some detailed data on wage rates for unskilled workers in formal sector manufacturing and services. In all sectors and regions real wages increased, in some cases quite substantially, between early 1981 and late 1983 - despite the sharp slowdown in growth in the latter year. Regional differentials provide a similar picture to incomes. Manufacturing wages in late 1983 were of the order of Rp. 1,000-1,200 per day in Central Java and Jakarta, compared with Rp. 1,300 a day in South Sumatra, over Rp. 2,000 in North Sumatra and Rp. 2,500 and above in West Kalimantan. These rates apply to only one segment of the market. The characteristic pattern is of a wage ladder within individual subsectors, ranging from small locally owned firms up to large scale joint ventures. Research in Central Java in the mid-1970s found differentials of several times in the cigarette, kretek and weaving industries./l 32. The high wage segment of the formal sector covers both the public and private sector. Both are viewed as preferred sources of employment for new entrants to the labor market, especially amongst the educated. As Table 16 /1 See Chris Manning, Wage Differentials and Labor Market Segmentation In Indonesian Manufacturing, Doctoral Thesis, Australian National University, October 1979. - 145 - Appendix 1 Page 21 shows, there are substantial differentials between private aad official public sector salaries. Differentials within the private seitor are also much larger, both for different skill categories and, as noted above, for different categories of firms for unskilled labor. Table 16: INDIC&TORS OF PUBLIC/PRIVATE SALARY DIFFERENTTATS (Rp. per month) Civil service la Private sector Private to public Level 1984/85 1985/86 large companies /b differential, 1984 1984-1985 I 61,000 73,000 67,000 /c 0.9 II 107,000 129,000 290,000 7T 2.2 III 159,000 191,000 630,000 7T 3.3 IV 254,000 305,000 1,330,000 7T 4.4 /a This is the estimated average salary for a civil servant with ten years experience and a wife and three children. /b This is an estimate of the average salary, including allowances, for experienced workers in large private companies. /c Average of rates for semi-skilled workers, from firm visits to manufacturing firms. /d Average of rates for file clerks, drivers and clerk-typists. Te7 Average of rates for typists, supply clerks, teletype operators, motor pool supervisors, account clerks, executive secretaries and reference librarians. ,f Rates for an architect, library director and civil engineer. Source: World Bank staff estimates, based on data from the Ministry of Finance, firm visits and the American Enbassy in Jakarta. 33. The process of wage determination at the upper end of the private sector is important to understanding the urban labor market. Skilled manpower shortages are a factor, but do not explain why the whole wage structure is above the level at the bottom of the market. Previous analysis has concluded that the explanation lies in the advantages to firms of having a known and reliable workforce with low turnover. To achieve this, firms in effect share part of their returns with the workforce./l The resultant wages are also characteristically higher than minimum wag-es. This varies by region and by sector, since minimum wages are currently set by province and for different sectors. Table 17 gives the regional minimum wages for three provinces. The / See Indonesia - Wages and Enployment, 2p. cit.; Chris Manning, 2p. cit. - 146 - Appendix 1 Page 22 general policy is to base the rate on market survey information. Where this is frequently updated, as in Jakarta, the result is a market-following floor wage for the large scale sector: this provides a useful fuaction in protecting workers at the lower end of the market without distorting the overall wage structure./l In provinces where there is no systematic updating, the minimum wage can bear little relation to market conditions. The minimum wage is not currently enforced in the small scale sector: this is appropriate, since this vould have excessively high adm-inistrative costs, and, if successful, could reduce employment and/or put smaU1 scale firms out of business. Table 17: MINIMUI WAGES FOR THREE ROVINCES, 1977-84 DKI Jakarta Central Java North Sumatra Rp/day Index /a CPI /b Rp/day Iadex /a CPI lb Rp/day Index /a CPI lb n977 435 100 100 175 100 100 431 100 100 1980 600 128 150 265 151 162 540 125 156 1981 600 138 163 325 186 183 540 12.5 175 1982 750 172 177 625 357 203 700 162 186 1983 1,050 241 196 625 357 226 700 162 209 1984 1,250 287 224 625 357 247 700 162 237 /a 1977 = 100 .b Consumer Price Index for Jakarta, Semarang and Medan, respectively. Sources: Statistical Pocketbook Indonesia, BPS, 1983, Buletin Ringkas, BPS, December 1984, Department of Manpower, Pelaksanaan, lebij!aksaaaan Pemerintah Menzenai Penetapan Upah Minimu di Seluruh Indonesia, Jakarta (1982, 1984). 34. The Government directly sets the wages and benefits for workers in government employment. In the draft 1985/86 budget, it was announced that the salaries of civil servants were to be raised so as to improve their net (after-tax) income by 20X, with higher increases for teachers and health workers. Some context for the recent increase is given in Table 18, that summarizes changes in official civil service salaries over the past fifteen years. This includes official supplements, but excludes both the rice allowance and any paymen--s for specific activities. Year to year changes have been highly variable - characteristically a substantial increase in one year has been gradually eroded, in real terms, in the ensuing years. The major increase of the past decade occurred in 1977/78, and subsequently real /1 It is possib e that rises in the floor wage can push up the whole structure, but there is no evidence of this in Indonesia. - 147 - Appendix 1 Page 23 salaries have peaked in 1981/82 and now in 1985/86. The overall increase since 1977/78 has been quite moderate, and, as seen in Table 16, differentials with the private sector remain large for higher grades. The issue of civil service compensati_i is Mpl- bt to zo.e extent, these differentials are compensated by the security and prospect of specific payments for studies, etc. in the civil service. Table 18: GROWTH IN AVERAGE SALARIES OF CIVIL SERVANTS, 1969-85 Average real increase la Level 1969-76 1976-77 1977-81 1981-85 Z p.a. I 16.1 98.4 4.7 4.3 II 11.4 66.2 2.0 1.6 III 11.5 42.9 -0.2 1.6 IV 11.4 66.4 -1.0 1.6 Average 12.0 66.0 2.0 2.6 /a The nominal salaries were deflated by the Indonesia Consumer Price Index after 1977/78, and the Jakarta Cost of Living Index prior to 1977/78. All years are fiscal years, i.e. 1985 is FY1985/86. Source: World Bank staff estimates, based on information provided by the Ministry of Finance. 35. Incomes within the informal sector also sary greatly. Members of this sector can be broadly divided into three categories. The highest income group are small scale entrepreneurs, often working by themselves or with family members. The best example is established street vendors, for whom micro stuaies indicate average earnings of Rp. 4,000-5,000 per day in Java, with some earning substantially more. Second, there are individuals who are essentially tmskilled workers, with earnings comparable to or higher than wages at the lower end of the urban wage ladder. Becak drivers and refuse collectors are good examples, with inoDmes in Java of the order of Rp. 1,000-3,000 per day. The third group are iuvolved in lower return activities, and include people such as kulis (market porters) or cigarette scavengers, with daily incomes of the order of Pp. 1,000 or less. These are all average incomes and an important characterimtic of informal sector work is a high variability in incomes from day to day and, in some cases, between seasons. - 148 - Appendix 1 Page 24 36. Higher incomes and wages also lead to much lower poverty incidence in urban than rural areas. It bas been estimated that in urban Java 30% of households had an expenditure level below an estimated subsistence requirement in 1980, compared with over 50% in rural Java, and 20% in urban Sumatra./l Furthermore, rising incomes led to a significant reduction In incidence over the course of the 1970s. But urban poverty does exist and could become a more serious problem with slower growth. Poverty occurs in al the major production sectors, and, for Java at least, households in poverty are roughly equally divided between those dependent on wage and informal sector employment. Unemployment 37. In this section the structure of unemployment and the pattern of change between 19:6 and 1982 is examined. This is an interesting period for the unemployment situation, since high formal sector growth coincided with the beginning of a large influx of secondary school leaders into the urban labor force. Overall urban unemployment rates are not high by developing country standards, but unemployment is becoming increasingly concentrated amongst the young and the secondary educated. As there appears to be reasonably free entry into informal sector activities, unemployment is predominantly associated with the formal sector: it reflects an imbalance between the supply of and demand for formal sector jobs. It is thus very much a function of the labor market structure outlined in the introduction to this appendix. The existence of Limited numbers of preferred jobs, whether due to high wage differentials within the private sector or the other attractions of public sector employment, provides incentives for waiting. 38. The statistics suggest the unemployed are largely new entrants to the labor force looking for their first job C70% of unemployed males and over 80%. of unemployed females in 1982) and are often single. Workers with dependents can rarely afford to be unemployed. There is also a heavy concentration amongst the educated and the young. Table 19 presents data on unemployment rates and the composition of unemployment by completed level of schooling for 1976 and 1982. Unemployment rates in both periods, standardized for varying age structures among schooling groups, rise with educational level, reaching a peak ameng upper secondary school leavers. Graduates of general (academic) secondary schools experience slightly higner rates than vocational graduates, especially at the upper secondary level. Overall unemployment rates are fairly stable over this period. There are, however, two less positive trends. First, unemployment rates of females increased for all categories except lower secondary academic school graduates. The data, consistent with 1971-80 census trends, suggests that recent increases in urban female labor force participation rates since 1971 have been matched by increasing difficulty for women to fiad jobs./2 The proportion of females among all unemployed increased from 23% to 36% over the period, with the absolute number of recorded female unemployed more than doubling in the six year period. /1 See Bhanoji Rao, op. cit. Preliminary analysis of SUSENAS 1981 suggests a somewhat lower poverty incidence, see Appendix 3, Table 6. /2 The unstandardized rates by educational category indicate this trend more clearly and suggest younger, educated females are especially finding it harder to obtain employment in recent years. - 149 - Appendix 1 Page 25 Second, the absolute numbers looking for work has become increasingly dominated by upper secondary leavers, contributing in 1982 over 40% of all urban unemployed in 1982. For males the proportion of unemployed in 1976 did not differ substantially from the proportioa of the labor force In each schooling category, but by 1982 those with primary education or less, accounting for 60% of the labor force, amounted to only 41% of all unemployed (see Appendix 3, Table U). Table 19: OPEN UNEMPLOYKENT IN URBAN DNDONESIA BY EDUCATIONAL ATTAINMENT, 1976 AND 1982 (in percent) Completed Male Female Both sexes education 1976 1982 1976 1982 1976 1982 Age-standardized open unemployment rates Below primary 5.0 3.3 2.1 2.6 3.9 3.3 Primary 6.2 4.2 3.6 4.8 5.8 4.4 lower secondary General 7.8 6.0 10.1 7.7 8.3 6.6 Vocational 7.7 9.5 6.2 6.3 7.4 7.6 Upper secondary General 11.8 11.4 16.6 17.3 12.9 13.1 Vocatioaal 10.8 9.5 13.2 13.5 10.8 11.0 Tertiary 8.0 8.3 6.3 7.5 7.4 7.9 All levels 6.9 5.6 4.9 6.5 6.4 6.0 Distribution of the unemployed Below primary 24.9 16.2 19.0 16.7 23.5 16.4 Primary 33.0 24.7 22.5 19.9 30.6 23.0 Iower secondary General 14.1 13.4 18.5 11.4 15.1 12.7 Vocational 4.1 4.0 2.5 2.1 3.7 3.3 Upper secondary General 12.7 21.6 16.7 22.4 13.6 21.9 Vocational 9.6 17.3 17.8 23.3 11.5 19.5 Tertiary 1.6 2.8 3.0 4.2 1.9 3.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 Memo item Unemployment level ('000s) 359 422 109 238 467 660 Source: SAKERNAS 1976 and SUSENAS 1982 (special tables prepared by BPS). - 150 - Appendix 1 Page 26 39. Unemployment rates by age and education are given In Appendix 3, Table 12. About 40% of the total unumployed fall in the 20-24 age group, with very high unemployment rates, of 30-40%, amongst male and female graduates of general upper secondary schools and female graduates of vocational schools. The specific changes between 1976 and 1982 follow the broad pattern described above: umemployment rates undergo a moderate decline for most categories of males and a moderate rise for most females in the 15-19 aad 20-24 age groups. However, there are two important exceptions: first there was a sigaificant rise in the unemployment rate for both male and female graduates of general upper secondary schools in the 20-24 age group, from 32-33% in 1976 to 37-38% in 1982; and, second, there is a general rise in the rate for those with tertiary education in the 25-29 age group, and a dramatic increase, from 14% to 31%, for females. Finally, while the primary focus is on educated unemployment, the data also shows high unemployment rates (10% and above) amongst the less educated (primary and below) in the 15-19 and 20-24 age groups, five to ten years after most of these young people left school. 40. Overall, a detailed review of unemployment presents a less sanguine picture than the low aggregate unemployment rate indicates. The general pattern is of peaks in unemployment amongst young school leavers followed by major declines in the 25-29 and 30+ age ranges. The stability of this pattern between 1976 and 1982 suggests a slow process of absorption of new labor force entrants into work. A tracer study of secondary school leavers in the late 1970s concluded that long working periods paid off in terms of better paid jobs./l However, the rise in unemployment rates amongst key groups (and especialy amongst females) suggests that the queue for preferred jobs is getting longer, and is now also affecting tertiary graduates. 41. There is some regional variation in unemployment, summarized in Appendix 3, Tables 13-14. the higher rates in Jakarta stand out: no doubt a consequence of higher migration, especially of the better educated, to the capdtal city and more attractive formal sector job opportunities in the public and private sectors. Unemployment rates are somewhat lower for the rest of urban Java, and fall in between the two in urban areas in the Outer Islands. However, the structure of unemployment is quite uniform throughout Indonesia, and inter-regional differences are much less marked than between age and education categories. 42. Labor Exchmnges and the Registered Unemployed. The Government reactivated the labor exchanges in 1983 and official data suggest that a large number of the unemployed have been registerinh, since then. Between 26,000 (March 1983) and 107,000 (September 1984), with a mean of 46,000, registered each month throughout the country between January 1983 and September 1984./2 The number of unemployed registered with the Department of ML-npower has ranged from 300,000-400,000 per month over the same 21 month period, equivalent, on /1 See David Clark, How Secondary School Graduates Perform in the labor Market: A Study of Indonesia, World Bank Staff Working Paper No. 615, 1983. /2 The large month to month variations are closely related to the number of school leavers entering the labor market, peaking in August and September each year. - 151 - Appendix 1 Page 27 average, to over half the total of 660,000 unemployed recorded by SUSENAS 1982. Table 20 gives figures on the composition. This shows the disproportionately high share of upper secondary school leavers - the group experiencing the highest unemployment rates. New vacancies registered each month were about 10,000 for the period January 1983 to September 1984, and official figures record that an impressive average of 40% were filled each month, declining to slightly below 30% in the later months of 1984. Just for this 21 month period 144,000 new jobs were reportedly found in labor exchanges in Indonesia, a figure which compares favorably, for e-ample, with an approximate increase in urban wage workers outside agriculture of about 100,000 per annum in the 1970s (or even of all wage workers outside agriculture of approximately 275,000 a year)./I However, there is a large imbalance between the numbers of registered unemployed and vacancies, and the ratio of placements to registered unemployed is low - never above 4% per month and declining in 1984 to below 2%. Table 20: JOB S EERS AND JOB PLACEMENTS RE0DRDED BY THE LABOR EXCHANGES, INDONESIA, DECEMBER 1983 AND SEPTEMBER 1984. December 1983 September 1984 New job Stock at New job Place- Stock at Level of seekers Placements end of month seekers ments end of month schooling Male Female Male Female Hale Female (Both sexes) Primary or less 16 10 32 49 12 4 8 32 Ul Lower secondary 12 6 19 12 15 8 14 14 10 Upper secondary 61 70 45 31 68 80 71 49 74 - Academic (26) (30) (18) (19) (30) (37) (41) (23) (38) - Vocational (16) (2) (15) (1) (20) (2) (9) (11) (13) - Economic (10) (19) (8) (9) (11) U28) (12) (9) (12) - Other (9) (19) (4) (2) (7)/a (13)/a (9) (6) (11) Tertiary 11 14 6 7 5 8 9 5 5 Total 100 100 100 100 100 100 100 100 100 Number ('000) 23 10 3 2 193 53 107 4 538 /b la An error in the raw date for subgroups of upper secondary education is presumed to be derived from the 'other SNA" category. /b The large increase in absolute numbers compared with December 1983 is mainly a consequence of large numbers of school leavers registering in August-September. Source: Department of Manpower statistics (unpublished) and Department of Manpower, Berita Pasar Xerja, No. 11, March 1984, pp. 57-70. /1 The calculations are based on the 1971 and 1980 censuses. The data on placements are likely to be reflected in much lower employment growth, since many new employees would replace previous employees. - 152 - Appendix 2 Page 1 POPULATION LND LABOR FORCE PROJECTIONS /1 1. The demographic projections that underlie the analysis of this report were rum on spatially d'saggregated projection models in the World Bank. This involved assumptions in four areas: underlying demographic parameters, especially fertility and death rates; interprovincial migration; the pace of urbanization; and labor force participation rates by age-sex category. The demographic assumptions are close to those used by the Government /2, but the other three areas go beyond existing work and are briefly summarized here. 2. There are two sources for the assumptions on interprovincial migration. For the underlying trend, the observed pattern between 1971 and 1980 was taken, with a slowdown in the 1990s and some modification for specific provinces (notably Lamputg) where the potential for additional immigratiom was known to be limited. The sponsored transmigration program subsequent to 1980 was treated as being additional to these underlying flows. A number of alternative scenarios were developed to reflect different levels of the whole program; these are discussed in Chapter 5. For the distribution across source provinces in the Inner Islands the historical pattern from transmigration statistics was taken, while the distribution across destination provinces was based upon a very preliminary World Bank assessment of the absorptive capacity of different regions. The age-sex composition of transmigrants is based on past experience, and households that migrate are assumed to have the fertility and mortality rates of destination areas. In each scenario it was assumed that there would be additional spontaneous flows following the sponsored movement - this was made a function of the total previous transmigrant population (net of estimated backflow). 3. Some uncertainty surrounds the likely future rate of urban growth, both because of our weak understanding of the determinants of rural-urban migration in Indonesia and the changed economic situation. As a simplifying assumption, we took a stable differential between rural and urban growth, but with a downward adjustment in the historically high differential in Kalimantan and Sulawesi to the level prevailing in Sumatra - otherwise implausibly high rates of urban growth would occur in the former two provinces. Summary results for urban and rural population growth under two of the migration scenarios are given in Table 1. These should be treated as reasonable, but only indicative, scenarios. As discussed in the text, the realization of the relatively moderate implicit rates of rural-urban migration will, in part, depend on successful rural development. /1 The demographic projections were conducted by Sulekha Patel (Population, Health and Nutrition) /2 See Proyeksi Penduduk Indonesia, 1980-2000, BPS. - 153 - Appendix 2 Page 2 Table 1: URBAN AND RURAL POPULATION GR0WrH, 1986-95 Population growth, 1986-95 Low Intermediate Urban share transmigration transmigration 1980 1995 Urban Rural Urban Rural - - % Z p.a. Java-Bali 25 33 2.9 0.8 2.5 0.5 Sumatra 20 27 4.3 2.1 4.7 2.4 Kalimantan 21 30 5.0 2.7 6.4 2.4 Sulawesi 16 22 4.2 2.0 4.4 2.2 Eastern Isles 12 16 4.3 2.6 4.6 2.9 Outer Islands 18 25 4.4 2.2 4.9 2.7 Indonesia 22 30 3.4 1.4 3.3 1.4 Source: World Bank staff estimates and projections. 4. Labor force participation rates were projected by age-sex and urban-rural category for each island. In the past, recorded rates have been systematically higher for the labor force surveys than for the censuses. The baseline rates were obtained by adjusting the 1980 Population Census to reflect the better coverage of the surveys./l Then for the future, a gradual decline was assumed for the 10-14 and 15-19 age groups, with the spread of education, and for the 64+ group in urban areas. An Increase in urban female labor force participation was also assumed on the basis of observed trends in the 1970s. For all other age-sex categories there is insufficient evidence of systematic changes, either within the labor force survey series or between the 1971 and 1980 censuses, to warrant the projection of changes in labor force participation rates in the future. A summary of the resultant assumed rates for all Indonesia in 1980 and 2000 is given in Table 2. The demographic projection models did not project aa age-sex composition separately for urban and rural areas - current data make this a very difficult task. Instead it was assumed that the urban share of the labor force will move in line with the share in population. This could slightly underestimate the growth in the urban labor force, if there are further relative shifts in the working age population in favor of urban areas. The resulting patterns of growth in the labor force for two of the migration scenarios is given In Table 3. /1 For a description of the methodology, see Zainab Bakir and Chris Manning, Partisipasi Angkatan Kerja, Kesempatan Kerja dan Pengaugguran di Indonesia, Universitas Gadjah Mada, Yogyakarta, 1983. - 154 - Appendix 2 Page 3 Table 2: ESTIMATED ACTUAL AND PROJECTED LABOR FORCE PARTICIPATION RATES, 1980 AND 2000 /a (in percent) Urban male Urban female Rural male Rural female Age 1980 2000 1980 2000 1980 2000 1980 2000 10-14 3.3 0.0 4.6 0.0 18.4 9.2 17.5 8.8 15-19 29.0 14.5 30.2 15.1 56.7 45.4 36.2 28.9 20-24 75.4 n.c./b 34.7 41.6 92.5 n.e. 42.2 n.c. 25-29 93.5 n.c. 32.9 39.5 98.1 n.c. 41.2 n.c. 30-34 98.0 n.c. 32.2 38.6 98.8 n.c. 44.6 n.c. 35-39 98.4 n.c. 34.1 40.9 98.9 n.ce. 47.3 n.c. 40-44 97.7 n.c. 38.7 46.4 98.5 n.e. 50.6 n.c. 45-49 93.9 n.c. 38.9 46.7 98.0 n.c. 52.7 n.ec. 50-54 86.4 n.c. 37.2 44.6 95.7 .ce. 52.3 n.c. 55-59 70.5 n.c. 29.1 34.9 88.3 n.c. 43.9 n.e. W0-64 59.9 n.ec. 23.8 28.6 80.5 n.e. 35.0 u.c. 65+ 37.2 18.6 13.2 6.6 56.8 n.c. 20.4 n.c. Total /c 62.5 59.0 28.0 28.6 74.4 71.1 38.4 36.0 /a This presents the aggregate results and assumptioas; the labor force projection was actually developed for the five major island groups. lb n.c. - no change from the 1980 estimated rate. ,' As a proportion of the population aged ten and over. The 2000 averages given are for the 1980 age-sex structure, to isolate the effects of assumed changes in the labor force participation rates. Source: World Bank staff estimates and projections based upon the Results of the 1980 Population Census, BPS. 5. As noted in the text, the Government's projection has an overall rate of growth of the labor force of 2.8% p.a. in the 1986-95 period./l The underlying projection involves the extrapolation of age-sex labor force participation rates on the basis of fitted trend lines from the censuses and surveys between the 1961 Population Census and SUSENAS 1981. In our view this is somewhat biased upwards, especially for females, in part as a consequence of different labor force concepts between the censuses and surveys, and an unusually high result for 1981. While some uncertainty surrounds future labor /1 See Proyeksi Angkatan Keria Indonesia, 1983-2001, BPS. - 155 - Appendix 2 Page 4 force participation rates (that will, amongst other things, depend on future economic growth) we consider the more gradual rise in female labor force participation in the 20-64 age range given in Table 2 to be the more likely prospect. The initial results of SUSENAS, 1982 also suggest a somewhat more moderate overall rate of growth of the labor force. Table 3: GROWTH IN THE URBAN AND RURAL TABOR FORCE, 1986-95 Low transmigration Intermediate transmigration Growth Increment Growth Increment Urban Rural Urban Rural Urban Rural Urban Rural - % p.a. - - '000 - - Z p.a. - -'000 Java-Bali 3.3 1.3 381 432 3.0 1.0 340 327 Sumatra 4.8 2.6 127 313 5.1 3.0 139 360 Kalimantan 5.2 3.0 40 94 6.5 4.3 53 144 Sulawesi 4.5 2.4 35 90 4.9 2.6 36 99 Eastern Isles 4.5 2.9 26 123 4.9 3.2 29 139 Outer Islands 4.8 2.7 228 621 5.2 3.1 258 742 Indonesia 3.7 1.9 608 1.053 3.7 1.9 597 1,068 Source: World Bank staff projections. 6. The final element of importance to the analysis is the educational composition of the labor force. An approximate projection was developed based on projected school enrollments and estimated labor force participation rates; the results are given in Table 4. In 1990 the labor force will be much better educated than in 1980. The proportion of the labor force with secondary or tertiary education doubles, and there are rapid rates of growth in these categories - around 10X p.a. These results are for the total labor force, but it is likely that urban areas will account for a high proportion of the growth in the educated labor force, if past patterns are maintained. - 156 - Appendix 2 Page 5 Table 4: THE EDUCATIONAL COMPOSITION OF THE LABOR FORCE, 1971-90 Share of Composition Growth rates urban areas 1971 1980 1990 1971-80 1980-90 1980 -- % - - p.a. -- -% Leas than primary 71.2 67.0 46.9 2.0 -0.9 12 Primary 21.8 21.3 28.3 2.4 5.3 23 Junior high 4.0 5.2 10.0 5.2 9.5 48 Senior high 2.5 5.8 13.4 12.4 11.6 57 Tertiary 0.5 0.8 1.4 8.5 8.0 77 Total 100.0 100.0 100.0 2.5 2.6 19 Source: Results of the 1971 and 1980 Population Censuses, BPS and World Bank staff projections. - 157 - INDONESIA COUNTRY ECONOMIC MEMORANDUM Appendix 3: STATISTICS ON EMPLOYMENT AND INCOMES List of Tables 1. Sectoral Employment and Productivity, 1971 and 1980 2. Total Employment by Sector, Java and the Outer Islands, 1976 and 1982 3. The Distribution of Urban Employment Between the Formal and Informal Sectors, 1980 4. Migrants in the Outer Islands as a Result of Sponsored Transmigration between 1950 and 1978 and Associated Population Growth 5. Average Household Income by Sector in Urban and Rural Indonesia, 1981 6. The Distribution of Poverty in Urban Areas, 1981 7. The Distribution of Poverty in Rural Areas, 1981 8. Average Daily Wages for Specific Unskilled Jobs in Selected Industries and Provinces, 1981 and 1983 9. Indicators of Underemployment, 1980 10. Reasons for Low Work Hours, Both Sexes, Rural Indonesia, 1982 11. The Distribution of the Labor Force and Unemployed by Education, Urban Indonesia, 1976 and 1982 12. Youth Unemployment Rates by Age and Education, Urban Indonesia, 1976 and 1982 13. Unemployment by Education and Region, Both Sexes, Urban Indonesia, 1980 14. Unemployment by Age and Region, Both Sexes, Urban Indonesia, 1980 - Appendix 3 NDONESIA OOUNIRY EODNOMIC MEURANDUN Sectoral DEployment and Productivity, 1971 and 1980 Growth in Elasti- Employment Productivity value- city of Levels la Growth Levels Growth added employ- ('000) (2 p.a) tRp2 OOO/worker) (2 p.a) (% p.a) uent 1971 198F 1971-80 1971 1950 1971-80 1971-80 1971-80 Agriculture Food crops 26,121 27,500 0.6 163 230 3.9 4.5 0.13 Cash crops 1,206 2,134 6.6 1,149 1,027 -1.2 5.2 1.25 Livestock 348 1,200 14.7 2,194 992 -8.4 5.1 2.90 Forestry 135 502 15.6 4,008 2,815 -3.9 11.2 1.39 Fishery 602 827 3.6 1,139 958 -1.9 1.6 2.22 Subtotal 28,413 32,164 1.4 268 370 3.6 5.1 0.27 Mining Petroleum lb 46 28 -5.4 119,776 421,115 15.0 8.8 -0.62 Other 46 333 24.7 4,500 1,883 -9.2 13.2 1.86 Subtotal 92 361 16.4 62,471 34,401 -6.4 8.9 1.84 Manufacturing Food processing 615 1,187 7.6 1,050 1,474 3.8 11.7 0.65 Textiles 933 1,235 3.2 230 467 8.2 11.6 0.27 Wood & products 455 1,071 10.0 80 312 16.3 28.9 0.36 Paper & products 54 81 4.6 1,408 1,550 1.1 5.7 0.81 Chemicals 150 185 2.4 2,428 3,343 3.6 6.1 0.39 Non-metallic 244 411 6.0 445 593 3.2 9.4 0.64 Iron A steel 14 52 15.5 4,082 4,223 0.4 15.9 0.97 Eaglneering 328 777 10.1 1,212 1,337 1.1 11.3 0.89 Other 86 288 14.4 141 216 4.9 19.9 0.72 Subtotal 2,879 5,289 7.0 664 940 3.9 11.2 0.63 Electricity, gas & water 40 62 4.9 402 373 -0.8 4.1 1.21 Construction 728 1,547 8.7 1,418 1,669 1.8 10.7 0.82 Services Trade 4.574 6,793 4.5 970 992 0.3 4.8 0.94 Transport .021 1,972 7.6 1,346 1,121 -2.0 5.4 1.40 Financial & business 100 282 12.2 8,339 8,341 0.0 12.2 1.00 Public administration 1,423 1,982 3.8 643 1,245 7.6 U.7 0.32 Other 2,998 4,688 5.1 314 518 5.7 11.1 0.46 Subtotal 10,116 15,717 5.0 840 1,031 2.3 7.4 0.68 igal 42.2,68 S5.140 &I Z A Z 0 /a Sectoral employment levels were obtained by a proportionate adjustment In the estimates -tn the Input-Output Tables to reflect a revised aggregate employment level. The latter was calculted on the basls of an adjusted labor force participation rate for 1980 (see Annex 2) and an estimated employment rate. lb Includes INC. Source: World Bank staff estimates, based upon the 1971 and 1980 Input-Output Tables, BPS. - 159 - Appendix 3 Table 2 INDONESIA COUNMY ECONOMIC MEKORANDLM Total Employmet by Sector, Java and the Outer Islands, 1976 and 1982 (in thousands) 1976 1982 °ndo- Indo Sector Java Other nesia Java Other nesia Urban: Male & Female Agriculture 197 539 736 503 291 794 Mining 9 13 22 24 33 56 Manufacturing 670 204 874 1,341 267 1,608 Electricity, gas and water 14 6 20 26 8 34 Construction 239 86 325 439 237 676 Trade 1,341 672 2,014 2,340 858 3,198 Transport 415 180 594 612 235 847 Finance, insurance, etc. 50 14 64 64 16 80 Other services 1,550 688 2,23d 2,521 887 3,408 Subtotal 4,486 2.401 6.887 7,870 2,832 10,702 Rural: Wale & Female Agriculture 18,395 9,986 28,381 17,545 13,255 30,799 Mini8g 71 20 91 211 123 334 Manufacturing 2,287 807 3,094 3,194 1,220 4,414 Electricity, gas and water 6 1 7 16 12 28 Construction 393 98 491 1,099 371 1,471 Trade 3,711 1,090 4,800 4,078 1,278 5,356 Transport 498 192 690 679 270 949 Finance, insurance, etc. 17 13 30 25 8 33 Other services 1,992 818 2,809 2,553 1,164 3,717 Subtotal 27,370 13,023 40,394 29,401 17,700 47,100 Urban & Rural: Male & Female Agriculture 18,593 10,525 29,117 18,048 13,546 31,593 Mining 81 33 113 235 155 391 manufacturing 2,957 1,011 3,968 4,535 1,487 6,022 Electricity, gas and water 20 7 27 42 20 62 Construction 631 184 815 1,538 608 2,146 Trade 5,052 1,762 6,814 6,418 2,136 8,554 Transport 913 371 1,284 1,291 505 1,796 Fimance, insurance, etc. 68 27 94 89 24 113 Other services 3,541 1,505 5,047 5,074 2,051 7,125 Source SARN 6and S 19 4280 378270 20,532 57,802 Source: SAKh3NAS 1976 and SUSENIAS 1982, BPS. -160- Appendi 3 Table3 INDONESIA COUlNTRY ECONOMIC MEMORANDUM The Distribution of Urban Employment Between the Formal and Informil Sectors, 1980 Formal/enterprise /a Informal/household /b Share Share Compo- of Compo- of Total sition women Total sition women ('000) (Z) CZ) ('000) (Z) CZ) Agriculture 341 6.2 24.9 549 13.6 21.7 Industry /c 1,177 21.4 29.4 317 7.8 38.2 Construction 394 7.2 2.3 145 3.6 1.4 Trade 416 7.6 21.9 1,976 48.9 44.8 Transport 461 8.4 2.8 268 6.6 0.7 Finance 200 3.6 17.0 10 0.2 10.0 Other services 2,500 45.5 31.4 776 19.2 32.7 Total /d 5,489 100.0 24.8 4,041 100.0 34.2 /a Employers and employees. 7b Self-employed, self-employed with family members and family workers. ic Includes iuding, maufacturing and utilities. 7d Excludes 'others" and 'unstated". Source: Results of the 1980 Population Census, Series S, No. 2, BPS. - 161 -A dir 3 Table4 DDONES.T ODUNTRY EC(NDMIC MafORANDUN Nigrants iu the Outer Imlands as a Remlt of Sponsored Transmigration between 1950 and 1978 and Associated PoPulation Grovth Sponsored Javanese, SundaDese Proportion of transaigration Nadurese and Balinese migrants in ludividuals Expected speakers, 1980 total population maved population Proportion in 1980 1950-78 In 1980 Number of sponsored -Sponsored Totl lb ProvInce -'000 '000 z z Aceh 8 9 175 5 0 7 North Sumtra 16 26 1,768 1 0 21 Rian 17 23 190 12 1 6 Went Sumatra 27 38 56 68 2 3 Jatibi 58 69 255 27 5 18 Bencu1u 29 36 135 27 5 18 South Sumatra 259 427 635 67 9 14 Lamg 220 348 3,401 10 8 74 Subtotal 634 976 6.615 15 3 24 West Kalhlantan 31 42 198 21 2 8 Central Kalimantan 12 18 63 28 2 7 South- Klizantan 46 66 U16 57 3 6 Fast alaUmantn 40 58 126 46 5 10 Subtotal 130 183 503 36 3 7 North Sulawesi 15 22 31 72 1 1 South Sulawesi 39 51 54 96 1 1 Central Sulawesi 51 63 72 88 5 6 Southeast Sulawesi 27 35 46 75 4 5 Subtotal 131 171 202 85 2 2 East Nusatenggara 0 0 3 8 0 0 Maluku 4 7 16 44 1 1 Irlan Jaya /a 4 6 4 138 0 0 Subtotal 4 13 24 56 0 0 Excluding North Sumatra and Lampung 664 969 2,175 45 3 6 /a There appears to be an error In the irian Jaya figures, either due to an utdercount of Javauese In the 1980 Census, or because migrants vere actually moved after the Cenmsus Ws completed. lb Inner Island langpage speakers. Source: Ministry of Transmitgration, Results of the 1980 Population Census, BPS and World Bank calculations. - 162 - ~~~Apnedix 3 Table 5 INDONESIA COUNINTY ECONOMIC MEMORANDUM Average Household Income bz Sector in Urban and Rural Indonesia, 1981 /a (Rp '000 per capita per month) Other Java Sumatra Indonesia Sector lb Urban Rural Urban Rural Urban Rural Agriculture 1l.3 9.4 13.0 13.4 16.0 12.3 Mining 32.9 9.2 29.3 16.8 20.9 16.0 Manufacturing 18.3 10.1 17.7 16.5 19.6 13.8 Electricity, gas and water 23.4 n.a. 17.7 n.a. 23.9 n.a. Costruction 17.7 10.3 17.1 15.4 18.1 14.7 Trade 17.6 11.7 23.5 17.0 22.7 16.8 Transport 15.8 12.0 17.4 17.1 18.2 31.5 Fiwace 30.4 n.a. 39.0 na. 33.4 n.ao Other services 19.7 16.1 19.8 18.0 21.2 19.4 Average 17.7 10.3 19.9 14.2 20.2 13.5 Index (rural Java - 100) 172 100 193 138 196 131 Urban-rural differential 1.7 1.4 1.5 /a This includes wage plus enterprise income, but excludes "other- income, Wth is entirely nonlabor income. /b This is the priulary sector of activity of the hosehold head. Source: SUSENAS 1981, BPS. - 163 - dls 3 Table 6 IDONNEIA COUNTRY ECODNOMIC MEMORANDUM The Distribution of Poverty In Urban Areas, 1981 /a (in percent) Java Sumatra Share of Households Share of Households Sector Below the Above the Below the Above the poverty line poverty line poverty line poverty line Agriculture 21 7 31 10 Ma=nfacturing 14 14 6 9 Constructim 10 7 9 6 Trade 23 27 24 32 Transport 12 10 12 9 Other services 19 33 17 31 Other /b 1 2 0 3 Total 100 100 100 100 Formal 52 60 36 50 Informal 48 40 64 51 Apparent poverty incidence 18 6 /a This is derived from a poverty line estimated on the basis of calorie requirements and observed household budgets. See Bhanoji Rao, Poverty in Indonesia, 1970-80, World Bank mimeo, January 1984. /b MNiang, electricity and finance. Source: SUSENAS 1981, BPS. -164- Appendix 3 Table 7 MNDONSIA 0UNTRY EODNOMIC MEMORANDUM The Distribution of Poverty in Rural Areas, 1981 /a (in percent) Java Sumatra Share of Households Share of Households Sector Below the Above the Below the Above the poverty line poverty line poverty line poverty line Agriculture 79 66 90 75 Manufacturing 5 6 3 3 Construction 4 4 1 2 Trade 6 11 2 8 Transport 2 3 0 2 Other services 4 10 3 9 Other /b 1 1 0 1 Total 100 100 100 100 Household enterprises 70 70 88 81 Wage labor 30 30 12 19 Apparent poverty incidence 38 16 /a This is derived from a poverty line estimated on the basis of calorie requirements and observed household budgets. See Ehanoji Rao, Poverty in Indonesia, 1970-80, World Bank m.ieo, January 1984. /b Mining, electricity and fianmce. Source: SUSENAS 1981, BPS. INDONESIA COUNIY EC,oN0OIC I4R4ImNDUN Average Daill Wages for Specific Uinskilled Job. in Selected Industries and Provinces, 1981 and 1983 Hotel Transport ManufacturL h (room (drivers Food Textlles Chemicals Savwlil furniture boy) assistant) Occupation Rp, Occupatlon Rp. Occupation Rp. Occupatlon Rpi North Sumatra February 1581 1,069 1,544 Ice 1,856 Yarn 706 Chemicals 1,262 Wood 1,367 November 1983 1,423 2,000 maker 2,287 spinner - proceasor 2,054 cutter 2,067 % (real) increase /a (14) (19) (4) - (43) (32) South Sumatra February 1981 1,450 983 Ice 648 Spinning 1,624 Rubber 983 Veneer 525 November 1983 2,021 1,986 maker 1,318 mach. op - extrude op. 1,323 mach. op. - S (real) Increase /a (16) (79) (33) - (38) (46) I DKI Jakarta February 1981 1,927 1,224 Noodles 844 Weaver 800 ChemLcals 938 Lathe 724 November 1983 2,488 2,927 maker 1,241 (clothing) 999 processor 1,487 operator 1,202 X (real) increase /a (9) (119) (26) (5) (38) (46) Central Java February 1981 824 994 Noodles 525 Cutting 6 528 Cheaicals 732 Processing 486 November 1983 1,383 1,794 maker 1,090 tailoring 999 processor 1,180 mach. op. 563 S (real) increase /a (42) (57) (84) (66) (38) (-8) West Kallmmntan February 1981 - - Bread 857 - - Rubber proc. 1,189 Processing 1,860 November 1983 - - maker 1,642 - - macho op. 2,561 mach. op. 3,080 S (real) increase /a (67) (91) (41) South Sulavesi February 1981 1,023 - Ice 828 Dyer 963 - - Sawmill 653 I November 1983 1,508 - maker 947 1,584 - - mach. op. 1,081 1 l t (real) Increase /a (25) (-8) (42) (43) /a Deflated by the CPI for the major cities In each region. Sources Survai Upah 1981, 1983, BPS. - 166- Appeudix 3 Table 9 INDONESIA COUNTRY EODNOMIC MEMORANDUM Indicators of Underemployment, 1980 Mean hours worked Proportion working less per week than 35 hours per week (x) Urban Both sexes 46.8 17.6 Rural Male Agriculture 36.7 39.3 Other 4. 23.6 All sectors 39.1 34.4 Female Agriculture 28.9 62.8 Other 38.4 42.1 All sectors 32.4 55.1 Both sexes Agriculture 34.3 46.8 Other 42.2 30.5 All sectors 36.9 41.3 Source: Results of the 1980 Population Census, Series S, No. 2, BPS. INDONESIA COUNTRY ECONOMIC MEMORANDUM Reasons for Low Work Hours, Both Sexes, Rural Indonesia 1982 (in percent) Underemployed Part-time worker Other /b Proportion Looking Dis- Not capable of total for cou- of looking Sub- Unne- At House- Sub- Sub- . Hours worked employees /a work raged for work Total cessary school wife total Other total 2 1 - 9 3.2 5.2 0.7 8.0 13.9 15.6 16.7 31.0 63.3 22.8 100 10 - 24 21,6 6.7 0.9 9.6 16.6 23.8 9.0 24.0 56.8 26.6 100 25 - 34 18.2 6.9 1.2 7.3 15.4 33.1 1.6 14.2 48.9 33.7 100 Sub-total 43.0 6.4 1.0 8.6 16.0 27.4 6.5 20,5 54.5 29.5 100 All employees 100.0 6.2 1.0 8.8 16.0 36.3 2.8 12.9 52.0 32.0 100 /a Excluding those temporarily out of work. 71 No breakdown available of this category. Source: SUSENAS 1982, BPS. II - 168 - Appendix 3 Table 11 INDONEIA 0DUNTRY E0NOMIC MEIORANDUM The Distribution of the Iabor Force and Unemployed by Education, Urban Indonesia 1976 and 1982 (In percent) Male Female 1976 1982 1976 l982 Completed Iabor Unem- Labor Unem- Labor Unem- Labor Unem- education force ployed force ployed force ployed force ployed Below prinry 33.5 24.9 29.1 16.2 54.7 19.0 49.5 16.7 Primary 31.7 33.0 30.4 24.7 22.9 22.5 22.1 19.9 Loer secondary General 12.2 14.1 12.5 13.4 6.8 18.5 7.4 11.4 Vocational 3.5 4.1 2.0 4.0 2.4 2.5 2.2 2.1 Upper secondary General 9.1 12.7 11.7 21.6 4.4 16.7 6.5 22.4 Vocational 6.2 9.6 10.3 17.3 7.2 17.8 10.0 23.3 Tertiary 3.8 1.6 4.0 2.8 1.6 3.0 2.3 4.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Number ('000) 5,218 359 7,565 422 2,207 109 3,649 238 . Source: SAKERNAS 1976 and SUSENAS 1982, BPS. - 169 - Apppendix 3 Table 12 INDONESIA COUNTRY ECONOMIC MEKORANDUM Youth Unemployment Rates by Age and Education, Urban Indonesia, l976 and 1982 (in percent) Age and completed education Male Female 1976 1982 1976 1982 15-19 Below primary 22.3 11.4 6.5 7.1 Primary 26.2 20.3 7.5 10.2 Lower secondary General 31.4 25.5 26.3 20.3 Vocational 35.3 19.6 24.0 15.1 All levels 26.3 20.4 9.9 12.9 20-24 Below primary 11.5 9.9 3.0 4.1 Primary 13.9 9.3 8.3 10.0 Lower secondary General 19.9 16.9 23.4 24.0 Vocational 18.1- 16.3 9.7 17.2 Upper secondary General 32.2 37.1 33.4 38.0 Vocational 27.6 25.1 21.9 32.9 All levels 18.2 17.6 14.4 18.8 25-29 Below primary 3.0 3.2 2.0 3.3 Primary 4.7 3.4 3.4 5.9 Lower secondary General 7.9 4.0 12.4 5.0 Vocational 7.1 6.4 6.0 1.0 Upper secondary General 8.4 7.2 5.9 11.8 Vocational 5.8 7.2 9.1 6.7 Tertiary 7.4 9.4 13.6 30.5 All levels 5.8 4.9 5.5 6.9 Source: SARERNAS 1976 and SUSENAS 1982, BPS. -170- ApjcndLz 3 Table 2.3 DNDONMI ODUMRY ECODNOIC MEHORANDUH Unemployment by Education and ReRion, Both Sexes, Urban Indonesia, 1980 (In percent) Unemployment rates Proportion of unemployed Coampleted DKI Other Outer DKI Other Outer schooliug Jakarta Java Islands Indonesia Jakarta Java Islands Iudonesia Below primary 2.7 1.4 1.9 1.7 22.8 26.5 26.0 25.3 Primary 4.0 2.4 2.4 2.7 26.5 25.8 23.3 25.4 Lower secondary General 5.0 3.4 2.8 3.6 15.5 12.5 12.6 13.4 Vocational 3.3 3.0 2.6 3.0 1.7 3.6 2.5 2.8 Upper secondary General 5.0 4.6 4.6 4.7 18.0 12.4 17.0 15.1 Vocational 6.0 5.3 4.7 5.3 13.0 17.2 16.7 15.9 Tertiary 1.7 2.0 1.6 1.8 1.4 2.1 2.0 2.1 All levels 3.8 2.4 2.7 2.8 100.0 100.0 100.0 100.0 No. unemployed 77 131 68 275 ('000) Source: Results of the 1980 Population Census, Series S, No. 2, and provincial results, BPS. -171 - Apendlz 3 Table 14 INDONSIA ODUNTRY ECONOMIC MIMORANDUM Uoeuployment by Age and Region. Both Semes, Urban Indonesia, 1980 (in prcent) - Ueuploiuent rates Proportion of unmeployed DKI Other Outer DKI Other Outer A8e group Jakarta Java Islands Indonesia Jakarta Java Islands Indonesia 10-14 8.3 4.3 5.1 5.2 2.8 2.9 2.4 2.8 15-19 9.7 5.9 7.1 7.0 27.8 24.1 22.3 24.7 20-24 8.8 5.8 6.6 6.7 42.6 37.9 41.2 4'0.0 25-29 2.8 2.1 2.4 2.4 13.2 13.8 15.6 14.1 30+ 1.0 0.5 0.9 0.9 13.6 21.3 18.5 18.4 All ages 3.8 2.4 2.7 2.8 100.0 100.0 100.0 100.0 No. ueuployed 77 131 68 275 ('000) Source: Results of the 1980 Population Census, Series S, No. 2 and provincial results, BPS. - 172 - INDONESIA COUNTRY EODNONIC MEHORANDUM Annex I: ANALYSIS AND PROJECTIONS TABLES List of Tables 1. Exports by Commodity, 1975/76- 1995/96 2. Imports by Category, 1975/76 - 1995/96 3. Balance of Payments, 1974/75 - 1995/96 4. Oil Sector Projection, 1984/85 - 1995/96 5. Projection of Crude Oil Refining Capacity, 1981/82 - 1995/96 6. ING Current Account, 1981/82 - 1995/96 7. Terms of Trade Index, 1973/74 - 1995/96 8. The Public Sector Capital Account, 1974/75 - 1984/85 .-73- Ai I Acftmx - 1.t ~ ~ ~ ~ ~ ~ ~ ~ h _aI a /. sW 96 3 1.110 2.6 1,.12 15 573 DSC 75 303 46 Su 09 1.3 _3- 517 76 L . 1.038 23 6215 9m 1.591 1.267 1X.59 Z.1 3.32 c.eG. in2 308 3 SW 715 36 363 M0 530 563 a9 03 gm 1659 Pazl .41 142 1 Zt 221 257 7 9 3 2 213 IN 27 262 332 728 mmso 122 13 91 97 96 121 15 232 2 236 269 316 53 40 1 59 so so 59 69 37 30 so 67 5 59 7 2 119 Pulp- 25 55 QI 46 46 51 49 41 58 67 * 9 53 62 31 0cuo 195 248 278 36 69 50 4556 3 6as GU 704 43 1.113 1.333 2.194 bvmtl aw Z n 2_30 2.6 3-19 5115 *.23 2J0 2.3" 3. 3.2D 3S 3 M .J 5. 0.373 1,6 381 253 326 3 454 435 34 309 328 43 331 45 342 796 - _ _ - 95 165 1s 1" 1 206 21 228 295 in 496 6 - - - 43 1s 293 29 313 337 376 562 ZOC 7 9- 7 55 7Ł 4 95 11 n2 ns 39 3 29 21 29 1" 26 Oz 25 64 36 49 31 40 12 25 3 D9 10 3" 207 257 426 sab-mi aut1a e .s.-.1. 257 320 363 437 09 774 73 676 101 1I02 2 1.2 1 2072 1.676 53D 1 i I " - - - - 32 57 660 732 32 1.335 1.705 *. Oabwu 1" 196 265 360 Ł67 SW 346 530 3 05 19 143 1.59 2.251 3.013 6.386 S _btatal _ 1Ł 196 265 360 47 56* S65 853 1.48 1. 2,133 2. 3.J5 _J2Q 10, ?O=Zh am-odl wt I-g 2.363 3.30 3 996 S_ 71 _57* 3.9273 5.365 2_5_ MO __3 223 _ 23,55J 0!1 6 PCDOS 5,10 6.350 7,192 6.t35 10.995 15.217 36,4M 1.=23 12.030 =.u5_ 10,714 U.769 15,023 7.7 22.802 La - - in6 51 1.365 2,11 Z-53 2.461 2.3"9 3. 3._39 3*7U3 4.997 6.0*6 20.762 btul all md D ; 5.10 Z7, 7,374 12,340 2,P 28 147 ?4.49 16.?U 12,253 1 .20 2337 Tott exprt 7,28 9 213 lD.IIo 11.37D 22511 22 5S 22 9911 19.n 19. 12 20 2i1 20.769 22J8 29 4S2 35,235 5 J, pri. lim (CL1ML/2-1O0) 49 55 62 63 134 10D 9 1o21 97 93 97 1D0 1I6 154 53 70 74 89 21D6 230 10 so Ii in 117 130 158 18 250 C_ffi 51 112 187 229 235 21 20 97 123 123 134 140 176 2.3 Od agrLea 1 -pn o 2 so 97 so 201 117 100 go 103 in 117 125 268 161 209 49 '1 76 91 109 119 200 91 91 a 94 20 113 26 164 0b_ tala -od 2 76 74 76 77 99 111 10 5 95 96 10 l 206 1 12in 1i _ _bmfsccmre s67 68 76 87 97 1D5 2D0 93 53 90 95 203 22 142 182 Oll mumd *re6stme 36 36 38 33 66 93 100 93 S2 D so 95 1.13 186 - - 3J 3S 6 93 00 201 S5 a 90 91 lD9 129 209 MOOL1gm art Contint price C31/92 - 1D0 12a6 lo 1.076 1.609 1.521 1.794 1.951 1.248 753 5S7 690 68 616 451 538 601 903 719 3A g2 870 56 a" 768 765 869 8"9 936 92 1.051 1.170 1.529 coff_ 220 295 335 396 530 486 364 373 412 43 657 70 699 529 616 Otb0w astwl1tairml *po 623 694 763 876 1.22 79 725 30 96 1.09 1.035 1.101 1.295 1.33!o 1.772 Tin 322 3Q2 333 356 356 302 435 332 361 361 31 330 404 429 685 Otb itala d o 2 130 1i 165 147 223 z83 283 365 517 732 776 73 61 1.D2 _ftwsfnctorea 215 238 331 616 4"1 516 65 870 1.537 1.830 2.238 2.30 2.701 3.349 6.045 ?oatl saw-oil 0 * .24 .232 *. 4 569 S.5 4 * .17 4 . 5.17 51 6. 29 6 j2, 7.22 J2 9 9 12.369 0G1 4 FcoCa? 15.912 17.639 L.M 13.067 218.742 18.00 16.481 13.227 14.7e5 13.779 13.59S 14.6-4 13.785 15.725 2.425 IC - - 426 1.358 2,102 2.269 2.363 2.66 2.810 3.914 3.939 *.092 4.60 6.731 5.161 Subtata OI1 aid D C 9 17.&1 19,330 191.W 20 S" 20 U9 23 15.571 17A 5 75 693 1 1 537 .21,7" 20,3 9 2D,6 17IJ3 yota'L amparts 19.2t2 t.37 23.532 24.256 26.64S3 15 9 19.353 22,746 D3.48 3 2 27.617 2.765 29 /a Zacladin plyanad matil I3W/8l. Source 1.ld k ataif atta d wo34etiin. INDONESI COUwrm ECONOHIC HKI4MUZDUN InEorts by Cate,gorz. 1975/76 - 1995/96 MIS miUllin) 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 1995/96 ---- Actual -E-- Rut. - Pojacted- At Current Prices Food 565 693 1,106 946 1,393 1,485 1,637 1,270 1,L10 940 908 993 1,227 1,438 1,624 Other consuser goods 200 260 281 344 365 s0 743 534 534 575 604 649 772 919 1,251 Intermdiate goods 1,869 1,867 2,275 2,361 3,501 4,274 4,983 4,861 4,661 4,60 4,904 5,456 6,884 8,818 15,276 Capital goods 2,456 3,347 3,579 3,692 3,769 5,538 7,198 9,139 7,921 6,150 7,200 7,800 9,320 11,263 16,702 Total non-oal Iports 5.090 6.67 7.241 7.543 9,04 11837 14A561 15.824 14.246 12.865 13A616 1a899 18,202 22.4:8 J4,533 0i1 and IXC sector 2,272 2,640 2,909 3;364 42,940 4,050 5,407 4,802 3,839 3,135 3,801 4,113 5,168 6,540 10,989 Non-factor services (net) 345 490 536 586 1,237 1,702 2,602 1,713 1,570 1,611 1,650 1,772 2,145 2,608 3,822 Totl mnrt ed FRZ.ZLM 2fLM IXM JUAU ALM2 ALM U a.M~ U=~ LA" ALAMJ 9=~ ILZM ZL= ALM hUAW Price index (1981/82 * 100) Food 74 52 55 75 68 90 100 77 80 79 77 84 108 132 169 Other consumr goods 60 62 66 77 87 96 100 98 94 91 96 103 120 140 179 Intermedlate goods 61 61 64 77 87 99 100 98 94 91 96 103 120 140 179 Capital goods 61 61 64 77 87 99 100 98 94 91 % 103 120 140 179 Total non-oil imports 61 61 64 77 83 97 100 96 93 90 94 102 119 140 179 Ol and LNG sector 48 49 53 60 74 93 100 98 94 91 96 103 120 140 179 Non-factor services (net) 61 62 67 77 88 97 100 98 94 91 96 103 120 140 179 Te to nZ 57Z 3~ AZ 2* 96LA UL 2U 9L 2Q JQ j in AZ2 At constant 1981/82 prices Food 746 1,333 2,011 1,261 2,048 1,650 1,637 1,658 1,410 1,186 1,186 1,186 1,140 1,093 959 Other consumer goods 333 419 426 447 419 551 743 564 568 629 629 629 641 654 698 lntermediate goods 3,155 3,011 3,447 3,326 4,024 4,361 4,983 4,951 4,954 5,031 5,108 5,286 5,718 6,280 8,523 Capital goods 4,093 5,398 5,423 4,795 4,332 5,651 7,198 9,307 8,420 7,382 7,499 7,557 7,741 8,021 9,320 Total non-oil imports 5.305 10,161 11,307 9.829 1 2 12,213 1 16,479 j31 14,227 14 421 14 658 15,240 16,048 19,50C Oil and 1MG sector 4,733 5,388 5,489 5,607 3,973 4,355 5,407 4,890 4,080 3,428 3,959 3,985 4,309 4,657 6,132 Non-factor services (net) 566 790 800 761 1,406 1,755 2,602 1,745 1,669 1,762, 1,719 1,717 1,782 1,857 2,133 |. Total Isei t and n eS and proj ec tion sA 22 5L0 Ł1421 1 L22 LUM 3 .ZZZ I# J Sourcet Iorld Dadi staff eatietesa nd projections, INDONISIA COUNTRY ECONOMIC KFORANOUM Daladce of Paynmnts. 1974/75 - 1995_96 (US$ million) 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1984/87 1988/89 1990/91 1995/96 Actual E------------------- at. - Projected 1. Export. 6 581 7 283 9 213 10 861 11,370 18 510 22,885 22 994 184672 19 817 20 243 20 769 22 866 29 452 36235 57 457 (a) oll and LG (groas) 7bt 50 9 -1R 173 TlZg=- 17Sfl7 1EIT TR715 W1 W4T TRj13 133J 20j02 2jP7 -T357 (b) Non-oil 2,033 1,873 2,863 3,507 3,996 6,171 5,587 4,170 3,928 5,367 5,902 6,516 7,356 9,432 12,387 23,686 2. Imports (Including net UPS) -6,514 -7 707 -9 297 -10 686 -11 493 -13 205 -17 589 -22 570 -22 339 -19 655 -17 611 -19 067 -20 784 -25 535 -31,586 -49 644 (a) Oil and LNG aector 1,10 2 -299 -3364 -2 940 -4:050 -5407 -4I802 -3 839 -3o135 -3:1 -4:113 -5 10 989 (b) Non-oil Imports -4,341 -5,090 -6,167 -7,241 -1,543 -9,028 -11,837 -14,561 -15,824 -14,246 -12,865 -13,616 -14,899 -18,202 -22,438 -i4,853 (c) N"S (net) -263 -345 -490 -536 -586 -1,237 -1,702 -2,602 -1,713 -1,570 -1,611 -1,650 -1,772 -2,145 -2,608 -3,822 3. Resource balance 67 -424 -84 175 -123 5 305 5 296 424 -3 66? 161 2 632 1 703 2 085 3 917 4.649 7,793 4. Factor marvices (not) -20! f-lf -m -1W! -CU5 -9M 3 _3 To -3572 4 J 1 4.3m Vitm -1- Z7[ le - (a) Interest on public debt t5 aI!S -31 8 57 :114 8 72 4 -1176 (b) Other (net) /a -125 -265 -400 -424 -547 -2,471 -2,441 -2,214 -2,426 -3,219 -2,976 -2,929 -3,143 -3,993 -4,487 -7,070 5. Net transfers 75 75 61 66 46 52 76 67 105 95 100 110 120 130 150 lO0 6. Balance on current account -63 -779 -741 -624 -1,109 2.251 -2,207 -2,719 -7.134 -4.2lJ -1.864 -2.715 -2,790 -2.323 -2.488 3,053 - 7, Direct foreign inveatwent 538 454 287 285 271 217 140 142 311 193 250 250 275 325 375 479 8. Public KLT loans (a) Groae disbursements 1,120 2,152 2,332 1,956 1,638 1,939 2,864 2,673 4,192 4,965 3,828 4,988 5,428 6,159 6,692 10,062 (b) Amorttration -212 -352 -437 -825 -977 -1,335 -987 -1,053 -1,102 -1,295 -1,628 -1,980 -2,137 -3,394 -4,603 -6,867 (c) Net disburaements 908 1,800 1,895 1,131 660 604 1,877 1,620 3,090 3,670 2,200 3,008 3,291 2,764 2,290 3,195 9. Other capital (net) -1,392 -1,839 -440 -141 886 -1,382 -1,488 -31 383 1,974 287 -143 -103 24 132 -300 10. Change in reserves (- increame) 9 364 -1,001 -651 -708 -1,690 -2,736 988 3,350 -1,619 -873 -400 -673 -791 -309 -320 11. Net official reserves 920 556 1,557 2,205 2,916 4,606 7,342 6,354 3,004 4,623 5,496 5,896 6,568 7,534 8,325 9,075 Mmooranduu item. Reservea in m-athe of non-oil Imports e NPS 2.4 1.2 2.8 3.4 4.3 5.6 6.5 4.4 2,0 3,4 4,4 4.5 4.5 4,3 3.6 2.7 Public debt ervice as 2 of exports /b 6.3 10.3 11.7 15.9 18.4 16,0 11.5 14.4 19.4 19,4 25,1 27.4 27.1 29,3 29,8 27.1 Total net foreign aaaets (S billion) /c 10.6 6,3 8,4 9.9 10.3 11,0 12.8 13.8 17.1 In months of imports of goods 6.4 3.7 5.6 7,4 7.1 6.9 6.5 5.7 4.5 Current accoutt balance as I of GNP -3,3 -8.5 -6.0 2.4 -3.3 -3.1 -2.1 -1.9 -1.5 /a After 1980/81 includes e atimted interest an privata short-term debt. Th Oil exports on net baail. 7; Includes net foreign assets of deposit sonay banks In addition to official reaervea. Source: World Bank staff estimtam and projections. INDONESIA COUNTRY ECONOMIC MEMORANDUM oil Sector Projection. 1984/85-1995/96 (Volumes In million bareelo per year; values in US$ million) 1984/85 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1995/96 Prices ($ per barrel) Crude 28.40 27,90 28,40 31.00 33.70 36.76 40.00 65,00 Products (erports) 27.01 27,34 28.40 31.62 35.39 38.60 42.00 70.85 Products (liports) 34,08 30,69 31,24 34,10 37.07 40.44 44.00 71.50 1. Crude production /a 533 518 SS1 569 588 588 595 528 2. Refini48 5ju (volume) 220 248 248 248 248 248 248 250 A. Crude dinietic D7 Tff Tff Yfl Tfl flf fYf TIT B. Crude imports (volume) 23 37 37 37 37 37 37 37 3. Domestic conaum tlon 159 162 166 17i 175 179 184 210 A. Doesic refinries 131 T 15 U W m TX B. Imports (volume) 8 8 8 8 a a 8 8 (value) 273 246 250 273 297 323 352 572 4. Gross exports (value) 11 051 10 714 11 769 13 327 15 023 16 218 17,752 22 808 A. Crude (volume) ="W = 03 =3f4 517[ =AW 7'Uw (value) 9,548 8,560 9,646 11,095 12,676 13,827 15,338 20,443 B. Products (volume) 56 79 75 71 66 62 57 33 (value) 1,503 2,155 2,123 2,232 2,347 2,391 2,414 2,366 5. Crude and product Imports (2B + 3B) 934 1.264 1.287 1.404 1.527 1.665 1.812 2,945 6. A. Production-related Imports 1,967 2,250 2,598 2,978 3,417 3,939 4,560 7,840 B. Non-factor service Imports 620 698 751 1ll 876 946 1,022 1,304 C. Factor service payment. 1,664 1,510 1,599 1,;,3 1,997 2,148 2,331 3,259 7. O-l current accommt (4-5-6) A=. Q i2Z L=2 ALM IA, Hemorandum items Domestic proceselng capacity 220 250 275 275 275 275 275 275 Coats of production per barrel 4.34 5.43 5.89 6.54 7.27 8.38 9.58 18.56 /a Includes condensates. Source: World Bank staff estimates and projections. INDONESIA COUNTRY EODONIC N(ORANDUM ProlectLon of Crude Oil Rafinioo Cspacity. 1981/02 - 1995196 (million barrelo per year) 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1988/89 1990/91 1995/96 Reflanis Cacity /a axtlng t lne rtieneries) 140 140 140 140 140 155 155 155 155 New refinerLes Dalikpapan 40 55 60 60 60 60 Cllacap 40 55 60 60 60 60 Subtotal 80 110 120 120 120 120 Total Domentic 140 140 140 220 250 275 275 275 275 /a Capacity for input of crude. Thse doea not include the new hydrocracker at Dunal, which will process LSWR (31 a. bbl. per year), not crude, nor does lt Include the proposed but Indefinite Sorong/Jakarta/Batam Island refinery that could come on stream ln the late 1980s or early l990o. Sourcet Ministry of Nining and Energy. INDONESIA COUNTRY ECONOMIC MEMORANDUM LNG Current Account, 1981/82 - 1995/96 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89 1990/91 1995/96 Actual Eet. -- ----- Projacted --- Exports (f,o.b.) 2,343 2,461 2,399 3,290 3,539 3,743 4,494 4,997 6,095 10,762 Imports of goods and services /a 960 1,084 1,044 1,338 1,591 1,682 1,940 2,112 2,190 3,806 Balance on current account 1.382 1,377 1.355 1.952 1.948 2.061 2,554 2.884 3.906 6.956 He i tem. Price (SflH4TU) /b 5.12 5.15 4.37 4.30 4.60 4,68 5.11 5.55 6.59 10.71 Rxport volume (miTlion HHBTU) 458.0 477.8 549,4 765.5 770.0 800.0 880.0 900.0 * 925.0 1,005.0 of which Existing plants /c (458.0) (477.8) (549.4) (765.5) (770.0) (800.0) (800.0) (800.0) (800.0) (800.0) New plants /d - - - - - - ( 80.0) (100.0) (125.0) (205.0) /a Includes factor service payments (contractors' shares for LNG plants and cost of gas recovery), 7 FOB basis; price movements after 1983/84 are assumed to be lame in percentage term as for crude oll. 7c Includes 5 trains at Arun and 4 traLns at Bontang. Assumes that exports In 1984/85 are limited to sinimum volumeu under contract. /d Assuaes that additLonal train for export to Korea comes on stream in 1987/88 and that a further expansion of about 50 million MMBTU (1 mililon metric tons) is on stream In 1990/91. Sources Bank Indonesia and World Dank staff eatimateo and projectlons. 1ii - 179 - ANNEX I Table 7 INDONESIA COUNTRY ECONONIC MEMORANDUM Terms of Trade Index, 1973/74 - 1995/96 (1981/82 - 100) Non-Oil Exports: /a Total Exports: /b Nonr-Oil Imports (including NFS) Total Imports (includiug NFS) 1973/74 96.0 50.0 1974/75 90.0 60.0 1975/76 76.0 62.0 1976/77 95.0 70.0 1977/78 107.0 72.0 1978/79 107.0 50.0 1979/80 120.0 86.0 1980/81 108.0 97.0 1981182 100.0 100.0 1982/83 97.8 97.4 1983/84 111.8 93.7 1984/85 112.7 95.2 1985/86 110.8 92.3 1990/91 106.8 90.4 1995/96 108.0 107.1 /a Based on price indices of non-oil exports (Table 1) and non-oil imports, including net NFS (Table 2). /b Based on price indices of total exports (Table 1) and imports, including net NFS (Table 2). Source: World Ban-k staff estimates and projections. INDONESIA COUNTRY ECONOHIC KHEORANDU The Public Sector CaDita1 Account. 1974/75 - 1984/85 (Rp bilon) 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 h Coverneat aourcoa 928 1 492 1 547 1 522 1 888 2 047 3 403 5 763 7 788 7 107 7 787 Public national savingts m T M 7 R 7 Net foreign savings /b 429 830 865 701 677 895 1,275 1,543 2,639 3,609 2,310 Cavernment borrowing7 c 48 3 -343 -351 -293 -1,218 -1,748 -137 822 -2,342 -2,500 Use 928 1,492 1 547 1,522 1,888 2,047 3,403 5763 7,788 7 107 7,787 ransfers to public enterprises /d P0 '74Z IWf '111 639 '--61S 1 M- 2,13T I 7:113 49S6% :18w Direct governeent inventment /e 458 750 520 954 1,249 1,422 1,908 3,632 4,223 2,651 3,987 Public entercrise sources 768 1 221 1 346 749 989 1 773 2 093 2 730 4 143 4 761 4 910 Transfers from CentralOovernmsnt 7X "W V',0W To Zh '1!3f t2,13 P,NT V.313 3iBW 1 Interaal savings /f 198 217 196 227 250 275 300 312 365 401 450 Domestic borrowing /8 100 262 123 -46 100 -873 298 287 213 -96 660 Uses uMiTsc enterprise investment 768 1,221 1.346 749 989 1.773 2.09- 2.730 4.143 4.761 4,914 /a Total government revenues (excluding regional governmeats) lesr current expenditures. b Gross disbursements of public debt lees amortization payments. 71 Net changes In government savinge with the financial system. 71 Include, budget and off-budget transfers to public enterprises. 71 Calculated as a residual. 7? Eatimate based oan 1974-77 public enterpriae capital account survey, BPS. 7i Excludes Dulog; also exclude. Pertamina until 1978/79. /h Preliminary. Sourcel World Bank staff estimates based on budget data, Bank Indonesia financial statistice and the World Bank Debtor Reporting System. I!1 181 - INDONESIA ODUNTRY ECONOMIC MEMORANDUM Annex II: HISTORICAL DATA List of Tables Population and Employment 1.1 Population 1930, 1961, 1971, 1980: Average Annual Growth Rates, 1930-80 and Population Density, by Region and Province. 1.2 Distribution of Population by Age Group and Sex, 1961, 1971, 1980. National Income Accounts 2.1 Gross Domestic Product by Industrial Origin at Current Market Prices, 1967-83. 2.2 Distribution of GDP at Current Market Prices, 1971-83. 2.3 Gross Domestic Product by Industrial Origin at Constant 1973 Market Prices, 1971-83. 2.4 Distribution of GDP at Constant Market Prices, 1971-83. 2.5 Expeaditures on GDP at Current Market Prices, 1971-83. 2.6 Expenditures on GDP at Constant 1973 Market Prices, 1971-83. 2.7 Estimates of the Terms of Trade Effects, 1972-83. International Trade and Balance of Payments 3.1 Balance of Payments, 1973/74 - 1983/84. 3.2 Non-oil Exports, 1971/72 - 1982/83. 3.3 Export Values by Country of Destination, 1971-84. 3.4 Import Values by Country of Origin, 1971-84. 3.5 Oil Balance of Payments, 1976/77 - 1983/84. 3.6 LNG Balance of Payments, 1977/78 - 1983/84. External Debt 4.1 External Public Debt Outstanding Including Undisbursed as of December 31, 1983. 4.2 Service Payments, Commitments, Disbursements and Outstanding Amounts of External Public Debt. 4.3 External Public Debt by Country and Type of Creditor as of December 31, 1983. 4.4 External Public Debt as of December 31, 1983 by Major Currency and Country. 4.5 Loan Commitments by Country, 1975-83. 4.6 IGGI and Nonr-IGGI Disbursements and Net Resource Transfers, 1975-83. 4.7 Summary External Debt Data, 1975-83. - 182 - Public Finance 5.1 Central Government Budget Summary, 1973/74 - 1985/86. 5.2 Central Government Receipts, 1973/74 - 1985/86. 5.3 Central Government Expenditures, 1973/74 - 1985/86. 5.4 Development Expenditures, 1973/74 - 1985/86. 5.5 Development Expenditures by Sactor, 1975/76 - 1985/86. 5.6 Project Aid by Sector, 1975/76 - 1985/86. Monetary Statistics 6.1 Money Supply, 1975-84. 6.2 Changes in Factors Affecting Money Supply, 1975-84. 6.3 Consolidated Balance Sheet of The Monetary System, 1975-84. 6.4 Consolidated Balance Sheet of The Monetary Authorities, 1975-84. 6.5 Banking System Credits by Ecormouic Sector, 1975-84. 6.6 Banking System Credits by Type of Bank, 1975-84. 6.7 Small-Scale Investment Credits and Permanent Working Capital Credits 1975-84. 6.8 Medium Term Investment Credits by Economic Sector, 1975-84. 6.9 Time Deposits with State Banks, 1975-84. 6.10 Interest Rates on Deposits at Commercial Banks, 1978-83. Agricultural Statistics 7.1 Principal Agriculture Products by Subsectors, 1968-84. 7.2 Agricultural Production of Major Crops by Type of Product, 1970-83 7.3 Rice - Area Harvested, Production and Yield, 1968-84. 7.4 BULOG Rice Program, 1978/79-1983/84. 7.5 Area Covered Under Rice Intensification Programs, 1969-83. Other Sectors 8.1 Quarterly Index of Manufacturing Production for Selected Industrial Groups, 1979-84 (3rd quarter). 8.2 Production of Minerals, 1973-84. 8.3 Crude Oil Production by Company, 1969-1984 (July). 8.4 Petroleum Products - Supply and Demand, 1970-84. 8.5 Domestic Sales of Petroleum Products, 1971-84. Prices 9.1 Indonesia Consumer Price Index, 1979 - February 1985. 9.2 Wholesale Price Indices in Indonesia, 1975-84. 9.3 Domestic Prices of Petroleum Products, 1972-85. Investments 10.1 Approved Foreign Investment by Sector, 1977-83. 10.2 Implementation of Foreign Investment by Sector, 1977-83. 10.3 Approved Domestic Investment by Sector, 1977-83. - 183 - Tab 1.1 INDONESIA couuMY zcowwic MDIOAIDUN Populatlaz 1930, 1961, 1971 and 1980: Avere Aonual Growth Rat_. 1930-80 and Pouaatlom D1ty. ab Reiuon md Proa ice Deulty 2930 -M-17Census Groorth rate tS) (tPer<"|/q km) RegIon - 1971 la I 1930-61 696127. i972-m 1971 1980 Java 41 718 63 059 76 086 91 270 1.3 1.9 2.0 576 690 OI Jakarta -171m- T 3 1 T455 ;T 7,71! l,lrf vest Java 10,586 17,615 21,624 27,454 1.7 2.1 2.7 467 593 Central Java 13,706 18,407 21,877 25,373 1.0 1.7 1.7 640 742 DI Yogyakarta 1,559 2,241 2,489 2,751 1.2 1.1 1.1 785 868 Kat Java 15,056 21,823 25,517 29,189 1.2 1.6 1.5 532 609 Sumtra 8.255 15739 20.809 28.017 2.1 2.8 3.4 U 59 Lempyag *511 ~ 1~77T 1i3n 31 I' 11 Beankulu 323 406 519 768 0.7 2.5 4.5 25 36 South Sumtra 1,378 2,773 3,441 4,630 2.3 2.2 3.4 33 45 Rlau 493 1,235 1,642 2.169 3.0 2.9 3.1 17 23 Jmbi 245 7U 1,006 1,446 3.6 3.1 4.1 22 32 West Sumatra 1,910 2,319 2,793 3,407 0.6 1.9 2.2 56 68 North Sumtra 2,542 4,965 6,622 8,361 2.2 2.9 2.6 94 118 Aceh 1,003 1,629 2,009 2,611 1.6 2.1 3.0 36 47 Kalimntan 2 170 4 102 5 155 6 723 2.1 2.3 3.0 10 12 ,eat Na1±.nta T1U! !WJ Y C, ,,3 IT Central Kallmantan 203 497 702 954 2.9 3.5 3.5 5 6 South Xallmntan 836 1,473 1,699 2,065 1.8 1.4 2.2 45 55 ea-t KaIllumtan 329 551 734 1,218 1.7 2.9 5.8 4 6 Su--1ei 4 231 7 079 8 528 10 409 1.7 1.9 2.2 45 55 Cenmtral Sulaveut -1 ' T.I u 1 North Sula_el 748 1,310 1,719 2,115 1.8 2.8 2.3 90 111 South Sulael 2,657 4,517 5,181 6,062 1.7 1.4 1.8 71 83 Southast Sulawesl 436 559 714 942 0.8 2.5 3.1 26 34 Other Islands 4 219 7 106 8 630 11 071 1.7 2.0 2.8 1S 19 1rli 1;101 I711 TL- 2tm 470 -1;7 -1. Arl 7 West Nma Teggara 1,016 1,808 2,203 2.725 1.9 2.0 2.4 109 135 Mot Nana Tenggra 1,344 1,967 2,295 2,737 1.2 1.6 2.0 48 57 Naltuk 579 790 1,089 1,410 1.0 3.3 2.9 15 19 Irian Jay& 179 758 923 1,174 4.8 2.0 2.7 2 3 Ent Tluor n.a. n.a. n.a. 555 u.a. n.a. u.n. U.S. 37 oSAl lando 60,593 97,08 11.0 147.490 AA, lal 2 zz n.a. - not- available. /a Includes adjuttent for the ezclusLon of rural Iria Jaya. Sowrcea: BPS, Population Census Reports, 1961 and 1971, 1980 and Statistical Yearbook 1982. INDONESIA COUNTRY ECONOMIC MEMORANDUM Distribution of Population by Age Group and Sex, 1961, 1971, 1980 1961 1971 1980 Age Group Males Females Total Hales Females Total Hales Females Total 0-4 8,529 8,649 17,178 9,674 9,560 19,234 10,813 10,339 21,152 5-9 7,745 7,700 15,445 9,593 9,302 18,895 10,891 10,480 21,371 10-14 4,353 3,892 8,245 7,406 6,875 14,281 9,225 8,550 11,775 15-19 3,865 3,905 7,770 5,627 5,779 11,406 7,637 7,866 15,503 20-24 3,480 4,373 7,853 3,627 4,461 8,088 5,965 7,000 12,965 25-34 7,392 8,610 16,002 7,722 9,226 16,948 9,587 9,832 19,419 35-44 5,765 5,406 11,171 7,062 7,119 14,181 7,846 8,119 15,965 45-54 3,587 3,511 7,098 4,360 4,213 8,573 5,743 5,905 11,648 55-64 1,913 1,865 3,778 2,224 2,373 4,597 3,312 3,412 6,724 65+ 1,183 1,245 2,428 1,450 1,539 2,989 2,269 2,667 4,936 Unknown 60 57 117 7 8 15 17 13 30 Total 47,872 49,213 97,085 58,753 (455 119,205 73,306 74,184 147,490to -- … -- ---------- - ---- - - --- Percentsge distribution - 0-4 17.8 17.6 17.7 16.5 15.8 16.1 14.8 13.9 14,3 5-9 16.2 15.6 l5.9 16.3 15.4 15.9 14.9 14.1 14.5 10-14 9.1 7.9 8.5 12.6 11.4 12.0 12.6 11.5 12.1 15-19 8.1 7.9 8.0 9.6 9.6 9.6 10.4 10.6 10.5 20-24 7.3 8.9 8.1 6.2 7.4 6.8 8.1 9.4 8.8 25-34 15.4 17.5 16.5 13.1 15.3 14.2 13.1 13.3 13.2 35-44 12.0 11.0 11.5 12.0 11.8 11.9 10.7 10.9 10.8 45-54 7.5 7.1 7.3 7.4 7.0 7.2 7.8 8.0 7.9 55-64 4.0 3.8 3.9 3.8 3.9 3.9 4.5 4.6 4.6 65+ 2.5 2.5 2.5 2.5 2.5 2.5 3.1 3.6 3.3 Unknown 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1 100.0 Source: BPS 1961, 1971 and 1980 cenaus. ii INDOMSIA 00UNrRY EWfOHIC KEM ANDUKM Gross Domestic Product by Indu_trlal Origin at Current Market Prices, 1967-83 (Rp. billion) 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1961 1982 19831a Agriculture 457 1,069 1 339 1 575 1.646 1.837 2.710 3,497 4,003 4 812 5,906 6,706 8 996 11 290 13 643 15 668 18 772 Fare ood crops 75 726 -'1ff2 16i 961 1,071 1.573 2,095 2,54 3,660 3,9"2 =6! 61 35J1, 12 = 3U-! Farm nonfood cropa 46 133 199 214 196 226 323 386 358 481 762 802 1,201 1,304 1.327 1,227 1,496 Estate crops 19 47 69 83 107 118 152 191 184 213 326 404 590 693 904 1,026 1,146 Livestock products 33 53 89 103 124 135 173 223 303 346 305 462 690 991 1,251 1,418 1,521 Forestry 6 35 59 102 142 173 355 423 413 513 525 653 1,048 1,142 1,140 983 1,040 Fishery 54 75 101 112 116 114 134 179 191 215 328 393 575 803 912 1.053 1,188 Mining & quarrying 23 87 129 173 294 491 831 2,374 2,485 2,930 3,600 4,358 6,980 11,673 12,971 11,708 13,824 Manufacturing 62 179 251 312 307 448 650 890 1,124 1,453 1,817 2,420 3,311 5,288 5,822 7,681 8,918 Electricity, gSa & water 3 9 13 15 18 20 30 52 70 98 106 118 149 225 288 380 503 Construction 14 45 75 100 128 174 262 406 590 813 1,023 1,242 1,790 2,524 3,U8 3,507 4,434 Commerce, hotels, etc. 149 356 476 619 592 769 1,118 1,775 2,104 2,552 2,959 3,450 4,775 6,391 7i906 8,865 10,875 Transport & coeammicatlon. 19 57 77 96 162 182 257 442 521 663 843 1,032 1,422 1,9S 2,352 2,795 3,325 Banking, etc. 4 12 22 33 45 53 83 13 151 207 236 396 655 752 1,404 1,604 1,341 Ownership of dwelling 17 41 53 66 85 103 143 194 258 319 542 671 914 1,200 1,439 1,703 1,962 Public administration & defence 41 116 136 183 214 290 405 585 864 1,074 1,394 1,685 2,200 3,142 3,905 4,429 5,225 Other services 59 126 147 168 181 197 264 380 473 546 607 668 833 996 1,119 1,293 1,536 Gro,n dometic oroduct r l 2 ^AL 3 3-672 Lfl2 6.7S 1,643 15.033 /a Preliminary. Source: BPS. INDONESIA COUNTRY ECONOHIC NEKDRANDUM Distribution of GDP at Current Market Price., 1971-83 (In percent) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/- Economic sectors Agriculture, forestry and fishery 44.8 40.2 40.1 32.7 31.7 31.1 31.0 29.5 28.1 24.8 25.3 26.3 26.4 mining 8.0 10.8 12.3 22.2 19.7 13J.9 18.9 19.2 21.8 25.7 24.0 19.6 19.4 Manufacturing 8.4 9.8 9.6 8,3 8.9 9.4 9.5 10D6 10.3 11.6 10.8 12.9 12.5 Electricity, gas and water 0.5 0.4 0.4 0.5 0.6 0.6 0.6 0.5 0.5 0.5 0.5 0.6 0.7 Construction 3.5 3.8 3.9 3.8 4.7 5.3 5.4 5.5 5.6 5.6 5.8 5.9 6.2 Transport and co.runications 4.4 4.0 3.8 4.1 4.1 4.3 4.4 4.5 4.4 4.3 4.4 4.7 4.7 Other services 30.4 30.9 29.8 28.5 30.5 30.4 30.1 30.2 29.3 27.5 29.3 30.0 30.1 Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Expenditures categories Private consumption 77.6 72.5 71.1 68.6 69,1 68.4 65.6 66.8 60.9 60.5 65.8 69.9 69.1 Government consumption 9.3 9.1 10.6 7.9 9.9 10.3 10.9 11.7 11.7 10.3 10.7 11.5 10.9 Gross domestic Investment 15.8 18.8 17.9 16.8 20.3 20.7 20.1 20.5 20.9 20.9 21.4 22.6 24.1 Exports, net -2.6 -0.4 0.4 6.8 0.7 0.6 3.4 1 6.5 8.3 2.1 -3.9 -4.2 Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a Prellainary. Source: BPS. I!1 INDONESIA COUNTRY ECONOMIC MEMOMDUN Gross Domestic Product by Industrial Origin at Constant Market Prices. 1971-83 (Rp, bililon) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983La Agriculture 2 441 2 479 2 710 2 811 2 811 2 944 2 992 3 135 3 256 3 425 3 594 3 670 3 846 Far f6ood crop. J. W5 ft. P tffl V w- i w Parm nonfood crops 302 329 323 307 312 325 385 388 402 417 430 460 485 Estate crops 154 160 152 174 183 188 201 210 231 233 244 285 388 Livestock products 160 169 173 186 202 216 177 184 202 212 22 230 241 Forestry 258 276 355 325 274 310 335 352 338 308 246 196 203 Fishery 131 130 134 138 144 150 159 166 174 182 194 204 217 Mining and quarrying 551 674 831 859 828 952 1,070 1,049 1,047 1,035 1,069 940 957 Manufacturing 490 564 650 755 848 930 1,058 1,236 1,395 1,705 1,878 1,901 1,943 Electricity, gas and water 25 26 30 37 41 46 49 57 69 78 90 106 113 Construction 171 222 262 320 365 385 464 529 563 639 720 759 805 00 Commerce, hotels, otc, 924 1,028 1,118 1,224 1,294 1,351 1,438 1,530 1,681 1,852 2,043 2,159 2,240 Transport and comatlcations 210 229 257 288 303 343 439 514 560 609 677 717 753 Banking, etc, 64 75 83 88 102 117 151 165 180 208 231 258 277 Ownership of dwelling 93 121 143 174 198 209 252 288 306 336 359 377 401 Public administration and defence 326 393 405 443 564 596 689 768 . 805 972 1,076 1,115 1,176 Other services 250 256 264 270 277 283 280 296 303 310 318 323 331 Otua.. dmestic tlaruct ^ ~ AaL~a, ~~aia L~A1& A41Ł LL L5L 7 ~.d"269 LJL.a6 JL.§12-l55 ALM.3 /a Preliminary. Source 3 BPS. I W INDONESIA COUNTRY ECONOMIC HEMORANDUM Distributlon of GDP at Constant Market Prices, 1971-83 (In percent) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 /a Economic sectors Agriculture, forestry and fishery 44,0 40.9 40.1 38.7 36.8 36,1 33,7 32,8 32,0 30,7 29.8 29,8 29.9 Mining 9.9 11.1 12,3 11.8 10.9 11,7 12.0 11.0 10.3 9.3 8.9 7,6 7.5 Manufacturing 8.8 9.3 9.6 10.4 11.1 11.4 11.9 12.9 13.7 15.3 15.6 15.4 15.1 Electricity, gas and water 0.5 0.4 0.4 0.5 0.5 0.6 0,6 0.6 0.7 0.7 0.7 0.9 0.9 Construction 3,1 3,7 3.9 4.4 4,8 4,7 5,2 5.5 5.5 5.7 6.0 6.2 6.3 Transport and communications 3.8 3.8 3.8 4.0 4,0 4,2 4.9 5.4 5.5 5.5 5.6 5.8 5.9 Other services 29.9 30.9 29.8 30,3 31,9 31,3 31.6 31.8 32,2 32,9 33.4 34.3 34.5 Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ExpendLture cate8wories Private consumption 73,7 71.3 71,1 75.7 74,7 75,5 72,1 71,9 77.4 79.4 85.9 86.8 89.6 Government consuaptlon 9.3 9.2 10.6 8.8 11.0 11.0 11.8 12.8 13,2 13.3 13.6 14.4 13,7 Gross domestic investment 15.6 17.0 17.9 19.8 21.6 21.4 22.8 24.4 24.0 25.9 26.7 29,5 30.5 Exports, net 1.3 2.5 0.4 -4.3 -7.3 -7.9 -6.6 -9.1 -14.6 -18.7 -26,2 -30.7 -33,8 Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.00 100.0 100.0 100.0 100.0 100.0 /a Preliminary. Sources BPS. NH| 8$. INDONESIA COUNTRY ECONOHlC MEHORANDUH Expenditures on GDP at Current Market Prices, 1971-83 (Rp. billion) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/a Private consumption 2,848 3,309 4,804 7,344 8,732 10,572 12,481 15,184 19,514 27,504 35,560 41,671 49,231 Government consumption 341 414 716 841 1,254 1,591 2,077 2,659 3,733 4,688 5,788 6,832 7,791 Gross domestic investment 580 857 1,208 1,797 2,572 3,205 3,826 4,671 6,704 9,485 11,553 13,467 17,188 Export of goods and non-factor services 527 762 1,356 3,044 2,897 3,621 4,513 4,974 9,629 13,849 14,928 13,345 17,733 Less Import of goods and non-factor services 624 778 1,331 2,318 2,812 3,522 3,864 4,742 7,555 10,080 13,802 15,682 20,728 Groas domestic product 3,672 4,564 6,753 10,708 12,643 15A467 19.033 22,746 32,025 45446 027 59633 71,215 ,0 Net factor from income abroad -68 -144 -245 -499 -557 -483 -678 -867 -1,484 -2,011 -1,925 -1,958 -3,036 GNP 3,604 4,420 6,508 10,209 12,086 14,984 18,355 21,879 30,541 43,435 52,102 57,675 68,179 ODS 483 841 1,233 2,523 2,657 3,304 4,475 4,903 8,778 13,254 12,679 11,130 14,193 ONS 415 697 988 2,024. 2,100 2,821 3,797 4,036 7,294 .11,243 10,754 9,172 11,157 GDI/GDP (2) 15.8 18,8 17,9 16,8 20,3 20.7 20,1 20.5 20.9 20.9 21.4 22.6 24.1 GDS/GDP (2) 13.2 18.4 18.3 23,6 21.0 21.4 23.5 21.6 27.4 29.2 23.5 18.7 19.9 GNSIGNP (2) 11.5 15.8 15,2 19,8 17.4 18.8 20.7 18.4 23.9 25.9 20.6 15.9 16.4 /a Preliminary. Sources BPS. Ng-4 1~ 4 INDONESIA COUNTRY ECONOMIC MEKORANDUM ExpendLtures on GDP at Constant 1973 Karket Prices, 1971-83 (Rp. billion) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983/a Private consumption 4,088 4,324 4,804 5,502 5,699 6,154 6,400 6,880 7,866 8,867 10,350 10,698 11,501 Government consumption 518 561 716 641 836 896 1,044 1,288 1,345 1,490 1,641 1,775 1,759 Gross domestic Investment 867 1,032 1,208 1,440 1,650 1,749 2,027 2,333 2,436 2,896 3,219 3,637 3,921 Export of goods and nonfactor servlces 943 1,143 1,356 1,445 1,410 1,650 1,806 1,824 1,822 1,719 1,678 1,444 1,535 Less Import of goods and nonfactor services 871 993 1,331 1,759 1,964 2,293 2,395 2,698 3,304 3,803 4,833 5,229 5,874 Gross domestic product 5,545 6,067 6,753 7.269 7,631 8,156 8,81!2 9,567 10,165 11,169 12,055 12325 12,842 Net factor income abroad -95 -184 -245 -378 -389 -314 -420 -493 -649 -759 -674 -653 -835 Terms of trade effect -211 -170 0 861 616 701 997 1,002 2,383 3,507 3,542 3,004 3,489 ODY 5,334 5,897 6,753 8,130 8,247 8,857 9,879 10,569 12,548 14,676 15,597 15,329 16,331 GNP 5,450 5,883 6,508 6,891 7,242 7,842 8,462 9,074 9,516 10,410 11,381 11,672 12,007 GNY 5,239 5,713 6,508 7,752 7,858 8,543 9,459 10,076 11,899 13,917 14,923 14,676 15,496 GDS 728 1,012 1,233 1,987 1,712 1,807 2,435 2,461 3,337 4,319 3,606 2,856 3,071 GNS 633 828 988 1,609 1,323 1,493 2,015 1,968 2,688 3,560 2,932 2,203 2,236 GDI/GDP (2) 15.6 17.0 17.9 19.8 21.6 21.4 22.8 24.4 24.0 25.9 26.7 29,5 30.5 GDS/GDY (2) 13.6 17.2 18.3 24.4 20.8 20.4 24.6 23.3 26.6 29.4 23,1 18.6 18.8 GNS/CNY (2) 12.1 14.5 15,2 20.8 16.8 17.5 21.3 19.5 22.6 25.6 19.6 15.0 14.4 /a Prellolnary. Source: BPS. 0g1 INDONESU COUNTRY ECONOMIC HNBCANDUH Estimate of the Term of Trade Effects. 1972-803 (Rp. billion) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 19831. Exports In current prices 762 1,356 3,044 2,897 3,621 4,513 4,974 9,629 13,849 14,928 13,345 17,733 Exports in 1973 constant prices 1,143 1,356 1,445 1,410 1,650 1,806 1,824 1,822 1,719 1,678 1,444 1,535 Export price Index 67 100 211 205 219 250 273 528 806 890 924 1,155 Imports In current peices 778 1,331 2,318 2,812 3,522 3,864 4,742 7,555 10,080 13,802 15,682 20,728 Imports In 1973 constant prices 993 1,331 1,759 1,964 2,293 2,395 2,698 3,304 3,803 4,833 5,229 5,874 Import price Index 78 100 132 143 154 161 176 229 265 286 300 353 Exports (import capacity) 973 1,356 2,306 2,026 2,351 2,803 2,826 4,205 5,226 5,220 4,448 5,024 Terma of trade index 85 100 160 144 143 155 155 231 304 311 308 327 Term of trade effect -170 - 861 616 701 997 1.002 2.383 3507 3,542 3.004 .3.489 Net factor Income from abroad In current prices -144 -245 -499 -557 -483 -678 -867 -1,484 -2,011 -1,925 -1,958 -3,036 Net factor income from abroad In 1973 prices -184 -245 -378 -389 -314 -420 -493 -649 -759 -674 -653 -835 /a Preliminary. Source: BP8. *1-f NDONESIA COUNThY ECONOMIC KlMMUNDUN Balance of Pazmnto, 1973/74 - 1983/84 (ug* million) 1973/74 1974/75 1975/76 1976/77 1977/7B 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1. met oil /a 641 2,638 3,138 3,710 4,352 3,785 6,308 9,345 8,379 5,788 6,016 2. N t LNG /a - - - - 93 225 667 1,256 1,382 1,378 1,355 3. Non-oil (net) -1 397 -2 776 -3 992 -4 512 -5 135 -5 165 -4 777 -8 470 -12 551 -14 205 -u 522 Exports, FOD ti M 11i7 7 t . - T T17im 4,170 3 928 5W367 Imports, CIF -2,938 4,341 -5,090 -6,167 -7,241 -7,543 -9,028 -11,837 -14,561 -15,824 -14,346 Servicem (noufveight) -364 -468 -755 -1,208 -1,401 -1,601 -1,920 -2,220 -2,160 2,309 -2,543 4. Current account (1+2+3) -756 -138 -854 -802 -690 -l,lSS 2,198 2131 -2,790 -7,039 -4,11 5. iDR. - - - - - 64 65 62 - *- - 6. Official capital 643 660 1 995 1 823 2 106 2 101 2 690 2 684 3521 5 011 5 793 IGCI mUn 46T7 E Program aid 281 180 74 147 157 94 239 118 50 21 84 Project aid 275 333 871 1,449 1,537 1,473 1,998 2,288 2,365 2,884 4,171 ODA (275) (333) (482) (513) (661) '(814) (1,106) (1,299) (996) (1,356) (1,902) Non-ODA (H) (-) (389) (936) (876) (659) (892) (989) (1,369) (1,528) (2,269) Non-ICCI 87 147 1,00S 227 412 534 453 278 1,106 2,106 1,538 7. Official debt repayment (principal) -81 -89 -77 -166 -761 -632 -692 -615 -809 -926 -1,010 8. Hiscellaneous pital 549 -131 -1 075 38 176 392 -1 315 -361 1 140 1 795 1 191 Direct inveatment m 53 -- 217 5 7 1U 14I 14 2 Others 218 -669 -1,529 -249 -109 121 -1,532 -501 998 1,484 998 9. Total (4 through 8) 355 302 -11 893 831 770 2,946 3L901 1,062 -1,159 1,823 10, Errors and omissions 5 -311 -353 108 -180 -62 -1,256 -1,165 -2,050 -2,121 247 11. Monetary movements -360 9 364 -1,001 -651 -708 -1,6j00 -2,736 988 3,280 -2,070 /a Cross ezports of products less Imports of goods and services of the oil and ING sectors respectively. Source: Bank Indonesia. - 19- AM It Ihfimma~ ~ ~ ~ ~~~~~~VWr- or-all t,ca. 197V72 - 13/4 19717n 1773 19 A74 1974/75 19/76 1976/77 1977/78 1978179 1979/U 19D 0/8± 186182 19Om/3 1Ma//8a V&T- De0 275 720 615 527 a5 943 1.130 2,16 1.672 952 a" 1.123 ra 3.340 12,701 15.70" 12.436 11.33J 15.770 13.717 16,141 16,259 11.682 5.949 5.101 5.481 rmce 19 22 46 49 46 54 60 70 133 143 160 176 205 tobbr fai8 215 211 403 425 331 577 603 774 1.101 1.073 770 614 962 TolR 309 8 26 02 843 S46 392 373 923 1,015 954 833 377 1,079 Piee 266 255 535 505 450 647 697 S34 1.04 11.30 672 701 392 Pals oll 45 42 89 2M 14 147 202 221 257 176 79 103 U 3 Ver 212 2a5 279 303 417 415 4N 415 440 376 13 315 244 prime 21 171 319 607 341 354 4"I 533 584 472 434 327 342 coffee Va-ln $4 *3 79 92 112 330 321 508 715 38B 343 363 469 Vlol z2 11 96 105 142 143 179 232 23B 232 219 239 268 730 748 323 876 789 2.306 3.496 2,190 3.004 2.533 1.564 1.522 1.743 Tims Vrnln 31 31 31 50 50 64 120 98 91 97 94 116 124 Vole 46 46 46 51 61 6 60 65 69 77 8s 68 32 price 674 674 674 90 8 20 996 2.007 1.503 1.319 1.259 1.075 1,711 1.,13 20 32 46 36 40 41 59 58 60 69 49 37 47 Vole 19 27 35 26 23 21 27 27 24 31 26 19 26 Pric 1.053 11185 1,314 1,335 1.756 1,954 2.294 2,130 2.300 2.252 1,857 2.018 1.328 21 21 31 22 25 55 62 66 46 51 49 41 55 Vole 24 24 25 14 17 33 31 38 24 32 38 34 46 Prim 375 375 1.240 1.571 1.434 1.6 2.012 1.729 1.937 1.627 1.291 1,19 1.214 VPotkso 5 4 6 a 4 4 5 2 12 7 4 1 4 vole 59 51 37 3r 41 30 25 6 33 30 21 3 16 Prie 85 78 162 267 93 14 213 333 354 221 195 193 237 da~ 20 20 22 22 29 36 33 34 65 *6 32 38 27 Vole 303 364 245 236 363 375 301 323 381 390 300 368 261 Pric 66 55 90 93 80 96 111 Ws 171 117 108 104 105 Value 14, 12 7 30 17 20 13 28 59 36 20 9 32 Vole0100 434 304 17 455 3 133 181 435 565 334 266 206 300 Prce 32 39 60 66 73 75 68 64 w0 109 76 86 107 Orbs feadectfte value 28 26 49 47 37 52 48 65 79 99 71 50 9 7M U23 42 90 92 103 146 179 214 255 224 214 251 255 Tin velue 66 70 9e 136 158 11 253 324 333 454 437 349 309 Vole 20 21 22 24 22 27 25 26 27 30 31 27 24 Price 3.200 3.333 4.455 6.917 7,541 6.707 10.110 12.454 14,370 14.874 14.037 12.931 12.715 WM - 13 56 102 74 95 74 64 95 111 120 115 so Vole - 2S 126 189 230 in M1 17 184 207 209 154 price - _ 44 439 392 413 395 382 508 600 580 550 320 Nw molm is 19 21 2s 25 4 36 49 126 205 187 212 373 "Ouammm. 56 76 77 114 1" l 96 245 361 656 570 623 730 1.167 Total va 786 977 1.905 2.033 1_73 2.S3 3.506 3.996 6.171 5.485 4 031 3923 5.235 la PreluesLay flae Val_s: *000 t. prim: ut/ao/. Source: Un la_dmrei (baee V /C qppl±Atiaa). INDONESIA COUNTRY ECONOMIC KEMNDU1 Expert Values by Country of DestinatiXo, 1971-84 (In percent) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984,a Japan 44.6 50,7 53.2 53,4 46.9 41.7 40.2 39.2 46.1 50.3 47.5 50.1 45.8 47.4 ASEAN 17.7 9.7 11.8 8.7 10.3 8.9 10.6 12.7 14.3 12.7 13.6 15.7 16.4 10.9 Halaysia 2.5 1.7 1.1 1.0 0.9 0.3 0.2 0.2 0.4 0.3 0.3 0.3 0.3 0.5 Philippines 2,1 0.5 - - 0.4 1.1 1.2 1.7 1.1 0,8 1.6 1.3 1i1 0.8 Singapore 13.0 7.5 10.6 7.5 8.9 7.5 9.2 10.7 12.6 11.6 11,5 14.0 14.8 9.2 Thailand - - - 0.1 - - - 0.2 0.2 0.1 0.1 0.1 0.2 0.4 Other Alal 3.6 4.7 5.2 3,8 4.3 4.3 5.8 5.8 5.8 3.9 3.7 4.9 4.7 6.8 USA 15,6 14.9 15.7 21.3 26.3 28.7 27.7 25.4 20.3 19.6 19,3 15,9 20.2 21,3 Other America 0.5 4.2 2.2 6.1 5.5 7.6 5.4 6.9 3.0 4.1 7.9 4.3 4.9 4.7 EEC 13.6 11.9 10.3 5.3 5.7 7.3 8.5 7.5 7.5 5.8 4.2 4.0 4.5 4.6 France 0.6 0.6 0.5 0.3 0.2 0.4 0,6 0.5 0.5 0.5 0.2 0.3 0.3 0.2 West Germany 5.0 3.7 3.7 2.2 1.9 2.4 2.2 1.9 2.2 1.6 1.0 1.1 1.2 1.1 Netherlands 5.8 4.4 3.1 1.9 2.5 2.7 3.4 3.0 2.6 1.7 1.4 1.2 1.4 1.4 United Kingdom 1.0 1.3 1.0 0.3 0.4 0.5 0.6 0.5 0.6 0.6 0.5 0.6 0.9 0.8 Other EEC 1.2 1.9 1.9 0.6 0.6 1.3 1.7 1.6 1.6 1.4 1.1 0.8 0.7 1.1 Other Europe 2.3 2.7 0.9 0.8 0.7 0.9 0.9 1.2 1.3 1.1 1.1 0.6 0.9 1.3 Auatralia 2.0 0.8 0.5 0.3 0,3 0.4 0.6 0.9 1,2 1.4 1.8 3.0 1.0 1.4 Other Oceania - 0.1 - - - - - 0.1 0.3 0.5 0.8 1.2 1.2 1.0 Africa 0.1 0.3 0.2 0.3 - 0.2 0.3 0.3 0.2 0.2 0.1 0.3 0.4 0.6 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Lo January to October. Source: BPS, Indlkator Ekonoul. EI '-4 INDONESIA COUNTRY ECONOMIC MEMORANDUM Import Values by Cotmtry of OrlIgn, 1971-84 (In percent) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 /a Japan 32.8 34.0 29.3 29.4 31.0 26.2 27.1 30.1 29.2 31.5 30.1 25.4 23.2 23.7 ASEAN 7.7 9.3 8.7 9.3 8,6 14.0 14.3 9.7 11.6 12.5 12.8 19.6 23.9 12.8 Malaysia 0.4 0.5 0.5 0.3 0.4 0.3 0.3 0.3 0.5 0.3 0.4 0.3 0.4 0.6 Philippines 0.2 0.3 0.5 0.3 0.3 0.3 0.3 1.1 0.7 0.8 1.9 1.4 1.1 0.1 Singapore 6.3 6.5 4.9 6.5 7.2 9.7 8.6 6.8 7.4 8.6 9.4 16.7 21.2 12.0 Thailand 0.8 2.0 2.8 2.2 0.7 3.6 5.1 1.5 3.0 2.7 1.1 1.2 1.3 0.9 Other Asia 11.7 11.8 17.4 16.4 14.4 12.8 17.0 17.0 18.7 19.7 15.5 15.0 14.0 18.4 USA 15.8 15.6 18.8 15.9 14.0 17.4 12.4 12.4 14.3 13.0 13.5 14.3 15.5 17.9 Other America 0.5 0.7 0.9 1.4 1.8 1.3 2.3 2.3 1.8 1.9 2.8 1.8 1.9 2.9 WI BBC 20.3 17.8 17.7 19.3 18.6 21.2 20.8 18.9 14.9 13.3 16.6 15.8 13.7 14.8 France 1.5 1.3 1.7 1.9 1.9 3.5 3.0 2.5 2.0 2.2 2.6 3.4 3.6 3.1 Went Germany 9.5 7.5 7.2 8.2 7.6 8.5 7.9 8.9 6.4 6.3 6.8 7.1 4.5 5.9 Netherlands 4.6 4.3 3.3 2.7 2.8 3.1 4.2 2.2 1.7 1.1 1.5 1.1 1.6 2.0 United Kingdom 4.2 4.1 3.8 3.8 3.5 3.1 3.8 3.1 2.7 2.4 4.1 2.6 2.2 2.1 Other EEC 0.5 0.6 1.7 2.7 2.8 3.0 1.9 2.2 2.1 1.4 1.5 1.6 1.7 1.7 Other Europe 5.3 3.7 2.1 3.9 5.7 2.4 2.0 4.7 4.0 2.7 3.4 4.1 4.1 5.1 Australia 2.9 3.3 3.3 3.4 3.3 3.3 3.0 3.3 3.1 3.5 2.7 2.2 2.5 2.6 Other Oceania 0.1 0.3 0.2 0.4 0.3 0.4 0.5 0.6 0.6 0.7 0.7 0.6 0.4 0.5 Africa 2.9 3.5 1.6 0.6 2.3 1.0 0.5 1.0 1.8 1.2 1.9 1.2 0.8 1.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 /a January to October. Source: BPS, Indikator Ekonodi. a-} INDONESIA COUNTRY ECONOMIC MUI4RANDUM oil Balance of Paymeate, 1976/77 - 1983/84 (USS million) 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1. EXports. FOB 6 349.7 7 191.7 6 857.9 10 994.5 15,186.6 16 481.5 12,283.1 12 050.4 COW 2,880.5 2,576.2 2,628.2 3,302 -3 762. Production sharing (PS) 1,561.8 1,750.8 1,755.2 2,210.7 3,049.5 3,674.3 3,775.5 3,369.3 Iu klad (COW + PS) 1,221.7 1,703.3 1,594.5 2,670.5 3,707.4 3,333.2 2,507.7 2,071.1 PERtTAMIN 685,7 961.4 880.0 2,783.1 3,585.8 4,054.7 2,308.7 2,847.5 2. Imports -1,948.0 -1 640.0 -1,829,4 -2,844.8 -3.913.2 -5,278.0 -4,645.2 -3,601.2 cow -111.0 -138.9 -1IT9 -146.6 -244.2 -Z22.7 -5765 -614.4 PS -1,024.6 -720.3 -827.6 -683.0 -1,308.0 -1,486.0 -1,545.0 -1,028.1 PERTAM1NA -812.4 -780,8 -889.9 -2,015.2 -2,631.0 -3,569.3 -2,523.7 1,958.7 3. Services -692.1 -1 200.0 -1 243.1 -1 841.9 -1,929.0 -2 824.8 -1,849.7 -2 ,433.0 dow- _M".: -497.5 -472.2 -633.8 -55sG.0 -S90.0 -621.6 -887.8 PS -92.4 -433.1 -422.3 -807.2 -540.5 -980.0 -850.8 -1,085.1 PERTAHINA -161.1 -269.4 -348.6 -400.9 -480.5 -954.8 -377.3 -460.1 4. Current account (1+2+3) 3 709.6 4 351.7 3 785.4 6 307.8 9 344.4 8.378.7 5 788.2 6 016.2 coy ~ ~ ~ ~ ~ ~ ~ wr i~~~~~~~777 ~~~~ 3,'6917 4,216.6' 2,4931 COW 2,330.9 2 139,8 2 044,1 2!577.7 2,9. ;1.62431 t260.3 PS 444.8 597.4 505.3 692.6 1,471.0 1,298.3 1,379.7 1,256.1 In kind (COW + PS) 1,221.7 1,703.3 1,594.5 2,670.5 3,707.4 3,333.2 2,507.7 2,071.1 PERTAHINA -287.8 -88.8 -358,5 367.0 474.3 -469.4 -592.3 -428.7 5. Miscellaneous capital 710.3 -198.4 10.5 -904.3. -659.2 300.1 554.0 331.6 Reisbursement LNG - T - - 5 Debt repayment -458.8 -278,5 -220,8 -169.3 -151,0 -127.0 -76.4 -59.2 Short-term (-98.1) (-12.0) (-7.2) (-8.8) (-2.7) (-9.6) - - HP/LT borrowing (-145.4) (-106.1) (-92.0) (-82,0) (-60.5) (-22.7) - - Special projects (-34.8) (-28.2) (-32.1) (-14.4) H-) (-12.9) - - Crude debt repayaments (-207.5) (-132.2) (-89.5) (-64.1) (-87.8) (-81.8) (-76.4) (-59.2) Project prefinancing -59.8 -8,7 -13,6 -3.0 - - - - Oil export credit -234.0 -73.4 244,9 -737.2 -508.2 427.1 630.4 390,8 Paymenta due (4,177.5) (5,343.1) (5,179.3) (6,906.7) (10,760.9) (11,401.0) (9,243.2) (8,766.6) Receivables (-4,411.5) (-5,269.7) (-4,934.4) (-7,643.9) (-11,269.1) (-10,973.9) (-8,612.8) (-8,375.8) 6. Total (4+5) 2,999.3 4.153,3 3,795.9 5,403.5 8,685,2 8,678.8 6,342.2 6,347.8 7. Errors and osissions -50.3 15.0 39.2 182.6 -65.6 792.1 254.5 -121.5 8, Monetary movements -2,949.0 -4.168.3 -3,835.1 -5,586.1 -8,619.6 -9,470.9 -6,596.7 -6,460.3 Source: Bank Indonesia. INDONESIA COUNTRY ECONOMIC HEHQRANDUH LNG Balance of Payxents, 1977/78 - 1983/84 (USS million) 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1. Exports, FOB 161.7 516.2 1,345.3 2,110.5 2,342.6 2,461.1 2,398.9 C&v 188.9 604.3 1,511.0 2,320.4 2,587.8 2,689.3 2,622.0 HMBTU (million) (71.2) (216.3) (373,1) (424,3) (458.0) (477.8) (549.4) H/T (million) (1.4) (4.1) (7.3) (8.2) (8.9) (9.3) (-) Price ($/KMBTU) (2.63) (2.79) (4.05) (4.98) (5.12) (5.15) (4.37) Freight -27.2 -88.1 -165.7 -209.9 -245.2 -228.7 223.1 $/IMTV (0,42) (0.43) (0.45) (0.49) (0.54) (0.48) (0.50) 2. Importa CIP -17.0 -52.8 -95.4 -136,3 -129,1 -156.7 -237.4 3. Services -52.2 -238.8 -582.7 -718.6 -831.3 -926.9 -807.0 Coat of recovery -21.8 -122.8 -428.2 -221.3 -216.0 -300.2 -338.9 Contractor's share -30.4 -115.8 -153,7 -495.6 -613.3 -624.7 466.2 Other charges - -0.2 -0.8 -1.7 -2.0 -2.0 -1.9 4. Current account (1+2+3) 92.5 224.6 667.2 1,255.6 1,382.2 1,377.5 1,345.0 5. Hiscellaneous capital -79.0 -146.6 -334.8 -149.6 -190.4 -168,7 -227.2 1 Debt repayments (JILCO ex-escrow account) -29.7 -96.7 -140.4 -238.0 -167.1 -172.6 -195.4 (Net transfer to escrow and special account) -49.3 -49.9 -194.4 -88.4 -23.3 3.9 -31.8 6. Total (4+5) 13.5 78.0 332.4 1,106.0 1,191.8 1,208.8 1,127,3 7. Errors and omissions 13.9 1.5 -23.5 -102.6 -52.6 -49.3 -254.5 8. Monetary movements -27.4 -79,5 -308.9 -1,003.4 -1,139.2 -1,159.5 -872,8 BIN -11.9 -28.4 -263.1 -979.2 -1,112.8 -1,130.3 n.a. Pertamina -0.8 -2.5 -6.7 -24.2 -26.4 -29.2 n,a. Pertamina (to BI as debt repayments) -14.7 -48,6 -39.1 - - - n.a. Source: Bank Indonesia. W14P1 '4 ANNEX II -198- al4. Page 1 of 2 INDONESIA COUNTR.Y ECONOMIC MEMNANDUM Ezternal Public Debt outstanding Including Undisburmed as of December 31, 1983 with Major Reported New Comitments throuth Deceber 31, 1954 Debt Repayable In Foreia Currency and Goods Major reported Type of creditor/ Debt outstanding new corl toents Creditor country Diaburwed Undlsburued Total Jan. 1-Dec. 31, 1984 Suppliers' creditc Australia 1,659 85 1,744 France 13,029 859 13,888 Germany, Fed. Rep. of 37,892 - 37,892 Japan 2,096,890 2,510,588 4,607,478 301,413 Korea, Rep. of 91,778 31,421 123,199 - Netherlands 3,995 - 3,995 Pakistan - 12,682 12,682 Switzerland 747 - 747 Unlted Kingdom 13,754 20 13,774 United State. - 2,273 2,273 - USSR 1.323 305 1,628 Yugoslavia 59 ,575 16 59,591 Total suppliers' credits 2,320,642 2,558,250 4,878.892 301.413 Financial institutions Austria 23,129 2,374 25,503 35,647 Belgium 70,669 52,507 123,176 - Canada 318,182 - 318,182 France 379,541 577,965 957,506 36,338 Cermany, Fed. Rep. of 389,344 62,133 451,477 Hong Kong 734,269 - 734,269 7,597 Italy 3,178 - 3,17B Japan 732,154 386,649 1,118,803 379,350 Netherlads 172,666 203,583 376,249 20,005 Noray 38,450 14,418 52,868 - Siugapore 455,109 3,145 458,254 - Sweden 44,208 139,050 183,258 _ Switzerland 20,768 99,260 120,028 United Kingdom 604,302 539,651 1.143,953 480,397 Unlted States 2,366,246 422,269 2,788,515 2,791 Multiple lenders - - - 750,000 Total finacial institutions 6,352,215 2,503,006 8,855,221 1,712,125 Bonds Germany, Fed. Rep. of 73,426 - 73,426 - Japan 167,973 - 167,973 Kuwait 19,141 - 19,141 - Netherlands 47,316 - 47,316 Saudi Arabia 75,000 - 75,000 Switzerland 226,912 - 226,912 - United Kingdom 250,000 - 250,000 Total bonds 859,768 - 859,768 - Nationallzation Netherld 116,561 - 116,561 Total nationalization 116,561 - 116,51 - 199 _ Table 4.1 Pap Z of 2 INlONESIA COUNTRY ECONOMIC MEMORANDUM External Public Debt Oututandlng Includin Undibureed - of December 31. 1983 with NIjor Reported New Cosmitmot. through December 31. 19a Debt Repayable in Foreig!Currency and Goode Major reported Type of creditor/ Debt outstandint new comintments Creditor country Disbursed Undi.buraed Total Jan. 1-Dec. 31, 1984 Multilateral loans ADB 568,078 1,491,302 2,059,380 790,000 EEC 5,500 - 5,500 - IBRD 2,136.387 3,727,966 5,864,353 987,200 IDA 762,589 164,575 927,164 - IFAD 5,083 71,450 76,533 Islamic Development Bank - 8,376 8,376 Total multilateral loens 3.477.637 5,463.669 8.941,306 1,777,200 Bilateral loan Australi - 7,671 55 7,726 43,525 Austria 71,913 5,566 77,479 Belgium 42,963 20,220 63,183 Bulgaria 1,575 - 1,575 Canada 226,152 245.991 472,143 26,892 China 51,064 - 51,064 Czechoslovakia 52.524 - 52,524 Denmark 64,619 4,489 69,108 Egypt, Arab Rep. of 2,548 - 2,548 France 183,959 121,448 305,407 12,627 Germny, Den. Rep. of 43,195 - 43,195 Germny, Fed. Rep. of 855,427 464,476 1,319,903 138,564 Hungary 13,101 - 13.101 India 16,191 55,993 72,184 Iran 73,660 24 73,684 Italy 31,607 - 31,607 - Japan 2,952,514 1,190,010 4,142,524 359,534 Kuwait 16,790 121,746 138,536 Netherlands 352,362 121,983 474,345 50,070 New Zealand 1,989 315 2,304 Pakls tn 6,579 - 6,579 - Poland 73,775 - 73,775 Romania 10,579 - 10,579 Saudi Arabla 57,718 87,080 144,798 - Spain 212,574 6,584 219,158 United Arab Emirate 12,242 1,733 13,975 United Kingdom 7,473 69,048 76,521 United States 2,312,361 732,405 3,044,766 262,164 USSR 584,960 - 584,960 - Yugoslavla 94,454 4,320 98,774 Multiple lenders 124,764 - 124,764 Total bilateral loans 8.559.303 3.253,482 11,812,785 893,376 Total external public debt 21,686,126 13,778,407 35,464,533 4,684,114 Note: Only debts wlth an origlnal or extended maturlty of over one year are Included In this table. Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. ID0NESIA ODUNTRY E0DNOHIC MNK(RANDUM Service Payments, Commitments, Disbursezent. and Outstanding Aaounts of External Public Debt /a (USS 'W000 Debt outstanding at beglnning of period Transactions during period Other changes Dlsbursed Including Co dit- Disburse- Service payments Cancel- Adjuat- Y e a r only undisburmed ments ments Principal Interest Total latlons m_nt /b Actual 1977 10,001,648 14,574,783 1,720,488 1,958,958 820,999 440,695 1,261,694 14,249 736,687 1978 11,669,764 16,196,710 3,284,605 2,214,595 1,548,319 513,797 2,062,116 40,543 1,144,859 1979 13,149,658 19,037,312 4,101,018 1,887,248 1,328,656 770,911 2,099,567 128,423 -478,831 1980 13,277,847 21,202,420 4,277,370 2,550,504 935,337 823,134 1,758,471 118,261 25,668 1981 14,971,338 24,451,860 5,266,296 2,672,846 1,052,836 994,322 2,047,158 163,286 -1,291,014 1982 15,869,989 27,211,020 7,061,392 4,192,257 1,101,950 1,144,679 2,246,629 7,042 -947,406 1983 18,515,124 32,216,014 5,622,011 4,965,184 1,294,859 1,255,900 2,550,759 179,341 -937,166 1984 21,686,126 35,464,533 4,684,114 3,828,300 1,628,410 1,619,467 3,247,877 44,383 -1,639,438 8 ProJected 1985 22,863,311 36,836,416 - 3,624,047 1,980,216 1,597,316 3,577,532 - 833,491 1986 24,461,097 34,022,709 - 3,078,317 2,093,412 1,707,845 3,801,257 - 36 1987 25,446,028 31,929,333 - 2,570,683 2,451,965 1,761,332 4,213,297 - 10 1988 25,564,753 29,477,378 - 1,771,986 2,897,171 1,729,506 4,626,677 - 18 1989 24,439,587 26,580,225 - 987,942 3,081,692 1,610;105 4,691,797 - 10 1990 22,345,850 23,498,543 - 513,373 2,900,134 1,433,116 4,333,250 - 41 1991 19,959,113 20,598,450 - 318,086 2,525,283 1,243,891 3,769,174 1 1992 17,751,920 18,073,168 - 224,333 2,326,388 1,094,294 3,420,682 - 20 1993 15,649,879 15,746,800 - 96,922 2,001,923 948,144 2,950,067 - 18 1994 13,744,895 13,744,895 - - 1,586,498 813,739 2,400,237 - 35 1995 12,158,432 12,158,432 - - 1,346,326 715,003 2,061,329 - 3 /a Based on debt outstanding including undisburaed an of December 31, 1983 and major transactions during 1984. /b This column shows the amount of arithmetic Imbalance In the amount outstanding including undiabursed from one year to the next. The most common causes of imbalances are changes in ezchange rate. and transfer of debt. from one category to another ln the table. Source: IBRD Debt Reporting System, based on data provided by Bank Indonesia. - 201 - AU II Table 4.3 INDONESI& COMELY ECONOMIC NEKORANDUM External Public Debt by Coantry and Type of Creditor an of December 31, 1983 CUSS mfIllI Ion) Bilateral/ mltilateral Other /a Total Dis- mci. Di- Incl. Din- Imcl. bursed udln- bursed undis- bursed undis- only bursed only bursed only bursed Australia 8 8 2 2 ID 10 Austria 72 77 23 26 95 103 Belgium 43 63 71 123 114 186 Canda 226 472 318 318 544 790 Denmrk 65 69 - - 65 69 France 184 305 393 971 577 1,276 Germamy, Fed. Rep. of 855 1,320 501 563 1,356 1,883 Italy 32 32 3 3 35 35 Japan 2,953 4,143 2,997 5,894 5,950 10,037 Netherlands 352 474 341 544 693 1,018 New Zealad 2 2 - - 2 2 Norway - - 38 53 38 53 Spain 213 219 - - 213 219 Swed!n - 44 183 44 183 Switzerland - - 248 348 248 348 United Kingdom 7 77 868 1,408 875 1,485 United States 2,312 3,045 2,366 2,791 4,678 5,836 Total bilateral IGGI 7.324 10,305 8,212 13,228 15,536 23,533 ADB 568 2,059 - - 568 2,059 IBRD/IDA 2,899 6,792 - - 2,899 6,792 EBC 6 6 - - 6 6 Total multilateral IGGI 3,473 8,856 = - 3,473 8,856 Total IG&I 10.797 19,261 8,212 13,228 19,009 32,389 Non-IGGI 1,240 1,593 1,437 1,483 2,677 3,076 Total 12,037 20,754 9J649 14,711 21.686 35.465 /a Suppliers, financial institutions, bonds, natlonalization debt. Note: Data in thia table refer to public sector aad medium-term debt with an original maturity of one year or more. Figures rounded to nearest millioa. Totals may not add due to rounding. Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. - 202- ANNEX II Table 4.4 INDONESIA COUNTIRY ECONOMIC MEMORANDUM Externals Public Debt as of December 31, 1983 by Major Currency and Country Amouot (t billion) Share (Z) Disbursed Total Disbursed Total Currency US dollar 9.14 U.7O 42 32 Yen 5.03 7.9k 23 23 DN 1.53 2.25 7 6 NLG 0.69 1.02 3 3 Rouble 0.58 0.58 3 2 Fr. frarc 0.55 1.26 2 4 Other 1.44 2.64 7 8 ?HLtiple 2.73 7.92 13 23 Total 21.69 34.66 1e0 100 country Japan 5.95 9.04 27 26 USA 4.68 5.84 22 17 Germany, Fed. Rep. of 1.36 2.02 6 6 Netherlands 0.69 1.02 3 3 France 0.58 1.34 3 4 USSR 0.58 0.58 3 2 Other countries 4.36 5.87 20 17 Multilateral organizatioms 3.48 8.94 16 26 Total 21.69 34.66 100 100 Source: IBRD Debtor Reporting System, based on data provided by Bank Indonesia. INDONESIA COUNTRY ECONOMIC MEMORANDUM Loan Comditnents by Country, 1975-83 (US$ million) Bilateral/Multilateral /a Other /b Total 1975 1976-1977 1978 1979r 1980 1981 195Z2T§ 197S 1976 1977 1978 1979 1980 1961 1952 1983 197S-M976 1977 1978 1979 1980 19dl 1982 i9si Australia - - - 6 3 2 - 4 - - - 6 - - - - - - - b 6 3 2 - 4 - Austria - - - - - 115 - - - - - - - - - 28 - 3 - - - - - 115 28 - 3 Belgium 9 8 9 10 11 3 10 - 15 31 24 7 50 135 8 9 10 26 35 34 7 57 Canada 14 224 5 61 11 - 149 40 17 - - -350 - - - - - 14 224 5 411 11 - 149 40 17 Denmark - 57 - - 10 54 - - - - - - - - - - - - - 57 - - 10 54 - - - France 16 - 77 77 20 208 - 40 10 331 88 50 132 221 234 579 330 92 348 88 127 209 241 442 579 370 102 Germany,Fed.Rep. of 126 13 76 86 240 162 209 272 170 3 470 - 77 396 177 79 39 60 129 483 76 162 635 339 289 311 229 Italy - - - - - - - 4 - - - - - - - - - - - - - - - - - 4 Japan 173 132 419 157 640 505 358 251 291 213 334 79 212 291 189 1275 933 1499 386 465 498 398 931 693 1632 1184 1790 Netherlands - 89 41 - 55 113 2 95 4 310 1 - 9 37 6 40 78 214 310 90 41 9 92 119 42 173 219 Nev Zealand 1 1 - - - - - - - - - - - - - - 1 1 - - - - - - - Norway - - - - - - - - - 90 - - - - - 8 - - 90 - - - - - 8 - Spain - - - - - - 316 17 24 - - - - - - - - - - - - - - - 316 17 24 Sweden - - - - - - - - - - - 48 7 - - 176 - - 48 7 8 7 - - 176 - Switzerland - - - - - - - - - - - - - 153 45 - 200 4 _ _ _ - 153 45 - 200 4 United Kingdom - - - - - - - 27 49 144 50 - 42 47 4 90 1045 432 144 50 - 42 47 4 90 1072 480 United States 143 430 112 389 178 334 43 431 186 905 249 204 685 425 512 400 316 1009 1048 679 315 1074 603 846 443 747 1194 Total bilateral IGCI 483 953 738 816 1167 1496 1085 1176 762 2032 1281 338 1554 1592 1198 2516 3133 3362 2515 2234 1076 2369 2759 2694 3601 4309 4124 ADD 78 109 136 199 235 285 338 371 223 - - - - - - - - - 78 309 136 199 235 285 338 371 223 IBRD/IDA 311 564 406 551 815 734 837 977 1210 - - - - - - - - - 311 564 406 551 815 734 837 977 1210 EEC - - - - 6 - - - - - - - - - - - - - - - - - 6 - - - - Total multilateral w ICGI 389 673 542 750 1056 1019 1175 1348 1433 - - _ _ _ _ _ 389 673 542 750 1056 1019 1175 1348 1433 Total IGGI 871 1626 1279 1565 2223 2515 2260 2524 2195 2032 1281 338 1554 1592 1198 2516 3133 3362 2904 2907 1617 3119 3815 3713 4776 5656 5557 Non-IGCI 200 72 103 23 28 125 212 74 54 175 154 - 143 258 440 279 1331 11 375 226 103 166 286 565 490 1405 65 Total 1071 1697 1382 1588 2251 2640 2472 2597 2249 2207 1435 338 1697 1850 1638 2794 4464 3373 3278 3132 1721 3285 4101 4277 5266 7061 5622 /a Specific loan and/or project agreements signed including official export credits. Amounts my, therefore, dtffer from donor's pledge or budget allocation, general agreements, frame a&reements, exchange of notes and other foros of bilateral coaeitoent preceding specific comamtments. Grants are excluded. /b Suppliers, financial inatitutiona, bonds. Note: Data In this table refer to public sector medium and long term loans with a maturity of one year or more. Figurea rounded to nearest million. * Totals my not add due to rounding. Sourcel IdRD Debtor Reporting System, based on data provided by Bank Indonesia, INDONISIA COUNTRY ECONOMIC HNHORANDUI 1001 and Non-1G0I Disbureement, and Net Resource Transfers. 1975-83 (US$ million) Bilateral/multilateral /a Other /b Total T975 1976 1-77 197d 1979 19o8 1981-192IT 1975 1976 1977 1975 1979 1980 1901 1982 1953 1975 1976 1977 1978 1979 1980 1981 1982 1983 Groas disbursements Bilateral IGGI 394 615 478 621 510 677 775 1061 983 1526 1323 1046 1192 852 1152 894 1955 2902 1919 1938 1524 1813 1362 1828 1669 3015 3885 Multilateral IGOI 184 291 268 2 6 279 431 476 714 713 - - - - - - - - 184 291 268 216 279 431 476 714 713 Total IGGI 578 906 746 837 789 1108 1251 1775 1697 1526 1323 1046 1192 852 1152 894 1955 2902 2103 2229 1791 2029 1641 2259 2144 3730 4599 Non-IGGI - 15 122 98 37 22 112 61 49 24 89 46 88 210 269 417 401 317 24 103 168 186 246 291 528 462 367 Total groes 'Ii5urseeients 578 920 867 935 826 1130 1363 1836 1746 1549 1412 1092 1280 1061 1421 1310 2356 3219 2127 2332 1959 2215 1887 2551 2673 4192 4965 Net disbursesants /c Bilateral 10I 361 562 396 494 340 475 531 784 640 1300 1070 364 -114 -114 604 246 1364 2199 1661 1632 760 380 226 1079 776 2148 2839 Multilateral IGCI 184 290 266 208 252 393 419 617 605 - - - - - - - - - 184 290 266 208 252 393 419 617 605 Total 10I 545 852 662 702 591 869 949 1401 1245 1300 1070 364 -114 -114 604 246 1364 2199 1845 1922 1026 588 477 1473 1195 2765 3444 Non-IWGI -31 -18 89 29 -32 -59 38 -30 -50 -36 -6 23 49 113 201 388 356 277 -66 -24 112 79 81 143 425 325 226 Total net diT burel ents 515 834 751 731 559 810 987 1370 1194 1264 1064 387 -65 -1 805 633 1720 2476 1779 1899 1138 666 559 1615 1620 3090 3670 Net reaource transfers /d Bilateral 1I00 27W 473 282 347 145 288 339 570 402 1197 875 92 -389 -562 135 -330 750 1528 1492 1348 374 -42 -417 422 9 1320 1930 Multilateral ICLC 180 282 230 144 167 286 293 458 397 - - - - - - - - - 180 282 230 144 167 286 293 458 397 Total 1001 475 755 512 491 312 574 632 1028 799 1197 875 92 -389 -562 135 -330 750 1528 1672 1630 604 102 -250 708 301 1778 2327 g Non-aICl -32 -21 79 15 -49 -75 20 -64 -77 -37 -38 14 36 87 159 304 232 164 -68 -59 93 51 38 84 325 168 87 Total net resource transfers 443 734 592 506 263 499 652 964 722 1160 837 106 -353 -475 293 -26 981 1692 1604 1572 697 153 -212 792 626 1946 2414 /a Excluding grants. 7T Suppliers, financial inmtitutions, bonds 7& Equals gross disbursement, stnus amortimation. 73 Equals grose disbursements mlnus debt service. Notet Data in this table refer to disburaements and resource transfers of public sector mdium and long term debt with a maturity of one year or more. Figures roumded to nearest million. Totals my not add due to rounding. Sources ISRD Debtor Reporting System, based on data provided by Bank Indonesia. - 20S - UIX II Table 4.7 couur xCgauc IWUANDOI S9v ht.xaal Debt Data. 2975U3 la 1975 1976 2977 1978 2979 1960 1981 192 293 - - ~~~(I DS S inf.m Etarual debt dats iasbwreed end utatmdSln debt (DO3) lb 7 994 20 002 11 670 23 .W 13 278 -14 971 15 870 lll.SI 21 686 5Jsera7zlwtturl e ?. 8 im 38 9 -w Y.w 1 . t7ff iZ 1,05 w Other Le 2990 4092 4.597 4,762 4,769 5,465 5,813 7,403 9.649 Tota debt atst atdh=. , ieladi%s dis_bbursed U_D_ lb 11 741 14 S7S 16 197 19 037 21 202 24452 27 211 32 226 35 465 DJilteraIJutiwoterel 10635 I!LU1 V W T1W lisw5 V7 Other IC 4,622 5,747 5,562 6,202 7.003 7,777 9.246 12,667 14,711 Co Itumta 3 278 3 132 1 721 3 285 4 101 4 277 5 266 7 061 5 622 DIil. rW eItatera1 0:Tg! ME iw BY ! I Other /e 2,207 1.435 338 1.697 1,850 1.636 2,794 4.464 3,373 Croe disbursment 2 127 2 332 1959 2 215 168B7 2 551 2 673 4 292 4 965 BlaterU-ltrlal 71 7 1,83 6 Other /c 1,549 1,412 1,092 1,280 1.061 1,421 1.320 2.356 3,229 Net diebursemente 1 779 1 899 1 138 666 559 1 615 1 620 3 090 3 670 BilatealJilrtatellsttl 'e 'it 'Yr 7m 3W -=Ii -'Y i57R =15- Other c 1,264 1.064 387 -65 -1 805 633 1,720 2,476 Net resource transfora 1 604 1 572 697 253 -212 792 626 1 946 2 414 DsI2arzen i ltEI3aEWA 1U! -l w73I p 3T 3 -zW 7w -31 :- JZ2 other /c 1,180 837 206 -353 -475 293 -26 961 1,692 Puble debt *erwic 523 761 1262 2 062 2 00 1 758 2.047 2 247 2 551 I_tL tSne t 7; 821 ,05 =6 2 1 29S _nter_et 157 327 441 514 7 A23 994 1,145 1,256 Public debt service 523 761 1 262 2.0 2 lD 1 758 2 047 2 247 2 551 Other le 386 574 966 1.633 1,537 1127 1,336 1,375 1,527 -lebarsemt f5(n preant) Ir_1aboreed debtir7O lb 32 31 28 31 37 39 42 43 39 miiateraijmz±iiareTh~ 17 1!t 31 ' -a ! -a 'a Othae /e 35 29 17 23 32 30 37 42 34 Cre_ diaburaemta tu 65 74 114 67 *6 60 51 59 88 MlaterWilt±iatwrga 31 § -J W 17 'a 35 71 79 Other /c l0 96 323 75 57 87 47 53 95 Croer daburremmta/mdlsberud debt ed oltJo 7d 36 34 31 28 19 21 18 23 26 iutr l/ altilrtl 21 24 20 ii 22 it IT iT it Other lc 48 46 55 48 32 37 26 30 37 _et_Sieburueita7roee 6 ua dsret 86 81 58 30 30 63 61 74 74 Jlltet ra2/ltllaterml W 7 79 U I 7! 7 75 U Oter /c 82 75 35 -S - 57 48 73 77 Met r_eurce tranafarata" diabure_ants 75 67 36 7 -11 31 23 4 49 BI.W LUtrL/amlrIlatsŁ1er t7 ard 3= W ' 3 Otber /c 75 59 20 -28 -45 21 -2 42 53 IS Deta In this table refer to iaul5c oector indis end lng ter lame. Loame with a mtority of legs tbhs ome yar an cr tn are not Included. /b ftdof yar. /C Sup1iero. flnAnetAl Inatitutiona, bonds. natlomallztlr debt. /d Croe dlbrroeeata - a v-prentage of undlbor-ed debt (TMO-DOD) at beg,enarg of rer pla comitments drlng the year. Source: IfUD Debtor lap.rtfng Syata. based oc data pceordad by a n} Indoinla. INDONESIA COUNTRY ECONOMIC MEMORANDUM Central Government Budget Sumar,. 1973/74 - 1985/86 (Rp. b111ion) Actual 84et 1973174 1974175 1975/75 1976777 1977178 1978/79 1979/80 19B081 1951/82 1952/83 1983/84 l9B4/d5 198 1. Domestic revenue 967.7 1,753.7 2,241,9 2,906.0 3,534.4 4,266.1 6,696.8 10,227.0 12,212.6 12,418.3 14,432,7 16,149.4 18,677.9 2. Routine expenditures /a 713.3 1,016.1 1,332.6 1,629.8 2,148.9 2,743.7 4,061.8 5,800.0 6,977.6 6,996.3 8,411.8 10,101.1 12,399.0 3. Government saving (1-2) 254.4 737.6 909.3 1,276,2 1,385.5 1,522.4 2,635,0 4,427.0 5,235.0 5,422,0 6,020,9 6,048.3 6,278,9 4. Developuent expenditures 450.9 961.8 1,397.7 2,054.5 2,156.8 2,555.6 4,014.2 5,916.1 6,940.0 7,359.6 9,899.2 10,459.3 10,647.0 S. Balance (3-4) -196.5 -224.2 -488.4 -778.3 -771.3 -1,033.2 -1,379.2 -1,489.1 -1,705.0 -1,937.6 -3,878.3 -4.411.0 -4.368.1 Financed byt 6. Counterpart Eunds /b 89.8 36.1 20.2 10.2 35,8 48.2 64.8 64.1 45.1 15.1 14.9 39.5 70.9 7. Project ald 114.1 195.9 471.4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,867.5 4,371.5 4,297.2 8. Change In balances (- inerease) -7.4 -7,8 -3,2 -5.5 -2.1 -2.3 -1.9 -4.7 -4,0 -2,4 -4.1 0 0 /a Includes debt service payments. 7E Program aid. Source: Kinletry of Pinance. II1 INDONIA COUNTY ECONOMIC MEKXMNDUM4 Central Government Receipte, 1973/74 - 1985/86 (Rp. M11l10a) Actual Budnt 1973174 1974175 1975176 1976/77 1977/78 1978/79 1979/80 1980181 1981/82 1982/83 1983/84 198418S 19356 Taxes an income 505.0 1 228.7 1,592.1 2,046.6 2.511.3 2'996.3 5.129.3 8,230.3 10,100.3 10,009.9 11,605,1 12 968.3 14.401.1 Incom tax , 4 6,7 -42 104,6 122T . 1 164.2 207,2 28 .8 3988 577.6/e 797.3/e Corporate tax 44,2 91,2 128.2 127,2 169,5 226.5 297.1 447.6 559.1 674.5 757.4 1,873.5 Z,276.7 Corporate taz on oil 344.6 473.1/a 1,249.1 1,619.4 1,948.7 2,308.7 4,259.6 7,019.6 8,627.8 8,170.4 9,520.2 10,366.6 11,139.7 Withholding tax 56.8 83.3' 97.3 148.4 201,7 232,5 291.3 433.5 513.0 641,9 628.1 - - IPEDA 19.5 28.0 34.6 42.2 52.5 63.1 71,4 87.2 94.5 105.2 132.4 150.6 167.4 Other 5.5 9.8 21,2 25.2 34.3 43.3 61.8 78.2 98.7 129,1 168,2 /f /f Taxes on domestic conuumption 165.4 158.6 231.3 319.6 397.8 491.4 537.2 732.9 888,0 16137.4 1 392.1 1.761.1 2,726,1 Sales tax o19.2 in UT TW 1 U65.6 31. 476.6 575,2 95B,2 /f 1,666. Excises 61.7 74.4 97.3 130.7 181.9 252.9 326.4 437.9 544.2 620.1 773.2 727.5 963,3 Other oil revenues 37.6 -15.9 -1.1 15.9 -/b -/b -/b -/b -/b -/b -/b -/b -/b Miscellaneous levies 11.5 15,2 15,9 10.7 12.r 17.Z 18.6 29.r 33., 40.7 43., 75X 96.r Taxes on International trade 247.5 299.8 308.1 421.3 481.7 587.0 843,0 948.1 887.9 835.4 916.0 805.0 818.8 Import dutieT 1 2. I; B737W UlZ 1W3 MlW7 44.0 T77 XT.9 37; THET 717.1 Sales tax on Import. 50.7 68.9 72,5 102.2 114,6 125,5 137.2 195.1 223.3 231.0 255,0 -/ A/ Export tax 68.6 70.3 61.6 61.7 80,2 166.2 389,1 305,0 128.4 82.5 104.0 123.6 101.7 Nontax receipt 49.8 66.6 110.4 118.5 143.6 191.4 187.3 315.7 336.4 435.6 519,5 615.0 731.9 domestic revenue 967.7 1,753.7 2,241.9 2,906.0 3,534.0 4,266.1 6,696,8 10,277,0 12,212,6 12,418.3 14,432.7 16,149.4 18.677.9 Devalopent funds 203.9 232.0 491.6 783.8 773.4 1,035,5 1,381,1 1,493.8 1,709.0 1,940 0 3 882.4 4 411.0 4,368.1 Coutterpart ftmde /c fe, 0,2 10.2 358 48,2 64,8 64.1 45,1 15.1 14.9 '39 5 70.9 Project aid /d 114.1 195.9 471.4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,867.5 4,371.5 4,297..2 Total revenueo 1,171.6 1,985.7 2,733.5 3,689.8 4.307,R 5.301.6 8,077.9 11,720,8 13,921.6 14,358.3 18,313.1 20,560.4 23,046,0 /a Excludes underpayament of revenues, estimated at about Rp. 340 billion, due to the Governaent by PERTAMINA. 7b Oil subsidies shown as goveranent expenditures (iee Table 5.3). 7? Program aid. 77 Includes commrcial bank and suppliers' credits for development programs/project. 7e Since 1984/85 withholding tax neglected and combined with lncome tax, 7f Clasification changed to other tax and included In mdicellaneous levies. 7i Since 1984/85 clasification changed to value-added tax and tax on luxury goods. Source: Ministry of Finance. A F INDONESIA COUNTRY ECONOMIC HEHORANDUM Central Governxet ExeondLtures. 1973-74 - 1985/86 (Rp. bllllon) Actual BudRt 1973/74 1974/75 1975/76 1976/77 1977/78 197837T 1979/80 1980/81 1981/82 1982183 198384 1984/35 1985/86 Personnel expenditures 268.9 420.1 593.9 636.6 893.2 1,001.6 1 419.9 2.023.3 2.277.7 2 418 1 2 757.0 3,189.5 4,117.3 Wagea and salarles 17].i Xi0 'a". Tr". b7a 760.3 1',053.9 1,482.9 1,660.4 l,749.0 l,996.0 2,307.9 3,1L15,d Rice allowance 50.6 59.5 111.9 114.9 126,2 132.8 179.9 252,0 253.3 289.9 346.1 415.7 482.5 Food allowance 16.8 24.4 43.5 45.7 47.8 51.2 109.9 193.2 241.0 254.9 261.3 286.6 313.3 Other 20.2 24.7 25.8 36.9 31.5 33.6 47,1 61.2 80.0 78.6 87.6 99.9 116.6 External 7.4 9.8 12,7 14,3 14.8 23.7 29,1 34,0 43.0 45.7 66.0 79.4 89.1 Material expenditures 110.1 175,2 304.9 339,7 376.8 419.5 569.0 670,6 922.4 1 041.2 1 057.1 1 263.9 1 529.9 Domestic WT B3ET 283. 3Z0,S 6 3W8.4 1z S 63-. lT1007.4 1' 007.0 1207.8 1 551.6 External 11.8 16.8 21.8 18.9 18.2 21.1 29.4 32.8 31.9 33.8 50.1 56.1 78.1 Subsidies to regions 108,6 201.9 284.5 313.0 478.4 522.3 669.9 976.1 1,209.4 1 315.4 1,546.9 1 784.6 2 590.0 West Irlan Jaya 16.75 W 187 1,7 21. 22.1 313,9 42,0 43,0 41, 48,2 / N2 Other regions 98.3 187.6 265.8 293.3 456,7 500.2 644.9 942.2 1,167,4 1,272.4 1,505.4 1,736.4 0 Debt 70.7 73.7 78,5 189.5 228.3 534.5 684.1 784.8 931.0 1,224.5 2 102.7 2 686.1 3 559.5 Internal 198.2 6.4 6.5 24.4 7.4 8.8 3198 29,8 30.0 30.0 Rxternal 62.5 67.3 71.7 165.1 220.9 525.7 647.6 754.0 915.0 1,204.7 2,072.9 2,656.1 3,529.5 Other expenditures 155.0 145.2 70.8 151.0 172.2 265.8 718.9 1 345,2 1 637.1 997.1 948.1 1,177.0 602.3 Pood subsidy 153.0 !TriT 5. 39.0 - -AT. T23'. 281.6 224.0 --- T - - - Oil subsidy - - - - 65,1 197.0 534.9 1,022.0 1,316.0 962.0 928.1 1,147.0 532.3 Others 2.0 4.2 20.8 112 /a 107,1 /b 25.3 59.1 /c 41.5 97.1 /d 34.1 20.0 30.0 70.0 k Routine expenditures 713.3 1,016.1 1.332,6 1.629.8 2,148.9 2,743.7 4,061.8 5,800.0 6.977.6 6,996,3 8,411.8 10.101.1 12.399.0 Development expenditures /e 450.9 961.8 1,397.7 2,054.5 2,156,8 2,555.6 4,014.2 5,916.1 6,940.0 7.359.6 9,899.2 10,459.3 10,647.0 Total expenditures 1,164.2 1,977.9 2,730.3 3,684.3 4,305,7 5,299.3 8,076,0 11,716.1 13,917.6 14,355.9 18.311.0 20,560.4 23,046.0 /a Includes debt service transfer to PERTAMINA (Rp. 31 billion) and general election (Rp. 37 billion). 7b Includes PERTAMINA subsidy (Rp. 86.4 billion). 7; Includes PeRTANINA subsidy (Rp. 48.1 billion). 77 Includes general electlon (Rp. 81.0 billion). 7e For details, see Tables 5.4 and 5.5. 7f Classification changed to wage/salary and nonwage/salary expenditures. 78 Includes preparation of general election (Rp. 40,0 billion). c| Sourcei Ministry of Finance, @| INDONESIA COUNTRY ECONOMIC HMKRANDUH Development Expenditures. 1973/74 - 1985/86 (Rp, bilflon) Actual Budget 1973174 1974/75 1975176 1976177 1977/78 1978)79 1979/80 1980/81 1981/82 1982/83 1953784 1984/85 19B5186 1. Departments 167.3 221.6 384.9 590.9 744.5 851.0 1,480.3 2,533.2 2,724.6 3,260.9 3,219.5 3,510.0 3,644.3 2. General INPRES programs 45.7 101.3 129.0 143,7 167.7 181.6 218.8 336.8 448.1 535,3 538.8 547.7 594.5 Subsidies to provinces 20,8 T1 54,0 1.5 77 100.7 1KY 215. 23.0 YT1 Ti .0 !20. Subsidies to kabupatenn 19.2 42.5 59.1 62.4 69.1 70.9 87.1 119.4 162.6 193.9 194.1 215.9 21S.9 Subsidies to Millages 5.7 11.4 15.9 19.8 23.2 23.9 31.0 50.7 70.5 88.4 91.6 92.8 98.6 3. Sectoral INPRES progran 19.2 25.0 65.1 94.1 137.0 176.0 252.0 377.2 584.5 444.2 771.2 809.7 872.8 Primary schools T?T7 11:7 4. 5Us TIt. 155.8 9 374, 7TM. 549.3 I2" Wi7 5 Health - 5.3 15.2 20.8 26.3 26.9 30.0 50.4 78.8 80.3 87.3 98.4 114.5 Markets - - - - 1.2 1.3 12.4 2,5 6.0 4.5 10.6 10.6 11.5 Replanting/afforestatten - - - 16.0 24.5 36.0 40.8 48.6 70.4 49.6 59.4 39,8 42.3 Roads - - - - - - 13.0 25.9 54.8 42.4 64.6 80.1 87.5 4. IPEDA 19.5 28.0 34.6 42.2 52.5 63.1 71.4 87.2 94.5 105.2 132.4 150.6 167.4 5. Irian Jaya and East Timor 3.3 4.0 5.5 5.0 9.0 10.4 6.6 6.4 6.8 5.7 5.2 8.5 8.8 Subtotal of traasfers to 85.7 158.3 234.2 285.0 366.2 431.1 548.8 807.6 1,133.9 1,090.4 1,447.6 1,5'6.5 1.643.5 ' levels of government (2-5) 6. Fertilizer subsidy 33.0 227.2 134.5 107.3 31.8 82.6 125.0 283.6 371.4 420.1 324.2 458.7 557.8 7. Government capital 40.8 91.1 108.7 217.9 166.9 128.5 252.8 476.5 480.9 336.6 591.7 359.6 255.6 participation (PMP) 8. Others 10.0 67.7 64.0 79.8 109.8 75.1 291.0 385.5 565.3 326.7 448.7 243.0 248.6 Total (1-8) 336.8 765.9 926.3 1,280.9 1,419.2 1,568.3 2,697.9 4,486.4 5,276.1 5,434.7 6,031.7 6,087.8 6,349., 9. Project aid 114.1 195.9 471,4 773.6 737.6 987.3 1,316.3 1,429.7 1,663.9 1,924.9 3,867.5 4,371,5 4.297.2 Tsota (1-9) 4S0.9 2.37Q 2.054.5 ]. 2.555.6 .1 6.940.0 7.359.3 JfL6 Source, Ministry of Finance. U. 1. '.4 INDONESIA COUNTRY ECONOKIC MZH(RANDUM Development Expenditures by Sector, 1975/76 - 1985/86 (Rp. billion) Sector 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 Actual - Budget Budget Agriculture and irrigation 257 356 380 450 508 929 954 931 913 1,402 1,430 (of which fertilizer subsidy) (135) (107) (32) (83) (125) (284) (371) (420) (324) (459) (558) Industry aud mlaing 124 195 139 205 356 491 827 913 2,153 926 931 Electric power 128 218 223 272 376 431 530 758 660 1,025 1,026 Transportation and tourism 312 429 355 413 466 780 807 876 1,527 1,392 1,425 Manpower and transmigration 12 27 61 95 162 326 417 436 456 675 677 Regional development 173 190 251 275 336 482 616 7U 749 810 868 Education 114 136 211 251 362 575 726 703 1,032 1,502 1,511 Health 38 48 71 79 142 218 286 259 279 253 255 l1ousing and water supply 13 30 90 56 117 191 166 151 221 433 438 General public services /a 72 114 123 225 473 700 800 785 8a" 940 971 Government capital participation 115 225 190 162 466 389 389 281 234 227 229 Others /b 40 87 63 73 250 404 422 556 776 874 886 Total development expenditures 1,398 2,055 2,157 2,556 4,014 5,916 6.940 7,360 9,899 10,459 10.647 Total (excluding fertilizer subsidies) 1.264 1.948 2.125 2.473 3.929 5,633 6.569 6.940 9.575 10,000 10.089 /a Law and order, defense and security, government apparatus. 7b Trade and cooperatives, religion, information and science. Fros 1979/80 Includes natural resource development and enviroment. Sourcet Ministey of Finance. INDONESIA COUNTRY ECONOMIC HEMOLAMDUM Project Aid by Sector. 1975/76 - 1985/86 (Rp. billion) 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 ------------ ---- -------- Actual - …--- ------ Budget Budget Agriculture aid irrigation 43.0 106.7 145.5 135.2 154,5 223.0 135.9 101.0 155.0 529.6 472.5 Industry and mining 76.4 137.3 95,4 199.0 306.8 225.9 580.9 733.8 1,051.0 769.3 760.7 Electric power 89.7 165.2 163.9 207.8 257.2 264.9 308.2 506.0 1,182.0 729.7 826.2 Transportation and tourism 226.5 303.8 212.9 249.7 192.4 308.0 263.6 332.1 889.0 760.8 789.9 Manpower and transuigration 0.6 1.0 9.8 11.6 23.0 31.1 30.5 14.9 45.0 150.5 137.0 Regional development 0.4 1.5 7.9 7.9 18.2 23.6 16.7 2.6 7.0 42.3 25.9 Education 7.3 5.3 29.5 35.3 42.8 50.0 36.7 24.2 211,0 284.7 237.8 Health 6.9 5.9 14.8 21.7 34.4 36.2 33.6 23.7 37.0 75.5 65.4 Housing and water supply 2,8 2.9 28.1 18.3 28.1 33,0 21,7 21,2 51.0 198.8 163.8 General public services - - - 54.1 174.9 153.8 180.0 83.2 152.0 322.1 321.2 Government capital participation 6.7 7.3 23.1 33.1 34.3 35.6 27.9 46.7 45.0 200.7 217.9 Others /a 11.1 36.7 6,7 13.6 49.7 44.6 28.2 35.5 42.0 307.5 278.9 Total project aid /b 471.4 773.6 737.6 987.3 1,316.3 1,429,7 1,663,9 11924.9 3,867.0 4,371.5 4,297.2 /a Since 1979/89 Includes natura resource development and environment. 7T Includes commerclal credits for development programa/projects. Sources Ministry of Finance. U' - - 212 - ANNEX n Table 6.1 INDONESIA COUNTRY ECONOMIC MEMORANDUM Mone1 Supply, 1975-84 (Rp. bllloio) BEd of Money SuEy Curren Demand dep dte period Total Chnne Amount Share (Z) Amount Share Z() k ount 2 1975 1,250 313 33 625 50 625 50 1976 1,603 353 28 781 49 822 51 1977 2,006 403 25 979 49 1,027 51 1978 482 24 Qtr I 2,1U1 10 -T 1,036 49 1,075 51 Qtr II 2,240 129 6 1,110 50 1,130 50 Qtr III 2,370 130 6 1,156 49 1,214 51 Qtr IV 2,488 118 5 1,240 50 1,248 50 1979 897 36 *tr I 2,800 TE -;l 1,369 49 1,431 51 Qtr II 3,005 205 7 1,493 50 1,512 50 Qtr III 3,160 155 5 1,480 47 1,680 53 Qtr IV 3,385 225 7 1,552 46 1,833 54 1980 1 610 48 Qt I 3,797 412 12 1,774 47 2,023 53 Qtr II 4,179 382 10 1,955 47 2,224 53 Qtr III 4,682 503 12 2,130 45 2,552 55 Qtr IV 4,995 313 7 2,153 43 2,842 57 1981 1 491 30 tr I 5,214 WT 2,229 43 2,985 57 Qtr II 5,618 404 8 2,384 42 3,234 58 Qtr III 5,997 379 7 2,451 41 3,546 59 Qtr IV 6,485 489 8 2,557 39 3,928 61 1982 636 10 Qtr I 6,775 290 17 2,541 38 4,234 62 Qtr II 7,171 396 6 2,643 37 4,528 63 Qtr III 7,593 422 6 2,826 37 4,767 63 Qtr IV 7,121 -472 -6 2,934 41 4,187 59 1983 448 6 Qtr I 7,379 25 T 3,000 41 4,379 59 Qtr }I 7,505 126 1 3,284 44 4,221 56 Qtr III 7,716 211 3 3,307 43 4,409 57 Qtr IV 7,569 -147 -2 3,333 44 4,236 56 1984 1 012 13 Qtr I 8,055 6 3,554 44 4,501 56 Qtr II 8,183 128 2 4,047 49 4,136 51 Qtr III 7,961 -222 -3 3,641 46 4,321 54 Qtr rv 8,581 620 8 3,712 43 4,869 57 Source: Bank Indonesia. - 213 - ANNEX II Table 6.2 INDONESIA COUNTRY ECONONIC MEMORANDUM Changes In Factors Affectlnx Money Supply. 197.5-84 (Rp. billIon) Claims on official Net Net claims entities Claims on Time Net End of foreign on Central & public Blocked business & & savings other perlod assets Government enterprises account individuals deposits /a items 1975 -588 162 926 -415 -298 -213 143 1976 345 -334 450 -51 356 -30U -113 1977 568 -274 34 67 284 -96 -180 1978 678 -265 901 -77 587 -196 -1,146 1979 1,655 -825 371 85 555 -516 -428 1980 3,101 -1,916 488 -5 1,180 -859 -379 1981 118 -560 593 36 1,756 -535 83 1982 -1,528 422 732 108 2,218 -723 -593 1983 3,031 -1,305 61 12 2,371 -3,140 -582 1984 2.767 -2.595 190 124 3.646 -2,262 -858 Qtr I 1,178 -103 -57 -3 911 -610 -830 Qtr II 532 -828 -174 63 1,081 -563 17 Qtr III 49 -901 287 -6 779 -514 64 Qtr IV 1,008 -763 134 70 875 -575 -129 /a Includes foreign currency deposits held by residents. Source: Bank Indonesia. INONESIA COUNTY ECONOIC KORANDUN Consolidated Balance Sheet of The Monetary System, 1975-84 (Rp. billion) End of period 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Asseta Forein assets (aet) 72 417 985 1,663 3,318 6.419 6.657 5,129 8,160 10,928 Domestic credit 2 366 2 788 2,900 4 040 4 232 3 979 5 802 9,282 10.421 11.786 Clam on public sector 99i 1 056 1073 - 36 -2 92 970 -262 -2 543 Central govern ent ~ ;S -339 -g3! -878 - -3619 -4,179 -3,.7 -5,062 -7t657 Official entities and public enterprises 1,411 1,861 1,895 2,796 3,167 3,655 4,247 4,979 5,040 5,230 Govervaent-blocked account -415 -466 -399 -476 -391 -396 -360 -252 -24U -116 Claims on private sector 1.376 1,733 2,017 2.604 3.159 4.339 6.094 8.312 10,683 14.329 Loana 1,321 1,655 1,939 2,493 2,993 4,107 5,844 7,995 10,184 13,550 Other claim. 55 78 78 111 166 232 250 317 499 779 LlaSll lec .ul Liabilities Imoort deposits 79 88 146 174 213 365 298 30u 242 218 Other items (net) 382 486 608 1,726 2,115 2,342 2,445 3,036 3,676 4,S59 Honey and Quasi money 1,978 2 631 3 131 3 809 5 222 7 691 9 716 11 075 14 663 17 937 Money 1 2 4 8735i 7;3b 569 II Currency 625 781 979 1,240 1,552 2,153 2,557 2 3 3,712 Demand deposits 625 822 1,027 1,248 1,833 2,842 3,928 4,187 4,236 4,869 Quasi money 728 1,028 1,125 1,321 1.837 Z,t96 3,231 3,954 7,094 9,35O Source: Bank Indonesia. w 0 INDONESIA COUNTRY ECONOIMC MOMORANZDU Consolidated Balance Sheet of the Monetary Authorlties, 1975-84 (Hp, billion) End of period 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Assets Foreign assets 246 620 1.057 1,652 2.62b 4,216 4,u33 3667 5,314 8JQif Clales on Dublic sector 1 254 1 448 1,537 2,434 2.723 3,018 3,444 3,777 2 725 1.399 Central governienut -2* 2539 312 509 5b0 604 86U 1,109 495 679 Official entities and public sector enterprises 886 1,209 1,225 1,9Z5 2,143 2,414 2,584 2,668 2,23U 720 Clalms on deposit money banks 565 640 81 846 1,129 1,722 2,548 3,742 4,35 6,931 Other assets 80 94 25 70 158 289 536 2,068 2,379 3,464 Total assets/liabilities 2.145 2A802 3400 5,0U2 6.636 9,245 10,561 13,254 14,783 19,848 Liabilitles Reserve money 1,038 1,333 1.670 1,847 2.429 3.258 3,83b 3,997 4,888 5,473 Currency outside banks and governaeat 625 781 979 1,240 1,552 2,153 2,557 2,934 3,333 3,712 Currency and deposlts of banks 382 523 623 551 780 1,058 1,199 1,010 1,496 1,709 Other deposlts 31 29 68 56 96 47 82 53 59 52 Covernmeat deposits 704 950 1,154 1,646 2,354 3,912 4,553 4,56b 5,284 7,494 Other liabilities 448 518 476 1,547 1,853 2,075 2,170 4,691 4,611 6,881 Sources Bank Indonesia, 0'l DMUSIA COuuMY ECONOMIC MfhCmAiMM Uukiu SYstm Credits by gemc Sector. 1975-84 Ia (Rp. bLIlicon) Sectors 1975 1976 1977 1978/b 1979/c 1980 1981 1982 1983/d 1584 Asrlcdl,Tue 220 266 270 345 438 539 813 1 025 LA26 1.31- ili n rupih 3i 1,22E 1.3NS ID. forelge -hae 8 10 5 1 2 741 1 036 1,062 1 699 1 893 1 84 1 693 1.472 800 384 in rupih Ie i 176 197 2 i 3 1,8'I.7 17 - In foreign ezchange 653 860 865 1,49 - - - - _ _ Menufacrurnlg industrY If 719 990 1.156 1 624 1,933 2.213 2.702 3.923 5.207 b66b7 In rupith 31a T3i 904 t!ni;- 1,530 1,826 2,376 3.429 4.595 in foreign exchange 211 251 252 359 397 387 386 494 612 402 Trade j 706 858 9131 1U4 133b 1976 3 062 4 129 5 132 ;34 In rupiah 741 837 698 1.105 1,334 1,970 3,0 b, MIO In forelCn exchange 25 21 13 9 4 6 lb 120 351 45 Servlce renderlng Industry /h 172 260 319 389 422 946 1.3S5 1.807 Z,277 3.1b In rupiah lb -m ii 3U5 ]4W 93Y 1,38Z 1,800 Z.253 3.U88 in for lgct exch - "e 6 7 8 4 4 7 3 7 24 a1 Other 132 156 219 223 244 333 444 bO 051 931 -In ruplch flY 1i 218 mI 3ZI ] o3I O In foreign ezchange 5 2 1 2 3 2 - - - 2 Total 2 750 3 566 3 937 5.394 6 268 7.874 10 159 13.022 15.299 3, 813 In ruipU Id 1 , 8 §2 3 ,55U 747 .1-Z9,7 12.401 34.31Z tlS,ZZ Iz foreiu?zcsxne 907 1,251 1,144 1,844 410 402 405 b21 987 590 /a Credits otstandlng end of perlod. Inclndes investen credLts, flU and HUN. LIcdes interbank credits. credits to Central Government and to no_reoldeurs, and foreign rchong compo_ent of project aid. lb Includes foreign exchange revaluation (Rp. 681.8 bilUln). /c Includes foreign exchange revalutio (Rp. 698.0 billion). Id Includes foreiggL echan revaluatio (Up 251 bllin). le Includes crdits to PEBNUhND for repayment of foreign borrowlng. Since March 1979. credit iu forelgn ezchange to EEmnAMiK has bIee cawerted to ruplh credits. If Processing of agricultural products is cla ssfied into *anufactuxing induatry ccording to I3ternatoonal Standard Industrial Clsaification (1SIC 2968). Starting 1980. credtts for constroction wh1ch were previously lncluded In sanufActuring industry are now Included ln wervice rendering industry. / Includes credits for food procurement and hotel projects. lh Credits for elctriclty, g asd weter wupply Is ncluded ervice rendering industry sector. Source: Bank Indonesia. - 217 - AM= II COUNY ECOIEONC IOCANDUN Bonklng Systes Credilts by Type of lank. 1975-64 /s URp. biJi_ Sectors 1975 1976 1977 1978Jb 1979/c 1980 1981 1982 1983/A 1984 Bank Indonesia (direct credltc) 7d 893 1.22 1229 1,935 2 163 2.454 2.649 2 771 2 356 870 I- rupih 356 ,3 24454 2,649 z,77 M n 4 In foreign exchange 649 861 864 1,469 - - - - - - State com ercll banks (e 1 602 2 007 2 267 2 832 3.270 4 295 5 881 8.031 9.787 13.345 In rupiab 743,958 S 7,7 8,910 I2,959 In foreign exchange 204 233 209 283 312 341 358 557 877 386 National private banks /f 133 197 257 36S 493 71 1.081 1.554 2 3,552 lu ruplab ]z[ 197 254 i 466 7U5 1,069 1,534 2,279 3,4e0 In forelsgnexchange 2 0 3 6 27 6 12 20 15 72 ForeigL banks 122 150 184 r6Z 342 414 548 666 862 1.046 In ruplih 70 93 116 176 271 359 5313 622 767 914 In forelg exchange 52 57 68 86 71 55 35 44 95 132 Tota 2 2.750 3.5 3 937 5 394 6 268 7 874 10 159 13 022 15 29Y 1b,813 in rupiah 1,843 2,415 2 73 0 S 8 9 754 , 1 18,223 In forelgn exchange 907 1,151 1,144 1,844 410 402 405 621 987 590 /a Credits outstandin at end of period. Includes investment credits, EX and KInd. Excludes lnterbank credits, credits to Central Government and to non-residents, and foreign exchange component of project ald. /b Inludes foreigz excbhnge revaluatlon (Rp. 681.8 billion). /c Includes foreign exchange revaluation (Rp. 625 billion). /d Excludes liquidity credits but ifcludes credits to Perctniaz for repayment of foreign borrowlag. /e rcludes state development bank. If Caombned national prlvate banks and local development banks. Include foreign ebcange revaluatlon (Rp. 251 blln. Source: Bank Indoneia. - 218 - ARME II Table 6.7 INDONESIk COUNTRY ECONOMIC 0MORhNDUN Small-Scale Invetatut Credits and Permanent Working Capital Credits, 197S84 (Rp. b i'lon) Small-scale Permanent working investmet credits la capital credits /a Number of Approved Out- Number of Approved Out- applications value standing applications value standing Year approved - (Rp billon) - approved (Rp billion)- ('O00) ('0008) 1975 17 28 22 24 29 19 1976 28 50 36 166 67 41 1977 40 74 50 322 115 62 1978 55 106 65 420 177 84 1979 72 163 99 644 305 154 1980 115 314 210 890 569 321 1981 167 528 353 1,242 1,062 635 1982 Qtr I 176 571 374 1,298 1,178 704 Qtr II 184 608 387 1,342 1,300 770 Qtr III 193 648 400 1,383 1,378 784 Qtr IV 200 685 405 1,423 1,454 791 1983 Qtr I 213 723 414 1,486 1,542 815 Qtr II 218 749 409 1,531 1,627 845 Qtr III 222 778 411 1,553 1,697 872 Qtr IV 225 799 393 1,592 1,798 858 1984 Qtr I 228 825 387 1,621 1,861 867 Qtr II 231 882 380 1,658 1,961 865 Qtr III 238 872 376 1,718 2,073 886 Qtr IV 241 898 359 1,749 2,136 882 /a CuLrlative as of end of period. Source: Bank Indonesia. INDNESIA COUNTRY ECONOMIC MIKOLUDUM Medium-Ters Investbent Credits b Ecanomc Sector. 1975-84 /a (Rp. .1L ion) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 /c Credit *proved /b 255.066 320 002 352 324 438,353 566 233 879,743 1. 238 000 I 866 000 3.213 000 3.584.000 A&riculture t34034 44,434 61,824 80,601 108U750 151,739 212,'000 277,000 S13:0i0 572,000 Hanufacturing Industry 108,658 130,264 143,782 154,174 189,132 265,454 431,000 812,000 1,309,000 1,4600000 #loin8 154 5,296 5,296 5,142 5,277 5,245 37,000 40,000 76,000 85,000 Comunication end tourism 960763 125,465 125,920 177,271 248,320 4180018 503,000 656,000 1,165,000 1,300,000 Others 15,137 14,543 15,502 21,149 14,754 39,287 55,000 81,000 l50,000 167,000 Credit outstandiog 177 788 246 156 278 180 332 492 396 987 554 834 816 000 1.227 000 1,740 000 21042 000 Agricultute 26:95t 38:922 52;072 67T12i 73:179 92 299 143 000 Ig9;00 2'5:0T G -375;006 manufacturing Industry 78,306 94,066 105,754 115,190 140,247 176,889 256,000 505,000 669,000 785,000 Hla a ag 143 4,278 3,277 2,122 1,222 219 25,000 31,000 43,000 51,000 Ca _unleatlon and tourism 62,222 99,985 106,556 133,630 172,420 257,532 357,000 437,000 665,000 736,000 Others 10,260 8,905 10,521 14,262 90919 28,892 36,000 55,000 78,000 95,000 /a Excludes uall-scale investment credits end permanent votking capital credits. /b Cumulative as of end of period. Excludes repayments. /c Provisional figures as of June 1984. sources Dank Indonesia, - 220 - AmCI1I COUNTY BCCNOiIC MUORAUDNh Time Iepoitm vith State Baksn. 1975-84 (Rp. million) Non- tIterbank resident 3 time time 24 18 12 m onths Total deposlts deposits End of mouth *outbc Months mouths 4 la" Jl b lb 1975 335.476 1D,281 27,372 9,212 3,971 386,312 5,065 469 1976 517,568 3,987 48.500 25,082 16,575 611,712 14,466 862 1977 604,925 1,896 33,559 40,967 20,869 691,846 i3,480 974 1978 qtr 1 615,913 S99 34,621 34.308 1,477 686,918 13,997 486 Qtr II 622,049 45 39,000 44,632 1,865 707.591 13,615 451 Qtr III 623.876 - 39,491 55,700 2,226 721,293 13,306 21b Qtr IV 608,971 - 42,115 51,718 3,808 706,612 12,840 190 1979 Qtr I 608.194 - 36,259 58,304 5,121 707,878 14,479 170 Qtr II 616,609 - 30.191 55,489 5,811 708,101 15,441 156 Qtr III 615,288 - 28,939 64,927 2,768 711.922 15,915 161 Qtr iv 607.017 - 29,871 74,693 3,822 715.403 16,230 1,104 L980 qtr I 610.360 - 31,726 75,312 7,106 724,504 19,589 1,012 Qtr I1 616,849 - 34,086 72,020 2,639 725,594 19,379 628 Qtr III 646,050 - 36,248 64,826 3,724 750,848 20,600 526 Qtr IV e56.215 - 34,447 38,747 4,988 734.447 19,888 559 1981 Qtr I 692,309 - 33,502 24.918 Z,918 753,647 16,149 5b5 Qtr II '20,211 - 37,085 25,237 2,948 785,481 21,572 186 Qtr III 748,100 - 38,900 23,300 3,500 833,800 - Qtr IV 765,200 - 42,800 18,500 2,700 829,200 - - 1982 Qtr I 777,300 - 40,000 10,000 3,800 831,100 - - Qtr I1 811,900 - 36,400 8,000 2,800 859,000 - - Qtr III 819,400 - 38,500 9.100 5,900 872,900 - - Qtr IV 848,700 - 39,300 10,100 5,300 903,400 - - 1983 Qtr I 848,300 - 42,300 11,600 3,600 905.800 - - Qtr II 763,200 - llL,900 119,300 129,600 1,124,000 - - Qtr III 655,800 700 417,000 210,500 297,700 1,581,700 - - Qtr IV 538,700 1,400 837,900 298,700 449,100 2,125,800 - 1984 Qtr I 499,200 1,000 1,061,400 335,800 46U,500 2,357,900 - - Qtr II 374,700 1,700 1,368,800 665,500 494,200 2,905,900 - - Qtr III 292,900 1,800 1,596,400 673,000 356,400 2,920,500 - - Qtr IV 277,300 2,300 1,676,400 557,900 472,000 2,985,900 - ls Excludes iaterbank time deposits and nonresident tlme deposits. lb Not published after second quarter 1981. Source: 1ak Indameia. - 221 - NAAI IX Table 0i.10 XNMDIUSXA COUN!IX ICONWKIC MNDROUNIDU Interest Rates on Deosits at Commercial lanka. 1978-83 CZ p.a.) State bank Private natlonl bank /a TADAN*S Cercf 1- time dopotots time deposits Deand savings 18518 cats of Lan 6 24 Les deposits deposits vings deposits than 3 o. 32 mo. than 3 0 12 24 /b /c deposits /d 3 me. mos. /e mor. /f 3 or. Son. mor. mos. orn. 1978 Hteh 3/1.8 15/6 9 6.1 6 9 15/12 10.5 13.3 16.2 18.6 20.8 June 3/1.8 15/6 9 6.1 6 9 .5/32 10.8 13.3 15.8 18.0 21.2 Sept-ber 3/1.8 15/6 9 7.6 6 9 15/12 12.0 13.1 15.2 17.6 21.1 December 3/1.8 15/6 9 7.6 6 9 15/12 12.8 12.5 15.6 17.2 20.7 1979 -arch 3/1.8 15/6 9 7.6 0 9 35112 13.9 14.8 36.0 17.2 20.3 June 3/1.8 15/6 9 7.6 6 9 35S12 12.9 15.8 15.9 17.7 19.9 September 3/1.8 15/6 9 9.5 6 9 15112 13.2 lS.1 16.8 18.0 20.5 Dacember 3/1.8 15S6 9 9.8 14.3 14.8 6 9 15112 16.2 16.7 18.3 19.6 19.6 3980 .Mth 3/L8 15/6 9 10.0 7.0 8.8 6 9 15/12 14.3 17.2 18.5 19.5 19.8 Jime 3/1.8 15/6 9 11.6 7.0 8.8 6 9 15/12 14.2 lb. 17.8 20.1 19.3 September 3/1.8 15/6 9 9.3 7.0 8.8 6 9 15/12 14.6 17.6 18.7 20.2 .9.5 December 3/1.8 15/6 9 10.2 9.0 15.0 6 9 15/22 14.2 16.1 17.8 20.1 19.3 1961 warh' 3/1.8 15/6 9 10.4 9.0 12.0 6 9 15/32 15.9 36.8 17.7 20.0 18.9 Juna 311.8 15/6 9 10.9 13.1 15.0 6 9 15/32 16.4 18.0 18.8 20.4 19.4 September 3-18 15/6 9 10.9 13.8 15.0 6 9 35132 16.2 17.2 17.8 19.5 19.4 December 311.8 15/6 9 10.9 12.5 15.0 6 9 15132 15.4 17.4 LT .9 19.4 19.0 398Z march 3/1.8 15/6 9 31.3 22.0 12.0 6 9 15/32 15.9 10.8 18.1 19.3 38.6 Jue 3/1L8 15/6 9 12.5 12.0 10.0 6 9 15)12 lb.7 17.4 18.3 19A* 27.9 September 3/1.8 15/6 9 L2.5 9.0 9.8 6 9 l5/12 2b.7 17.7 18.5 19.4 18.8 Deber 3/1.8 35,6 9 1Z.5 9.0 10.0 b 9 15132 1b.9 37.1 18.5 19.3 15.5 1983 March 3/1.8 15/6 9 12.5 12.0 9.6 6 9 15/32 17.9 17.4 18.6 39.3 19.0 Jme /a 3/1.8 15/12 9 14.5 15.5 16.5 17 38 17/h 10.3 17.4 18.8 19.5 I8.8 /a Averao rate of lnterest at selected banks. Based on daly averge for the last moth of the period throug Aprll 3983 for private blks and may 3983 for stte banks; and of period data used thereafter. /b UntLil February 1978, 4.SZ for dd depositg excasing &p. 50 uIlI on, 3S for smller monts. From, Mrh 3978 3S for asmtot above Rp. 50 mlUion, 1.6S for Ip. 1-50 miLion, ad individually determined for amonts belowRp. I million. Ic Up to Rp. 200.000 352, 6S above Rp. 200.000, 62 above Rp. 200,000. Id Nidpoint of rae for six mth rate. le Sice January 3978, banks ar free to set interest rates an deposits three anthu ad lena. /f Effective Jary 1978, 5l for amouns up to Up. 2.5 mllion ed 3Z2 for amounts above Up. 2.5 milon. A Ceilng on the deposit Interest rate celIng at state ceills remosd on June 1, 3983. /h Starting in Jma W3 12S legal finimum rate. Source: lank Indonesia. 1NDONESLI COUNTRY ECONOHIC NEHORANDUM Principal Agricultural Products by Subsectorm, 19b6-84 P'000 tons) Product 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 198 /a Food Crop. Rice 11,667 12,249 .3,140 13,724 13,183 14,607 15,276 15,185 15,845 15,876 17,525 17,872 20,163 22,286 22,837 23,961 24,701 Corn 3,166 2,292 2,825 2,606 2,254 3,690 3,011 2,909 2,572 3,143 4,029 3,6U6 3,991 4,509 3,235 5,095 5,412 Cae ava 11,356 10,917 10,478 10,690 10,385 1,186 13,031 12,546 12,191 12,488 12,902 13,751 13,726 13,301 12,988 11,651 14,702 Sweet potato 2,364 2,260 2,175 2,211 2,066 2,387 2,469 2,433 2,381 2,460 2,083 2,194 2,079 2,094 1,676 2,G44 2,257 Soya beans (shelled) 420 389 498 516 518 541 589 590 522 523 617 680 653 704 521 568 783 Groundauts (shelled) 287 267 281 284 282 290 307 380 341 409 446 424 470 475 437 469 535 Fishery Saltvater fish 723 785 807 820 836 889 949 997 1,082 1,158 1,227 1,318 1,395 1,408 1,491 1,600 1,670 Freuhwater fish 4,11 429 421 424 433 389 388 393 401 414 420 430 455 506 507 520 549 Heat and Poultry meat 305 309 314 332 366 379 403 435 449 468 475 486 506 596 629 671 694 Eggs 51 58 59 68 78 81 98 112 116 131 151 164 173 275 297 316 329 Milk (ln ultero) 29 29 29 36 38 35 57 51 57 61 62 72 78 86 117 143 170 Cash Crops Rubber 735 777 802 804 804 844 817 782 857 844 884 898 1,002 1,046 899 1,230 1,107 Palo oil 181 189 217 248 269 290 348 397 431 473 532 642 701 748 884 907 1,038 Coconut/copra 1,133 1,221 1,208 1,149 1,311 1,237 1,341 1,375 1,532 1,518 1,575 1,582 1,759 1,812 1,723 1,607 2,015 Coffee 150 175 186 196 214 150 149 160 193 194 223 228 285 295 281 302 309 Tea 73 62 64 71 61 67 64 69 73 79 91 125 106 110 93 113 116 Cloves 17 11 15 14 15 22 15 15 20 41 21 35 39 40 33 45 b6 Pepper 47 47 17 26 13 29 27 23 37 43 46 47 37 39 34 40 41 Tobacco 54 84 78 76 79 80 79 82 89 84 81 87 116 118 106 120 121 Cane sugar 752 922 873 1,041 1,133 1,009 1,237 1,227 1,321 1,438 1,516 1,601 1,831 1,700 1,618 1,693 1,769 Cotton - 3 3 2 1 1 3 2 1 1 1 1 1 10 15 8 40 Forestry ('000 cu a) Teakwood 468 520 568 770 597 676 620 595 480 573 475 575 500 578 692 716 450 Other tifber 4,783 7,587 11,856 12,968 17,120 25,124 22,660 15,701 20,947 22,366 25,781 26,256 21,240 15,376 12,323 8,986 754 /a Prelilinary figures. Sources Supplemat to the President'. Report to Parllament, January 1985. *J - 223 - HUfl II Table 7.2 INDONESIA COUNTRY ECONOMIC IWIANDUM Agricultural Production of Major Crone by Type of Product, 1970-83 ('000 toes) Product 1970 1971 1972 1973 1974 1975 1970 1977 1978 1979 1980 1961 1982 1983 Suallholdere Rubber 571 572 559 599 371 536 610 584 612 616 705 740 586 910 Coconut/copra 1,198 1,147 1,308 1,233 1,355 1,370 1,527 1,513 1,554 1,561 1.737 1,789 1,7U7 1,592 Coffee 170 178 196 140 132 144 178 151 200 209 26b 276 202 285 Cloves 15 14 13 22 15 15 17 37 21 35 39 40 32 44 Tea 21 24 7 14 1S 14 13 14 17 17 21 22 17 25 Sugar 196 211 247 199 250 223 267 352 485 498 749 1,304 1,373 1,339 Tobacco 69 69 74 69 69 74 76 72 68 73 101 103 97 111 Pepper 17 24 18 29 27 23 37 43 46 47 37 39 34 40 Cotton 3.0 2.0 2.0 1.1 2.9 2.4 0.9 0.9 1 1 6 10 13 0 Pain oia - - - - - - - - - - - - - - Palm kernel - - - - - - - - - - - - - Pritvte estates Rusbber 113 114 128 309 108 109 104 107 110 1i2 1in 114 125 124 Cconut/copra 2 2 3 4 6 5 5 b 21 21 22 23 11 11 Coffee 6 7 6 4 7 6 6 6 7 8 6 6 6 7 Cloves .* . .. 0.1 01.2 0.1 0.2 1.6 0.2 0.2 0.2 0.2 0.2 0.2 Tea 9 10 7 10 11 10 11 11 15 16 17 l 16 16 Su r 74 122 130 118 127 326 152 162 71 73 114 116 72 72 Tobacco - - - - - Pepper - - - - - - - - - - - - - - Cotton - - - - - - - - - - - - - - Pa- oll 70 79 1 82 U 104 326 145 147 165 168 202 206 285 28b Pa_ kernel 15 l8 17 18 21 24 27 29 22 23 36 37 47 47 Government estates Jabber 118 118 121 137 138 137 142 147 162 270 186 192 189 197 coconutlcopra - - - - - - - - - - - - - - Coffee 9 11 12 6 10 10 10 10 10 11 13 13 13 10 Cloves - - - - - - - - ' ' - - - - Tea 34 37 37 43 40 46 49 51 59 92 68 70 61 72 Sur 603 708 756 693 860 878 902 924 960 1,030 968 220 152 176 Tobecco 9 7 5 11 8 8 11 12 13 14 15 1S 9 U Pepper - - - - - - Cotton - - - - - - Palm oil 147 170 189 207 244 271 286 338 367 474 499 542 599 b21 Pal kernel 33 39 42 46 52 57 56 64 72 85 90 98 110 115 Total REber 802 904 808 845 818 782 856 836 884 898 1,002 1,046 900 1,231 Cococt/cpra 1,200 1,49 1,311 1,237 1,341 1,375 1,532 1,518 1,575 1,582 1,759 1,812 1,718 1.603 Coffee 185 196 214 150 149 160 194 197 223 228 283 295 281 302 Clo iS 14 13 22 15 15 20 39 21 35 39.2 40 32.2 44.2 Tea 64 71 51 67 65 70 73 76 91 125 106 110 94 113 Sugar 873 1,041 1,133 1,009 1,237 1,227 1,321 1,438 1,516 1,601 1,831 1,700 1,627 1,5b7 Tobecco 78 76 79 80 77 82 87 84 81 87 116 118 106 119 Pepper 17 24 18 29 27 23 37 43 40 47 37 39 34 40 Cotton 3 2 2 3 3 2 3 2 1 1 6 10 13 6 Pals oll 217 249 270 289 348 397 431 483 532 642 701 748 864 9U7 Pal kernel 48 57 59 64 73 81 83 93 94 108 126 135 157 102 Sources: Department of Ariculture; Supplement to the President's Report to Parliament, agust 1984; and Nota Keuangau 1983/84. - 224 - ANNEX II Table 7.3 INDONESIA COUNTRY ECONOMIC MEMORANDUM Rice - Area Harvested, Production and Yield, 1968-84 Area Average Paddy Rice Year harvested yield output output ('000 ha) (tons/ha) ('000 tons) ('000 tons) 1968 8,021 2.17 17,413 11,667 1969 8,014 2.28 18,282 12,249 1970 8,135 2.41 19,612 13,140 1971 8,324 2.46 20,484 13,724 1972 7,987 2.46 19,676 13,183 1973 8,403 2.59 21,801 14,607 1974 8,509 2.64 22,464 15,276 1975 8,495 2.63 22,331 15,185 1976 8,368 2.78 23,301 15,845 1977 8,360 2.79 23,347 15,87b 1978 8,929 2.89 25,772 17,525 1979 8,850 2.97 26,283 17,872 1980 9,005 3.29 29,652 20,163 1981 9,382 3.49 32,774 22,286 1982 8,988 3.74 33,584 22,837 1983 9,162 3.85 35,303 24,006 1984 /a 9,636 3.94 37,978 2.S,825 /a Preliminary figures. Source: BPS. - 225 - ANNEX II Table 7.4 INDONESIA COUNTRY ECONOMIC MEMORANDUM BULOG Rice Program, 1978/79 - 1983/84 ('000 tons) 1978/79 1979/80 1980/81 1981/82 1982/83 1983/84 /c Beginning stock 459 708 886 1,192 1,594 911 Domestic procurement 881 431 1,635 1,953 1,933 1,208 Import: 1,268 2,580 1,213 437 506 1,115 PL-480 (304) (353) (101) (46) C-) (65) Other food (15) (327) (198) (48) (-) (140) Commercial (949) (1,900) (914) (343) (506) (909) Total availability 2,608 39719 3,734 3,582 4,033 3,234 Distribution 1,858 2,834 2,531 1,972 3,105/a 1,872 Government (608) (666) (649) (806) (1,320) (1,373) State enterprises (106) (90) (89) (95) (95) (89) Market operations (1,032) (2,036) (1,646) (1,033) (1,529) (399) Other (106) (42) (147) (38) (1b1) (11) Losses 46 8 1 16 17 28 End stock 708 886 1,192 1,594 911 1,334 Nemorandum item: Rice production /b 17,325 17,872 20,163 22,286 22,837 23,9b1 /a Since January 1982, all regions have received rice in kind; formerly, surplus regions received food allowance in money. /b On calendar year basis. /c Preliminary. Source: BULOG. - 226 - ANNEX II Table 7.5 INDONESIA COUNTRY ECONOMIC MEMORANDUM Area Covered Uuder Rice Intensification Programs, 1969-83 ('000 ha) Of which Of which Year BIMAS INSUS INMAS INSUS Total 1969 1,309 - 821 - 2,130 1970 1,248 - 845 - 2,093 1971 1,396 - 1,393 - 2,789 1972 1,203 - 1,966 - 3,169 1973 1,832 - 2,156 - 3,988 1974 2,676 - 1,048 - 3,724 1975 2,683 - 1,957 - 3,640 1976 2,424 - 1,189 - 3,613 1977 2,059 - 2,181 - 4,240 1978 1,960 - 2,888 - 4,848 1979 1,571 - 3,452 - 5,023 1980 1,374 420 4,142 640 5,516 1981 1,384 587 4,802 1,119 6,186 1982 1,296 832 5,047 2,113 6,343 1983 1,401 955 5,222 2,484 6,623 Source: Supplement to the President's Report to Parliament, August 1984. - 227 - townsa ~ ~ ~ ~ ~ ~ ~ ~~~ani COUINIY 2cuOIIC fOE*DVN Quarterly ladx of kalmfctu-rl production for selected udustriel Cropss. 1979-1914 (111) /a urturly seraget 7V3- l) wrsl *rF c 1902 tby qnrltlSU3 lb (bv qrt19e04 lb Descriptlo 1979 190 1 S1 IL 1 I III IV I 11 111 Dairy products (4) 201 234 235 197 229 202 247 244 275 281 246 221 216 1SS Halt liquors and wlt (4) 111 129 147 IoU 149 175 177 I" 1lob n" zoU 212 aInY 2U2 Clove cigarettes (20) 120 131 LUO 1e3 107 W93 20U 175 197 200 214 2ft 2a2 219 White cigarettes (13) 131 13U 124 117 117 114 112 114 122 lUV 127 l1b lib 113 Yara and thrad (20) 111 110 126 129 124 113 11 117 113 111 117 S23 126 124 veaving except juts product. (193) 12in 12b W 137 133 123 in 110 ll1 o 18 1 *9 124 12b 1I att C10) 117 117 99 iUo 115 111 107 104 1U2 110 lU L22 122 IlS Ka!ttig producta C32) 77 go 89 8 82 70 79 77 02 03 4 e4 1h 2 Footwear (14) 112 130 123 124 L17 122 122 149 17* 144 145 1og 113 179 Plywood (b) ZZU 392 471 447 471 314 404 44b 439 429 439 362 374 47U Paper Cll kinds) (8) 151 153 152 156 148 148 134 147 154 11* 109 103 1t2 lgb Base chemcals except fertillzer (13) 124 120 127 l12 12e 129 143 132 13 137 13b IW 1Di 148 rertllixer (5) 336 400 492 510 482 201 489 554 504 571 552 @31 7uU 7e3 Paint. varnIshes. Lacquers (7) 98 115 15S 1e8 1"4 1be 172 132 141 11 ISa 150 1l5 175 Hatches (7) 139 179 18S 194 Z15 232 Z78 324 305 Z71 205 3jo 100 345 Tires sad tubes (12) 227 257 3U1 342 Zob 25b z20 30N ill 3 27 2b4 3U5 311 Classw md gis products (17) 171 200 257 234 220 19 1U 223 223 223 241 242 229 241 Cent (10) 314 307 392 407 421 42U 429 415 451 472 21 404 442 424 Iron snd *teal (15) 43 1.034 1.248 1,031 947 784 1,.11 1,127 1.11 1.117 1.223 1,232 1,1Z3 1,111 Structural metal products (24) 154 172 lUI 183 118 207 19b 2W0 195 20 203 217 Z12 17 Dry-c*lUbstteril (12) 180 220 231 236 247 255 331 341 343 285 343 315 3U2 306 Electroale And comm_lctlan equpment (1b) Z30 340 340 344 330 30e 345 338 37U 37U 3Z5 2e3 287 3UU Motor vehileas Assembly (17) 117 194 n5 262 Zi 109 233 20 139 225 lO 112 152 1" Notorcycleus and three-weel motor vehicles (5) 75 114 1l1 14 139 1b7 219 197 1ll 103 111 94 1u 7b GeCral Index 158 194 214 213 2ll 210 220 217 223 224 22b 230 238 235 /s lmed on Laspeyxe formula. /b PreIlAaIsry flgures. Note: Figures withlI brackets in -flscriptioe colut indicate the number of astab.llhsents covered In that group. Source: Biro PSit StatiatiL. INDONESIA COUNTRY ECONOMIC MEMORANDUM Production of Minerals, 1973-84 Tin Copper ore Nickel Iron sand Natural Year Petroleum concentrate concentrate ore Bauxite Coal concentrate Gold Silver gas (mln bbls) -- - ('000 tons) -- (kg) (kg) (mcf) 1973 488.5 22.6 125.9 867.3 1,229.4 148.8 280.9 352.1 9,371.9 186.1 1974 501.8 25.7 212.6 878.9 1,290.1 156.2 365.2 265.3 6,464.6 202.2 1975 476.9 25.3 201.3 801.1 992.6 206.4 353.0 330.1 4,754.7 222.2 1976 550.3 23.4 223.3 828.9 940.3 182.9 292.3 355.2 3,397.5 312.1 1977 615.1 25.9 189.1 967.9 1,301.4 230.6 311.5 255.9 2,831.9 542.8 1978 596.7 27.4 180.9 1,206.7 1,007.7 264.2 233.3 253.9 2,506.4 820.1 1979 580.4 29.4 188.8 1,551.9 1,051.9 278.6 79.9 170.0 1,644.6 998.4 1980 577.0 32.5 186.9 1,537.6 1,249.1 304.0 62.9 247.9 2,196.0 1,045.7 1981 584.8 35.2 188.5 1,543.2 1,203.2 350.4 86.6 183.1 2,000.2 1,123.7 1982 488.2 33.8 223,7 1,640.9 700.2 481.0 144.5 222.7 3,057.9 1,111.9 1983 490.5 26.6 205.0 1,298.0 777.9 485.7 124.9 259.5 1,793.7 1,186.4 1984 /a 259.8 10.3 92.7 586.9 442.7 348.7 45.1 142.6 926.6 700.5 /a Up to second quarter. Source: Department of Hines and Energy. 01-4 - 229 ANEX- Table 8.3 DWCURESIA COUNT ECONOMIC I0ORANUN Crude Oil Productlon by Company. 1969-1984 ('000 bbl.) Productlon Average Contract of vork sharing daily P.ERTAHII LENIGAS CaLtex C&T Stanvac Subtotal contract Total output 1969 35,298 376 217,912 - 17,365 235,277 - 270,951 742 1970 35,535 465 257,877 - 17,674 275,551 - 311,552 854 1971 34,776 575 262,846 - 22,951 285,979 4,524 325,673 892 1972 37,697 369 303,826 - 27,173 330,999 26,516 395,581 I,0l 1973 38,543 431 351,528 1,035 22,768 375,331 74,231 488,530 1,339 1974 40,143 362 329,907 1,959 16,626 348,492 112,840 501,838 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 1,508 1977 30,706 285 292,950 2,459 11,974 307,383 277,812 616,186 1,688 1978 31,273 195 275,349 2,266 11,853 289,468 275,762 596,698 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 11,577 271,948 274,971 577,015 1,577 1981 29,515 176 255,515 1,799 13,141 27U,454 284,694 584,839 1,600 1982 27,374 196 175,928 1,422 13,214 190,564 270,055 488,189 1,354 1983: 27,443 233 - - - 223,967 238,848 490,491 1,342 January 2,306 21 12,376 65 1,064 13,505 22,089 37,921 1,223 February 2,052 19 7,136 66 952 8,154 18,225 28,450 1,016 Ntrch 2,285 22 13,711 80 1,083 14,874 19,367 36,548 1,179 April 2,226 23 18,352 146 1,042 19,540 20,190 41,979 1,399 maya /. 2,280 21 - - - 21,896 19,168 43,366 1,399 June 2,281 20 - - - 20,890 18,877 42,068 1,402 July 2,328 18 - - - 21,475 20,123 43,944 1,418 August 2,294 17 - - - 21,913 19,479 43,703 1,410 September 2,185 18 - - - 21,085 18,670 41,958 1,399 October 2,245 18 - - - 21,763 19,875 43,901 1,416 November 2,155 18 - - - 21,924 19,530 42,627 1,421 December 2,805 18 - - - 17.948 23,255 44,026 1.420 1984: January /b 2,766 19 - - - 463 40,964 44,218 1,42b Februarj 2,564 16 - - - 424 38,336 41,340 1,427 March 2,692 16 - - - 4b6 41,314 44,490 1,435 April 2,529 18 - - - 477 39,862 42,886 1,435 may 2,619 19 - - - 489 40,834 43,961 1,418 June 2,467 18 - - - 459 40,006 42,950 1,432 July 2,458 17 - - - 476 40,499 43,45U 1,402 /a Since May 1983, contract of work data have been consolldated. /b Since Znuary 1984, data of Caltex have been excluded from the contract of work and they have been Iciluded in the production sharing contract. Source: BPS. INDONESI COUNmY ECONONIC HUIRANDUK Petroleum Products - SuDPlY and Dennd. 1970-04 (HillLon bble) 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984La Production of crude 311,6 325,6 395.6 488.5 501.8 476.9 550.3 615,1 596,8 580,4 577.0 584.8 488,2 454.5 431.5 Crude impoats 0.8 2.8 2.7 1.9 2.7 2.6 7.7 29.7 31.1 30.5 32.9 37,0 22,0 25.7 36,. Subtotal 312.4 328.4 398.3 j90,4 504.5 479.5 558.0 644.8 27.8 610.9 609.9 621.8 510.2 450.2 408.3 Crude *xports 228.1 239.6 299.1 269.5 378.9 363,1 449.5 485.3 472,0 410,8 370,8 383.4 320.9 330.2 329.1 Crude available for reflneries 84.3 88.8 96.2 120.9 125.6 116.4 108.5 159,5 155,8 200,2 231,2 238.4 189.3 150.0 139.2 Changea In crude stocks (decrease - -) 0.6 -1.2 -4.3 1.0 0.7 2,9 -4.8 7.3 -5,0 14.2 38.3 44,7 6.7 48.2 42,4 Refinery inputs (including swaps) 83.7 90.0 100.5 119.3 124.9 113.4 113.7 153.8 159.5 186.0 192.9 193.7 182.6 198.2 181.6 Refinery consumption 7,5 7,6 7.7 8.0 7.7 6.7 6.4 11,2 9,4 13.0 13,5 6,5 6,5 7*2 7.2 Refinery output 76,2 82.4 92,8 111,8 117.7 106.7 107.3 142.6 150.1 172.0 179.4 187.2 170.1 191.0 174.4 Export of refined products 36.3 33.6 46,0 56.S 45,1 30,6 36.3 S1.4 40.3 49.4 53.4 49.9 39.0 43.3 57.9 Waxy residues 27.2 32.5 39.7 53.8 41.3 32.6 35.2 42.1 36.3 48.9 51.0 77 M.7 40,5 -437 Buinker fuel, avtur, etc. 9.1 1.1 6.4 2.7 3,8 4.1 6.b 9.3 4,U 0,4 2,4 2.0 5.3 2.8 14.2 Available for domestic conoumotlon 39.9 48.8 46.8 55.3 72.6 70.1 71.5 91,2 109.8 123.7 126.0 I3LWO 137.1 147.7 116.5 Product Import 2,1 4.2 8.6 11.9 12,8 15.0 30.4 18.3 10.9 15.0 22.0 42.6 28.0 23.5 2.5 Total supply 42,0 53.0 55.6 67.2 85,4 85,1 101.9 109, 126,7 138,7 148,0 179.9 165.1 171.2 119.0 Domestic consumption 39,2 44.2 50.7 58,6 67,9 77,5 87.7 98.5 113,0 134.3 141.8 156.0 161,1 159,9 143.5 Changae In refined *tocks 2.4 8.8 4.9 8.6 17,5 7.6 14.2 11.0 13,7 4,4 0.2 23.9 4.0 11.3 2,1 /a Up to November 1984. Sources HIOA9. UN INDONES1A COUNTRY ECONOH1C EWI0RANDUM Domeatic Sales of Petroleum Products. 1971-84 /a ('000 bDls) 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Aviation as 144 118 123 139 139 143 128 134 134 130 110 1U3 85 72 Aviation turbo 961 1,200 1,658 2,150 2,579 2,758 2,913 3,494 3,656 4,355 4,869 4,899 4,424 3,800 Premium gasoline 100 201 359 496 661 706 710 728 b18 466 392 238 244 518 Regular gamoline 10,409 10,779 11,757 12,787 14,284 15,606 17,356 19,608 21,295 23,321 25,048 25,709 24,309 24,817 Kerosene 18,927 20,697 23,146 26,769 30,623 33,259 36,880 41,717 45,457 48,975 52,497 51,778 48,133 45,198 Rotor diesel 6,895 9,027 11,838 14,524 18,023 22,749 27,041 31,709 34,595 40,116 44,737 48,918 49,409 48,056 w Industrial diesel 2,364 2,676 3,488 4,022 4,673 5,429 6,239 6,744 7,581 7,829 9,391 9,311 1U,U70 10,044 Fuel oil 4,095 5,379 7,924 8,755 7,844 8,222 10,296 11,061 13,626 15,739 17,587 19,341 22,293 21,587 Total 43.895 50.077 60,293 69,042 78,826 88,872 101,563 115,195 126,902 140,931 155,231 lbO.297 154,973 154,092 /a Excluding lubricating oil and other products. Source: Department of Xines and Energy. 1U, -232 - AI=m ii Table 9.1 ADONSI - aonm oainc D.umo indonesi C Dmm Prie md 7. b79-rusE 395 (IndeZ: April 1977MrCh 3978 - hIDU Index I Chmane Food lusing Cloth Other al Food lousin Clothing Other General Welght a (46) (24) (31) (39) (100) 1.979 141.1 140.9 168.2 137.7 143.1 22.9 lb 22.1 lb 33.2 /b 20.8 lb 23.3 lb 3980 165.6 168.7 390.8 lS9.1 167.6 19.1 U.0- 13.0 18.b - 18.5 1951 179.3 182.3 398.2 368.8 179.8 372 TT 3 3. 3 1982 January 184.5 194.9 200.0 181.9 188.3 2.9 6.9 0.9 7.8 4.7 February 383.7 198.4 200.2 183.7 189.3 -0.4 1.8 U.1 1.0 0.5 March 183.4 200.1 200.3 183.9 189.6 -0.2 0.9 0.1 0.2 April 182.4 200.7 200.2 24.6 189.5 -0.5 0.3 - 0.4 -0.1 May 182.8 201.3 200.9 184.8 189.9 0.2 0.3 0.3 0.1 0.2 June 183.4 202.0 202.0 184.9 190.5 0.4 0.4 0.6 0.1 0.3 July 186.5 203.0 204.1 186.4 192.6 1.7 0.5 1.0 0.8 1.1 August 183.8 203.2 203.8 187.5 191.7 -1.5 0.1 -0.2 O.b -0.5 September 816.3 205.0 204.5 187.1 193.4 -1.4 0.9 0.3 -0.2 0.9 October 389.2 208.0 204.8 189.0 195.8 1.6 1.5 0.2 1.0 1.2 November 390.4 208.9 205.1 189.3 196.7 0.6 0.4 0.1 0.2 0.4 December 192.7 209.8 205.0 189.3 197.8 1.2 0.4 0 0 U.O Total 7.3 14.3 3.4 11.8 9.7 1983 January 195.6 223.2 205.3 209.4 206.9 1.5 6.4 -0.1 10.0 4.6 February 392.1 229.7 204.9 210.3 207.2 -1.8 2.9 -0.2 0.4 0.1 March 189.7 228.8 204.6 220.6 204.0 -1.2 -0.4 -0.2 0.1 -0.o AprLl 294.8 233.2 207.8 216.6 211.0 2.7 2.0 1.6 2.8 2.4 May 197.9 234.4 209.2 217.0 212.8 1.6 0.5 0.7 0.2 0.9 June 205.2 234.9 220.2 217.2 216.2 3.7 0.2 0.5 0.1 1.6 July 208.2 235.3 212.1 217.7 217.9 1.4 0.2 0.9 0.2 U.8 August 207.2 235.4 212.4 219.4 217.8 -0.5 0.0 0.1 o.a - September 210.5 236.5 213.0 229.5 219.6 1.6 0.5 0.3 0.1 0.8 October 209.7 237.1 223.2 220.1 219.6 -0.4 0.3 0.1 0.3 - November 209.7 238.0 213.7 221.4 220.2 0.0 0.4 0.2 0.6 0.3 Decezber 212.7 238.1 214.0 221.5 221.5 1.4 0.0 0.2 0.0 0.6 Lotal 10.0 12.9 4.3 16.3 11.5 1984 January 219.8 250.6 214.5 227.2 229.1 3.3 5.3 0.2 2.5 3.4 February 222.6 259.9 214.9 227.7 232.9 1.3 3.7 0.2 0.2 1.7 March 220.5 263.9 225.1 229.8 233.4 -0.9 -1.5 0.1 0.9 0.2 April 221.2 265.6 215.7 240.3 236.5 0.3 0.7 0.3 4.6 1.3 May 224.3 265.9 216.0 240.9 238.0 1.4 0.1 0.1 0.2 0.7 June 225.3 266.1 217.5 240.9 236.7 0.5 0.1 0.7 0.0 0.3 July 225.9 267.3 218.8 241.7 239.6 0.3 0.5 0.6 0.3 0.4 Anugst 223.2 267.9 239.7 244.1 239.2 -1.2 0.2 0.4 1.0 -U.2 September 222.5 268.0 239.8 244.6 239.0 -0.3 0.0 0.0 0.2 -0.1 October 221.5 268.5 220.3 246.0 239.1 -0.4 0.2 0.3 0.6 0.0 November 220.9 269.5 220.5 246.4 239.1 -0.3 0.3 0.1 0.1 0.0 December 226.4 270.0 220.6 246.5 241.6 2.5 0.2 0.0 0.0 l.u Total 6.3 12.8 3.0 10.9 8.8 1985 January 227.1 272.4 220.8 247.2 242.8 0.3 0.9 0.1 0.3 0.5 February 223.9 272.9 220.9 247.4 241.5 -1.4 0.2 0.0 0.1 -0.5 March 224.3 273.5 221.1 248.1 242.1 0.2 0.2 0.1 0.3 0.2 /a Aritbmatlc average of weights for 17 cities. lb March-December annualized rate. Source: BPS. INDONESIA COUNTRY ECONOKIC MESOEANDUM Wholesale Price Indices In Indonesia. 197S-84 /a (1975 100) 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 /b Agriculture 100 123 144 162 213 262 302 336 382 430 Food crops 100 125 142 154 201 257 304 361 430 492 Commercial crops 100 130 167 195 251 268 285 289 331 380 Livestock 100 115 133 152 201 268 315 330 349 384 Mlning & quarrying .100 113 130 144 175 218 266 311 339 370 Mhanufacturing 100 115 128 139 178 210 234 257 301 339 1 Imports 100 103 108 118 153 174 191 201 243 270 w Exports 100 103 116 127 246 375 414 43U 514 580 Nonoll exports 100 117 148 171 303 365 360 371 513 608 General Index 100 110 122 134 195 254 283 302 357 401 General Index excluding exports of petroleum 100 113 124 136 176 208 243 263 315 35S /a Average for year. /b Average January - November 1984. Source: BPS, Indikator Ekonomi. '.0 INDONESIA COUNTRY ECONOMIC MFKORANDUM Domestic Prlces of Petroleum Products, 1972-85 (Rp. /liter) 1972 1973 1974 1975 1976 1977 1978 1979 1980/a 1981 1982/b 1983/b 1984/b 1985/c Aviation gas 35 40 50 62 70 70 70 100 150 150 240 300 300 300 Aviation turbo 30 40 50 62 70 70 70 100 150 150 240 300 300 300 Premium gasoline 40 45 55 67 90 90 90 140 220 220 360 400 400 400 Regular gasoline 35 41 46 57 70 70 70 100 150 150 240 320 350 350 Kerosene 10 11.5 13 16 18 18 18 25 37.5 37.5 60 100 50 50 motor diesel (solar) 14 16 19 22 25 25 25 35 52.5 52.5 85 145 220 220 Industrial diesel 8.5 9 13 19 22 22 22 30 45 45 75 125 200 200 Fuel oil 6.5 7.5 12 19 22 22 22 30 45 45 75 125 200 200 /a From May 1980. /b Prices increased In January. Lc Excludes value added tax. Source Kcas. USA - 235 - C II Table 10.1 ZINDOESIL COUN7TR ECOOMIC NEORANDUH Approved Foreign luveotuent by Sector, 1977-83 /a Total Sector 1977 1978 1979 1980 1981 1982 1983/b 1977-83 Agriculture 21.4 3.0 16.2 55.9 25.0 15.9 13.0 150.4 Forestry 28.5 38.6 12.1 8.2 3115.2 57.2 8.7 268.5 Flobery 2.7 23.1 21.1 2.9 21.6 b.2 3.7 81.3 Minin & quarryng 200.5 38.1 65.5 3.0 28.5 22b.4 19.0 581.0 Naufacturlng 327.4 274.8 1,157.7 772.6 835.0 1.213.3 1,751.6 7.212.5 Food 8.3 5.5 60.7 14.2 40.5 6.0 11.9 147.2 Teitiles & lecther 70.8 114.6 33.6 77.4 138.6 4b.1 112.4 593.5 Wood & wood products - 1.0 6.0 10.8 123.6 5.7 12.9 100.0 Laper & paper product. 9.7 0.4 11.2 2.3 48.5 - 724.0 796.1 Chemical. & rubber 49.3 25.4 63.9 282.0 36.4 340.4 202.0 1,499.5 Nonmetallic minerals 98.3 19.7 76.7 222.1 20.2 60.5 44.0 541.5 Basmc metals 18.4 9.9 561.1 0.4 84.8 3.6 881.0 1,559.2 Metal products 72.16 92.0 44.5 1.629 142.4 750.7 643.3 1,905.6 Other - 6.2 - 0.7 - - - 6.9 Construction 0.8 5.4 0.5 7.7 48.8 39.3 73.4 175.9 Trade & Wholesale 7.0 9.7 3.0 38.6 - 19.2 77.9 155.4 Wbolesale trade - - - - - 2.2 - 2.2 Hotels 7.0 9.7 3.0 38.6 - 17.0 77.9 153.2 Transport & Coamunication - - 0.2 25.1 - 17.9 0.3 43.5 Transport - - 0.2 25.1 - 17.9 0.3 43.5 Rea estate. buslness services and other services 20.2 4.4 43.9 18.2 204.9 1,086.0 400.3 L2ailLI IILI ].Jz j Ll^022.3 1-8UU4 2-SE26J2 9.o68.8 /a Intended Capltal Investment. Aaounts reprenent origlnal approval plus approved expansion minus cancellatilon. /b Provisional figures. Source: Bank Indonesia. - 236 - tatleo of rl,a vtuat br Sector. 1977-83 Total Seetor 1977 1978 2979 1810 1981 2982 1983 /a 2977-63 ASicu.Lture 22.5 10.1 4.3 14.5 13.0 5.8 2.3 oa.5 Poreetry 22.1 15.0 19.2 26.2 34.9 11.0 2.6 131.0 Flabhry 2.8 13.5 10.5 7.9 0.4 9.0 - 44.1 indun and quarrying 20.1 57.3 47.5 49.4 70.0 32.2 17.7 294.2 AnSUf CturiDS 186.2 267.0 192.0 235.4 243.5 378.9 220.3 1,722.4 Food 3.1.9 14.9 7.1 7.4 15.8 7.1 1.2 65.4 Txtila and leatber 27.9 3L4 41.7 78.7 102.5 69.7 14.1 366.0 Wood and wood products 1.4 0.4 0.1 2.3 2.2 23.9 8.b 36.9 Paper nd4 paper products 9.6 11.8 1.4 6.1 2.5 1.6 - 33.0 Cbendcals and rubber 28.0 71.7 44.8 32.0 44.5 1b4.9 110.5 496.4 Noometallc islurale 42.9 9.0 3.2 30.0 30.9 49.4 15.9 181.3 JaJe metals 27.8 37.8 47.5 23.9 7.9 28.5 54.0 227.4 Metal ptrducts 35.4 89.9 36.0 52.0 35.3 33.8 15.8 298.2 Others 1.3 0.1 10.2 2.0 1.9 - 0.2 15.7 Coutructloa 3.0 1.4 12.0 0.8 0.6 6.9 - 24.7 Trade 4 Natal. 6.2 17.2 4.3 0.4 2.9 - 0.2 31.2 1hol0sale trade - 0.7 - - 2.5 - 0.2 3.4 Hotels 6.2 16.5 4.3 0.4 0.4 - - 27.8 Tran- port & ComounIcatioR 2.0 4.7 21.9 4.6 1.3 = - 34.7 Trnsaport 1.8 L3 0.1 2.1 0.2 - - 5.5 Con5eLcation 0.2 3.4 21.8 2.7 1.1 - - 29.2 Rea estate. busnes s ces and 3.9 19.0 6.9 7.2 22.4 6.1 3.8 59.3 otbor *ezvsce Z9t l ~ 254 318.6 346. 9~. *2 4 Ia PrelSolanry e*timtes. Soure : lank Indonesia. cI! - 237 - ANN II Table 10.3 INDONESIA COUNTRY ECONOMIC EORANDUI Approved Domestic Investment by Sector. 1977-83 /a (Rp. billion) 1977 1978 1979 1980 1981 1982 1983 Agriculture, fisheries and livestock 49 100 39 30 60 62 477 Forestry 80 59 80 115 175 93 106 mining 64 18 33 55 13 52 57 Manufacturing 392 522 580 1,093 306 1,419 4,552 Textile 75 1 56 74 129 178 298 Chemicals 99 103 141 162 193 205 733 Other manufacturing 228 61 319 857 1,177 1,241 3,421 Construction - 5 4 8 16 198 Hotel 4 12 13 10 54 76 282 Real estate 35 15 6 16 5 74 169 Others 20 24 18 35 70 143 203 /a Intended capital investment, comprising original approvals plus approved expansions minus cancellations. /b Preliminary estimate. Source: Bank Indonesia. THAILAND 10 nr B.Id. Aomh 0 BRUNEI " ' MALAYSIA BRUNEI *.I@Lwm.e, : S.bolsao 0 / MALAYSIA ) SINGAPORE f-L _ / -~~ -~ L,...~~ YmTping Pi.onu , ~~~~~~~~~~~~~~~A^A iV 4f A N rACNA JO-6 0~~,~ 0P \ 18 \ SU2 A WESI KEPULAUAN SU SA Fok&oC0 0 Wag., 22 - SERAM NobM no,atol| UURU IRIAN(V0 JArA Koke..@ W..k - ISO~~~~~~~~~~~~~~~~~~~~ N Ckeo Aeo0thO\ ooubou , fA 0 .1 p i ORES . / I b Aio.buoa.;} 0 100 200 300 *00 s - ( *10 MILE I SUAVA rW TAR MLaES Kwang 0 100 200 300 *00 500 0 ~ ~ ~ 0 TI, 1g. boo rw. b~ Tllr Wo0 R_.0 do ..o.. I,. U'. f-zr 0 I * I I 124' 130' 136b APRIL 19.85