Report No. 12857-IND Indonesia Stability, Growth and Equity in Repel ita VI July 20,1994 Country Department III East Asia and Pacific Region FOR OFFICIAL USE ONLY MICROGRAPHICS Report No: t12857 IND Type: ECO Document of the Wor!d Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization 4 CURRENCY EQUIVALENTS Before November 15, 1978, US$1.00 = Rp.415 Annual Average 1979-1992 1979 US$1.00 = Rp.623 1980 US$1.00 = Rp.627 1981 US$1.00 = Rp.632 1982 US$1.00 = Rp.661 1983 US$1.00 - Rp.909 a 1984 US$1.00 = Rp.1,026 1985 US$1.00 = Rp. 1,II 1986 US$1.00 = Rp.1,283 b 1987 US$1.00 = Rp.1,644 1988 US$1.00 = Rp.1,686 1989 US$1.00 = Rp.1,770 1990 US$1.00 = Rp.1,843 1991 US$1.00 = Rp.1,950 1992 US$1.00 = Rp.2,030 1993 US$1.00 = Rp.2,079 May 27,1994 US$1.00 = Rp.2154 F`SCAL YEAR Govrment - April 1 to March 31 Bank Indonesia - April 1 to March 31 State Banks - January 1 to Decwmber 31 a On March 30, 1983 the Rupiah was devalued from US$1.00 = Rp.703 to US$1.00 = Rp.970. bOn Septembe 12, 1986 the Rupiah was devalued from USS1.00 = Rp.1,134 to US$1.00 Rp.1,644. FOR OFFICIAL USE ONLY INDONESIA: STABELTY, GROWUi AND EQUITY IN REPELfTA VI CONTENTS Executive Summary ............................................. vii Executive Summary (Blana Indonesia) ............................... xxi 1 Recent Economic Developments .................................. I A. Introduction to the Report ................ .................. 1 B. Macroeconomic Developmen in 1993-94 ..1.............. B.1 Domestic Developments in 1993 ........................... 4 B.2 The Balance of Payments and Externa Debt in 1993/94 .... ........ 13 C. Sources of Indonesia's Strong Performance: Macroeconomic Management .16 Fiscal Policy .16 Monetary and Financial Sector Policy .18 The Open Capital Account, Monetary Policy and Exchange Rate Poicy .19 Exchange Rate Policy .21 External Debt Management .23 D. Sources of Indonesia's Strong Performance: The Supply Side .24 E. The Lessons of Experience .................................. 25 2 An Overview of REPELlTA VI ............... ................... 29 A. The Macroeconomic Objectives of REPELITA VI (1994/95-1998/99) .... .... 29 B. Poverty-Reduction and Equity: The Social Objectives of REPELrTA VI ...... 30 C. REPELUTA VI in Historical Perspective .......................... 31 D. The Projected Balance of Paments During the REPELITA VI Period .... ... 33 This report was prepared by a team led by James A. Hanson. Contributors were Richard Calins (Envwronment), Timothy Condon (Incentives), Dipak Dasgupta (Poverty Human Resources and Long- Term Planning), Oscar de Bruyn ICops (Public Idustrial Enterprises), James Douglas (Forestry), Don Hanna (Environment and Natural Resources and Financial Sector), Chita Jarvis (Public Agricultural Enterprises), Frida Johansen (Public Enterprise Efficiency), Faukh Iqbal (Public Resource Mobilization), Uloyd Kenward (Public Expenditures and Implem ion), and Zia Qureshi (Fiscal Policy, Public Expenditures and Implementation). Yasmine Hamid prepared the Staistical Annex and graphics. Mayling Oey-Gardner, Peter Gardner, Paul Gertler, Edison Hulu, Chris Jones, and Martin Panggabean contributed background studies. Jessica Ardinoto, Innek Herawti, Datty Sembodo and Ester ljahyadi were responsible for document processing. lhis document has a restricted distiution and may be usd by cipie only in the pefman of their offia duies. Its ontents may not otherwise be disosed withu Wodd Bank authion. I U Coaents E. Funding REPELTA VI: Domestic Saving and External Fm nce ........... 37 E.1 Domestic Saving ................. .................... 37 E.2 External Finance ................ .................... 39 F. External Sources of Uncertainty ......... ...................... 43 G. Policy Options to Attain REPELITA V v Objeives . .44 G.1 Macroeconomic Policies for Stab;. .' and Growth .44 G.2 Improving 'ncentives to Raise Ma. xconomic Efficiency. 46 G.3 Irnproving Invesanent Efftciency .......................... 46 G.4 Improving Implementation ......... ...................... 47 G.5 Reducing Poverty and Preserving the Environment ................ 47 3 REPELJrA VI: Investing Effectively for Growth .......... ............. 49 A. Inroduction ........................................... 49 B. Main Investnent Challenges ........... ...................... 49 C. Investment Size and Sectoral Allocation .......................... 51 D. Ensuring Effectiveness of Sectoral Investment Programs ..... ........... 54 Agriculture ...................................... 54 Irrigation and Water Resources .......... .................. 56 Electric Power ...................................... 57 Telecommunications . ................................. 61 Transportation ...................................... 62 Urban Public Services . ................................ 65 Health ........................................... 68 Education .......................................... 71 E. Inproving Project Planning and Implementation .75 Project Plamning .75 Project Implementation ................................. 76 4 Sustining Growth: Improving The Incentive Framework And Efficiency .. ..... 83 A. Introduction . .......................................... 83 B. Trade Deregulation: Removing Non-tariff Barriers .................... 86 NTBs on Rice: BULoo at a Crossroads ........................ 86 NTrs on Sugar, Soybeans and Wheat Ilmpede Processed Food Exports .... 90 NTBs in the Engineering Sector ............................ 96 C. Trade Deregulation: Tariff Reform ............................. 96 D. Trade Deregulation: Eliinaing Export Restrictions .................. 99 Contents U E. Deregulationof Foreign nvestmert ............................ 103 F. Privaization to Inprove Efficiency in Commercially-Oriented Public Enterprises ...................................... 105 5 RedudagPovertyDuringREPELITA Vl ................. III A. Introduction ............. ............................. 111 B. The Great Ascent How The Poor Rose Out of Poverty, 1970-90 .... ..... 112 C. Identifying The Poor ..................................... 124 D. Implementing A Poverty Alleviation Strategy-The Challenge .... ....... 127 E. Targeting Poverty: The INPRES Desa Terdnggal .................... 129 F. Reorienting Basic Public Programs Better to Address Poverty ..... ....... 132 F. 1 Setting Public Expenditure Priorities for the Poor ............... 132 F.2 Inproving the Delivery of Basic Public Services for the Poor .... .... 135 F.3 Promoting Income Earning Opportu4.tles for the Poor .... ........ 141 G. Addressing Poverty in Remote/Resource Poor Regions ................ 142 6 Natural Resources and The Environment .. 14" A. Itroduction ............. ............................. 149 B. The Role of Natural Resources in Growth ...................... . 151 B.1 Natural Resources and Growth ........................... 151 B.2 Future Challenges in the Management of Natural Resources .... ..... 154 C. Environmental Degradation and Growth ...... ................... 159 C.1 Urbanization and Industrialization ......................... 159 C.2 Challenges in Urban Enviromental Management ................ 16) D. Sustainable Development: The Challenges of Integration . .163 D.1 Complementarity and Tradeoffs .164 D.2 National Priorities and Global Concerns .165 D.3 Policies and Instruments to Improve Natual Resource and Environmental Management .166 D.4 The Costs and Financing of Environmental Protection .171 D.5 Ensuring Sound Implermentation .172 D.6 Growth, Equity and StOility: Striking a New Balance .174 7 The Next 25 Years-Structural Changes and Chailenges . .177 A. Introduction .177 iv Contents B. The Transition from a Natural Resource-Based to a Productivity-Based Economy ........................................... 178 C. The Demographic Challenige-An Aging Population .................. 181 D. The Urbanization and Environmental Challenge .......... ........ 185 ANNEXES Statistical Annex .193 TABLES IN TEXT 1.1 Indonesia: Summary of Principal Macroeconomic Indicators ..... ......... 3 1.2 Central Government Operations: 1993/94 Fiscal Outcome and the 1994/95 Budget ............ ......................... 6 1.3 Factors Affecting Reserve Money .............................. 9 1.4 Indonesia: Summary Balance of Payments 1989/90-1993/94 .... .......... 14 1.5 Indonesia: Medium- and Long-Term Debt Indicators 1989-1992 .... ....... 15 1.6 Indonesia: Central Govenmment Fiscal Indicators, 1982/83-1993/94 .... ..... 18 1.7 Externl Borrowing and Debt 1982-1992 .......................... 23 2.1 Indonesia: REPELITA VI: Main Macro-Economic Objectives ............. 29 2.2 Indonesia: REI ELfIA VI: Principal Social Indicators .................. 30 2.3 Indonesia: Comparison of Principal Macroeconomic Variables, 1989-1993 and REPELITA VI Targets .31 2.4 Indonesia Balance of Payments 1992/93-1995/96 and 1994195-1998/99 Average ...................................... 36 2.5 Indonesia: Investment and Saving Balances Selected Years .............. 38 2.6 Indonesia: Projected External Finance for REPELITA VI ............. ... 41 2.--' Indonesia: Medium- and Long-Term Debt Indicators ...... ............ 42 3.1 Indonesia: Sectoral Distribution of Government Development Expenditures .52 3.2 Recent Agricultural and Water Resource Development and REPELITA VI Targets .55 3.3 Indonesia: REPELHTA VI Subsectoral Investment Allocations for Agriculure and Water Resources ............................. 57 3.4 Indonesia: Main REPELHTA Targets for Infrastrucure Development .... .... 59 3.5 Indonesia: Power Sector Investment and Financing ................... 59 3.6 Indonesia: International Comparison of Quality and Availability of Telecommunication Services, 1991 ........ .................... 62 3.7 Indonesia: REPELITA Subsectoral Allocations for Transportation .... ...... 64 3.8 Indonesia: International Comparison of Urbanization 1970s, 1980s and 1990.66 Coment v 3.9 Indonesia: REPELITA VI Targets for Public Water Supply .............. 66 3.10 Indonesia: REPELITA Targets for iHuman Resource Development .... ..... 69 3.11 Indonesia: REPELITA Subsectoral Spending Allocation for Human Resource Development ................... ...................... 69 3.12 Indonesia: Total Number Enrolled as Percentage of Age Group Population .... 72 3.13 Reading Achievement Test Scores, 1992 ......... .. ............... 74 4.1 Production Coverage of Restrictive Import Licensing .... ..... ........ 87 4.2 Monthly Variability in Nominal Rice Prices ......... ............... 89 4.3 Variability of World Rice Prices ................................ 90 4.4 The Cascading Effects of High-Cost Sugar on Downstream Food Processors .... 93 4.5 The Cascading Effects of High-Cost Soybeans on Domnstre-m Food Processors .94 4.6 The Cascading Effects of High-Cost Soymeal on Downstream Food Processors .95 4.7 The Cascading Effects of High-Cost Wheat Flour on Downstream Food Processors ....................................... 95 4.8 The Structure of Protection in Manufacturing ....................... 97 4.9 Indonesia: A Summary of the Negative Investment List ................ 105 5.1 Indonesia-Apparent Per Capita Food Consumption, 1968-88 .... ........ 119 5.2 Indonesia: Trends in Food Consumption By Different Income Groups, 1965-90 ...............119 5.3 Indonesia-Laber Force and Employment Growth, 1970-90 ............. 120 5.4 Indonesia: Open Employment Rates, 1980-90 ..................... 122 5.5 Indonesia: Estimated Migration from Rural to Urban Areas, and By the Main Islands, 1980-90 .123 5.6 REPELXTA VI Targets in Education and Heelt, .................... 129 5.7 Indonesia: Differences Between Remote, Poor Area and Others .... ...... 145 FIGURES IN TEXT 1.1 Macroeconomic Indicators ............ ....................... 4 1.2 Rupiah Interest Rates . ..................................... 8 1.3 Quarterly Non-oil Exports and Imports ........................... 13 1.4 Relation Between NFA and DC ......... ...................... 20 1.5 Real Effective Exchange Rate ................................ 22 1.6 Accounting for Growth in GDP per Worker ........................ 25 2.1 Indonesia: Indicators of Diversification .......................... 34 3.1 Indonesia: Per Capita Costs of Basic Health Interventik,s ............... 70 4.1 Production Subject to Import Licensing ........................... 83 4.2 Average ''ariff Plus Tariff Surcharge ............................ 83 4.3 Rice Prices: Indonesia and International .......................... 88 4.4 The Coverage of Export Restrictions ............................ 99 vi Qr~~~~~~~~~~~~~~~~~~~Cntexts 4.5 Export Revenue from Logs, Plywood and International Log Prices ........ . 100 4.6 Returns on Assets and on Equity: IPEs vs Private Manufactung, 1992. ..... 106 5.1 Indonesia: Trends in Poverty Incidence, 1971-1990 .................. 113 5.2 Indonesia: Regional Patterns of Poverty, 1992 ............ ......... 126 6.1 Physical Stocks of Natui Resource .......... ................. 152 6.2 The Value of Natur Resource Stocks ......... ................. 152 6.3 GDP and NDP ...................................... .. 154 6.4 Environmental Challenges: Urban and Industrial Pollution ..... ........ 162 7.1 Changing Economic Strucre ............................... 179 7.2 Indonesia: Age Structure of Population ........ ................. 182 7.3 Indonesia: Spread of Urbanization in JABOTABEK (1980 to 2010) .... .... 186 BOXES IN TEXT 2.1 TMe ICOR and Macroeconomic Efficiency in Indonesia and East Asia .... .... 32 3.1 Inproving Investment Quality: Lessons from Irrigation Works in hdonesia .... 77 3.2 Recent Actions Taken by Indonesia to Improve Project Effectiveness .... .... 78 4.1 Effective Protection, Nominal Protection and Cascading ................ 84 4.2 Import Substitution Po!icy in the Petrochemicals Sector ................. 98 5.1 Faces of Poverty in Indonesia ............................... 115 5.2 Urbanizaion and Poverty Reducion ........................... 123 5.3 Indonesia: A Compilation of Past or Ongoing Programs for the Poor .... ... 133 5.4 Encouraging Small Enterprises in Public Works .................... 143 5.5 LSMs and Their Activities ................................. 147 Bibliograhy. 17 Executive Sumnaiy wi EXECUTIVE SUMMARY lNDONESIA: STABIMITY, GROWTH AND EQUITY in REPELfTA VI Overview Indonesia's economnc performance has Moneary policy would benefit from closer be.'n one of the best in the developing world. Over coordinaton with exchange rate policy, and the past 25 years, average GDP growth exceeded Increased attention to shifts in external financal 6%, Ifaon averaged less than 10% and absolute markets; this would help achieve balance of poverty's incidence was reduced from 60% of the paynents targets. l7ghter. fscal policy would raise popudation to about 14%. The Sixth Rve-Year public saving, accommodang prhwe invest Development Plan (WL rrs n vO and the Second and helping to reduce the external debt burden. A tent-Fve Year Long-Term Development Plan Fiscal dghtening will entaUfinrm iplementation of both program continued macroeconomic statdkiyt, the Budget, re-straint in roine and off-budget high growth, and poverty reduction. Their most spending,further tax admnistradon improvements, important target is rapid non-oil etport growth, to andfurtU rincreases in property taxes, forestryfees act as the locomotlve for growth in employment (brought on-budget), electricity andferrilizerp-ices. and GDP and to ease the external debt burden. As continuations of past acevements, the Plans' Policies to improve efficiency-to do more lets am fe,asible provided poUcy changes with less-are critical to achieving the Plans' iwprove efficiency, andfinancig needs are met. targets. Greater efficiency could raise growth of (LOP and employment with the same inesinentl Connu will depend on chage la saving. Greater effidcency in delivery of social many areas. In the past, growth was based on services andpovertyprograms could reducepoverty naitral resources - oUl & gas, andforestry - but faster. And greater efficency, in a long-trm, the depledon of stock! and continued weakess in macroeconomic sense, would require greater oil prices means further diversaficatlon Is needed, attention to environmental costs and sustainabiity. Recent high growth was based on non-oil industrial expors, along the lines of the Ea Asian model. Policies to unprove efficiency can be Continuing thisgrovih In ncreasingly ompeive categorized in four broad areas: a) Incentive wrld markets will require a more flexible and improvements. Deregulation that cuts high tarWv efficient economy. Etenal borrowing was used to across-te-board, and reduces non-tariff barriers, ease the past diversflcadonfrom natural resources export restricaons, and inestment restritins and recently priate borrowing g7ew rapidly: would ixrease efficeency and external cowmped- REPIW A v now targets a reduction In the heavy tiveness, contributng to the r'pid growth of non-oil eternal debt burden. Bankdng secaor weak esses exports andjobs. Improve` -bic sector pricing, could hinder growth Industrl growth, and the described above, would stimulate efficiency and associated urbanion, are beginnig to overload mprove equity and the environment. b) Investment the environment and irastructure, requiring In human capital and Wrastructure. The envisaged attention. Fialy, many of the remaning poor are Increase In private particpaon wn,dd be encou- Isolated In resource-poor areas. They need high raged by development of regulatoryframeworks qudity social sectorprograms, as well as continued also protect the public interest. c) Implementon broad-based growth, to lift them ow of povery. improvements (In the broadest sense) In public programs. Alloctonal improvements, better The key to dealing with these Issues is pricing, more reliance on private providers, and continued macroeconomic stabilty, coqpkd with Improved project irplementation would make more policy changes to improve efficiency, as ELrrA V7 efficent use of scarce resources. d) Institutonal recognizes. Continued macroeconomic stability deveopment to improve the effectveness of markents remains the cornerstone for rapid growth and and program Implemenation, In areas such as the poverty reduction. Macroeconomic s*tbiy would regulatory franework, the legal system and land be enhanced by tighter moetwy andfiscal polky, ttling, and the management of external debt, strong efforts to deal with the banking system's urbaniation, privatation, the environment, and problems, and continuedpruden debt management. del.very of socida services, especially to the poor. vii Executive Swwnary Recent Maconomic Developments 1. In 1993, Indonesia completed its cool- Figure 1.1: Macroeconomic Indicators down of he 1990-91 overheating with only a negligible slowdown; in the second half of the tPO5 year, growth began to rise. This strong __ p_ _ _ _ _ _ performance continues Indonesia's traditionally 10 rapid policy response to changing circumstances. The challenge for REPuTA vI p will be to increase the outward-orientation and -.4X 8.SE private sector foundation of the expansion e-- through rapid non-oil export growth. This will contribute to continued rapid GDP growth and 4- _ poverty reduction while avoiding a renewal of rising inflation and widening external deficits. 2-- ii. Macroeconomic developments in 1993- 0- 94 largely reflected monetary, fiscal and low 1991 1992 19s exchange rate policy and their response to Qum" Inhl PaW external events. In the first quarter of 1993, 0_ __pq_gu_m" monetary policy was tight and the Government 10191 10i*n 199 m raised domestic energy prices to international 1 2a levels- Ibis tightened fiscal policy and 1S 9o n ajf 1992 h 1u 2x impro I efficiency, equity, and the envi- ronmert, but caused a one-time increase in prices. In the second quarter, with inflation 4-_ falling sharply, Bank Indonesia unwound the large volume of its high interest rate liabilities. 2- As was expected, some capital outflow occurred. The decline in interest rates and the 12 3 4 2 9 4 1 2 3 4 1 2 a 4 availability of funds stimulated aggregate 1 9u0 I 11# I I 1t92 1 1 INS8 demand and output growth, particularly in construction and consumer durables. Cut Account Defict and Be Debt sp (I ofGDP nd SbbibosYeer-en iii. After the first quarter of 1993, public p spending rose, adding to aggregate demand. E BWd - $93 . 4I The rise in spending was financed by a run- 15 t_7 down in net Govermment deposits, which added to monetary growth. Another factor adding to 10 -IL S53 b.40 aggregzte demand was the global portfolio shift toward Indonesia and other East Asian countries. O iv. Bank Indonesia attempted to slow the - -l L Mist De-ftLfY rise in aggregate demand and inflation in the WPS and Wodd Bank esOMata fourth quarter, by tightening monetary policy and allowing a gradual exchange rate appreciation. However, the combination of the Exetve Summay IV appreciating exchange rate and high interest ix. In the banking sector, the Government rates (compared to international rates) atacted brought legal charges of fraud against those additional capital inflow, a standard dilemma of involved with a large problem loan at &APDO, tight money in an open economy. Monetary one of the state banks that already had a weak growth remained fairly rapid because of the portfolio. On average, banks' portfolios have Governmet's run-down of its net deposits and improved some-what since mid-1993, but a the inflow of foreign exchange. For 1993 as a nurber of banks remain weak. The whole, official reserves rose $0.8 billion. Govemment is attempting to improve supervision, debt service collections, capital and v. Signs in early 1994 point to continued provisioning. Over the medium term, day-to- growth from domestic sources. Prices rose day management will need to improve. over 4% in the first four months of 1994. Seasonal demand increases and supply x. Non-oil export growth was 16.2% in d;sr4ptions from severe rains were major factors 1993. It fell to about 10% for FY1993/94, as in the price rise. a result of stagnating exports in the last half of the fiscal year, compared to the same period a vi. Growth continued in spite of the fall in year earlier. Data for 1993 indicate that about inernational oil prices at the end of 1993, half of the export growth was due to higher which put pressure on the balance of paymente prices for wood products and the remainder to and the fiscal accounts. The pressure is less footwear; machinery, metal and electrical than in the past-diversification since the mid- products; and miscellaneous products, all of 1980s has reduced the shares of oil & gas in which grew 40% or more. Textile exports exports and in fiscal revenues to less than 30%. suffered from competition-a 19% price fal Nonetheless, the Government reacted quickly. more than offset an 11% volume increase. vii. In the frst quarter of 1994, the xi. Despite its recent strong performance, Government restrained spending. This Indonesia's macroeconomic siuation rmains contributed to a reduction in the fiscal deficit to sensitive because of its large external debt; the 0.8% of GDP, compared to 1.4% in weakness in oil prices that affects the still-large FY1992/93. A tight 1994/95 Budget was exports of oil & gas; growing competition for passed. The Government also resumed the its export markets; weaknesses in the banking graiuual depreciation of the Rupiah. system; and the open capital account, which has attracted capital and should be mainained, but viii. Toward the end of the first quarter of which leaves the economy vulnerable to shifts in 1994, dollar interest rates rose in international expectations. markets. During this period, Rupiah interest rates were roughly constant, and Bank Indonesia xii. Sustaing stabia will depend on the loosened credit in anticipation of the seasonal budgeted tightening offiscal policy and rise Xs tax payments into Government deposits. public saving, to accommodate low oil prices Between end-February and end-April, capital and higher private investment, and to reduce flowed out-Bank Indonesia's net foreign assets reliance on foreign borrowing. Implementing fell Rp. 6.3 trillion and official reserves the tight FY1994/95 budget will be difficult declined about $1.0 billion-until rates on SBIs without continued strong tax administration, and deposits were increased. However, Bank improved public sector pricing, and limits on Indonesia's net foreign assets were up about Rp. routine and off-budget spending. fTghter 1.7 trillion and official reserves rose $0.7 inonetary policy, more closely coordinated with billion in FY1993/94. fiscal and exchange rate policy and more responsive to external financial developments, x Execut ve Swmwy will help achieve bWance of payments targets. borrowing and raise oCficial foreign exchange On-going efforts to Improve the banks need reserves prudently. strengthening. Finally, further dereglaton, with a supportive exchange rate policy, woldd xv. RERLuTA vi targets a fall in the incidencs contibute to efflcency, external compet- of absolute poverty to 6% of the population. tveness and ,apld non-oil export growth. This reflects the projected employment growth of 2.9% p.a. from continued strong growth in xiii. Prent debt management poliy to labor-intensive sectors. Human capital and lmi public and qaai-public borrowing to earning power wold rise, as educational quality sound projects will depend on the effective improves and nine years of free education are continuation of the Commercial Offshore Loan universalized over the next 10-15 years. Team's operations. Tbis is especially necessary Maternal mortality would be halved, and infant in light of the possibility that public companies mortality further reduced through further such as PLN will be allowed to borrow offshore extension and improve.nents in the primary directly. In addition, it would be desirable to health services. bring all large public sector projects on-budget and subject them to comparable feasibility and xvi. REPELITA vi's main targets are largely a cost-benefit studies. In addition, it would be continuation of past performance. In particular, desirable to scrutinize and coordinate public the projected growth rates of GDP, 6.2%, and enterprise borrowing in the domestic capital non-oil exports, 16.8%, are tower than the market more effectively, to avoid disruptions of 6.9% and 17.9% rates actually achieved during that market. REPEIUTA V, respectively. This continuity means that REPEuTA vi's targets should be attainable REPELUTA VI given appropriate policies and the required foreign financing. xiv. The Sixth Five Year Development Plan, REPuLITA vi (1994195-1998199), programs Polides to Achieve REPELITA VI's Goas continued macroeconomic stability, sustained high growth, and further reductions in xvii. Continuty wi require policy change, povert. Under the Plan, Indonesia's per however. Ensuring continuity in capita GDP is expected to reach $1000 (in macr, economic stabit and redudng current prices), reflecting real GDP growth of dependence on foreign borrcvIng while 6.2% and population growth of 1.6%, on financing needed investment will depend on average. Non-oil exports are programmed to stengthenedmacroeconomlcpoldes, along the continue to be the main "locomoti-,eh of lines described above (paras xii and xiii). growth, rising 16.8% p. a. in dollar terms. This growth would be an important factor in xviii. Policy changes to Imrove eJffiency industry's 9.4% p. a. growth. Agriculture is - doing more with the same resources - will projected to grow 3.4% p. a. compared to the be needed to ensure contined rapdd growth, 2.9% p.a. achieved during the last Plan period, further reductions of poverty and an increase that may be difficult to achieve environmental sustalnabt, as R=PETA VI without increased attention to agricultural recognizes. In a macroeconomic sense, exports. The projected growth pattern would Indonesia's high iCOR indicates the need for continue the economy's diversification away increased efficiency in public programs and for from oil & gas. As part of macroeconomic further deregulation to stimulate private sector stability targets, REPELTA vi plans to reduce the efficiency. Greater efficiency could raise average current account deficit to less than 2% growth to rates similar to Thailand and of GDP, reduce the reliance on foreign Malaysia, two low ICOR countries. Oppor- &ecutive Swiway xi tunites exist to iease efficiency in programs Incentive Framework Improvements to to reduce poverty. And fuilly taking into Promote Competitiveness and Efficiency account environmental costs and sustalnaility is fNndamental to macroeconomic efficiency. xx. Deregulation will need to play a major role in ataining the goals of RBPEL1TA VI, as it xix. Theefficiency-enhancingpolicy changes has in the past. Starting in 1985, a series of to support Repelita VIs targets of rapid growth deregulation packages has reduced protection, poverty reduction and environmental improve- investment licensing, and discrimination against mnen can be grouped into four broad areas: foreign investment. They were complemented by fiuther financial deregulation and by real * incenrie rmework hIrovement trough depreciations of the exchange rate to ease the Jtwher deregulaion to encourage greater adjustment to reduced protection. The packages efficiency and itenational ccmpetitiveness, represented a switch from an inward- to an vwich in turn will contribute to the most outward-oriented development strategy and important targets in REPETA vi, the rapid significantly increased competition. The growth of non-oil exports and jobs; resulting shift in resource allocation, to more internationally competitive industries, and the 3 Investment in human capital and infra- increased rate of innovation in order to structure, with an envisaged increase in the compete, in turn generated aggregate private secor's role, encouraged by regu- productivity increases. Total factor productivity latory changes that also protect the public analysis indicates that over 60% of the higher trest, generating efficiency; growth rate of output per worker since 1985 is due to the 1.2% p. a. increase in total factor * Iplementaon provements, in a broad productivity. Between 1978 and 1985, before sense, In the provIson of tradtonal pubic trade and investment deregulation began, there goods: allocative efficiency, greater market was no statistically sigmficant productivity oientation, and improved project selection increases. Without factor productivity growth, and implmentation, to make the monst higher investment/saving will be needed to efficient use of scarce investment funds attain the growth rate/export/balance of payments targets of REPEUTA VI. * stkutional development to make land and credit markets work more effectively through improvements in the legal system, bank AMoun o Gwth in QDP pe woemr regulation and supervision, and land tidtling, 6 ath p w and to improve the management of public programs, external borrowing, urbanization, 4 9 privatization, the environment, and delivery of quality social services, especially to the _ poor. ao w lhese policy themes are discussed in more Cap detail below, followed by a discussion of their contribution to two critical sectoral areas: poverty reduction and environmental 1 susinability; the summary then analyzes cap" external financing requirements. | l t06-6 198642 xX Execuive Swmnwy xxi. Since 1990, the approach to One example, is petrochemicals, where the deregulation has shifted. Cuts in protection potential mis-allocation of scarce capital is large have become more specific, less widespread. and the downstream impact on exporters could Non-tariff barriers cover about 30% of be severe. manufactring and 35% of agriculture, about the same as in 1991. The average nominal xxii. Agriculture and agro-industry tariff has been about 20% since 1991. Average have some of the highest protection, and suffer effective protection in manufacturing remains under most of the export restrictions. One about 50%, meaning, on average, domestic result is higher food prices in Indonesia (for producers can be 50% less efficient than their example, sugar and such wheat flour products international competitors and still sell in the as noodles are nearly 30% more costly locally domestic market, although they of course cannot than inter-nationally), an effective tax on export. This protection is roughly double that consumers. Another is that agricultural exports in countries such as Korea and Malaysia. (excluding forestry) are only about 1/4 of Coupled with still-substantial restrictions on Thailand's, and processed food exports, which exports, high protection deters Indonesian have to use high-cost agricultural inputs, are exports by misallocating scarce resources and only about 1/5 of Singapore's, despite entrepreneurial skills into domestically-oriented Indonesia's far greater agricultural potential. production and easing competitive pressures on Other Indonesian industries, such as textiles and them. Indonesian protection also is footwear, are characterized by a dualistic characterized by substantial protection for some structure. Protected, high-cost firms selling in industries and much less for others. This the domestic market co-exist with export- dispersion firther misallocates resources to less oriented frms that import inputs under duty-free efficient sub-sectors and reduces competition arrangements rather than buying them at within the import- competing sector. Although protection-inflated prices. The export-oriented protection has been reduced for some inputs (for fims have little incentive to develop backward example steel in the most recent deregulation linkages because local costs of many inputs are package), it has risen in some other sub-sectors. high. Competitive pressures on the high cost PRODU N L TO T A g Trif PlusTiff Surcha 40-~~~~~~~~~~~~~~~~~1 Io No INA. ad. r NMON . . . . * O R W~~~.6. ~ ~ us im lm lw l l lm l lr Executive Swnmary 41 firms will increase as a result of the last two most 15%, perhaps over a pre-specified period deregulation packages, which allow export- to allow producers time to adjust; (3) oriented fms to sell more in the local market, Elaton of export resicdions (except for benefitting consumers. However, monitoring auctions to allocate textile export quotas and will be needed to ensure that their gains in sales perhaps for tariffs in some forestry markets reflects higher efficiency, not simply their where Indonesia has monopoly power, although access to duty-free inputs. here the recommended increases in forestry fees would in any case raise export prices); 4) a xxiii. Restrictions still limit investment, and supportive exchange rate poicy, to smooth thus competition, in a number of sectors. gradually the adjustnent to a lower average rate Foreign direct investment is subject to of protection and higher levels of exports and additional restrictions, in particular limits on imports; and 5) further easing of the investments in certain sectors, and fairly high restions on invesbnent, particularfy the minimum investment requirements. Moreover, special restrictons on direct foreign the last deregulation package increased the Investment, for example by easing of divestiture required divestiture of equity to 51% after 20 and minimum investment conditions, in order to years (except for frms in bonded or export improve technology transfer and access to zones). Although actual foreign investment has foreign markets. continued to grow, new investment proposals fell in 1993 and Indonesia will face tougher Efficient Investment competition for direct foreign investment in the future. If direct foreign investment were to xxvi. Investment in human capital decline, and/or existing, footloose investment and infrastructure, asprogrammed inREPEUTA were to pull-out, then the transfer of technology vi, will be needed to achieve the targets for and the growth of exports would decline. rapid growth of GDP and non-oil exports. Under REELTA vi, the private semcor is expected xxiv. A change to more across-the-board to carry out the bulk of investment, as in the deregulation would boost exports and generate past. The main changes are the expected the efficiency, productivity growth and inter- reduction in the role of the public sector in national competitiveness needed to achieve the directly productive activities and the increasing goals of REPETA vi. Such a program would be role of the private sector in the provision of particularly appropriate currently, given the traditionally public services and infrastucture, possibility of low oil prices, the substantial in particular power and telecommunications. increase in competition for export markets and direct investment, and the opporunities xxvii. International evidence suggests provided by the Uruguay Round's opening of that the envisaged shift from public to private markets, particularly for agricultural and agro- management would improve efficiency and industrial products. Such a program would investment productivity. In addition, a shift encourage competition and automatically weed from public to private management probably out inefficient producers, which cannot be would improve the fiscal balance through lower supported in the current, more competitive public investment and higher tax revenues, in international environment. addition to the revenue from the sale of assets. The private sector already has begun to play an xxv. An across-the-board deregulation importan role in power, with the signing of the program to promote efficiency would entail: (1) Paiton agreement. Elimnatuon of NTBs (with replacement by temporary tariffs); (2) Reducton of high ftrf (including surcharges) to a stated maxinm, at xlv Executive Swmnaiy xxviii. Appropriate regulatoky arrange. project implementation and operational ments and institutions will be critical to ensure efficiency through greater reliance on private the gradual replacement of public frms by contractors to build or manage systems (See private firms in directly productive activities following section). In human capital, the and the planned increase in private infra- public sector also will continue to piay a major structure investment. In sectors where a role. REPLTA vI envisages a gradual extension competitive market strucure exists, or could be of universal education to nine years and stimulated by greater openness to international improvements in the quality of education and markets, the public sector could divest its assets health services. These efforts will improve without additional regulation. This would productivity and equity, and help reduce include mo3t of the industrial sector and poverty fu-ther. agricultural production and marketing. In these cases, competitive markets would provide the xxxi. The public investment program necessary protection of the public interest. in REPELITA VI reflects the priorities of human However, It still would be necessary to develop resource development and infrastructure. The institutional arrangements for the competitive largest allocations in REPEUTA VI's Devel-opment sale of the assets and, in many cases, for Budget are for human resources (education, restructuring of balance sheets and downsizing. health and family planning, and poverty Emphasis should be on greater reliance on alleviation programs) and infrastructure (power, private management, in order to improve telecommunications, transport, urban water efficiency, rather than on raising capital supply and sanitation). In addition, public revenues while retaining public control. Simply enterprises are programmed to make substantial selling minority shareholdings is unlikely to investments in power and telecommunications improve efficiency sabstantially, and may prove directly, outside the development budget. costly if minority shareholders block fiuther changes, as has occurred elsewhere. Implementation: Improving Efficiency at the Sectoral and Project Level xxix. In other areas, such as infrastructure, where supply is less competitive, an appropriate xxxii. In the power sector, where regulatory framework will be needed to protect programmed public investments are the largest, the public interest while providing reasonable some savings may be possible. The Plan's rates of return and limiting risks of policy estimates of demand growth are about 1.5 times changes to investors. Even without full industrial growth or 2.5 times oDP growth, privatization, efficiency would benefit from somewhat higher than the usual estimates of 1.2 greater reliance on the private sector, for and 1.5-2 respectively-the difference in example, through contracts to build or manage implied demand growth and capacity is about infrastructure projects or joint ventures. 25%. Higher prices would slow demand nstitutional arrangements should seek to growth, benefit the environment, raise public increase the role of competitive bidding for savings to help finance investment, and contracts. encourage private participation. Investment needs also could be reduced by encouraging xxx. Although the private sector will play a firms that currently generate their own power to larger role, the public sector will remain the continue self-generation through regulatoy principal provider of --frastructure, partic- arrangemerns that allow sales into the grid, ularly where the private sector shows litle rather than building new capacity to replace interest or where externalities are Important, for self-generation. example water, sanitation and waste disposal. As noted, opportunities exist for improving Executive Swnamy xv xxxiii. Intelecommunications, theprogram is cost recovery and equity considerations make It well designed and feasible. The mnjor issue is desirable to reduce subsidies to social services the regulatory framework for private equity. that are mainly used by the better-off and have The Government already is moving ahead with only limited externalities, such as tertiary partial privatization of PT INDOSAT. education. To the extent the poor do use these services, efforts should be made to provide xxxiv. In transport and urban targeted subsidies based on ircome levels. infrastructure, Indonesia, like most countries, has faced a difficult task to keep pace with xxxvi. Improved implementation of demands. Major expenditures are planned in the public investment program, particularly both areas. In urban infrastructure, high urban investment, can make an important priority is given to improvements in water and contribution to REPEuTA vi's targets for growth sanitation, and urban transporL Governments and poverty reduction. During REPEUrA V, urban and public agencies will continue to supply the investment, particularly in water and sanitation, bulk of the (increased) funding in these areas. was well below planned levels. Carrying out However, efflciency could be increased by the large increase in spending in these sectors greater reliance on the private sector through during RMPEUTA vi will entail a major efforL construction and management contracts, and by Moreover, a larger portion of this spending is improved cost recovery which would help fund expected to be done by sub-national needed investments. Even if this occurs, the administrations, which in the past has targets for water and sanitation appear contributed to lengthy implementation periods. ambitious. xxxvii. Project implementation imprve- xxxv. In education, major issues relate to meats can make a major contribution to upgrading quality, and to the approach of the achieving REPUuTA vi targets. Public projects proposed junior secondary program. Although must be highly productive, finished as rapidly primary education is universally available, the as possible and at the highest possible drop-out rate is still large. Educational quality:cost ratio, as President Soeharto attainments also appear less than elsewhere in emphasized in his 1994/95 Budget Speech. One the region. This may be related to the lat start important way to make the projects effective (at age 7), the limited hours of schooling, will be further improvements in consultation differential access to books and materials, and with the potential beneficiaries and affected the curriculum itself. Resources should be residents. In addition, the Government and allocated to improving quality in these areas. In donors have identified five main areas for junior secondary education, the targets appear improvement: (i) delegation of greater ambitious compared to the funding. Here too, responsibility, along with accountability, to there are issues of quality. Lack of quality, as actual implementing agencies; (ii) simplification well as fees, may limit the rate of return on of project design (particularly in projects being junior secondary school attendance, and, locally executed); (iii) avoidance of start-up correspondingly, enrollment growth. This is delays through more timely completion of particularly true among the poor, given design contracts, acquisition of land, and opportunities for casual earnings by children of provision of central government funds; ov) this age. Hence, the expansion strategy for simplification of procedures for land acquisition junior secondary should be measured, with procurement (including technical assistance), targeted adjustments to assist areas with low and the prompt payment of contracts (expect- enrollments. Fee setting by the public sector ations of payment delays can result in the should take into account the likely impact on Government's paying more than the private private provision of these services. Fially, sector for similar projects); and (v) adequate xvi Executve Summary provision for maintenance to lengten project Reducing PoverY life. The Government has already made progress in many of these areas, for example x1- er povert reduction is a major with Its revised procurement procedures. objective of Repelita VI. The reduction of poverty from 60% of the population in 1970 to Institutional Development about 14% was a major achievement. Large improvements also were made in life expec- xxxviii. Institutional development is needed to tancy, nutrition, and basic schooling and health, complement incentive improvements and make especially for those in the lower 40% of the markets work better. For example, a stronger income distribution and women. These gains legal system would malke incentives function reflect three interrelated factors: rapid, labor- better and reduce investor risk. Inprovements intensive growth in GDP that generated a large In collateral and bnkdruptcy laws, and higher increase in jobs; increases in rural infra- capital requirements and provisioning would structure and in human capital that accompanied make credit markets function more efficiently. the extension of primary health and education; Improved land titling would reduce investor risk and the demographic transition of lower birth and help protect poor residents. rates, higher male and female school attendance, women's participation in the labor xxxix. Improved public institutions could force and rural-urbanmigration. contribute to development in many areas. As noted above, further improvements in debt li- Diespite these gains, Indonesia still has management and project evaluation would be 27-35 million poor and near-poor. The desirable. Improvements in banking culture and majority live on Java, although the Eastern supervision would contribute to better Islands have a higher incidence of poverty. functioning of the financial system. Further REEUTA vi targets an ambitious further reduction institutioial changes will be needed to manage in absolute poverty, to 6% of the population. the massive on-going urbmization, and ensure But achieving further reductions in poverty is delivery of urban services as programmed. likely to be more difficult than in the past, Increased reliance on private provision of because a larger percentage of the remaining infrasucture will depend on development ad poor are those isolated in resource-poor areas. iplementation of appropriate regulatory franeworks and of institutions to manage xlii. Condnued high growth rates of contracts with private frms. stional employment and GDP wl remalin centa to changes also will be necessary to improve reducItg poveny. And a major instrmentfor public project implementation, including closer reducing poveri wil remain investment In consultation with affected persons and huma resource development - educaton and beneficiaries. In divestitre and privatzation of health - which is receiving great emphasis in public enterprises, institutional arrangements REPEXTA Vi The Government already has will need to be developed to ensure competitive announced plans to universalize junior sales of assets. Finally, as discussed below, in secondary education, improve the quality of te key sectoral areas of poverty and education, and improve the delivery of quality environment, institional changes will be health services. However, considerable needed to deliver high quality social services to pAneon efforts and nstluonal the poor and to improve environmental development will be needed to ensure that these management. improvements reach the poor. Executive Sunmary xvii xliii. In addition, to reduce poverty Islands will need to focus on improving human effectively, to these two traditional strategies, capital and sustainable increases in agricultural more targeted interventions probably are output and marketing facilities, in what is, in needed. This is particularly true given the many cases, a fragile environment. nature of remaining poverty, especially off- Java. In remote, resource-poor areas, targeted Environment interventions will be needed to raise farm productivity, build small infrastructure, reduce xlvi. REPELITA vi and the Second 25 Year high population growth rates, and improve Long-Term Development Plan aim to imnprove human resources. For example, the natural resource management and minimize Goverment might consider providing public pollution. Problems of natural resource pre-primary education in poor areas. management are the sustainability of forestry and potential declines in oil & natural gas xliv. As part of REPEuTAvi, the Govermnent reserves, with water basin and aquifer has announced a special program targeting management becoming important issues. World poverty alleviation in poor viDlages (INPRES Bank analysis suggests that pollution is not an Desa Tertlnggal, or IDr). The mT program has arnenity issue; it already generates substantial identified about 20,000 poor villages (out of costs in terms of higher health spending, for some 60,000 villages). Each will receive a Rp. example, an estimated $500 million annually 20 million special grant. Community "self- from air pollution in Jakarta alone. The highest help" groups in these villages, rather than priority pollution problems are water supply and central agencies and local governments, will sanitation, vehicle emissions, and industrial receive these funds and decide on their uses. pollution in the main urban centers. The Government also intends to increase other programs in these poor areas. The success of xlvii. Better use of incentives, in particular iyr will be furthered by careful monitoring of its pricing that more closely reflects the true value results and adjustments to build on the of resources and the costs of activities to the successes. Finally, the Government also is environment, would encourage more efficient decentralizing some infrastructure spending, use of resources, less damage to the envi- which should help to adapt it better to local ronment, and more fiscal revenues, a so-called conditions. "win-win-win' solution. A good example is the 1993 increase in petroleum prices. Other xlv. Effective implementation of important areas where higher prices would targeting will be the key to its success. In IDT, generate win-win-win solutions are, first and careful selection of poor villages, improvements foremost, forestry royalties and stumpage fees in the accountability of uses of funds and in the (with revenues brought into the budget), but community decision-making processes, a greater also electricity and fertilizer prices. In addition, role for women, and monitoring and there is considerable scope for increasing watar implementation will be essential. In the health charges and effluent fees, although these and education sectors, two cross-cutting measures would have to be complemented with themes for poverty reduction are: institutional developments that discouraged (I) Improvements in the quaty of bask tapping of aquifers and self-disposal that would services through better pklementadon and harm water resources. Fees for parking or Instiuonal development; and (a) targeting of access to congested urban zones could reduce services to the poor by reducingprices to them, bottle-necks and associated vehicle pollution. whie raising prices on social serices that are used more Intensively by the betteroff, for xlviii. Investment wil also be necessary to example tertiary education and hospials. A reduce pollution. Massive public investments poverty-reduction strategy for the Eastern will be needed to limit urban congestion and xVi Executive Sumnaiy realize REPEUTA vi's ambitious targets for community, and to provide public information delivery of safe water (from 50% to 75% of the about environmental problems and solutions. population) and sanitation (from 25% to 54% of the population). A key issue will be imple- External Financing of REPELffA VI mentation of the investment plan; over the last five years, investments in urban water and 1. External finance will continue to play sanitation fell significantly short of targets. a critical role in REPELITA vi, although both the Effectiveness of service delivery could also be current account deficit and external debt and improved by greater reliance on contracts with debt service will decline relative to CDP and the private sector for construction and manage- exports. Despite the reduced importance of net ment of systems. In addition, private borrowing, on average gross external financing investments will be needed to reduce the of $16.2 billion p. a. will be needed to finance enormous projected increase in industrial the projected current account deficit, the "roll- pollutants that otherwise would accompany the over" medium and long term amnortizations, and projected industrial growth. Adjustments in a prudent increase in official reserves. In investments need to begin now, because 85% of addition, short term credits, estimated by the the projected increase in pollution over the World Bank at about $18 billion at end-1992, Twenty-Five Year Long-Term Development need to be "rolled-over". Plan would come as a result of growth, not existing production. Experience shows that it is Hi. The availability of large amounts of far cheaper to correct pollution initially, at the gross external finance thus will be critical to "top of the pipe" rather than at the "end of the sustaining growth. Official assistance will play pipe" or by retro-fitting. A mixture of pollution a major role in this external finance, although charges, regulation, and development of r bilateral and multilateral inflows are institutional enforcement capacity will be needed projected to decline relative to GDP, in line to encourage these private investments. with the Government's objective of reducing reliance on foreign borrowing. Continued xlix. Institutional development also will strong official assistance will show the donor play a major role in improving management of community's support for the Government's natural resources and reaching the Plan's continued strong development efforts. The environmental goals. In the area of natural disbursement of such official flows will ensure resource management, institutional development that debt service does not rise too rapidly as will be critical to enforcement of higher charges amortization payments on official aid and for logging and water/sanitation. In the area of private capital rise. To the extent that the oil and gas, a decision will be needed soon on official assistance flows can be made what adjustment, if any, would be desirable in concessional, they will keep borrowing costs contract terms, given the long lead times for manageable and help limit Indonesia's debt development of fields, the projected decline in service. This will enhance Indonesia's access to net oil & gas exports, and the projected trends private markets. Official assistance also would in world oil prices. Institutional development smooth the adjustment process in the event of also will be needed to limit the growth of sustained low international petroleum prices, pollution, by strengthening the capacity of the which still affect almost 25 percent of local governments, which will increasingly Indonesia's exports. Fmally, despite implement urban infrastructure investments, and Indonesia's strong perfornance in terms of the institutions charged with monitoring and growth, stability, and poverty reduction, per enforcing environmental standards. A final, capita income is still only $670. Absolute important institutional element will be to build poverty, defined as the income necessary to a public consensus in favor of environmental purchase a minium diet and basic necessities, protection, particularly in the business is still the condition of about 14 percent of the Executive Swumary xlk population-about 27 million people. Official assistance from Indonesia's Consultative Group aid will not only help to raise per capita (CGI) will total about $4.1 billion, about $3.7 Incomes but help reduce poverty and provide billion in concessional loans, plus about social services for the poor. Official assistance $400million of grants. Assuming an will support projects in REPLTA vl in the areas appropriate mix of project and sector assistance of human resource and infrastucturethat will and furither progress in improving project reduce poverty and improve Indonesia's implementation to improve disbursements, this productivity and competitiveness. These translates into a CGI commitment of about $5 improvements will not only benefit the poor, billion, roughly the same level as in 1993. The they will add to perceptions of Indonesia's priority areas for this assistance will remain creditworthiness. human resources, poverty reduction, environment and infrastrucure. Wii. Ihe financing plan for REPELITA VI assumes that annual disbursements of official Ringkasan EAsekuqft RINGKASAN EKSEi IUTIF INDONESIA: STABILITAS, PERTUMBUHAN DAN PEMERATAAN Tinjauan Umum PrestasipembangunanekonomIndonesia ttnggi, disamping tetap memacu pernumbuh, adalah salah satu yang terbaik di antara negara untuk mengangkat mereka ke tuar dan kemiskin. berkembang. Seklwa 25 twhun yang lampau, rata- rata perwnbuhan PDB melanyad 6%, tfl Kund dalam menghadapi masalah- klag dard 10% dan kemisJina absoiw tunm masalah tersebutadalah stabifitas ekonoml-makov dad 60% menadi 1.4% dad tota penduduk. yang bedanjut, yang dtunjang dengon Repeta VI dan PJP-Ii, keduanya meWutkan penyesn wntuk memperbaild efislens4, seperti program stabltas ekonoml-makro, pertumbuha yang tercamn dalam REPELITA VI. Stbltas yang ttnggt, dan pengwsagan kemisidnan. ekonomi-makro yang berlanjut tetap menpakan Sasaran uama adlak pernwbuhan ekspor non- tonggak bagi pertumbuhan dan pengurangan nigas yang tinggi, untiuk bennd sebagal kemisida. Stabilitas ekonoml-makro akan lokomott penggerak perluasan kesempatan kerja ditngkat dengan kebijaksanaaa moneter dan dan PDB, dan mengurangi beban hutang luar fl yang keat, kerja keras wu enyelesakn neged. Sebagal kdanjutan dad hasH yang teaki masalah sistem perbankan, danpengelolaan huang dicpa4 sasa kedua rencana tersebut dapat yang berhad-hati. Rebijaksanaan moneter akan tewatud Jka diengkap dengan penyesuan madapat nmwfaat dad koordinas yang erast ebVaksana k meningkkan luens4 dan dengan kebijaksanaan nilal tukar uang, dan kebutukwa pembiayannya terpena. perhan yang semakcn besar kepada pergeseran dalan pasar modal luar negert; hal tn akan Kebedav4jtan prestai teebut ak membantu pencapaian sasaran neraca tergaawag pada penyesaimn di banyak bidang. pembayaran. KebUaksanaanfiskalyangketatakan Di waktu la,pau, penwnbuhan berlandaskan mentngkatkan tabungan pemedrah, meng- kepada sumberdaya alam -migas dan kayu- tetapt akomodasl-kan Investasi swasta dan mem!wvu penipLsan persedtaan (stock) dan kemerosotan wntuk mengurangi beban pinjaman luar ntwgert. dalam harga minyak, berart diversfkas yang Pengetatan kebtjaksanaan fiskal akan berkelardutan diperluk Penumbuhan tinggi di menghamskanpelasanaan anggann beaa yang woituoichartberpangkalpada ekspornon-nigas, tegar, menauan din lam beWa nin dan non- mengikut modl ekonond negara Asia T1mur. budget, perbaikan lebih lanjut dolam Melanfdk pen rnbuhw tnt dalam pasar dutia penaiausahaan pojak, serta semakin menfngkn yang semakin bersaing menghendakW suau bentuk pajak kekayaan, retdbusi kehutanan (tercatat ekonomi yang efihten dan lentur. Pinjaman luar dalam anggaran), taWVlistrik, dan harga pupuk. neged telah digwaakan untuk memadh4kan proses diversifkast dad ekspor yang benumpu pada Aiaksajan u empra eJ sumberdaya alam dan pinjaman war negert swasta -mela Ikbth banyak keglan dengan tumbah dengan cepat baru-baru tnt; REPELITA Vi sunberdaya yang bericurang- ad muka sekarang mentargekan pengurangan beban dalam pencapaian sasaran dad rencana pinaman luar negeri. Kelemahan sektor (REPELlTA VI dan PJP II). fstensi yang kbih perban dapat menghambat penumbuhan. tinggi akan mentngkaikan penumbuhan PDB dan Penvmbuhan nusrt, dan wtwrsasi yang pertuasan kesempatan kerja dengan jumlah men*dampingnya mula menjadi beban pada Investast/tabungan yang sama. Elstenst dalam Aingkungan dan prasarana fisik, yang memi*a pelayanan program sostal dasar dan pengentasan perhain yang seksama. Akidrnya, pen daduk kemiskinan akan mengurangi kemiskinan kbih miskin yang masih tersisa umumnya tersolas dl; cepat. Dan ejistensi yang lkh dnggt, dalam wllyah yang terbatas dalam pendmlkan sumber jangkapanjang, dalampengeran ekonoml-makro, alam. Mereka memerkan bantua program menghend4ld perhattan sungguh-sungguh a t pembangwan bidang sostat yang berkukau bkya kerusakan llngkungan dan keberlja xxi Ringksa E&sku4 KebUaksanan untuk meperbaki indator-Indkiator Ekonomi Moikrv dlsiensi dapat dikelompokkan dalam empat bidang kebijaksanaan: a) Perbaikan hisentif. Deregulasi yang memangkas tarif M tinggi secara lintas sektor dan mengurangi 10 Am a hambatan non-tarif, pembatasan ekspor, dan I pembatasan investasi, akan meningkakan - efisiensi dan persaingan eksternal, yang n p memberikan sumbangan kepada U1 pertumbuhan yang cepat ekspor non-migas 6- dan lapangan kerja. Perbaikan dalam penentuan harga di sektor fasilitas umum, 4-- yang dipaparkan di atas, akan merangsang efisiensi dan memperbaiki pemerataan serta 2I lingkungan. b) Investasi dalam kapital sumberdaya manusia dan kapital fisik. Peningkatan yang diperkirakan dalam 10 0 1gs 12 IOM partisipasi sektor swasta akan didorong oleh pengembangan peraturan perundangan yang ; tetap melindungi kepentingan umum. c) 10- P Perbaikan pelaksanaan (dalam pengertian luas) dalam program pemerintah. 8-- NMSb 1 Ulb Perbaikan alokasi, penentuan harga yang M.0O 12a lebih baik, lebih mengandalkan pada e 33 penyediaan oleh sektor swasta, dan perbaikan pelaksanaan proyek, akan 4-. menyebabkan penggunaan lebih efisien sumberdayayang langka. d) Pengembangan 2 kelembagaan unuk menwerbald efekis_ 1n pasai- dan pelaksanaan program 0 pembangunan, di beberapa bidag sepert 1284 1294 1234 1284 sAstem peraturan-perundangan, sistem I| WI I 1901 I I 192 1 1099 1 hwkwn dan h atas tanah, danpengelolaan Dii g n W* dan. 1a LVNiW hutang luar negeri, urbanisasi, Sm (UMMSa t t" swastanisast, lingkungan, dan pelayanan 2 P d1OD soslal dasar, terutama wuuk penduduk TOWMRULUff N fJ h' ,n miskin. isW -- Perkembangan TerakhirEkonomi Makro 10 _ *o $4S;;ffd }^FL3-N*W -s40 i. Pada 1993, Indonesia mengakhiri 6 masa "pendinginan" ekonomi secara cepat dari masa "pemanasan" yang teradi pada 0 1990-91 dengan kemunduran pertumbuhan 4 1 [:516 l {S - yang dapat diabaikan; dan pada bagian _ _ : _,_, _____ kedua tahun tersebut, pertumbuhan mulai IND lU 102 1 menaik. Prestasi yang mengesankan seperti ini adalah kelanjutan dari tradisi Indonesia Rlngkauan EkseW Xdii dalam memberikan tanggapan yang tepat pengetatan kebijaksanaan moneter dan terhadap keadaan yang berobah. Tantangan membiarkan apresiasi nilai tukar uang secara Repelita VI adalak untuk meningkatkan bertahap. Tetapi, kombinasi me-apresiasi-kan orientasi keluar dan landasan sektor swasta dari niW tukar dan tingkat suku bunga tinggi perluasan ekonomi melalui pertumbuhan ekspor (dibandingkan dengan tingkat internasional) non-migas yang cepat. Hal ini akan menyebabkan inflow modal tambahan, suatu memberikan sumbangan untuk melanjutkan dilemma yang baku dari kebijaksanaan uang pertumbuhan PDB yang cepat dan pengentasan ketat pada ekonomi terbuka. Pertumbuhan kemiskinan sementara menghindari kembalinya moneter tetap cepat karena penggnaan tabungan laju inflasi yang menaik dan melebarnya defisit netto pemerintah dan inflow dari valuta asing. neraca pembayaran luar negeri. Untuk 1993 secara keseluruhan, cadangan resmi naik menjadi $0.8 milyard. ii. Perkembangan ekonomi makro pada 1993-94 pada umumnya mencerminkan v. Tanda-tanda pada permulaan 1994 kebijaksanaan fiskal, moneter dan nilai tukar menunjukkan bahwa pertumbuhan yang uang, dan tanggapan terhadap kejadian berlanjut berpangkal pada sumber-sumber eksternal. Pada triwulan pertama 1993, domestik. Harga naik melebihi 4% pada empat kebijaksanaan moneter adalah ketat dan bulan pertama 1994. Permintaan musiman pemerintah menaikkan harga bahan bakar di menaik dan gangguan suplal karena hujan yang dalam negeri ke tingkat harga internasional. lebat dan berkepanjangan merupakan faktor Tindakan pengketatan kebijaksanaan fiskal dan utama dalam kenaikkan harga tersebut. efisiensi, pemerataan, dan kualitas lingkungan hidup perkotaan ini, hanya menyebabkan vi. Pertumbuhan berlanjut walaupun harga kenaikcan sekall waktu tingkat harga minyak pasar dunia turun pada akhir 1993, (konsumen). Pada triwulan kedua, dengan yang memberikan tekanan pada neraca inflasi turun secara tajam, Bank Indonesia pembayaran dan fiskal. Tekanan ini lebih meninggalkankebijaksanaantingkatsukubunga lunak jika dibandingkan dengan yang dialami tnggi yang merugikan dari hutangnya. Seperti pada masa lampau -diversifikasi sejak dapat diduga, sebagian outflow modal terjadi. pertengahan 1980-an telah menurunuan peranan Penurunan tingkat sulcu bunga dan ketersediaan migas dalam ekspor dan penerimaan pajak dana merangsang aggregate demand dan menjadi kurang dari 30%. Namun demikian, pertumbuhlan produksi, wrutama di sektor Pemerintah telah melakukan tindakan secara konstruksi dan barang konsumsi tahan lama cepat. (durables). vii. Pada triwulan pertama 1994, iii. Setelah triwulan kedua 1993, belanja Pemerintah menahan diri dalam pemerintah menaik, yang menambah besarnya perbelajaannya. Hal ini menyumbangkan suatu aggregate demand. Kenaikkan belanja dibiayai pengurangan dalam defisit belanja negara dengan penurunan tabungan (deposit) sebesar 0.8% PDB, dibandingkan dengan pemerintah, yang menambahkan pula kepada defisit sebesar 1,4% pada Tahun Anggaran kenaikkan jumlah uang. Faktor lainnya yang 1992/93. Anggran Belanja 1994/95 yang ketat turut menamnbah aggregate demand adalah telah disetujui. Pemerintah kembali melakukan pengalihan portfolio (investasi) global ke depresiasi Rupiah secara perlahan. Indonesia dan negara Asia Timur lainnya. viii. Menuju akhir triwulan pertama 1994, iv. Bank Indonesia berupaya untuk suku bunga dalam dollar naik di pasar dunia. memperlambat kenaikkan aggregate demand Selama periode ini, suku bunga dalam Rupiah, dan inflasi pada triwulan keempat, dengan secara garis besar, adalah tetap dan Bank xv Rngkawan Ekseutff Indonesia mengendurkan pemberian kredit harga minyak yang mempengaruhi ekspor dalam rangka andsipasi kepada pembayaran migas yang masih dalam jumlah besar; pajak musiman ke dalam tabungan/deposit persaingan yang semakin meningkat di pasar Pemerintah. Antara akhir Februari dan akhir ekspor; ketemahan pada sistem perbankan; dan April, terjadi outflow modal -asset netto dalam keterbukaan lalu lintas modal yang telah valuta asing Bank Indonesia turun Rp 6,3 menarik masuknya modal dan seharusnya triliyun dan cadangan resmi turun sekitar $1,0 dipertahankan, tetapi menyebabkan ekonomi milyard-- sampai tingkat suku bunga SBI dan peka terhadap pergeseran dalam perkiraan deposito dinaikkan. Tetapi, asset netto dalam (expectation). valuta asing Bank Indonesia berada sekitar Rp 1,7 triliyun dan cadangan resmi naik menjadi xii. Stabiitas yang berkelwtJutan akan $0,7 milyard pada tahun anggaran 1993/94. tergantung padapengetatan yang dianggarkan dart kebUaksaan fpskal dan kenalkan daia ix. Dl sektor perbankan, Pemerintah tabwnganpemerlntah, untuk meng-akomodasi- menuntut secara hukum masalah kecurangan kan harga mninyak yang rendah dan investasi terhadap mereka yang terlibat dalam pinjanan swasta yang lebih tinggi, dan mengurangi bermasalah yang besar di BAPINDO, yaitu ketergantungan pada pinjaman luar negeri. salah satu Bank Pemerintah yang mempunyai Pelaksanaan anggaran ketat Tahun Anggaran portfolio yang lemah. Secara rata-rata, 1994/95 akan sulit tanpa administrasi portfolio perbankan telah mengalami perbaikan perpajakan yang tegar dan berlanjut, penetapan yang memadai sejak pertengahan 1993, tetapi harga barang atau jasa di sektor publik yang portfolio sejumilah bank masih tetap lemah. disempurnakan, dan pembatasan atas belenja Pemerintah mencoba untuk meningkatkan rutin dan non-budget. Kebffaksanaan moneter pembinaan, pengembalian pinjaman, modal dan yang lebli keWaj,, yang dikoordinasikan lebih provisi. Dalamn jangka menengah, pengelolaan erat dengan perpajakan dan kebijaksanaan nilai harian memerlukan perbaikan. tukar, serta lebih tanggap kepada perkembangan pembiayaan eksternal, akan X. Pertumbuhan ekspor non-migas adalah membantu pencapaian sasaran-sasaran neraca 16,2% pada 1993. Pertumbuhan itu turun pembayaran. Upaya yang sedang berfakan sekitar 10% pada Tahun Anggaran 1993/94, an*sk memperbaild sistem perbankan sebagal akibat dari stagnasi elcspor pada paruh membuahdan pemafepn. Akhirnya, akhir tahun anggaran, dibandingkan dengan dereglabd seWaJya dengankebijaksanaan periode yang sama pada tahun terdahulu. Data altu kar yang mendukw*gnya, akan 1993 menunjukkan bahwa kira-kira separuh menyumbang dalam pencapan efhlsensi, pertumbuhan ekspor pada 1993 diakibatkan persalngan eksternal dan pefwnbuhan oleh harga yang tinggi untuk produk ka,vu ekspor nonmigas yang cepat. olahan dan selebihnya untuk alas kaki, mesin, produk metal dan listrik, dan aneka produk xiii. KebLaksanaan pengelolaan huang yang semuanya tumbuh sebesar 40% atau Yang berha-hatuntk membataslpJaman lebih. Ekspor tekstil mengalamni persaingan pemerntak dan sem-pemerlnt untukproyek yang sengit di pasar dunia -suatu penurunan yang l4yak tergantung pada kelanjutan yang harga 19% belum mengimbangi 1 I % kenaikkan efeitif dari operasi tim Pinjaman Komersial volume. Luar Negeri (PKLN). Hal ini suatu keharusan terutama dari sudut kemungkinan bahwa xi. Terlepas dari prestasi yang BUMN, seperti PLN, diijinkan untuk meyakinkan pada waktu akhir ini, situasi melalkuan pinjaman luar negeri secara ekonomi-makro Indonesia tetap peka karena langsung. Tambahan lagi, dikehendaki untuk hutang luar negeri yang besar; melemahnya menghimpun anggaran semua proyek Ringkasan Eksekuwf Xv pemerintah yang berskala besar dan mencerminkan perluasan kesempatan kerja mensyaratkan proyek tersebut untuk yang diperkirakan sebesar 2,6% per tahun dari dibandingkan secara studi kelayakan dan pertumbuhan yang tinggi dan berkelanutan di analisa biaya dan manfaat. Juga dikehendaki sektor yang padat karya. Kapital sumberdaya untuk memeriksa dan mengkoordinasikan manusia (human capital) dan penghasilan akan pinJaman BUMN di pasar modal dalam negeri menalk, sejalan dengan perbaikan kualitas secara lebih efektif, untuk mencegah goncangan pendidikan dan penerapan kewajiban belajar 9 pada pasar modal tersebut. tahun pada 10-15 tahun yang akan datang. Angka kematian ibu akan menjadi separuhnya, REPELITA VI dan angka kematian bayi semakin berkurang melalui perluasan dan perbaikan kualitas xiv. Rencana Pembangunan Lima Tahun pelayanan kesehatan dasar. Keenamn, REPELITP VI (1994/95-1998/99), memprogramkan stabilitas ekonomi-makro, xvi. Sasaran utama REPELITA VI sebagian menunjang pertumbuhan yang tinggi, dan besar adalah suatu kelanjutan dari prestasi masa pengurangan kemiskinan yang lampau. Khususnya, laju pertumbuhan PDB berkelaujutan. Dalam rencana tersebut, yang diperkirakan 6,2%, dan exkspor non- pendapatan per Icapita Indonesia diharapkan migas 16,8%, adalah lebih rendah dari masing- mencapal $1000 (pada harga berlaku), yang masing 6,9% dan 17,9% yang telah dicapai mencerminkan, rata-rata, pertumbuhan PDB pada REPELITA V. Kelanjutan Wii berarti ril sebesar 6,2% dan pertumbuban penduduk bahwa sasaran REPELfTA VI harus dapat 1,6%. Ekspor non-nilgas diharapkan terus dicapai jika ditunjang oleh kebijaksanaan yan; menjadi lokomotif penggerak pertumbuhan, tepat dan pembiayaan Iuar negeri yang yang bertambah 16,8% per tahun dalam nitai diperlukan. dollar. Pertumbuhan ini merupakan faktor penting dalam pertumbuhan sektor industri Kebijaksanaan Untuk Mencapai Tujuan yaitu 9,4% per tahun. Sektor pertanian REPELITA VI diperkirakan tumbuh agak pesat, yaitu 3,4% per tahun, jika dibandingkan pertumbuhan yang xvii. Keberlanjutan menghendaki besarnya 2,9% per tahun yang dicapai pada penyesuawankeb4 Usanaan. Menjaminadanya periode perencaan yang latu, yaitu suatu keberlanjutan dalam stabilitas ekonomi-makro kenaikkan yang mungkin sukar untuk dapat danpenguranganketergantunganpadapiniaman dicapai tanpa perhatian yang semakin luar negeri sementara membiayai investasi yang meningkat terhadap ekspor hasil-hasil dibuwhka., adalah sejalan dengan yang pertanian. Pola pertumbuhan yang dipaparkan di atas (alinea xii dan xiii). diperkirakan akan meneruskan upaya diversifikasi ekonomi yang menjauhi sektor xviii. Penyesuaaan kebUaksanaaw unwuk minyak dan gas. Sebagai bagian dari sasaran mnperbaii eiendi -mekukn leblh stabilitas ekonomi-makro, REPELITA VI banyak keglatan dengan junlah sumberdaya merencanakan untuk mengurangi rata-rata yang sama- akan diperlukan untuk menjamin defisit transaksi berjalan menjadi kurang dari pertumbuhan finggi yang berlanJut, 2% dari PDB, mengurangi ketergantungan pada pengurangan kemdskWl selanJutnya, dan pinjaman luar negeri dan menaildan ketangsunganlingkungan, senertidiungkapkan penerimaan cadangan resmi secara berhati-hati. oleh REPELITA VI. Dalam pengertlan ekonomi-makro, angka ICOR Indonesia yang xv. Repelita VI, mentargedtan suatu tinggi menunjukkan kebutuhan untuk efisiensi penurunan dalam persentase kemiskinan absolut yang ditingkatkan pada program pembangunan menjadi 6% dari peneuduk. Hal ini pemerintah dan deregulasi selanjutnya untuk xrvi Ringkasan Eekus merangsang efisiensi sektor swasta. Efislensi pengelolaan program pembangunan yang lebih tinggi dapat nieningkatkan pemerintah, pinjaman luar negeri, pertumbuhan seperti yang diaxani oleh urbanisasi, swastanisasi, kualitas Thailand dan Malaysia. Peluang terbuka untuk lingkungan hidup, dan pelayanan sosial meningkatkan efisiensi dalam program dasar, terutama bag! penduduk pengurangan kemiskinan. Dan nuskin. memperhitungkan sepenuhnya biaya lingkungan dan keberlanjutan adalah hal-hal yang mendasar KebUaksanaan ini akan dibahas lebih rinci di bagi efisiensi secara ekonomi-makro. bawah Wni, yang diikuti dengan pembahasan sumbangnannya kepada dua sektor yang xix. P'enyesuaiankebijaksanaanpeningkatan penting: pengurangan kemiskinan dan efisiensi untuk menunjang sasaran pengurangan kelangsungan lingkungan; kemudian bagian kemiskinan yang cepat dan perbaikan ringkasan mengkaji persyaratan pembiyaan lingkungan REPELITA VI, dapat eksternal atau dari luar. dikelompokkan dalam empat bidang utamaP rerbala Ssen Inseutif Untuk * perbaikan slstem Insentif melalui Mendorong Daya Saing dan Efisiensi deregulas relWutnya untuk mendorong efisiensi yang lebih tinggi dan persaingan xx. Deregulasi akan meminkan peranan secara internasional, yang pada gilirannya utama dalam pencapaian tujuan REPELITA VI, memberikan sumbangan kepada sasaran seperti halnya di masa lampau. Dimulai pada yang sangat penting dalam REPELXTA VI, 1985, suatu deretan paket deregulasi telah yaitu pertumbuhan ekspor non-migas dan mengurangi proteksi, ijin investasi, dan lapangan kerja yang tinggi; diskriminasi terhadap penanaman modal asing. Hal ini ditunjang selanjutnya oleh deregulasi q. Invesos pada kapital sumber daya finansial dan oleh deprisiasi riil dar nilai tumar manusia dan kapital fisik, dengan uang untuk meningankan penyesuaiannya untuk peningkatan yang diperkirakan dalam mengurangi proteksi. Paket tersebut peranan swasta yang didorong oleh merupakan suatu pergeseran dad strategi perbaikan dalam peraturan-perundangan pembangunan yang berorientasi ke dalam yang juga melindungi kepentingan umum, menjadi yang berorientasi ke luar dan yang menghasilkan efisiensi; kompetisi yang meningkat secara nym+aL Pergeseran yang dihiasilkan dalam alokali * percikanpelaksaaaan, damnpenger&an sumberdaya lebih kepada industri yang yang law, dalm penyediaan pelaanan kompetitif secara internasional, dan laju inovasi wnum yang tzdlonal efisiensi yang yang meningkat untuk bersaing, yang pada sifatnya alokatif, orientasi pasar yang gilirannya menghasilkan peningkatan semakin meluas, dan seleksi dan produktivitas secara agregat. Analisa pelaksanaan proyek yang diperbaiki, untuk produktivitas faktor produksi menunjukkan menjadikan penggunaan yang efisien dana bahwa lebih dari 60% dad laju peningta investasi yang langka; output per pekerja yang tinggi sejak 1985 berpangkal pada kenaikkan 1,2% per tahun * pengembangan Instlusi untuk menjadikan dalam produktivitas total faktor produksi. pasar uang dan pasar tanah bekerja lebih Antara 1978 dan 1985, sebelum deregulasi efektif melalui perbaikan dalam sistem perdagangan dan investasi dinmulai, tidak peraturan-perundangan, pengawasan dan diamati pertumbuhan produktivitas yang nyata peraturan dan pengawasan bank, status hak secara statistik. Tanpa perbaikan dalam atas tanah, dan untuk memperbaiki produktivitas faktor produksi secera tens- Rhagkasan Eksekt xrvi menerus, maka diperlukan investasi/tabungan sektor yang kurang kompetitif dan mengurangi yang lebih besar untuk mencapai sasaan laju kompetisi di dalam sektor yang sifatnya inpor. perumbuhan/ekspor pada sasaran neraca Meskipun proteksi telah dikurangi bagi pembayaran dalam Repelita VI. beberapa input (seperti baja pada paket regulasi yang baru), proteksi dapat sqja bertambah pada PPt mbtun P D8turnbuhan POD perpekwja sub-sektor lainnya. Sebagai contoh adalah s tIITIbtA16fl rata4sta industri petro-kimia, dimana mis-alokasi modal yang langka adalah besar dan dampak bagian 4' _.&70 hilirnya pada eksportir dapat menjadi beban yang berat. * = xxii. Pertanian dan agro-industri mempunyai beberapa proteksi yang paling * 1.es Fa tinggi, dan umumnya menderita oleh proteksi ekspor. Salah satu akibatnya adalah harga makanan yang lebih mahal di Indonesia (misalnya gula pasir dan produk dari tepung gandum seperti niie, hampir 30% lebih mahal o | | I l I l di pasar lokal jika dibandingkan dengan pasar 197645 1054" Internasional), yang sebenarnya merupakan suatu pajak konsumen yang efektif. Lainnya adalah ekspor komoditi pertanian (di luar xxi. Sejak 1990, pendekatan telah beralih produk sektor kehutanan) adalah 1/4 ekspor kepada deregulasi. Penghapusan proteksi Thailand dan ekspor makanan olahan yang menjadi lebih spesifik (tidak menyebar). harus menggunakan input pertanian yang Hambatan non-tarif meliputi 30% produksi mahal, adalah 1/5 ekspor Singapura, terlepas industri dan 35% produksi pertanian, yaitu dari potensi pertanian Indonesia yang besar. hampir sama dengan keadaan tahun 1991. Industri Indonesia lainnya, seperti tekstil dan Rata-rata tarif secara nominal sekitar 20% alas kaki ditandai oleh stuktur yang dualistik. sejak 1991. Proteks; efektif rata-rata dalam Perusahaan biaya tinggi dan pasarnya produksi industri tetap 50%, yang berarti dilindungi berdampingan dengan perusahaan secara rata-rata produsen domestik 50% kurang berorientasi ekspor yang mengimpor input yang efisien dibandingkan dengan produsen pesaing bebas bea masuk dari pada membelinya pada internasional mereka, dan masih menjualnya di harga tinggi yang dilindungi. Perusahaan yang pasar domestik meskipun mereka tentunya tidak berorientasi ekspor mempunyai insvzntif yang dapat mengekspor. Proteksi ini sekitar dua kali lemah untuk mengembangkan keterkaitan ke lipat dibandingkan dengan negara seperti Korea belakang karena biaya lokal yang tinggi. dan Malaysia. Digabungkan dengan Tekanan yang kompetitif pada perusahaan biaya pembasm ekspor yang masih besar, proteksi tinggi akan meningkat sebagai akibat dari dua yang berlebihan tidak mendorong pertumbuhan paket deregulasi yang mengijinkan perusahaan ekspor Indonesia karena mis-alokasi berorientasi ekspor menjual produknya lebih sumberdaya dan ketrampilan berusaha yang banyak di pasar domestik yang pula langka kepada kegiatan produksi yang menguntungkan konsumen. Namun demikian, beorientasi domestik dan melindungi mereka pemantauan diperlukan untuk menjamin bahwa dari tekanan persaingan. Proteksi Indonesia pendapatan mereka dalam penjualan ditandai pula oleh perlindungan yang cukup mencerminkan efisiensi yang tinggi, tidak besar terhadap industri tertentu dan kurang sekedar akses kepada input yang bebas bea pada lwnnya. Perbedaan ini mendorong lebih impor. lanjut mis-alokasi dari sumberdaya ke sub- XrVIll Rlngkasan Ekseku4 Pra&iinw Nlng Dtba~aI ~ Wn ~ radfnt Reaa dan Tadf Pungutan Tama im1W I1 11t3 11 19h it U 0 i I I I U I OB - - - -3pu&W m w m I -1 1I= u 11C ml m1tU as xxiii. Pembatasan-pembatasan masih tepat pada saat ini, dengan anggapan membatasi penanaman modal dan kompetisi, di kemungldnan bahwa harga minyak tetap sejumlah sektor. Investasi asing yang bersifat rendah, peningkaan persaingan yang semacin langsung harus berhadapan dengan ketat bagi pasar ekspor dan penanaman modal pembatasan-pembatasan, terutama investasi asing langsung dan peluang yang tersedia pada selkor tertentu, dan persyaratan investasi dengan terbukanya pasar oleh Putan minimum yang cukup besar. Tambahan lagi, Uruguay, terutama bagi produk pertanian dan paket regulasi yang terakhir menaikkan agro-industrL Progran seperti ini akan persyaratan pengalihan equity menjadi 51% mendorong persaingan dan dengan sendiinya setelah 20 tahun (kecuali bagi perusahaan pada mengurangi produsen yang tidak efisien, yang kawasan berikat atau ekspor). Meskipun tidak dapat ditorjang dalam lingkungan penanaman modal asing yang sesungguhnya internasional yang semakin kompetitif seperti terus bertambah di Indonesia, nilai usul sekang ini. investasi yang baru menurun pada 1993 dan Indonesia akan menghadapi persaingan yang xxv. Program deregulasi yang lebih keras untuk mendapatkar. penanaman menyeluruh, mengharuskan hal-hal sebagai modal asing yang sifatnya langsung di waktu berikut: (1) Penghapusan NTh (Non Tariff yang akan datang. Jika penanaman modal Barrier) dengan penggantian oleh tarif asing langsung menurun, dan atau "footloose sementara; (2) Penguangan tarif yang dlngg investment" yang ada menarilk diri, maka (tennamuk bea mauak tabakswa) ke suaf pengalihan teknologi dan permuhan ekspor dngk makswn, palng dnggl 15%, akan menurun. ntmgdn untuk jangka wakrn tententu untuk memberikan waktu bagi produsen urntk xxiv. Suatu penyesuaian kepada deregulasi penyesuaian; (3) Penghausan pekagan yang menyeluruh, akan menggalakkan ekspor ekspor (kecuali bagi lelang untuk dan menggerakkan peningkatan pertumbuhan mengalokasikan kuota ekspor tekstil dan produktivitas dan persaingan internasional yang mungkin untuk beberapa tarif dalan pasat diperlukan untuk pencapaian sasaran produk kehutanan dimana Indonesia REPELITA VI. Program seperti itu adalah mempunyai kedudukan monopoli, walaupun Rgkaan Eksek utx dalatn hal lni pertmbahan iyuran yang BUMN kepada perusahaan swasta dalam disarankan dalam sektor kehutanan (dalam hal kegiatan yang sifatnya produksi langsung, dan manapun) menaikkan harga ekspor); (4) Suatu peningaan investasi swasta yang terencana kebhsanaan ngd uar yang menunaJng dalam prasarana fisik. Pada sektor di mana untuk melicinkanjalan bagi penyesuaian kepada terdapat struktur pasar kompetitif, atau dapat tingkat perlindungan yang ringan dan tinglcat dirangsang dengan lebib terbuka terhadap pasar ekspor dan impor yang lebih tinggi; dan (5) internasional, sektor pemerintah dapat menjual Kedngaan lebi lanjut dalm pelrangan asetnya, tanpa adanya atran tambahan. Hal yang khusus pada pewnnamn modal asing ini mencakup produksi dan pemasaran di sektor langsung, mnsalnya melonggarkan lebih jauh industi serta produksi dan pemasaran hasil kondisi pengalihan equity dan tingkat investasi pertanian umumnya. Dalam hal ini, pasar mininum untuk memperbailki pengalihan kompetitif akan memberikan perlindungan teknologi dan akses kepada pasar dunia. seperlunya kepada kepentingan umum. Nanwn demikian, masih diperlukan upaya untuk Investasi Yang Efisien mengembangkan pengauran secara institusi untuk penjualan aset yang kompetitif dan, xxvi. Investasi dalam kapetal sumberdaya dalam banyak hal, resktruurisai neraca manusia dan prasarna fisik, seperti rugi/laba dan penciutan skala pemilikan. diprogramkan dalam Repelita VI, diperlukan Tekanan seharusnya diberikan kepada untuk mencapai sasaran pertumbuhan yang kepercayaan yang lebih besar pada pengelolaan tinggi dari PDB dan ekspor non-migas. Dalam swasta, untuk memperbaiki efisiensi, dard pads Repelita VI, seltor swast diharapkan sekedar menaikkan pendapatan dart kapital mengambil bagian yang terbesar darti invesusi, sementara mempertahanka pengendalian seperti halnya di waktu lampau. Penyesuaian pemerintah. Penjualan saham minoritas saja yang utama adalah pengurangan peranan sektor tidak akan memperbaiki efisiensi secara berarti, pemerintah dalam kegiatan produksi langsung dan dapat diperagakan maW jika pemilik dan peningkatan peranan swasta dalam saham minoritas menghambat proses penyediaan fasilitas umum dan prasarana fisik swastanisasi dan perobahan selanjutnya seperti yang secara tradisional diberikan oleh sektor yang terijadi di banyak tempat. pemerintah, terutama dalam tenaga listrik dan telekomunikasi. xxix. Di bidang lain, seperti prasarana fisik, dinana suplai kurang kompetitif, suatu sistem xxvii. Kenyataan internasional menyarankan peraturan-perundangan yang memadai bahwa pengalihan yang diperkirakan dari diperlukan untuk melindungi kepentingan pengelolaan pemerintah kepada swasta akan umum sementara menyediakan tingkat meningkatkan efisiensi dan produktivitas keuntngan yang memadai dan mengurangi investasi. Tambahan lagi, pengalihan dari resiko atas perobahan kebUaksanaanpemerintah pemerintah ke swasta ini akan niemperbaiki bagi investor. Bahkan tanpa swastanisasi keseimbangan fiskal melalui investasi penuh, kepercayaan yang lebih besar dapat pemerintah yang lebih rendah dan penerimaan diberikan kepada seltor swasta melalui pajak yang tinggi, sebagai tambahan kepada peljanjian kerja untuk e atau penerimaan dari penjualan aset. Sektor swasta mengelola proyek prasarana fisik atau melalui telah mulai menainkan peranan yang penting patungan. Pengaturan secara kelembagaan dalam pembangkit listrik, yaitu dengan seharusnya membantu proses lelang kompetitif penanda-tanganan perjanjian proyek Paiton. untuk kontrak atau perjanjian kerja. xxviii. Peraturan-perundangan dan institusi xxx. Meskipun sektor swasta akan yang memadai adalah menentukan untuk mempunyai peranan yang lebih besar, sektor menjamin peralihan secara bertahap dard pemerintah masih tetap penyedia utama Ringkasan Eksewutf prasana fisik, terutama dimana sektor adalah sebesar 25%). Tarif listrik yang tiUnggi swasta memperlihatkan keenggan aa akan memperlambat pertmbuhan demand, dimana eldernalitas adalah pentng, seperti air enngatkan klitas lngkungan, menaian minum, sanitasi dan pembuangan linbah. tabungan pemerintah, dan mendorong Sepei teWa dikemukakan, peluang tersedia partisipasi sektor swasta. Kebutuhan investasi urtuk perbaikan pelaksanaan proyek dan dapat pula dikurangi dengan mendorong eflslensi melalul lebih besar pemberian peran perusahaan swasta yang sekarang ini kepada kontraktor swasta untuk memnbangunan membangkit tenaga listriknya sendiri urtuk aau mengelola sistem (lihat bagian berikut). terus melaksanakannya melalui pengaturan Dalam kapital sUmb.rdaya manusia, sektor yang memungkinkan penjualan daya kepada pemerntah akan terus memainkan peranan sistem distribusi listrik dari pada menibangun yang penting. REPELITA VI memperkiralan kapasitas baru untuk menggantikan penibangklt perluasan kewajiban belajar menjadi sembilan tenaga listnk sendiri tersebut. tahun yang bertahap dan perbaikan dalam .zalitas pendidikan dan pelayanan kese}tn. xxxiii. Dalam telekomoniuksi, program yang Upaya ini akan memperbaili produktivitas dan ada dirancang dengan baik dan layak. Masalab pemerataan, serta membantu pengurangan utama adalah sistem peraturan-perundangan kemiskinan selanjutnya. untuk penanam modal swasta. Pmneitab telah mendahuluinya dengan swastanisasi secara xxuxi. Program ivessi pemerintah dalam parsial dari P.T. INDOSAT. Repelita VI mencerminkan prioritas sektor pemeritah pada pengembangan sumberdaya xxxiv. Dalam tranportasi dan prasarana mamusa dan prasarana fisik. Alokasi yang rusik perkotaan, Indonesia, seperti juga negara terbesar dalam proyeksi Anggaran Belanja lainnya, menghadapi tugas surit untuk Repelta VI adalah untuk sumberdaya manusia mengikuti pertambahan permintaan. (program-progam pendidikan, keseatn, Pembiayaan utama direncanakan di kedua keluarga berencana, dan pengentasan subsektor tersebut. Pada prasarana fisik kemiskinan) dan prasarana fisik (tenaga listrik, perkotaan prioritas tinggl diberikan untuk telekomunikasi, transpor, air minum perkotaan, perbalkan air minum dan sanitasi seta dan sanitasi). Tambahan pula, BUMN transportasi kota. Pemenintah akan terus diprograikan untuk melaulkan investasi yang menyediakan bagian terbesar (pertambahan) cukup besar secara langsung dalam tenaga pembiayaan di bidang ini. Tetapi, efisiensi listrik dan telekomunikasi, yaitu di luar dapat ditingkatkan dengan lebih memberikan anggran belanja pembanguran peenintah. kepercayaan kepada sektor swasta melalui kontrak pengelolaan, dan dengan perbaikan Pelaksanaan: Perbaikan Efsiensi Pada cost recovery yang membantu penghimpunan Tlngkat Sektor dan Proyek dana yang diperlukan bagi investasi. Meskipun hal ini terjadi, sasaran yang ditetapkan untulk xxii. Di sektor tenaga lisik dimana air minum dan sanitasi tampaknya sukar untuk investasi pemerintah yang diprogramkan dapat c.capai. terbesar, beberapa tindakan penghematan adah mungkin. Perkiraan pertumbian xxxv. Pada sektor pendidikan masalah permna dalam Repelita VI sdalah 1,5 kali utama berkaitan dengan peningkatan kualitas, pertumbuhan industri atau 2,5 kali dan pendekatan progran pendidikan SLTP pertumbuhan PDB, suatu perkan yang lebih yang diusulkan. Walaupun pendidikan dasar tinggi dari perkiraan biasa yaltu masing-masing telah tersedia untuk umum, tingkat putus adalah 1,2 dan 1,5-2.0, (tersirat perbedaan sekolah masih tinggi. Penyelesan pendidikan dalam pertmbuhan demand dan kapasitas tampaknya lebMi lama di daerah. Hal ini Rmigkasan Eksekf ml mungkin berkaitan dengan usia masuk sekolah besar pembiayaan ini diharapkan untuk yang tergolong lanjut (umur 7 tahun), dilaksanakan oleh pemerintah daerah, yang di keterbatasan jam belajar, ketersediaan buku masa lalu telah menyebabkan terjadinya waktu bacaan dan bahan untuk belajar yang berbeda, yang panjang dalam pelaksanaannya. dan kurikulum itu sendiri. Dana seharusnya dialokasikan untuk memperbaiki kualitas xxxvii. .erbaikan pelaksanaan proyek pendidikan di bidang ini. Pada tingka. SLTP, pembangunan dapat memberikan sumbangan target tampaknya melebihi kemampuan yang penting untuk pencapaian sasaran Repelita penyediaan dana. Disini juga ada masalah VI. Proyek pemerintah haruslah sangat kualitas pendidikan. Kekurangan kualitas produktif, diselesaikan secepatnya dan dengan (sama halnya dengan sumbangan pendidikan), kualitas tinggi sebanding biaya, seperti yang dapat membatasi manfaat terhadap pengeluaran telah ditekankan oleh Presiden Soeharto dalam biaya pendidikan dari mereka yang memperoleh pidato pengantar RAPBN 1994/95. Salah satu pendidikan SLTP, dan sebagai akibatnya cara untuk membuat proyek effektif adalah partisipasi masuk SLTP juga rendah. Hal ini perbaikan lebih lanjut dalam konsultasi dengan terutama terjadi pada penduduk miskin, dengan penerima manfaat dan mereka yang terkena membandingkannya dengan penghasilan dari dampak di lokasi proyek. Sebagai tambahan, anak-anak pada kelompok umur ini dengan Pemerintah dan donor telah menandai lima siswa pada SLTP. Dengan demikian, strategi bidang untuk perbaikan, yaitu (i) pen-delegasi- perluasan pendidikan SLTP harus diukur an kewenangan yang lebih besar, sejalan dengan penyesuaian target untuk daerah dengan dengan pertanggunag jawaban pelaksanaan, tingkat partisipasi pendidikan yang rendah. kepada instansi pelaksana proyek di lapangan; Penetapan sumbangan pendidikan oleh (ii) penyederhanaan desain proyek (terutama pemerintah harus memperhitungkan dampak bagi proyeck yang pelaksanaanya bersifat yang mungkin terjadi pada penyelenggaraan lokal); (iii) pencegahan penundaan dimulainya pelayanan pendidikan ini. Akhirnya, proyek melalui perjanjian pembuatan desain pertimbangan cost recovery dan pemerataan yang tepat waktu, pembebasan tanah, dan menghendali untuk mengurangi subsidi bagi penyediaan dana pemerintah pusat; (iv) pelayanan sosial yang penggunaannya terutama penyederhanaan dalam prosedur pengadaan oleh mereka yang manpu yang mempunyai (termasuk bantuan teknik), pengadaan tanah, ekternalitas terbatas, seperti pendidikan tinggi. pembayaran kontrak yang tepat waktu Dalam hal mereka yang kurang mampu (perkiraan kontraktor tetang penundaan menggunakan jasa pelayanan pendidikan ini, pembayaran menyebabkan Pemerintah maka upaya harus dilakukan untuk men-target- membayar lebih mahal dibandingkan swasta kan subsidi yang berdasarkan tingkat yang mempunyai proyek yang serupa); (v) pendapatan. penyediaan yang memadai untuk dana pemeliharaan untuk perpanjangan umur xxxvi. re a yang disempurnakan pelayanan proyek. Peuierintah telah mencapai dari program investasi pemerintab dapat kemajuan yang memadai dalam perbaikan di memberikan sumbangan penting bagi bidang-bidang ini, misalnya dengan melakukan pencapaian sasaran pertumbuhan dan revisi prosedur pengadaan barang dan jasa. pengurangan kemiskinan Repelita VI. Selama Repelita V, investasi perkotaan, terutama pada Pengembangan Institusi air minum dan sanitasi, berada di bawah tingkat yang direncanakan. Melaksanakan xxxviii. Pengembangan institusi diperlukan kenaikkan yang besar dalam pembiayaan di untuk menunjang perbaikan insentif dan sektor ini selamna Repelita VI merupakan menjadikan mekanisme pasar bekera lebih pekerjaan besar. Tambahan lagi, sebagian baik. Misalnya, sistem perundang-undangan xucii Rlngkasan Eksekff yang kuat akan meqiadikan insentif berfungsi Pengurangan tingkat kemiskinan dad 60% lebih baik dan mengurangi resiko investor. penduduk pada 1970 menjadi 14% penduduk Perbaikandalanperaturan-perundangantentang merupakan prestasi yang penting. Perbailcan agunan dan likwidasi perusahaan, dan yang nyata dilakukan pada angka harapan persyaratan modal yang lebih tinggi dan hidup, gizi, dan pendidikan dasar dan persyaratan akan menjadikan pasar uang kesehatan, terutama bagi penduduk dalam bekerja lebih efisien. Hak atas tanah yang kelompok 40% berpenghasilan yang lebih disempurnakan akan mengurangi resiko rendah dan wanita. Hasil ini mencerminkan investor dan membantu perlindungan penduduk tiga faktor yang saling terkait: pertumbuhan miskin. yang padat karya dan cepat dalatn PDB yang memperluas kesempatan kerja; pertambahan xxxix. Institusi pemerintah yang ditingkatkan prasarana fisilc pedesaan dan peningkatan kapasitasnya dapat memberikan sumbangan kapital sumberdaya manusia yang menyertai dalam pembangunan di berbagai bidang. perluasan pelayanan kesehatan dasar dan Seperti dicatat di atas, perbaikan selanjutnya pendidikan; dan transisi demografi dari angka dalam pengelolaan pinjaman dan evaluasi kelabiran yang lebih rendah, angka partisipasi proyek diperlukan. Perbaikan dalam budaya pendidikan wanita dan pria yang lebih tinggi, perbankan dan pengawasan akan memberikan partisipasi wanita dalam angkatan kerja dan sumbangan kepada berfungsinya sistem migrasi desa-kota. keuangan yang lebih baik. Perobahan institusi selanjutnya diperlukan untuk mengendalikan xli. Terlepas dad hasil-hasil yang telah urbanisasi masal yang sedang berlangsung, dan dicapai tersebut, Indonesia masih mempunyai nienjamin pelayanan fasilitas umum perkotaan 27-35 juta penduduk miskin dan hampir seperti yang diprogramican. Kepercayaan yang miskin. Sebagian besar berdomisili di Jawa, terus meningkat pada penyediaan prasarana meskipun kawasan Indonesia Bagian Timur fisic oleh swasta, akan tergantung pada mempunyal persentase kemiskinan yang lebih perkembangan dan pelaksanaan dari sistem tinggi. Repelita VI men-target-kan peraturan perundangan yang sesuai dan pada pengurangan kemiskinan absolut yang institusi mengelola perjanjian kerja dengan ambisius, yaitu menjadi 6% total penduduk. perusahaan swasta. Perobahan institusi Namun, keberhasilan besar Indonesia diperlukan pula untuk memperbaiki mengurangi kemiskinan masal in! membuatnya pelaksanaan proyek pemerintah, termasuk sukar pula untuk mencapai target tersebut, konsultasi yang lebih akrab dengan mereka karena kebanyakan penduduk miskin yang ada yang terkena dampak dan penerina manfaaS sekarang terisolasi di daerah yang miskin Dalam pengalihan equity dan swastanisasi dengan sumnberdaya alamn. BUMN, pengaturan secara institusi perlu dikembangkan agar nienjamin penjualan aset xlii. LqIu peflmbuhan kesempatan keda yang kompetitif. Akhirnya, seperti dibahas di dan PDB yang lenrm daggi akan tet4p bawah ini, di dua sektor kunci kenmiskinan dan merupakn kunl daam pengurangan lingkungan, perobahan institusi diperlukan pula kemisidnan. Dan sucaua nulwnen utama untuk menberikan pelayanan sosial dasar yang unc mengurangi kemudwk akan letap berkualitas tinggi kepada penduduk nmiskin dan pada Investasi dalam pengembangan untuk memperbaiki pengelolaan kualitas smberdaya manusla -pendkdan d=n lingkungan. kesehatan- yang mendapatkan tekanan utana dalam REPELXTA VI. Pemerintah telah Mengurangi Kemiskinan mengumumkan rencana kewajiban belajar sampai dengan tingkat SLTP, memperbaiki xl. Pengurangan kemiskinan selanjutnya mutu pendidikan, dan memperbaili mutu merupakan tujuan utama dari Repelita VI. pelayanan kesehatan. Tetapi, upaya Rlngkasan Eksek xli pelaksanaan yang seksama dan pertanggung jawaban penggunaan dana dan penge&iiiangan bdusi d upekan untuk proses pengambil keputusan nasyarakat menjamin bahwa perbaikan ini menjangkau setempat, peranan wanita yang lebih besar, dan pula penduduk niskin. pemantauan serta pelaksanaan adalah penting sekali. Pada sektor pendidikan dan kesehatan, xliii. Sebagal tambahan pada kedua strategi dua tema saling melengkapi adalah: (1) yang tradisional tersebut di atas, intervensi perbalkan dakun mut pelayanan sosla dasar yang lebih di-target-kan diperlukan untuk melald pelaksanaan yang lebih baik dan mengurangi kemiskinan secara efektif. Hal ini pengembangan lns&usi; dan (1) men-rgdt- adalah benar dengan menerima kenyataan ciri kan pelayanan unkuk penduduk miskin dari kemiskinan yang tersisa, terutama di luar melakd menurunkan harga unhuk mereka, Jawa. Di daerah terpencil dan miskin sementara menalkkan hargapelayanan soslad sumberdaya, intervensi yang di-target-kan yang dlgunakan secara Ienufolehpenduduk diperlukanuntukmeningkatkanproduktivitasdi mampu, mlsalnya pendidn tinggi dan tingkat usahatani, membangun prasarana skala pelayanan wnmak sakld Strategi pengurangan kecil, mengurangi laju pertumbuhan penduduk kemiskinan di Kawasan Indonesia runur perlu dan perbaikan sumberdaya manusia. Misalnya, untuk menitik beratkan pada perbaikan Pemerintah dapat mempertimbangkan sumberdaya manusia dan peningkatan produksi pembiayaan pendidikan pra-pendidikan dasar di pertanian yang berkelanjutan dan fasilitas daerah miskin. pemasaran, di apa, (yang dalam banyak hal) dinamakan lingkungan yang rapuh. xliv. Sebagai bagian dari Repelita VI, Pemerintah telah mengumumkan suatul program Linglmngan khusus yang men-target-kan pengeutasan kemsikinan di desa muiskil (INPRES Desa xlvi. Repelita VI dan PJP U bertujuan untuk Teringgal, atau IDI). Program IDT telah memperbaikipengelolaansumberdayaalamdan meng-identifikasi-kan 20.000 desa miskin (dari menekan pencemaran pada tingkat minimum. 60000 desa). Setiap desa miskin akan Masalah pengelolaan sumberdaya alam adalah menenimahibahkhususRp.20juta. Kelompok keberlanjutan produksi dan fungsi kehutanan Masyarakat di desa ini (bukan instansi dan penurunan cadangan migas, dengan pemerintah pusat dan pemerintah daerah) akan pengelolaan daerah aliran sungai dan air tanah menerima dana hibah dan kelompok semakin menjadi isu yang penting pula. menentukan penggunaannya. Pemerintah Analisa bank Dunia menunjukkan bahwa bennaksud pula untuk memperluas program pencemaran bukanlah masalah gangguan pembangunan lainnya di daerah miskmin ii. kenyamanan; pencemaran tersebut telah Keberhasilan program IDT ini ditentucan pula menyebabkan biaya yang cukup besar di bidang oleh pemantauan yang teliti dad hasil yang kesehatan, misalnya, suatu perkiraan $500 juta dicapai dan penyesuaian-penyesuaian program setahun akibat pencemaran udara untuk kota terhadap keberhasilan sebelumnya. Akhirnya, Jakarta saja. Pencemaran dengan prioritas Pemerintah juga melakukan desetralisasi tinggi adalah penyediaan air minum, emisi beberapa anggaran program prasarana fisik, kendaraan benmotor, dan pencemaran industri yang seharusnya membantu untuk lebih di pusat p¢rkotaan yang utama. menyesuaikannya terhadap kondisi setempat. xlvii. Penggunaa insenltif yag lebih balk, xlv. Pelaknaan yang efekBf dari terutama dalam penetapan harga atau TpricingM strategi pen-target-an merupakan kunci dan yang mencerminkan lebih dekat kepada nilai keberhasilan. Pada rencana IDT, pemilihan sebenarmya dari sumberdaya dan biaya kegiatan yang teliti atas desa miskin, perbaikan dalam lingkungan, akan mendorong penggunaan =Iv Ringkasan Eksew sumberdaya yang lebih efisien, kerusakan yang menunjukkan bahwa lebih murah memperbaiki lebih ringan terhadap lingkungan, dan lebih pencemaran pada tahap awal, pada "top of the besar penerina retribusi dan pajak, pada apa pipe" dari pada tahap akhir pada "end of the yang dinamakan pemecahan secara "win-win- pipe" atau secara "retro-fitting". Suatu win". Suatu contoh yang baik adalah campuran dari retribusi pencemaran, kenaikkan harga niinyak tahun 1993. Bidang pengaturan, dan pengembangan kapasitas penting laismya yang menghasi!kan pemecahan institusi penegakkan pengaturan diperlukan yang sifatnya "win-win-win' adalah, pertama untuk mendorong investasi swasta ini. dan sangat penting, iyuran hasil hutan dan dana reboisasi (dengan pendapatan dinasukkan ke xlix. Pengembangan institusi akan dalam anggaran), tetapi juga harga tarif listrik, memainkan peranan yang penting dalam dan harga pupuk. Sebagai tambahan, terdapat perbaikan pengelolaan sumberdaya alam dan ruang lingkup yang cukup untuk menaikkan pencapaian sasaran perbaikan kualitas retribusi air dan retribusi limbah cair, lingkungan REPELITA VI dan PJP II. Pada walaupun hal ini harus ditunjang oleh bidang pengelolaan sumberdaya alam pengembangan institusi yang mengerem pengembangan institusi adalah faktor penentu pengeboran air tanah dan pembuangan limbah untuk penegakkan ketentuan pengenaan iyuran yang mencemar sumberdaya air. Retribusi atau restribusi yang lebih besar untuk parkir atau akses kepada zona perkotaan dapat pengusahaan hutan dan air/sanitasi. Pada mengurangi kemacetan lalu lintas yang bidang niigas, suatu keputusan diperlukan berkaitan erat dengan pencemaran gas buangan segera atas penyesuaian apa (jika ada) yang kendaraan bemotor. diperlukan dalam persyaratan peranjian kerja, dengan memberikan waktu yang cukup untuk xlviii. Investasi diperlukan pula untuk pembangunan lapangan mninyak dan gas, mengurangi pencemaran. Investasi penurunan dalam ekspor netto migas yang pemerintah yang besar diperlukan untuk diperkirakan, dan kecenderungan dalam harga membatasi kemacetatan lalu lintas perkotaan minyak dunia yang diproyeksikan. dan realisasi sasaran besar Repelita VI untuk Pengembangan institusi diperlukan pula untuk pelayanan air minum (dari 50% menjadi 75% membatasi pertumbuhan pencemaran, dengan penduduk) dan sanitasi (dari 25% menjadi 54% memperkuat kapasitas pemerintah daerah, yang penduduk). Isu pokok disini adalah semakin banyak melaksanakan investasi pelaksanaan rencana investasi; selamna lima prasarana perkotaan, dan institusi yang tahun yang lalu investasi pada air dan sanitasi ditugaskan untuk pamantauan dan penerapen perkotaan tidak mencapai target. Efektivitas balu mutu lingkungan. Unsur institusi teraknlir pelayanan dapat pula diperbaiki dengan lebih yang penting dalam membatasi pencenaran, mengandalkan pada perjanjian kerja dengan adalah membangun kesepakatan masyarakat sektor swasta untuk kegiatan konstruksi dan unum dalain perlindungan lingkungan, sistem pengelolaan. Tambahan pula, investasi terutama dunia usaha, dan menyediakan swasta diperlukan untuk mengurangi informasi untuk masyarakat umum tentang peningkatan yang diperkhirakn besar dalam masalah dan pemecahan yang berkaitan dengan bahan pencemar industri yang akan menyertai kualitas lingkungan. pertumbuhan industri yang diproyeksikan. Penyesuaian dalarm investasi perlu dimulai Pembiayaa Eksternal Repelita VI sekarang, karena 85% peningkatan yang diperkirakan dalam pencemaran pada kurun 1. Pembiayaan sumber eksternal akan waktu PJP II akan terjadi sebagai akibat dari terus memainkan peranan yang menentukn pertumbuhan, bukan karena tingkat produksi dalam Repelita VI, walaupun kedua defisit yang ada sekarang ini. Pengalaman transaksi berjalan serta hutang luar negeri dan Rlagkasan Ekseka4ff pembayaran butang (luar negeri) menurun Pinjaman resnil juga membantu untuk secara relatif terhadap PDB dan ekspor. memudahkan penyesuaian dalam hal harga Terlepas peranan yang menurun dan pinjamnw minyak internasional yang tetap rendah, yang netto, rata-rata pembiayaan bruto sebesar $16,3 masih metnpengaruhi hampir 25% ekspor milyard per tahun diperlukan untuk pemnbiayaan Indonesia. Akhirnya, terlepas dari prestasi defisit transaksi beijalan yang diperkirakan, Indonesia yang meyakinkan dalam ukuran kewajiban pinjaman jangka menengah dan pertumbuhan ekonomi, stabilitas, dan jangka panjang yang di- roll-over", dan pengurangan kemiskinan, pendapatan per kapita pembentukan cadangan resmi yang berhati-hati. masih $670 saja. Kemiskinan absolut, yang Tambahan lagi, pinJaman jangka pendek, batasanya sebagai tingkat pendapatan yang diperkirakan oleh Bank Dunia sekitar $18 diperlukan untuk membeli kebutuhan gizi milyard pada akhir 1992, perlu diperbaharui minimum dan kebutuhan dasar, masih setiap tahun. merupakan 14% dari jumlah penduduk, yaitu sekitar 27 juta. Bantuan resmi akan H. Ketersediaan dalam jumlah besar dai mendumung proyek-proyek dalam REPEIfTA pembiayaan external bruto akan menentukan VI di bidang sumberdaya manusia dan bagi petumbuhan yang berkelanjutan. prasarana -yang akan mengurangi kemiskinan Bata resmi (official assistance) yang akan and memperbaiki produktivitas dan daya saing torus memainkan peranan penting dalam Indonesia. Perbaikan ini tidak saja pembiayaan eksternal ini, meskipun memberikan manfaat kepada penduduk miskin, peemasukkan n= dari bilateral dan multilateral tetapi juga untuk menambah persepsi atas diperoyeksikan akan nmenurun secara relatif *creditworthiness" Indonesia. terhadap PDB, yaitu sejalan dengan tujuan Pemerintah untuk mengurangi ketergantungan lii. Reucana pembiaymn Repelita VI pada pirjaman luar negeri. Bantuan resmi menganut anggapan bahwa pencairan dana yang berlanjut menunjukkan dukungan badan tahunan bantuan resmi dari Indonesia's dan negara donor bagi upaya pembangunan Consultative Group (CGI) akan mencapai Pemerintah yang berlanjut. Pencairan dana sekitar $4,1 milyard, yaitu sekitar $3,7 milyard resmi tersebut menjamin bahwa pembayaran per tahun dalamn bentuk pinjaman, ditambah hutang tidak bertambah secara cepat dengan sekitar $400 juta dalam bentuk hibah. Dengan naiknya pembayaran pinjaman pokok dan anggapan campuran yang tepat dalam bantuan bunga atas pinjaman pemerintah dan swasta. sektor dan proyek, dan perbaikan lebih lanjut Dalam hal pencairan bantuan resmi dibuat atas pelaksanaan proyek, hal ini menjurus bersyarat, maka hal ini akan menjaga biaya kepada komitmen CGI setidak-tidaknya $5 pinjaman terkendali dan membanut untuk milyard, lebih kurang sama dengan 1993. membatasi kewajiban pembayaran pinjaman Bidang prioritas untuk bantuan ini akan tetap Indonesia. Hal ini akan meningkatkan akses pada pengembangan sumberdaya manusia, Indonesia kepada pasar modal swasta pengurangan kemiskinan dan prasarana fisic. 1 RECENT ECONOMIC DEVELOPMENTS A. Introduction to the Report investment, external debt, urbanizaion, the environment, privatization and the delivery of 1.1 Indonesia has maintained rapid growth quality social services, especially to the poor. while completing its cool-down of the 1990-91 overheating. This strong performance 1.3 This chapter analyzes recent economic continues Indonesia's tradition of rapid policy developments and policy in 1993 and early response to changing circumstances. Nonethe- 1994, in the light of sustining macroecnomic less, Indonesia's situation is sensitive because stability and growth. It then examines the of its large external debt, the increased compe- sources of Indonesia's past strong performance, tition facing its non- :u L2 -IAD -14.3 -183.3 Disbursements 11.3 9.1 11.9 9.5 6.1 -20.1 Amnorization 9.9 10.3 10.7 10.5 8.1 -1.7 Domestic (asst drawdown) 2 -L_ Nonoil taxes/non-oil aDP 12.4 13.3 13.4 13.8 - - Goverment savings/oDP 6.4 7.5 6.6 7.2 - - Total expenditures/aDP 18.5 17.1 18.6 17.3 - - Overall fiscal balance/aDP -1.4 0.4 .0.8 0.3 - - MemoIem Avenge oil price ($/bbl) 18.4 18.0 16.4 16.0 -10.6 -3.0 a lbis table presents Central Government fiscal accou in the stndard format used by the zwo Governvm Finandal fttiscs, which diffes from the format used in te Government of Indonesia's Budget. Tables in Section 5 of the Statistical Annex preset the fiscal accounts in the Govenmen ts format. b Estmaed grant component of extemal fnancing. I Includ spending of a curent nature classihed as development expenditue in the Govenment's Budget (fertilizer subsidy, defence eenitre, O&M expenditure). d includes fertilizer and petroleum subsidies; for FY1993/4 includes setlemnt of subsddy for a previous year. ° Central Govenmuent's personnel spending plus transfers to tegional goverments for personnl expendie f Derived as the sum of government savmngs and vet financing (externul pbls domesic). Derived reidualy i this manner, these estiates of capital exped include off-budget sdig. Source: Ministry of Fimance and World Bank Staff esimates. Recent Economic Developments 7 a tight budget for FY1994/95. Spending is that are brought on-budget, which would budgeted to rise by 4.7%, compared with benefit the environment and efficiency as well actual FY1993/94 spending (including off- as raise revenues (See Chapter 6). On the budget spending). Current spending (the spending side, elimination of the fertilizer Government of Indonesia's routine spending subsidy would save nearly Rp. 500 billion, not category, less debt amortization, plus some affect agricultural yields much, and reduce current spending in the development budget) is fertilizer run-offs that worsen water quality. projected to rise only 5.1%. Indicative of the There also is scope to reduce budgeted Govermnent's prudence was the omission of personnel spending. The budgetary burden of any across-the-board salary increase. The financing power expansion could be reduced by development budget is programmed to increase raising power tariffs (see Chapter 3), which at 9%. Tbis increase is faster than total also would have positive environmental effects. spending but still displays restraint in the presence of the pressures for spending in the 1.25 Monetary and Finandal Sector first year of REPLITA VI. However, capital Developments in 1993 reflected monetary spending s projected to rise only 4.1% from policy, the lower interest rates and international actual 1993/94 levels including off-budget portfolio shifts that favored Indonesia in world sending. The President's budget speech markets, and the monetary consequences of emphasized prudence in using off-shore loans fiscal policy. In early 1993, the rise in and export credits, and the need to raise domestic oil prices relieved some of the burden efficiency in the use of soft loans, 'to avoid of contra-cyclical policy that monetary policy inappropriate planning, delayed completion of had borne since 1990. With continued tight projects and irregularities in the use of these monetary policy, funds were to be brought into funds." the country to accommodate the additicnal transactions demands for money related to the 1.23 Govermnent revenues are targeted to higher price level and the end-fiscal year tax rise by 11%, much faster than spending. Non- payments. Bank Indonesia's net foreign assets oil taxes are projected to rise by 17% and the correspondingly rose Rp. 3.4 trillion over the net revenues from domestic oil sales by 8.6%. first quarter of 1993. The maintenance of domestic oil prices provides a buffer for revenues if world oil 1.26 In the second quarter, inflation fell prices fail below the budget's $16/bbl. sharply; interest rates, although continuing to projection, since about 45% of oil output is fall, remained high compared to international sold domestically. levels (Fig. 1.2); and some concerns were raised about slow growth of credit. Bank 1.24 Implementing this prudent budget will Indonesia appropriately decided to unwind part depend on strong efforts to contain spending the large outstanding stock of its SBI liabilities within budgeted levels, limiting off-budget carrying high interest rates. The large stock of spending, and continuing improvements in tax SBIs had arisen from their extensive use to administration, which successfully raised maintain monetary tightness. The large revenues 25% in FY1993,'94. If oil prices volume of SBIs and their high interest rates stabilize at less than projected levels, then it complicated monetary policy. Because Bank will be necessary to tighten fiscal policy Indonesia was paying much more on each SBI fiuther. On the revenue side, possible than it earned on international reserves, the nmasures would be additional increases in stock of SBIs represented a quasi-fiscal drain property taxes, which are still low by (estimated at Rp. 2 trillion in FY1992/93) that iernational standards, and by additional had to be financed and thus a potential increases in revenues from the forestry sector limitation on Bank Indonesia's ability to 8 chapter I Figure 1.2 Rupiah Interest Rates (annual percen) P~ci 30 26 .. . .. . .. . .. . . .. . . . . . . . .. . . . . . . . . j (>~~~vemlght rate 10. 89 90 I 91 . 92 I 93 194 conduct contractionary monetary policy. To decline reflected falling international rates, unwind the stock of SBIs, Bank Indonesia slower depreciation, and lower risk premlia for allowed about Rp. 5 trillion (net) of SBIs to Indonesian borrowers, as the banking system's mature, between end-March and end-July, problems eased and the new administraton's p-ying off their holders and reducing the stock policies became clearer.) The shift in by about 17%. SBI rates fell 4 percentage monetary policy was reinforced by some easing pohints, cutting Bank Indonesia's loss on SBIs of the capital adequacy and loan loss sharply. Commercial banks' liquidity rose provisioning requirements, which freed up substantally. One expected result was a funds for credit expansion. The reduction in capital outflow; Bank Indonesia's net foreign interest rates was led by fth state banks. assets declined about Rp. 1.6 trillion between March and September. 1.28 After August of 1993, concern developed about renewed overheating as 1.27 The main result was, however, an inflation rose. The fiscal balance weakened, incras in credit aiid monetary growth (See and the Governmnent's ran-down its (net) Table 1.3). This accelerated the reduction in deposits at Bank Indonesia by about Rp. 4 interest rates that Bank Indonesia already had trillion between June and December. This been engineering as rates facing Indonesian tended to increase growth of money in the boffowers declined in world markets. (This hands of the public. In addition, a global Recent Econondc Developments 9 Table 13: Factors Affectin Reserve Money (In tri:lion of Rupiah, end of peiod except as noted) 1990 1991 1991 1992 1992 1993 1993 1993 1993 1 Mar. Mar. Dec Mar. Dec. Mar. Jm Sp. Dec. M. Net foreign aists 10.8 20.7 24.4 26.7 33.8 37.2 35.4 35.7 38.8 38.9 BI domestic credit 12.8 9.4 10.3 7.4 8.9 6.8 4.1 5.7 7.3 5.3 Net cla on ,ov. and Pub. Entrps. -5.7 -10.9 4.9 -11.4 -9.3 -10.0 -11.2 8.4 -6.9 -11.1 Net claims on Gov. ' -5.7 -11.0 -9.1 -11.6 -9.5 -10.2 -11.6 -9.1 -7.6 -1.8 Public entprises 0.1 0.1 0.2 0.2 0.2 0.3 0.4 0.7 0.7 0.7 Claims on private enteprises 0.8 0.7 0.8 0.8 0.8 0.8 0.8 0.4 0.5 0.S Claims on banks 17.7 19.7 18.4 17.9 17.5 16.1 14.5 13.6 13.7 16.0 Liquidity credits 17.4 13.1 14.1 13.8 14.6 13.4 12.9 11.9 12.3 12.6 New Bank Indonesia faities D 0.3 6.6 4.3 4.2 2.9 2.6 1.5 1.6 1.4 3.4 Net other items -13.2 -19.1 -22.3 -19.5 -28.0 -28.3 -24.4 -25.2 -28.5 -25.2 SBI ¢ -2.2 -9.4 -10.9 -11.2 -20.6 -23.0 -18.7 -18.7 -23.4 -19.8 Other -10.9 -9.7 -11.4 -8.2 -7.4 -5.3 -5.7 -6.S -5.1 -5.4 Reserve money 10.4 11.0 12.3 14.6 14.7 15.7 15.1 16.2 17.6 19.0 Currency outside banbs 7.8 9.1 9.6 11.3 11.5 13.1 12.5 13.3 14.4 15.5 Currency and deposits of banks 2.5 1.8 2.5 3.1 2.9 2.4 2.4 2.6 2.8 3.2 Other deposits 0.1 0.1 0.2 0.2 0.3 0.2 0.3 0.3 0.3 0.3 Memo Items: BI domestic credit excluding Central Govt. 18.5 20.5 19.4 18.9 18.4 17.1 15.7 14.8 14.9 17.1 Narrow money (Ml) 22.2 23.6 26.3 27.3 28.8 30.6 31.6 35.0 37.0 38.5 Broad money (Ml + Quasi-money) 64.4 81.1 96.0 100.9 119.1 123.2 125.0 136.7 145.6 149.3 % Increanse (over preceding 12 mos.) Narrow Money 6.3 10.6 15.7 9.5 12.1 17.6 14.8 28.5 25.8 Broad Money 25.9 17.0 24.4 20.2 22.1 16.7 20.4 22.2 21.2 Source: Bank Indonesia * Includes blocked deposit accounL b Compriing the tWo discouMnt Windows, the specia cedt fciiEty and the money market faclity and SEpUs. c Bank Indonesia certificates of indebtedness. portfolio shift developed toward East Asia, in to tighten monetary policy. From September which Indonesia shared. to December it sold (net) nealy Rp. 5 trillion of SBIs (a 25% increase in the stock). In 1.29 In response, Bank ndonesia attempted addition, Bank Indonesia also attempted to slow 10 COapter 1 inflation by a short-lived, managed appreciation increases. Nonetheless, non-performinhg loans of the exchange rate.I However, the represented about 16% of the system's earning combination of SBI sales and appreciation assets in October 1993. The state banks' made Indonesian assets more attractive for as situation was much worse than average, their long as the appreciation policy was expected to non-performing loans represented about 21 % of last, contributing to the capital inflows. Bank their earning assets in October 1993. Indonesia's net foreign assets rose over Rp. 3 trillion between September and December. 1.33 Although system-wide averages improved somewhat between June and October 1.30 lTus capital inflows and the monetary 1993, the status of some banks is likely to consequences of loosening fiscal policy continue to worsen. A particular case is swamped Bank Indonesia's attempt to re-tighten BAPINDO, where a major bad loan came to monetary policy through large open market light in February 1994, complicating an already sales. Reserve money grew 17% between June weak portfolio. The Finance Ministry has and December, and broad money and bank brought those responsible for the loan to court credit 14%. Bank Indonesia finished 1993 on fraud charges, and is taking steps to with more outstanding SBIs than at end-1992 strengthen the bank. (albeit bearing much lower interest rates), and with net foreign assets of Rp. 38.8 trillion, a 1.34 Bank Indonesia also has taken some rise of Rp. 5 trillion over December 1992. steps to improve banks' performance. A Bank Indonesia/Ministry of Finance committee for 1.31 In the first quarter of 1994, inter- State Banks, formed in June 1993, began national financial markets tightened and, as monthly oversight of large and problem loans; noted, the Government resumed its gradual Bank Indonesia is taking steps to improve depreciation of the Rupiah. At the same time, supervision of private banks. New minimum in an adjustment to the seasonal inflows of credit standards are being drafted and limits on taxes, Bank Indonesia maintained interest rates, lending to related enterprises tightened. Audits allowed holders to liquidate SBIs, and provided have been made of major debtors in the private increased credit to the banks. However, with banks and tehnical assistance is being the narrowing differential between foreign and provided for debt service restructuring. domestic rates (adjusted for depreciation), short Compulsory provisioning against non- term capital flowed out. Between end-February perforniing loans is being increased over time. and end-April, SBIs fell Rp. 6.8 trillion, credit to banks increased Rp. 2.1 trillion, while net 1.35 Despite these improvements, the foreign assets declined by Rp. 6.3 trillion. deterioration of some banks could still generate Official reserves fell about $1 billion over the problems. The examples of BApTDo and Bank two months. The outflow halted when SBI and Summa highlight the need to improve Bank deposit rates were increased. For FY1993/94 Indonesia/the Finance Ministry's ability to as a whole, net foreign assets rose Rp. 1.7 intervene in problem banks quickly, to prevent trillion. Official reserves rose $0.7 billion in their problems from spreading to the rest of the FY1993/94. bankdng system. World Bank experience internationally suggests that a two-step process 1.32 Banks. The average lending rate fell in handling problem banks is desirable: first, during 1993, but by less than the average intervention to preserve equity and assess the deposit rate. The wider average spread damage and, second, based on the assessment improved profits and helped reconstitute of damage, a decision on liquidation, merger, balance sheets, offsetting losses on non- or other courses cf action to resolve the performiing loans and permitting capital problem. When the potential losses in a barnk Recent Economic Developments 11 mount, management must be immediately health benefits is to be provided, funded by a replaced (and owners of private banks If they tax of 9.25-13.75% (depending on firm charac- do not quickly restore capital). This will help teristics) on the wage bill, of which 2 to limit losses and make it easier to get an percentage points is to be paid by the worker. accurate assessment of the bank's portfolio. Questions remain about the funding of the With new, temporary management In place, the program as a tax on the use of labor, and the task of determining the bank's future can costs, particularly the potential large liabilities begin. Again, World Bank experience suggests as health insurance expands widely. However, several important principles for this process: 1) JAMSOSTEK could stimulate the capital fully recognize losses and write them off as market. The funds are currently slated to be soon as possible, an approach that international administered by PT Astek, a public enterprise experience shows minimizes costs over the that also administers an existing, smaller long run; 2) settle with small depositors to programn in the Ministry of Manpower. This maintain general confidence in the fmancial reliance on PT Astek adds to the strains on an system and simplify the work-out; and 3) already overstrained agency. Regulations on maintain financial discipline through aggressive investmnent of the funds also need clarification, collection of bad loans, liquidating collateral, to protect the Govermnent from losses that publicizing the names of debtors who refuse to could result from losses on investments. settle, and prosecuting any fraud or other criminal behavior. Where problems involve 1.38 The second potentially major devel- state banks, sales of shares to the public can opment is the proposed partial privatization of provide a useful counterweight to political major Indonesian public enterprises. The sale pressures for loans. Finally, it would be of shares of these firms in the domestic stock desirable to codify these measures as much as market would increase the market's possible to minimize perceptions of political capitalization and trading substantially. The intervention or favoritism.(See World Bank partial privatization of PT INDOSAT has 1994a, pp. 80-82 for further details.) already begun; firms have been selected to market 25 % of the capital offshore and 10% in 1.36 The Non-bank Fmandal Sector grew the domestic market. rapidly during 1993. On the domestic side, the growth partly reflected both some disinter- 1.39 Two deregulation packages were mediation from bank deposits as their rates fell implemented in June and October 1993. In and the widening of bank spreads, which announcing them, the Government also encouraged firms to raise funds in the capital announced its commitment to firther markets. Internationally, a major factor was deregulation. The June package reduced non- the global portfolio shift in favor of East Asian tariff barriers from 470 to 413, mostly on markets. Indonesian stock prices more than machinery and equipment. In addition, the ban doubled in 1993 and new issues of stocks, on assembled automobile imports was replaced bonds and commercial paper rose sharply. In with less restrictive licenses and 100-200% 1994, however, prices have fallen, roughly in tariffs plus 40-150% surcharges and 20-35% line with declines in the rest of East Asia. sales taxes (depending on class and engine size of the vehicle). Models of cars and 1.37 Two recent developments have the motorcycles (68) made by local manufacturers potential to contribute to capital market do not receive the protection of tie new development. First, the Government initiated surcharge and tariffs were reduced on inputs a new pension/social insurance scheme, and on kits for automotive firmns with higher JAMSOSTEK, in 1993. A package of old age domestic content in production, in an attempt savings, accident benefits, death benefits, and to reduce the costs of the domestic content 12 Chapter I program. Tariffs were lowered S percentage local partner. The package also raised the points on 221 products (out of 9396 lines in the maxinum local sales by export zone producers tariff code), mainly machinery and equipment from 15% to 25% of output. Finally, the (115 lines), and paper (75). In addition, 76 (of minimum foreign investment was cut from $50 280) surcharges were reduced or eliminated, to $2 million for input or electronic including elimination of the 35% surcharge on components producers. soybean meal. However, import licensing was reinposed on soybean meal. The June package 1.41 The two 1993 packages continue the also streamlined restrictions on export deregulation tradition begun in 1985, including processing and bonded zones (including the selective approach to reducing protection. eliminating pre-shipment inspection and (See Chapter 4 for further discussion.) In increasing the maximaum local sales of bonded recent external trade deregulation, this has zone producers from 15 to 25% of production) meant reduirg tariffs on some inputs, and relaxed the negative list on investment encouraging higher domestic content, and licensing, notably eliminating barriers on simplifying export procedures. The two poultry breeding and wheat flour. packages reduced the (unweighted) average nominal tariff by about 1 percentage point, and 1.40 The October package's main impact the production coverage of NTBs by about 1 was in streamlining investment licensing. An percentage point. Most of the reductions were investment would be allowed to go ahead once aimed at inputs. This stimulates exporters' use approved by the Investment Board; other of these produ ts but gives users of these licensing steps would be granted by local inputs highe- effective protection in the authorities, without the need for provincial domestic market. Overall effective protection, approvals. Strong efforts were made to ensure on a production weighted basis, actually may implementation of these simplifications. In the have increased. The new approach to trade area, the October package lowered tariffs encourage domestic content in the automotive on inputs such as steel (77 products), glass industry and the tariffication of quotas should (72), copper (5), and eliminated them on inputs improve competition and efficiency. However, into electronic components. Duties also were it also introduces non-transparency, by cut on some chemicals (19 including 15 allowing tariffs on inputs and surcharges on pharmaceuticals but some of these cuts were fmal outputs to vary across individual later re-instated). Regulations on import of producers and potential producers. The same used machinery also were eased. Finally, holds true for the removal of tariffs on inputs BAPEKSTA, the scheme for duty and tax used by electronics components manufactures. drawbacks for exporters, was streamlined by The re-introduction of NTBs on soybean meal, reducing the role of its surveyors to ex post also to ensure domestic content, introduces auditing of input use. In the area of foreign non-transparency of a different sort. Although investment, divestiture regulations were the tariff surcharge was eliminated, reducing unified, with divestiture to begin after 10 years the cost of soymeal feed to poultry producers, and to reach 51% (except for foreign the NTB requiring that imports must be mixed investment in export and bonded zones, where with the output of the single existing meal the required divestiture is 20%). This change producer retains the effective protection for represented a lengthening of the period before that plant. Monitoring these restrictions will initial divestiture, but a substantial increase in be complex. Allowing producers in bonded the final divestiture from the previous 20% and export processing zones to sell more figure. In addition, the package added the production locally increases the attractiveness possibility of divestiture through the stock of these facilities to foreign investors and also market to the existing procedure of fmding a will increase domestic competition. However, Recent Economic Developments 13 close monitoring will be needed to ensure that a result of increased international competidon the preferential access of bonded and export in products that Indonesia exports; an estimated zone producers to untaxed inputs and 11% volume increase was more than offset by uninspected imports does not give them an an estimated 19 % fall In the unit value. unwarranted advantage over domestic Agricultural and mining exports remained low. producers who face high tariffs on inspected This export performance suggests that to imports and taxes. The reductions of red-tape continue high export growth, Indonesia will inthe areas of imports of used machinery and need to sustain its strong export drive in investment licensing are welcome. However, machinery, meta; and electrical products, they may also have some costs; problems become more competitive in textiles and move related to land appropriation, resettlement and up the quality ladder, and increase exports in the environmert may increase unless the new other areas where it should have comparative licensing procedures include a focus on these advantage such as agriculture and agro- issues. industry, through further deregulation (See Chapter 4). B.2 The Balanc of Payments and External Debt in 1993/94 Figure 1.3 1.42 Indonesia's Balance of Trade surplus reached an estimated $4.7 billion (3.2% of GDP) in FY1993/94, down somewhat from the L OValmertu Nonil ots ad Impos $5 billion surplus in FY1992/93. The non-oil 8 trade balance continued to improve, with a reduction of the deficit to $800 million. c V However, the oil & gas trade surplus fell by 6 $1.2 billion, to $5.5 billion, as a result of weak oil prices (See Table 1.4.). 4 - E 1.43 Non oil export growth was 16.2% in 2 - 1993. It fell to 10% for FY1993/94, as a result of the stagnation of non-oil exports in the last two quaters of FY1993/94, compared to SmIJSOMJSDMJSOMJSDMJSDMJSDMJSDMJSD the same period in FY1992/93. Despite the 8 I 88 I 8 I 1 1 92 1 03 1 04 slow down in non-oil export growth, the non- oil trade balance improved in FY1993/94 because imports continued to grow slowly - 1.45 The Current Account deficit was 6.1%. 2.1% of GDP in 1993/94, similar to the 1.9% (revised) figure for 1992/3. The subsnial 1.44 The growth of non-oil exports in 1993, improvement since 1990/91-1991/92 mainly reflected three diverse trends. About half the reflects the improved trade balance. The trade growth was due to the rise in prices of wood balance improvement in turn reflects rapid non- products, mainly plywood. The volume of oil export growth (21% p.a. since 1990/91) these exports has been stagnant for some time. and slow non-oil import growth (9% p.a.). The rest of the growth was mainly due to Growth of capital goods imports was slightly strong performances in footwear; metal less. Interest payments, the other large item in products, machinery and electrical products; the current account, have risen somewhat since and miscellaneous exports, which grew 40% or 1990/91, with the rise in private external debt more in value terms. Textiles, which account and the appreciation of the yen offsettng the for about 25% of non-oil exports, stagnated as fall in international interest rates. 14 Ohapter I Table 1.4: Indonesia: Summary Balance of Payments 1989-90-199314 (US$ billion) Itt 1989/90 1990/91 1991/92 1992/93 1993/94 Gross merchandise exports 23.8 28.1 29.8 35.3 36.5 Oil and LNG 9.3 12.7 10.7 10.5 9.3 Non-oil 14.5 15.4 19.0 24.8 27.2 Gross imports (cif) -19.6 -25.9 -27.7 -30.3 -31.9 Oil and LNG -3.1 -4.3 -3.6 -3.9 -3.9 Non-oil -16.5 -21.6 -24.1 -26.4 -28.0 Trade balance 4.2 2.2 2.1 5.0 4.7 Net non-factor services -1.2 -0.6 -0.7 -1.1 -1.2 IMLT interest payments -3.3 -3.4 -3.7 -3.8 -4.1 Other factor services and transfers -1.3 -2.1 -1.9 -2.6 -2.5 Current account balance -1.7 -3.9 -4.4 -2.6 -3.1 OiIALNG current account 3.8 5.9 4.6 3.9 2.8 Non-oil/LNG current account -5.5 -9.8 -9.0 -6.5 -5.9 Net disbursements of Public MET debt 1.2 0.6 2.2 2.2 1.2 Disbursements 6.1 5.2 6.9 7.8 7.2 Amortization -4.9 -4.6 -4.6 -5.5 -6.1 Other capital (net incl. Err. & 0mm.) 0.8 8.5 4.6 5.1 2.2 Direct Foreign Investment 0.7 1.4 1.5 1.7 2.0 Use of net foreigpn assets -0.3 -5.2 -2.5 -4.8 -0.3 Memo Items: Official reserves 5.7 9.6 10.5 12.0 12.7 (in months of imports) (3.5) (4.4) (4.6) (4.7) (4.8) Current ACCOUNT/GDP (%) -1.7 -3.5 -3.7 -1.9 -2.1 MLT debt service/exports (%) 34.1 29.5 30.8 30.3 33.5 Source: Bank Indonesia and World Bank staff estimates. Recent Economic Developments 15 1.46 International reserves (offcial) the Commercial Offshore Loan Team increased $0.7 billion during FY1993/94, to continuing to coord;nate and set ceilings on $12.7 billion (equivalent to 4.8 months of external public borrowing. Net public Imports). Bank Indonesia's net foreign assets borrowing was only $1.2 billion, equivalent to (including international reserves) were Rp. about .2% of the outstanding public debt. 38.9 trillion, a rise of about Rp. 1.7 trillion. However, the depreciation of the dollar against the yen increased the stock of public debt by an 1.47 Extenal Debt. Public sector medium- additional $2.2 billion.2 Thus public debt rose and long-term debt was $53.7 billion at $3.4 billion. Total private external debt is end-1992. (This includes about $4 billion of estimated to have increased by about $1.3 non-recourse obligations, mainly Pertamina's, billion in 1993, and then fallen in the first for developing LNG and LPG trains which will quarter of 1994 reflecting the capital outflow. be serviced by the gas output.) In addition, the Debt indicators of public and private medium World Debt Tables 1993-94 estimated private and long term debt, increased slightly during medium- and long-term debt at $16.9 billion, 1993. This increase largely reflected the and short-term debt at $18.2 billion. depreciation of the dollar against the yen and the drag on exports from the stagnation of oil 1.48 During 1993 the Government continued exports (Table 1.5). to exercise restraint in extemal borrowing, with Table 15: Indonesia: Medium- and Long-Term Debt Indicators 1989-1992 (% at year end) 1989 1990 1991 1992 1993' Debt Outst.& Disb. (DOD)IGNP 56.8 58.1 58.7 57.2 55.1 Public 49.5 47.8 47.1 43.9 42.1 Private 7.3 10.3 11.7 13.4 13.1 DOD/exports * 193.3 186.6 194.5 179.0 183.3 Public 168.4 153.6 155.9 137.1 139.8 Private 24.9 33.0 38.6 41.9 43.5 Debt service/exportsa 34.1 29.5 30.8 30.3 33.5 Public 28.2 23.6 22.6 21.8 22.8 Private 5.9 5.9 8.2 8.5 10.7 Interest/exports' 12.7 10.9 11.2 9.7 10.1 Public 10.6 8.9 8.7 7.8 8.0 Private 2.1 2.0 2.5 1.9 2.2 Includes non-recourse debt * Estimated. * Denominator is gross exports of goods and services. Source: Bank Indonesia and World Bank staff estimates. 16 Chapter ) 1.49 Direct forign investment rose from investor confidence, was maintained through $1.7 billion in 1992 to $2.0 billion in 1993/94. judicious use of fiscal, monetary and exchange However, approved proposals for foreign rate policy and foreign borrowing. The policy investment dropped 21 %, and nearly 40% in mix kept aggregate demand rising at a prudent manufacturing. (Much of this drop reflects the rate, despite the oil shock. The tax base was reclassification of the proposed $1.6 billion broadened through a value added tax and an Chandra Asri petrochemical plant from Income tax. At the same time, the Government donestic to foreign status in 1992, in response rapidly reduced protection across-the-board, to Government limits on foreign borrowing for encouraged non-oil exports, and further mega-projects; excluding Chandra Asri the deregulated the financial sector. These policies decline was 7% in total approv3ls and 15% in stimulated growth and diversified the economy. manufactuning.) The decline in foreign By 1992/93, non-oil revenues represented investment proposals probably reflects both the 66.7% of Government revenues, wrnpared to slowdown in Japan, the main investor in the 34.4% in 1984/85 (including the surplus from region in the last few years, and increased Wiomestic oil sales in non-oil revenues). competition for foreign direct investment from Similarly in 1992/93, non-oil exports China, India, and Viet Nam. Given this represented 70.3% of merchandise exports, competition, in order to sustain the transfer of compared to 29.7% in 1984/85. Thus, the foreign technology and the access to foreign relative size of the oil & gas and the non-oil & markets ta direct foreign investment provides, gas sectors in exports and government revenues Indonesia will need to maintain an attractive were roughly reversed. investment climate (See Chapter 4). Fiscal Policy C. Sources of Indonesia's Strong Performance: Macroeconomic 1.52 Prudent fiscal management was a major Management element in the Government's successful adjustment to the large external shocks 1.50 Developments in 1993 and early 1994 Indonesia suffered in the 1980s. Fiscal policy represent a continuation of Indonesia's strong sought to maintain macroeconomic stability in economic performance. Since 1985, growth the face of these shocks, at the same time has averaged 6.4% p.a., inflation 8.1 %. This laying the groundwork for a quick, sustainable occurred despite the drop in world oil prices in return to robust economic growth. Fiscal the mid-1980s that cost Indonesia (annually) adjustment in support of these objectives was the equivalent of 18% of its 1986 GDP in distinguished by three Laportant characteristics. external purchasing power. Indonesia's perfor- First, the Government responded promptly to mance is by far the best of the major oil the need to tighten the fiscal stance as oil exporters since 1985. It is worth re-examining revenues fell; the speed of adjustment was the sources of these successes at the beginning faster than in other countries experiencing of the R3PELITA vi and the Second Twenty- similar shocks. Second, the adjustment Five Year Long-Term Development Plan, in encompassed both expenditure restraint and order to see what lessons can be learned about revenue mobilization. Initially, expenditures the ways to continue this strong performance. bore the brunt of adjustment; later, strong mobilization of non-oil revenues cushioned the 1.51 As discussed below, Indonesia inpact and permitted expenditures to recover. managed to maintain stability and grow In reducing reliance on oil revenues, fiscal rapidly, despite the large decline in its terms of policy contributed importantly to structural trade, by adjusting rapidly and diversifing th, change in the economy. Third, expenditures economy. Macroeconomic stability, a key to critical to growth and poverty reduction, Recent Economic Developments 17 infastructure and human resource devel- government current spending rose relative to opwrent, were protected as much as possible. GDP even though non-interest current spending was tightened. 1.53 In the latter half of the 1970s, oil - revenues were relatively plentiful. Although 1.55 The further fall of oil prices in 1986/87 Indonesia's spending rose, its fiscal stance was again increased the fiscal deficit to about 59% of less expansionary than the other major oil GDP, necessitating renewed restraint. The exporters. Large deficits were avoided and required adjustment was more stringent than external borrowing was less compared to the earlier, because the burden of the previously other oil exporters, which generally opted for acquired external debt limited the room to highly expansionary policies. Also, Indonesia incur more debt to support spending. Both used its oil revenues more judiciously, current and capital spending were tightened emphasizing agriculture and basic physical and further, including the freezing of civil service social infrastructure and refraining from showy salaries for three years. The priority areas of but low-productivity projects (See Gelb et at. infrastructure and human resource development At the turn of te decade, Indonesia had a were shielded from the further expenditure fiscal surplus, and a debt-service ratio only cuts; their share in public capital spending rose about a quarter of Mexico's. from an already sizable 60% in the early 1980s to about 80% toward the end of the decade. 1.54 With the weakening of oil revenues in Also, efforts to mobilize non-oil revenues were the early 1980s, Indonesia's fiscal position stepped up, mainly by improved tax admin- umrned into a deficit (IMF definition), which istration. By 1990, the non-oil tax/GDP ratio reached nearly 5% of GDP in 1982/83. The had almost doubled from its level prior to the Government responded by tightening spending, tax reform, an impressive performance. These especially cutting large capital- and import- adjustment measures rapidly brought down the intensive investments. Concurrently, it fiscal deficit, reducing it to about 1% of GDp embarked on a major tax reform to raise non- by the end of the decade. oil revenues to offset the decline in oil revenues. The reform included introducing a 1.56 In the 1990s, fiscal policy has faced value added tax, broadening the income tax additional challenges. Spurred by deregulation base, and revamping property taxation. These and monetary policy, private investment measures helped reduce the fiscal deficit. rebounded strongly at the turn of the decade, While the adjustment was underway, the fiscal creating the need for the fiscal stance to be deficits were financed with sizable net external tightened further in order to accommodate the borrowings, averaging $2.9 billion annually in rise in private investment without jeopardizing 1982-85. The ability to borrow externally macroeconomic stability. Another reason for enabled Indonesia to finance its (falling) fiscal tightening is the need to reduce the public deficit and keep inflation low compared to external debt burden further. However, after other oil-exporters, such as Ecuador, Mexico, the windfall of the Gulf Crisis was appro- Nigeria and Venezuela, that had borrowed priately sterilized, the fiscal stance loosened heavily overseas during the 1970s and early somewhat, particularly on accouat of current 1980s and then were hit by the debt crisis as spending and projects that have not undergone well as falling oil prices. However, the full budgetary scrutiny. The Government increase in Indonesia's external debt, which endeavored to offset these increased was magnified by the yen appreciation and the expenditures by tightening monetary policy, rupiah's devaluation, did raise government which is of limited effectiveness in an open expenditure on interest payments by almost 2% economy (see below), by mobilizing more non- of GDp by the mid-1980s. As a result, total oil revenues, and by tightening the budget 18 Chapter 1 Table 1.6: Indonesia: Central Government Fiscal Indicators, 1982/83 - 1993194 (%) of GDP 1982/83 1985/86 1986/87 1989/90 1990/91 1991/92 1992/93 1993/94 (est.) Revenue * 18.2 19.7 15.1 16.6 20.1 17.9 17.1 17.8 Oil & gas taxes 11.9 11.3 5.9 6.4 8.6 6.6 5.8 4.2 Non-oil & gas taxes 5.5 6.7 7.1 8.8 10.2 10.0 10.3 11.2 Expenditure 23.0 22.9 20.0 17.5 18.2 18.6 18.5 18.6 Current 11.9 12.6 12.4 11.1 11.6 10.8 10.7 11.2 capital b 11.1 10.3 7.6 6.4 6.6 7.7 7.8 7.4 Govt. Savings 6.3 7.1 2.7 5.5 8.4 7.1 6.4 6.6 Fiscal Balance -4.8 -3.2 -5.0 -0.9 1.9 -0.6 -1.4 -0.8 Primary balancec -3.9 -1.5 -2.2 1.8 4.3 1.7 0.7 1.4 Memo Item: Public External Debt/GDPd 28.0 36.0 47.0 49.5 47.8 47.1 43.9 42.1 a Includes external grants. b Derived as the sum of government savings and net financing (external plus domestic). O Fiscal balance net of external interest payments. d Calendar year Source: World Bank staff estimates based on Ministry of Finance data. See Table 1.2. for FY1994/95. As discussed in Chapters 2 macroeconomic management, and in recent and 3, continuing these fiscal efforts to high growth by mobilizing resources and increase public saving will be important in allocating them to high return activities. The order to sustain macroeconomic stability during Government has deregulated financial markets R uBA vi. At the same time, emerging so that rates and the allocation of finarx al infrastructural bottlenecks and environmental resources are increasingly market-determined. problems will require sizeable public invest- Monetary policy has increasingly moved away ments; addressing these needs, given the fiscal from direct control, through, for example stringency, will depend on sound implemen- credit ceilings, to indirect control through open tation of public projects and institutional and market operations using Bank Indonesia's SBI incentive changes that encourage private and SBPU instruments. provision of traditional public services. 1.58 In the last twenty-five years, but Monetary and Financial Sector Policy especially in the last ten years, Indonesia's financial system has undergone one of the most 1.57 Monetary and financial sector policy thorough-going deregulations in the world. have played key roles in Indonesia's prudent This has had important implications for Recent Economic Developments 19 financial sector development and for monetary the 'nuality of banks' assets, weaknesses that policy. The first reform step was taken in led to the near failure of a major private bank 1970, when the capital account was opened. In in 1991 and the actual failure of Bank Summa June 1983, artificial restrictions on the in 1992. These banking sector weaknesses allocation of bank credit and state bank Interest contributed to higher risk premia for rates were eliminated. Bank Indonesia also Indonesian borrowers in foreign markets. In reduced its previously significant role in response, Government policy increasingly refinancing bank loans and introduced the SBI focused on prudential regulation and as an instrument for monetary control. These supervision. New regulations on loan loss reforms improved credit allocation. However, provisioning and Basel Committee capital the state banks continued to dominate banking, adequacy guidelines were put into place in with 61% of the system's assets. Late in 1988, February 1991. A new Banking Law was barriers to entry were dramatically lowered, passed in 1992. Outside of banking, the with a sharp cut in capital requirements for Government introduced new laws on insurance domestic banks and eased conditions on the and pension funds and social security in 1992, establishment and branching of foreign joint following up with detailed regulations in 1993. venture banks. In the wake of the 1988 reforms the number of banks more than 1.61 Banks spent 1991 and 1992 adjusting to doubled. New financial products bloomed: higher interest rates, deteriorating credit quality credit cards, home mortgage and consumer and tighter capital standards. Non-performing durable loans, and new savings c.ccount assets were about 16% of total earning assets schemes (see Bhattacharya and Pangestu, Cole in October 1993, roughly triple their 1991 and Slade, and Hanna (1993)). level. However, since June 1993 their importance has declined somewhat in the 1.59 Bank Indonesia also dramatically private banks. This is partly due to lower lowered reserve requirements, from 15% of domestic interest rates. This decline, combined current liabilities to 2% at that time. This with higher spreads and new capital infusions, successfully lowered the spread between has, on average, strengthened the private borrowing and lending rates. Although Bank banks' capital. However, state banks non- Indonesia sterilized most of the Inimediate performing loans averaged about 21% of their expansionary effect of this change, monetary portfolio in October 1993. Although for the policy loosened in mid-1989 and early 1990. banking system as a whole, there was some Credit growth reached an annual rate of 70% improvement on average, the situation of some in mid-1990. This increase in bank credit was banks may well deteriorate, as the BAPINDO accompanied by an 83% rise in the stock case illustrates. Further effo-ts will be needed market, which itself had seen important to develop mechanisms for dealing with reforms in 1987 and 1988. The financial problem banks, in order to avoid costs to the deregulation and the increase in credit, gave a rest of the system, as well as further efforts to boost to growth, particularly construction and improve capital, provisioning, loan recoveries, consumer durables. supervision, and day-to-day management. 1.60 After mid-1990, rising balance of The Open Capital Account, Monetary Policy payments imbalances and inflation spurred and Exchange Rate Policy some monetary tightening; in Februay 1991, the tightening was increased substantially. In 1.62 As international capital has become addition, the banks' ability to offset tight more mobile, the potential importance of money with offshore loans was reduced by capital flows in Indonesian monetary devel- higher capital requirements on extenial opments has grown. Short-term capital flows borrowing. Serious weaknesses developed in move in response to perceived differences In 20 Chapter I interest rates at home and abroad, corrected for expanded bank credit substantially.) Much of investors' expectations of depreciation and the net effect of Bank Indonesia's policy was country risk. Exogenous changes in these simply to change the composition of its assets differentials and expectations affect Indonesian that back reserve money, that is, to lower its interest rates, monetary aggregates and, net foreign assets and raise its domestic credit ultimately, aggregate demand. (again see Figure 1.4), with only a small change in the target-reserve money. 1.63 At the same time, the fluidity of capital flows and Indonesia's open capital account and 1.65 The opposite story holds for period managed float exchange rate regime limit the 1991-93, when Bank Indonesia followed a tight ability to use monetary policy for aggregate monetary policy by selling SBIs. The demand management, though it strengthens the reduction in Bank domestic credit, generated impact of monetary policy on the balance of through the sales of SBIs to public enterprises, payments. Because of capital flows, central raised domestic interest rates. These high banks, including Bank Indonesia, have limited rupiah rates had two effects, both of which led capacity to control monetary aggregates and set to higher net foreign assets at Bank Indonesia. interest rates widely different from world rates First, they spurred Indonesian banks to move (adjusted for depreciaLion and risk premia) off-shore for funds, increasing international under a managed float exchange rate regime. reserves, and external debt. Second, the rates For example, when Bank Indonesia attempts to attracted short term capital inflows, from tighten domestic monetary conditions by selling foreigners (again raising external debt) or SBIs, it tends to raise interest rates. But nationals holding funds offshore. Thus, once higher interest rates tend to attract more funds again, the change in monetary policy from abroad. In order to maintain the target engendered a countervailing change in Bank exchange rate, Bank Indonesia must buy Indonesia's net foreign assets ihat offset much foreign exchange. This purchase increases of the effect of open market sales on reserve Bank Indonesia's net foreign assets (NFA) and money. money, tending to offset the original contraction in Bank Indonesia's net domestic Fure 1.4 credit (DC). The reverse holds when Bank Ro 1.4 Indonesia attempts to loosen monetary policy. Relation 1.64 How relevant to the conduct of ldd Indonesian monetary policy is this offset ° between Net Foreign Assets (NFA) and NFA Domestic Credit (DC)? Episodes since 1989 4 and econometric work show that it is very 2 ...... . . important (Fig. 1.4). In 1989-90, when Bank 0 Indonesia loosened monetary policy through 2 expanding domestic credit (allowing part of the ........ . . - .. SBIs that had been issued to sterilize the Dew lowering of reserve requirements to mature), 40 the tendency toward lower interest rates drove I S J I S J goS J ofS J MS J MS capital out of Indonesia and caused a loss of l * l " l so 1 SI I 92 I 1 international reserves almost equal to the E GM #WM od,0 expansion in its domestic credit. (But with the much lower reserve requirements, even a small 1.66 The offsetting capital inflows also mean increase in Bank Indonesia's domestic credit that open market operations must be a multiple Recent Economic Developmews 21 of the target change in base money; in the case for example, would quickly be reflected in of Indonesia estimates suggest that the reserve outflows. Third, the combination of an operations may have to be three times as large open capital account and managed float of the (Hanna 1994a). These large open market exchange rate makes fiscal policy a very operations themselves compromise the course effective instrument for affecting aggregate of future monetary policy. Open market demand. Finally, the simple fact is that it is purchases generate reserve losses, and so can difficult for countries to close the capital only be carried on for a limited time. Open account, given the mobility of capital in today's market sales generate losses from the negative world. With an open capital account, prudent spread. (In 1992/93 the estimated net cost on macroeconomic management requires focusing the outstanding SBIs was Rp. 2 trillion. monetary policy on international reserves and (World Bank 1994a)). Such losses must be balance of payments targets, leaving fiscal financed, sooner or later, by switching to more policy to play the lead role in adjusting expansionary monetary policy. domestic demand. 1.67 Bank Indonesia recognizes these Exchange Rate Policy problems, and the difficulties of placing much of the burden of contra-cyclical policy, on 1.69 Exchange rate policy is an issue that monetary policy. Bank Indonesia has imple- cuts across the issues of macroeconomic mented various policies to try to gain more stability and the incentive framework. Since control over domestic monetary aggregates. In 1978, Indonesia has maintained a managed 1991 it placed limits on banks external float/crawling peg exchange rate regime. indebtedness and tightened regulations on Under this regime, Bank Indonesia has sought currency exposure, to lessen tnks' ability to to maintain the rupiah's competitiveness against use off-shore funds to offset tight money. a basket of currencies. In practice, the dollar More recently, on January 1 1994, Bank has a heavy weight in the basket. The last Indonesia widened Its bid-offer spread in the major devaluation was in September 1986, foreign exchange market. This widening which helped the economy adjust to the terms allows exchange rate changes (inside the of trade shock and the sharp reduction in spread) to absorb more of the variation in the protection following the first deregulation flows of foreign capital and international package. Since then, the managed float has reserves less (see discussion of exchange rate produced a slight depreciation in the real policy below). Higher reserve requirements exchange rate until last year. In 1993, the real would reduce the monetary impact of variations rate appreciated, in part due to the one-time in capital flows. rise in domestic oil prices and in part due to nominal appreciation in the last quarter that has 1.68 Indonesia's open capital account since been more than reversed. The policy of contributes to these offsetting capital flows, and gradual depreciation has contributed to therefore limits the effectiveness of monetary Indonesia's rapid non-oil export growth. On policy but it also has had several benefits and occasion, the depreciation rate has been slowed should be maintained. First, the confidence for short periods in hopes of slowing domestic engendered by Indonesia's open capital account inflation, but statistical estimates suggest that has stimulated foreign and domestic these policies have had no significant impact on investment. Any attempt to close the capital inflation in the short-run, but, consequently, account would reduce that hard-won have appreciated the real exchange rate.3 confidence. Second, the open capital account provides a good barometer of macroeconomic 1.70 A crawling peg exchange regime has policy; an episode of loose monetary policy, been used in Latin American and some East 22 Chapter 1 Figure 1.5 1.72 Bank Indonesia's offer to buy/sell at roughly the same price, albeit one that may Real Effective Exchange Rate* change daily by a small amount, means that 110 (Jan. 1988 100) Bank Indonesia absorbs the excess of private demands for foreign exchange/rupiah at the 106 rate it sets, as it would under a fully fixed exchange rate system. Corresponding to these 100 N} \ f \ A excess private supplies/demands, the domestic money base contracts or expands, as it would 95 I t \ /\ I I under a fully fixed rate. As noted above, this complicates monetary policy significantly. When open market operations are carried out, MMJSNJMMJSNJMMJSNJMMJSNJMMJSNJMMJSNJ they stimulate capitl InflOWs or outflows that Se I 89oIg0 1 91 1 92 1 93 q4 Bank Indonesia absorbs to maintain the A decine Is a depreciation. exchange rate target. As noted above, this Swo: MP offsets much of Bank Indonesia's attempt to raise or lower the money supply and the Asian countries to maintain the profitability of domestic interest rate. exports (and import substitutes) when domestic inflation exceeded world inflation. In Latin 1.73 Bank Indonesia's widening of the bid- America at the end-of the 1970s, Argentina, offer spread (band) for the exchange rate Chile and Uruguay switched from using the should give monetary policy somewhat more crawling peg to ensure export profitability to strength, as well as absorbing some of the using a slowdown in the crawling peg to affect international flows of hot money that can be inflationary expectations. The results were destabilizing. For example, when Bank disastrous - sharp appreciations of the real Indonesia tightens monetary policy, or exchange rate, high real interest rates, and, speculators decide to send funds into Indonesia, eventually, foreign exchange crises. In the exchange rate would tend to appreciate. contrast, in East Asia, China, and Korea, as This appreciation within the band tends to deter well Indonesia, have used the crawling peg to the incipient capital inflows (since a later mainn export profitability. In the 1960s and depreciation within the band could occur, early 1970s, Malaysia, Thailand, and Taiwan, which would generate losses on the capital China, maintained export profitability through inflow). Hence, the wider band acts as a shock tight fiscal and monetary policy that kept absorber. However the band is still relatively inflation below international levels and a fixed narrow and thus does not provide much room exchange rate, the most desirable approach. for absorbing shocks. For example, the band around the rate between the Dutch Guilder and 1.71 A second issue relates to implemen- the Deutsche Mark, currencies that are tation of the exchange rate target and its links regarded as fixed against each other, is 2.25%; to the effectiveness of monetary policy - now the agreed on exchange rate band between much the exchange rate is allowed to vary from other European currencies (except the pound the fixed, "central rate". Bank Indonesia Sterling) and the Deutsche Mark is 15%; and implements Its exchange rate target by the band for the exchange rate between the announcing a daily rate and buying or selling Chilean peso and the dollar is 20%. A wider foreign exchange within a very narrow band band transfers more risk to short term around that "central rate'. As noted, on speculators and thus deters hot money inflows January 1, 1994 the band per dollar was as well as making it easier to attain domestic increased, from Rp. 10 to Rp. 20, about 1%. monetary targets. Recent Economic Developments 23 Externa Debt Management significantly after 1986. At the same time, much of this new debt was Yen-denominated, 1.74 Indonesia used extemal borrowing to so the link to the Yen increased. cushion the adjustment to the first drop in oil revenues during the 1980s, as described above. 1.76 In 1989-90 private external borrowing Et was able to borrow externally because it rose and a number of potentally large capital- entered the 1980s with relatively little external intensive, public and publicly-related projects debt and a low external debt service burden. re-emerged, as growth picked-up. The This was in sharp contrast to other oil Government prudently limited its own net exporting countries. Indonesia's ability to borrowings in 1990, but also sought to manage borrow externally meant that it did not have to total borrowings better. In September 1991, it deflate as much, or undergo as much inflation established the Commercial Offshore Loan as other oil-exporters did. However, this Team (COLT) to (a) coordinate all public- borrowing, plus the appreciation of the yen (in sector, external borrowing, including which about a quarter of the debt was denom- borrowing by public enterprises and by the nated in 1983), meant that debt nearly doubled private sector for projects involving the public in dollar terms between 1980 and 1986. sector; (b) set annual ceilings for external borrowing by public and quasi-public entities; 1.75 The size of the debt in 1985 left limited (c) establish guidelines for loan terms; (d) room for further growth of external debt, to determine the priority order and timing of cushion the second drop in oil revenues. approved loans; and (e) improve reporting and Indeed, as occurred in most of the oil- information on public and private external producing countries, private lenders sought to borrowing. To ensure prudent external reduce their exposure. As noted above, the borrowing, the COLT issued regulations that: Govermnent tightened fiscal policy quickly and (a) cap public external borrowing from embarked on a major deregulation program. commercial banks until FY1994/95, (b) extend Bilateral and multilateral donors stepped up the restrictions on commercial banks' net open their lending to support the Government's external position to off-balance sheet ambitious deregulaton progran. Hence, the actions, and (c) limit commercial banks' source of public external finance shifted short-term external liabilities to 30% of capital. Table 1.7: External Borrowing and Debt 1982-1992 1982-85 1986-88 1989 1990 1991 1992 Net Public Ext. Borrowing 2.9 1.9 2.0 0.6 2.0 1.6 Official Sources 1.2 2.1 2.9 2.5 3.2 t.0 Non-official Sources 1.7 -0.3 -0.9 -1.9 -1.1 -1.4 NetPvt. MLT 0.1 0.7 1.1 1.2 1.9 2.6 Debt Stocks (year end) Debt Stock 34.2 5. 52 9_ MA Public Ext. Debt 26.8 41.2 41.0 45.0 48.6 49.3 PrMte MLT Eat. Debt 3.8 5.5 6.6 10.3 12.9 16.9 Private Short Term Debt 3.6 4.1 5.3 11.2 14.4 18.2 Source: World Debt Tables 1993-94 Excludes non-recourse debt. 24 chapter 1 1.77 These measures effectively limited net complemented by active exchange rate new public borrowings after 1989. And the management and financial deregulation (as depreciation of the yen in 1989-91 reduced the discussed in above). debt burden measured in dollars, a process that was reversed in 1992-93. The measures were 1.79 In sectoral terms, the non-resource less effective in containing private based, urban economy, particularly non-o51 borrowing.Private medium and long term exports and construction, grew rapidly as a borrowings accounted for 36.9% of the result of these measures. This rapid growth increase in external debt in 1990-92, and more than offset the slowdown in the private short term debt 39%. The increased traditional, resource-based foundation of the Inflows reflected the attractiveness of economy, because of the fall in oil & gas investments in the Indonesia economy, but also prices, the leveling-off of forestry production, the tight money policy/high domestic interest and the slowdown in agricultural growth. rates that encouraged off-shore borrowing. Poverty continued to be reduced through the Finally, it is important to note that some of the rapid increase in employment and the increase in private external debt was matched increasing educational auainments (human by increased asset holdings overseas, including capital) of the labor force (see Chapter 5). the build-up of net foreign assets by Bank Indonesia as a counter-weight to the direct and 1.80 In macroeconomic terms, the indirect external ownership of SBIs. Such deregulation measures improved the efficiency international trade in assets is to be expected of resource allocation. They encouraged the under an open capital account, and is desirable, shift of resources Into industries where they in the same way that trade in goods is produced more output, valued at prices that desirable. Such trading of course implies that more closely reflected international levels, than ndonesia's net external debt has grown more in the domestically oriented, inefficient slowly than its gross debt. industries. In addition, they encouraged greater competition, by making it profitable to D. Sources of Indonesia's Strong compete in the export market and necessary to Performance: The Supply Side face imports, rather than stagnate in a domestic, protected market. This in turn, 1.78 The series of deregulation packages forced frms to innovate, to keep pace with the that began in 1985, along with continued strong competition. Thus, deregulation increased the accumulation of physical and human capital, productivity of capital and labor inputs, both were the key to Indonesia's rapid growth in statically and dynamically. GDP and employment and to poverty reduction after international oil prices fell. Of course, 1.81 This post-1985 improvement in prudent macroeconomic management was a productivity-an increase in output beyond necessary condition for these policies' success. what can be accounted for by increased In March 1985 the Government initiated a inputs-shows up in the aggregate data. In series of deregulation packages to dismantle the simplest terms, growth averaged 6.3% in 1986- plethora of restrictions that had grow up during 1992, compared to 5.6% in 1979-1985. the inward-oriented period, a deregulation However, the rates of real gross fixed process that continues today. These packages investment (investment in plant and increased external and internal competition by equipment), adjusted for depreciation, and reducing protection, investment licensing, and increases in labor quality (as measured by the discrimination against foreign investors. (See market value of educational attainments) were Chapter 4 and Pitt, Booth, and Bhattacharya only slightly larger after 1985 than before, and Pangestu.) The packages were while the estimated growth in the labor force Recent Economic Developments 25 was somewhat lower. Ihis suggests that more schooling per capita between 1978 and 1992. of growth was due to productivity after 1985 However, the market value of that increase in than before. schooling grew much less -just under 1% per Figure 1.6 year. This difference reflects the low wage AccuntIn for Growth Int GD0P per workerdifferential (less than 15%) that the labor e Apvawm0Xe r4teh worke market accords to primary graduates compared to workers without schooling (McMahon and 4- _ 3.79 Boediono). In part this low differential (in 1989) may reflect the large increase in the 3-_ Productivity - supply of workers with primary education, but in part it also may reflect differentials in Capitat learning achievements, compared to the other 2-r"r l.e:D pEast Asian countries (See Table 3.13).S 6 _ _ HFlurnan _ 1.85 In sum, the total factor productivity analysis suggests that the deregulation packages 197"S l X | 2did indeed contribute to improved resource 197-886 1905-92 allocation and more rapid technical progress. In addition, deregulation was associated with higher rates of gross fixed investment, which 1.82 More precisely, about 31% of the also contributed to faster growth. 3.8% annual growth in GDP per worker in 1986-1992 was due to productivity growth, E. The Lessons of Experience based on standard, total factor productivity analysis. About 55% was due to capital 1.86 Indonesia's stability, rapid growth and deepening per worker, and 14% was due to reduction of poverty since 1985 derives from increased educational attainments per worker.4 sound macroeconomic management, mainten- ance of high investment rates in physical and 1.83 Perhaps most interesting of all, the human capital, and deregulation aimed at same analysis suggests that total factor produc- growth and poverty reduction. Macroeconomic tivity increased only after 1985, when the management kept aggregate demand growing deregulation measures began. In 1979-85, the moderately after the drop in oil prices. Budget data suggest that there was no (statistically) deficits were limited and external borrowing, significant increase in total factor productivity rather than money creation and inflation, was - all of the growth in output can reasonably used to finance them. In this respect, the be explained by increased inputs. After 1985, prohibition against domestic finance of budget GDP grew about 1.2 percentage point per year deficits has served the country well. Public faster than can be explained by the inputs of capital spending was maintained at reasonable capital, labor, and human capital. This levels, even when the growth of government productivity increase represents about 61% of spending was tightened. Over time, budget the increase in the growth of GDP per worker. deficits were reduced further (as a percentage of GDP), as expansion of the non-oil tax base 1.84 A surprising result of this analysis is brought rapid growth in non-oil revenues. the low contribution of human capital increases Public external borrowing correspondingly to the growth in GDP per capita. Indonesia slowed. Monetary policy, combined with an made a massive effort to broaden access to increase in required capital on banks' offshore primary education, reflected in an average borrowing, was used to cool down the annual increase of 3.8% in the total years of economy without much loss in growth 26 Ohapter 1 momentum. However, the reliance on Investment and reduce the burden on monetary monetary policy did force cuts in private policy (see below). However, achieving investment to bear much of the burden of the Budget target will require strong cool-down, and led to problems in the newly- implementation efforts. And, if oil prices deregulated, under-apitalized and over- remain low, then achieving the fiscal targets extended banking system. The high interest would entail further tightening. rates also encouraged short-tenn private external borrowing, despite the tightening of 1.89 Routine expenditures, particularly bank capital requirements and the increased personnel expenditures, will need to grow more scrutiny and limitations on large external slowly than in the last few years to achieve the borrowings through the COLT. These capital budget target. Achieving this objective, while inflows complicated monetary management. improving the delivery of key government Finaly, exchange rate policy kept non-oil services, particularly quality improvements in exports profitable throughout the period. education and health, may well require some public sector reform. 1.87 On the supply side, growth and poverty reduction reflected the maintenance of real 1.90 Public investment will need to grow gross fixed investment at 25-28% of GDP and more rapidly than routine expenditures, as rapid growth of human capital. Also, the post- planned. But, as expressed by the President in 1985 deregulation encouraged a more efficient his Budget speech, the efficiency of public use of domestic resources at international investment will need to be increased. This will prices and foreign direct investment. In entail allocation by sectors in line with the particular, it encouraged rapid growth of non- objectives of RBPBUTA vi and improvenents in oil exports and a labor absorbing pattern of implementaion (in the broadest sense) and economic growth in the industrial sector. This institutions (See Chapter 3 for a discussion). growth was complemented by deregulation of the financial sector, which made more funds 1.91 Domestic revenues will need to keep available for construction, another labor- growing rapidly to achieve the fiscal targets. intensive industry. Finally, the Green One area would be further increases in local Revolution in rice production and the property taxes, which are still low by development of natural gas, with foreign international standards. More effective public investment, were important sectoral factors in sector pricing-for example, elimination of the supply growth. fertilizer subsidy, higher electricity prices, and higher royalties and stumpage fees (paid to the 1.88 These results suggest that achieving Treasury) would not only raise revenue (or growth, stability, and equity during REPUTA reduce spending) but would improve incentives vi will depend on the following policies. To to increase efficiency and improve the sustain macroeconomic stability, the overall enviromnent-win-win-win policies. (See fiscal deficit, including any off-budget spending Chapter 6 for further details.) In addition, the will need to be reduced, and public saving bases of the income and value added taxes increased. This would Imply that the budget could be extended, through further should run a surplus until all public spending is improvements in tax administration. brought within the scrutiny of budget. This fiscal stance is consistent with the FY1994/95 1.92 Monetary Policy needs to be set taking budget, and the planned reduction in external into account exchange rate policy and external borrowing expressed by the President in his financial conditions. Contra-qclical monetary FY1994/95 Budget speech. This stance also policy is difficult to implement in countries would accommodate growing private with open capital accounts, such as in Recent Economfc Developments 27 Indonesia, because Inflows and outflows of 1.94 Prudent management of external capital offset much of the impact of open borrowing will remain an important element in market operations. In these circumstances, sustaining macroeconomic stability. The large differences between the domestic interest COLT's continued scrutiny of public and quasi- rate and the international rate (adjusted for public borrowing, whether financed on- or off- expectations of devaluation) would complicate budget, will be desirable to ensure the prudent, monetary management significantly. Greater productive use of off-shore funding that the reliance must be placed on fiscal policy to President called for in his FY1994/95 Budget manage aggregate demand, with monetary Speech. This scrutiny could be improved by policy playing a more complementary role and subjectin all large projects to standard cost- focussing on external balance. Indonesian benefit analyses and feasibility studies. These fiscal policy has adjusted much faster than in measures will be particularly important if most developing countries. However, an even public enterprises are given more latitude to quicker response of fiscal policy would be borrow on their own. Indeed, greater scrutiny desirable to offset variations in private of public enterprise borrowing in domestic spending, so that monetary policy did not have markets would be desirable to avoid disruption to bear most of the burden of contra-cyclical of these markets and to protect the public policy. interest on obligations that have an implicit government guarantee. 1.93 Exchange rate policy should continue to aim at maintaining reasonable non-oil export 1.95 On the supply side, the basics of high profitability. Such a policy was an important investment in physical and human capital need element in the other East Asian countries' to be maintained, as programmed in REPLITA growth until their per capita incomes exceeded vi. Quality improvement in human capital will $2000. Given the openness of the capital be especially important. In addition, recent account, exchange rate policy needs to be experience suggests a strong need to continue coordinated with monetary policy, to ensure improving the incentive framework, in order to that exchange rate expectations do not combine maintain productivity growth. This will entail with domestic interest rates to induce continued reduction in non-tariff barriers and destabilizing short term capital flows. investment controls, especially in agriculture Monetary, and especially fiscal policy, should and agro-industry, and a more across-the-board be the main instruments for slowing inflation, cuts in high tariffs (See Chapter 4 for details). rather than exchange rate policy, which is the more appropriate instrument for maintaining external balance. Endnotes 1. No statisticy agnificant lnk can be found between monthly inflation and current and lagged deprection in regression analysis of data since January 1988 . A longer series, going back to 1982, suggests some link between the rates of depreciation and inflaion. However, this result appers to reflect the inflationary impact of the lage step-devaluations before 1988. A split of the data at January 1988 indicates that the link between depreciation and inflation is significantly less (z-o) after 1988. When the step-depriteion onwths are removed from the pre-1988 data, that period also shows no (statistically) sgnificant link between depreciation and monthly inflation. These results hold for sized and d na diz ata. Of course, as with most stastical analyses of financid data, these results only hold within the range of depreciation that has occurred. 28 Ohwp:er 1 2. About 50% of pubiic debt is denominated in yen (including debt to multilaterd institutions). 3. A different rae of depreciation, stained over a long period, might affect the rate of inflation. However, a critical question in whether such a policy would have the desired effect, would be the teaction of financial markets to the implid steady change in the real exchange rate. For example, a policy of slowing the nomnal depreciation would make domestic interest rates more attractive to foreignets as long as the policy was expected to last. This would encouage hot money inflows initially. At the same time the real exchange rate would tend to appreciate, worsening the trade balance. Sooner or later this worsening trade blance would raise doubts about the sustainability of the exchange rat policy and lead to a sharp, reversal of capital inflows, putting ignificant pressure on reserves and the excbange rate. 4. This analysis of total factor productivity is based on the well-known approach of Solow and Denison. The approach jointly estimates statisticali the contribution of capital, labor and human capital to the GDP over time, as well as a(n assumed) constant rate of productivity increase. Specifically, in the case of Indonesia in 1978-92, the results reported in the text and Figure 1.6 were derived from the following estimated equation: GDP/adj. Lab. For. 3 .5 + .45 (Capital/adj. Labor Force) + 0.012 (productivity growth p.s. (4.7) (5.0) (2.46) in 1986-92) where all variables are in logarithms and the t" statistic of the estCmated output elasticities and productivity growth are reported in parentheses (a t' statistic of 2.2 would be considered statistically significant given the small number of observations). GDP and capital were estimated in 1983 prices; smilar resudts were obtaied when the data was rebased to 1989 pices. The capital stock figure was derived using gross fixed investment data, a baue year' capital/output ratio of 3 in 1985, and a 2% deprectio n rate. (Base year capital stocks ranging from 2 to 4 times output and depreciation rates of 2% and 3% were tried; a capital output ratio of 3 and a depreciato rate of 2% seemed togive the best result in tems of fit plus stability of the coefficients and a constant returns to scale production fimction.) The adjusted labor force was estimated by weighting the numbers of male and female laborers by educational level (SUSENAS annual surveys) by their average wage in 1989 (McMahon and Boediono). An adjustment was made for male and female family workers in agriculture to account for what seems to be under-counting prior to 1985. The above equation is a constrained version of the originally esimatd equatio. In the original equation, the output elasticity of capital was 0.42, the output elasticity of adjusted laor was 0.59 and productivity growth was 0.012, with all variables sgnificant at the 10 % level or better- Wiously the constraint of constant returns to scale, tat the coefficients sum to one, has no significant ,.fect on the fit of the equation. The coefficients of the equation were robust; if the regreson equation was re-run ini first differences, then the coefficients ar. about the same, although their statistical significance deteriorates. Finally, total factor productivity growth over the whole period, 1978-1992 was statistically insignificant. S. Other recent analyses (rhomas and Wang and World Bank, The East Asia Miracle) suggest that in Indonesia total factor productivity growth accounted for smaller increases i per capita GDP growth than elwewhere in Asia. In part this result may be due to an over-esimate of he growth of human capital in these stdies, by using the stock of years of education, rather than the market value of education, and to an ovestimte of the growth of capital stock due to inclusion of Indonesia's residual estimate of inventory investment as part of investment-upward biases in the estimation of physical and human capital growth yield lower estimates of total factor productivity growth. 6. Even wvith these low wage differentials, primary education has a high rate of return, because primary age children do not wvor. and hence the total cost of going to school is only the fees; the opporbunity cost is zero. The case is wmewhat different for junior secondary school age children, who consider not only fees and earnings differentials (which are 30% compared to primary graduates) but also the loss of possible casual eamnings (See para 5.75 for further discussion). AnOOwrvew of REu TA VW 29 2 AN OVERVIEW OF REPELIIA VI A. The Msaromic Objectives of Indonesia's shift from exports based on naural REPRLrrA vi (1994/95-1998199) resources to exports based on industrial capital and human resources - the well-known East 2.1 The Sixth Five-Year Development Plan Asian growth strategy. Non-oil industry is - RlPEUTA VI (in Bahasa Indonesia, Rencana programmed to grow 10.3% per year. Pembangunan L:ma Tahun Keenwn) - Agricultural growth is projected at 3.4% per progrms continued macroeconomic stability, year. Within agriculture, diversification away rapid growth, and poverty reduction and equity from rice is expected. hmprovement. Under the Plan, per capita oDp is projected to exceed $1000 (in current prices) 2.3 The average current account deficit is by the end of the century. This achievement projected to decline to less than 2% of oiP reflects average real growth of 6.2% and during REPrA Vi. Ihis reduction reflects population growth of about 1.6% per year, on the projected rapid growth of non-oil exports, average. Non-oil GDP is programmed to grow tourism and remittances, which will offset the even faster than GDP, 6.9% per year, projected decline in net oil and gas exports and continuing the country's economic the continued slow growth of interest diversification. payments--continued prudence in borrowing is projected to offset much of the gradual rise in 2.2 Non-oil exports are projected to be the interest rates. The debt service ratio is main growth 'locomotive" along with strong projected to fall by one-third, because of the agricultura performance. Non-oil exports are slow growth in debt service and the rapid programmed to rise by 16.8% per year (in growth in exports. Meanwhile, official currentdolars). The Plan thus continues reserves are projected to rise substantially. Table 2.1: Indonesia: REPELITA vi: Main Mhaco-Economic Objectives (Average % per year) GDP Growth 6.2 Employment Growth 2.9 Inflation 5.0 Non-Oil Export Growth (in current $) 16.8 Source: REPETITA VI. 2.4 REPUTA vi's macroeconomic targets service reduction targets are achievable represent a continuation of Indonesia's recent (Section D and E), even in light of external strong performance, as discussed below uncertainies (Section F). However, continuity (Section C). With strong non-oil exports, will require change. Continued improvements in public sector saving and an macroeconomic stability depends on higher appropriate level and composition of external public saving and tighter riscal and monetary fince, the balance of payments and debt- policy, as well as prudent debt management. 30 ahapter 2 Continuation of rapid growth depends not poverty. The percentage of the population only on high investment, but eficiency below the poverty line has been reduced from improvements derived from incentive 60% in 1970 to about 14% in 1993 according improvements through deregulation, to official estimates (see Chapter 5 for a implementatlonal improvements in the public discussion). Social indicators also show investment budget (not only project substantial improvement. For example, over implementation but greater allocative and the same period, the population growth fell operational efficiency) and further from 2.4% to 1.7% p.a., infant mortality from institutional development (see Section G and 118 per thousand births to 58 and the adult Chapters 1, 3 and 4 for details). illiteracy rate from about 50% to 23%. B. Poverty-Reduction and Equity: The 2.6 REIUTA VI aims to reduce absolute Social Objectives of REPEuTA vi poverty further, to 6% of the population. A major factor in poverty reduction will be the 2.5 Further poverty reduction and equity continued rapid growth of productive improvement are major objectives of R}ulTA etnployment opportunities, at 2.9% annually. vi. Indonesia has been among the world's Of the 11.9 million jobs that will be created, most successful countries in reducing absolute 25% are expected to be in manufacturing. Table 2.2: Indonesia: REPEuTA vi: Principal Social Indicators Acual Planned 1993/94 1998/99 Population Growth (% per year) 1.66 1.51 Infant Mortality (per 1000 live births) 58.0 50.0 Life Expectancy (years) 62.7 64.6 Edugcaho Coverage (% Enrolled in the Age Cohort) Primary Education 93.5 94.0 Junior Secondary Education 39.9 48.6 Senior High School 24.7 30.4 University (rotal enrollment as a % pop. aged 19-24) 10.5 12.8 Source: REPELITA VI 2.7 Anothew major factor in poverty rise. (See Chapter 3, Sect. C and Chapter 5, reduction will be continued improvements in Sect. F.2). schooling. Already near-universal coverage of primary education will be increased further, as 2.8 In health, the Government targets a students remain in school longer. Quality also furter reduction in infant mortality, to about will be improved. Junior secondary education 50 per 1000. A major effort will be made to will be made free and universalized over the halve maternal mortality. Average life expec- next 10-15 years; during the Plan, coverage is tancy is expected to increase to about 65 years targeted to increase from 40% to nearly 50% from 63. (See Chapter 3, Sect. C and Chapter of the age cohort. Senior high school and 5 Sect. F.2). university enrollments also are programmed to An Oveew of REPELiTA 31 2.9 Fina11y, in addition to the on-going growth over the last five years (6.9% p.a.). social sector programs and the increased However, growth is similar to the recent past development transfers to sub-national if the overheating period-1990-91-is govermnents, the Govenunent has initiated a excluded. Although projected growth rates new program -Inpres Desa Terdnggal outside the oil & gas sector, in particular (ur)-to provide grants totaling about Rp. 400 growth of non-oil exports and industry, are billion anumally to 20,633 villages that have rapid, they too are somewhat less than during been 'left behind". Under this program, the last five years (see Table 2.3). community-based groups in the villages wil decide how the Tr funds can best be used. 2.11 The projected high growth in non-oil (See Chapter 5 Sect. F.3). exports will raise their ratio to GDP very rapidly, to 25% of GD?, compared to 19.9% in C. REMPIWA Vin Horical Perspeive 1993194. This rapid rise in the share of non- oil exports suggests that the GDP growth 2.10 REPELITA vil's projections represent a projection may be conservative if the non-oil contnation of recent growth trends, export target is attained. This is true diversification, growing reliance on the private particularly if one takes into account the sector, and reduced dependence on foreign efficiency gains implied by the country's borrowing. REPLTA VI'S GDP growth target increased specialization along lines of (6.2% p.a.) is somewhat lower than average comparative advantage. Table 2.3: Indonesia: Comparison of Principal Macroeconomic Variables, 189-1993 and REPETA vI Targets (Ave. % per year, unless noted) 1989-93 REPELITA W Targets GDP Growth 6.9 6.2 Non-oil GDP Growth 7.2 6.9 Agricultual GDP Growth 2.9 3.4 Rice Output Growth 3.0 2.0 Industr GDP Growth (ncl. oil ref.) 10.2 9.4 Inflation 8.1 5.0 Development Budget (Ave. % GDP) 8.5S 8.1 Non-oil Export Growth Rate (Current $) 17.9 16.8 Source: Central Bureau of Stadstics, Ministry of Finance and Iwn.rrA vi. * Excludn Develomn Expendtr on Reserv. 2.12 The incremental capital to output ratio the efficiency. bIdonesia has a somewhat (IcoR) is sometimes used as a short-hand, higher ICOR than its two closest East Asian maco-economic indicator of invesutent comparators, Malaysia and Thailand, which efficiency - the higher the I3oR (the more also are more open to interational competition investment per unit of extra output), the lower ta IndonesiaeSee Box 2.1). If Indonesia 32 Chapter 2 could achieve greater efficiency and reduce its efficiency, and greater reliance on the private IOoR to the range of Malaysia and Thailand, sector, then its growth rate would rise to their through further deregulation to improve the 7.5-8% p.a. range without additional incentive framework, improved public sector investnent. Box 2.1: The ICOR and Macroeconomk Efficiency In Indonesia and East Asia The Incremental Capital to Output Ratio (ICOR) is often used as a quick indicator of investment productivity and macroeconomic efficiency. The ICOR is simply the additional capital (mvestment) per unit of additional output, the inverse of average macroeconomic investment productivity. It is easily calculated by dividing the investment ratio ([/GDP) by the GDP growth rate. Higher ICORs tend to indicate lower investment productivity/efficiency; lower ICORs, higher investment productivity. The ICOR tends to improve when factor productivity, employment or human capital grow faster, because growth is higher for the same nvestment. Although the ICOR is a usefut, easily calculated indicator, it has a number of well-known defects. The ICOR does worsen when macroeconomic efficiency declines. But it also worsens if projects have equally good returns but are increangly long-lived, or if their output is poorly meured in the GDP accounts (for example schools, hospitals and infrastructure). Paradoxically, the ICOR can improve if gestation periods lengthen-an increase in works-in-progress raises investment and GDP by equal amounts, lowering the ICOR in most cases. Comparisons of ICOR between countries or over time depend on similarities in the methodology for estimatng the undedying data. For example, in estimating investment in construction, many countries use building permit data, which tend to underestimate construction compared to indonesia's approach based on the value of construction materials and value added in the constucion industry. In estiat inventory investment, some countries use direct estmates, while others, like Indonesia, use inventry as a residual category to account for the difference between output-based and demand-based estimates of GDP. Finally, differences in the methods of estimating tae GDP from owner-occupied dwellings can be imporant, particularly when countries undergo building booms. Given these caveats, compared to other large East Asian countries, Indonesia's ICOR is similar to the ICORs of China, and Korea, which are in the 4-5 range, but subsntilly higher than the ICORs in Malaysia and Thailand, which are in the 3-3.5 range. Malaysia and Thailand are both more open to international competition than China, Korea, or Indonesia. 2.13 The projected pattern of growth during and mining decline from 12.1% to 10.1% of REPEwLTA VI continues the diversification away GDP. from natral resources, particularly oil and gas. Manufacturing rises to 24.1% of GDP, from 2.14 The share of agriculure (including 20.8%, with non-oil manufacturing rising from forestry and fishing) also is projected to 17.6% to 21.3%. The shares of construction d'cline, from 20.2% to 17.6% of GDP. This and services also rise, as is normal when per projected decline is surprisingly small, given capita income grows. Meanwhile oil & gas the economy's overall growth and the low An Overview of 1ELETA VI 33 income elasticity of demand for agriculture increase In non-oil revenues as a percentage of found in cross-country studies. Indeed, the GDP. Non-oil revenues rose from 7.7% of projected 3.4% average growth of agricultural non-oil GDP In 1984/85 to 14.5% in 1993/94, GDP implies a higher ratio between agricultural and are expected to rise further, to 16.9% by growth and overall GDP growth (55%) than in 1998/99. The 1985 tax reform was a major the last five years (42%). This contrasts with factor; it created a more diversified domestic the typical pattern of a slowdown in the revenue base that has increased with growth demand for food as income rises. Moreover, and widened as a result of improved tax during the last five years, agriculture's real administration. growth of 2.9% was more than could be absorbed at constant relative prices, leading to 2.17 The Government also has changed the a fall in the relative prices of food products. structure of the economy by reducing its own In order to increase the agricultural growth role, particularly in directly productive rate, it will be necessary to improve agriculture activities. Central Government expenditures, technology outside rice, to improve distribution excluding external debt service, represented and marketing through greater competition, (so about 20% of GDP in 1984/85, about 16% in that demand can be stimulated by falling prices 1993/94, and are projected to average just over to the consumers while prices to the farmer 16% of GDP during REPLTA VI. Moreover, remain high), and to stimulate exports of measures such as the elimination of subsidies, agricultural products and agro-industry. If particularly those on domestic petroleum prices these changes fall to occur, then it is likely that which ended on 1993/94, substantially agriculture will grow less rapidly than improved the allocative efficiency and projected. However, based on evidence from environmental impact of Central Government other countries, it is also true that services are spending. likely to grow more rapidly than projected, and thus overall growth should reach the target. 2.18 In 1983/84-1985/86, the development budget represented 10-12% of aDP. The 2.15 The economy's continued diversi- adjustment to the drop in oil prices led to a fall fication also is apparent in the continued in the development budget to an average of reduction in dependence on oil & gas exports, 8.5% of GDP in 1989/90-1993/94 (excluding and on Government revenues from oil & gas development expenditures for reserves). The exports. In 1984/85, the start of REPEUTA IV, development budget is projected to decline oil & gas exports were 70% of exports; by somewhat further, to an average of 8.1% of 1993/94, at end-RuPELrrA V, they represented aDp during R3PELITA vi. At the same time, 24%. REPELfTA VI projects that oil & gas the developmental impact of this budget has exports will further decline to only about 13% improved substantially. The share of the of exports by 1998/99. development budget spent on general government services, public enterprises and 2.16 Similarly, revenues from oil & gas subsidies has declined substatially, while the exports have fallen from 65% of Government shares spent on education, health and revenues in 1984/85, to 29% in 1993/94, and infrastructure have risen (see Chapter 3). are projected to fall even further to below 16% of revenues at the end of REPBUTA Vi. This D. ITe Projected Balance of Payments shift in revenue sources reflects not only the During the RE1ELITA vi Pertio sharp decline in the international price of oil in dollars (which, in terms of comparisons with 2.19 Non-oil export growth Is the key the domestic economy was partly offset by the factor in Indonesia's performance over large devaluations in 1983 and 1986) but the REPBUTA VI, as noted above. Non-oil exports 34 OYwpter 2 Figure 2.1: Indonesia: Indicators of Diverificaton GODP by 8Ou* 06 of GODP) oog~~~~~~~~~~~ow a 1 600 40 lWM "im 200 80- 108/ 1U 1 400 20 - - 0*- 20- Ros~na evenUeS o%f GDP) _ 17.4% 17.4% 1% 16 OlLN 539 0 - 1t0416 100/04 1W souwe:W odtd Bk so* GMft An Overview of REPEUTA V7 35 are programmed to grow 16.8% p.a. in dollar 2.23 Indonesia's current account deflcit is terms. Although fairly rapid, this growth rate projected to average 1.8% of GDP during is somewhat less than the 17.9% p.a. average REPELlTA vi, reaching 1.6% of GDP in rate during REPELITA V, as noted above. 1998/99. In dollar terms the annual deficit remains in the $3.1-3.8 billion range. Thus, in 2.20 In contrast, oil & gas axports are dollar terms, the trade balance improvement is likely to stagnate during the Plan period. Real roughly offset by a deterioration in the rest of oil exports are likely to decline as a result of the current account, mainly in non-factor rising domestic consumption and declining services, which are projected to worsen by reserves. As a result, Indonesia is projected to nearly $1.2 billion. Other factor services, rise become a net oil importer by the end of the about $0.5 billion, reflecting a limited rise in century. However, real gas exports (LPG and profit remittances and net private interest ING) are projected to continue growing. payments. (As noted in Chapter 1, World Bank Iternational energy prices also are projected to estimates of private debt exceed the rise slowly from current low levels. The Government of Indonesia's estimates, due to combination of these projections suggest that differences in sources and coverage; estimated the net export surplus from oil & gas will fall net private interest payments are over REPELITA VI. correspondingly larger under the World Bank's definition.) Finally, medium and long term 2.21 Non-oil imports (in current dollars) (MLT) interest payments are projected to rise are programmed to grow 15% p.a. during about $0.7 billion over the Plan (about 17%), REPUTA vi, somewhat slower than non-oil with continued restraint in external borrowing exports. The ratio of this growth rate to containing the effects of the projected rise in nominal GDP's growth is about 1.2:1, LIBOR. The MLT debt service ratio is compared to 1.1:1 during the last planning projected to decline from 33.5% to about 22% period. The higher elasticity during RPEULTA in 1998/99, based on the World Bank's vi reflects the projected greater specialization estimate of interest payments. of the economy In exports, and the corresponding necessity of importing more in 2.24 Two alternative scenarios illustrate the order to grow faster, given overall capacity links between non-oil export growth, growth. As noted, oil & gas imports also are macroeconomic stability, and balance of programmed to rise during REPEUTA Vi, payments outcomes. In the first alternative reflecting the rise in consumption relative to scenario, non-oil exports are assumed to grow, productive capacity. 13.5% p. a., rather than 16.8% p.a.; but non- oil import growth also is assumed to slow, to 2.22 The trade balance is projected to 12% p.a., because macroeconomic policy is improve by about $2 billion during RELTA assumed to continue to contain any excess vi, reaching a $6.7 billion surplus in 1998/99. growth in aggregate demand that would spill This represents an improvement equivalent w over into excessive import growth. Under this about 1.4 percentage points of oD?. The scenario, although the non-oil balace of trade improvement in the trade balance reflects the in 1998199 is about $1 billion worse than under substantial projected improvemant in the non- the previous scenario, over the whole period oil trade balance, which moves from an the average trade balance and the current average deficit of $1.2 billion in 1992/93- account would be only slightly worse, because 1993/94 to a surplus of $3.0 billion by end- of the slower import growth. With roughly the Plan, based on the projected difference in non- same current account deficit (and assuming the oil export and import growth. Meanwhile, the reserve growth as in the earlier scenario), this oil & gas balance worsens somewhat. scenario would imply a lower ratio of non-oil 36 COapter 2 Table 2.4: Indonesia: Balance of Payments 1992193-1995/96 and 1994/95-1998199 Average (USS billion) Average P 1992/93 1993/94 1994/95 P 1995/96 P 1994/95-1998/99 Gross merchandise exports 35.3 36.5 41.4 46.8 54.0 Oil and LNG 10.5 9.3 9.6 9.6 9.6 Non-oil 24.8 27.2 31.8 37.2 44.5 Gross imports (cif) -30.3 -31.9 -36.4 -41.1 -48.1 Oil and LNG -3.9 -3.9 -4.2 -4.1 -4.8 Non-oil -26.4 -28.0 -32.2 -37.0 -43.4 Trade balance 5.0 4.7 5.1 5.7 5.9 Net non-factor services -1.1 -1.2 -1.2 -1.7- -1.9 MLT interest payments -3.8 -4.1 -4.2 -4.5 -4.6 Other factor services and transfers -2.6 -2.5 -2.6 -2.8 -, Current account balance -2.6 -3.1 -3.1 -3.3 -3.5 Oil & LNG current account 3.9 2.8 2.6 2.5 1.7 Non-oil&LNG current account -6.5 -5.9 -5.6 -5.7 -5.2 Net disbursements of public MLT debt 2.2 1.2 2.3 2.2 1.4 Disbursements 7.7 7.2 7.5 7.4 7.1 Amortzation -5.5 -6.1 -5.2 -5.2 -5.7 Other capital (net) 5.1 2.2 2.4 3.5 4.1 Direct foreign investment 1.7 2.0 2.2 2.4 2.7 Use of net foreign assets -4.8 -0.3 -1.6 -2.4 -2.0 Memo Items: Official reserves 12.0 12.7 13.6 15.4 28.2' Cm months of imports) (4.7) (4.8) (4.5) (4.5) (5.0) Current account/GDP (%) -1.9 -2.1 -1.9 -1.9 -1.8 MLT debt service/exports (%) 30.3 33.5 29.7 28.0 22.1' Oil price ($/bbl) 18.6 16.2 16.0 16.3 16.5 Source: World Bank staff estimates * 1998/99. Estimnae. P Projection. An Overview of REPEUTA W 37 exports to GDP at end-Plan (23% versus 27%), savings. Thus the national saving must grow and a slightly higher MLT debt service ratio more rapidly than GDP, and national consump- (25% versus 22%). tion must correspondingly grow less rapidly, in order to achieve the targeted reduction in the 2.25 The second alternative scenario current account deficit. Achieving this rise in illustrates the impact of allowing aggregate the national saving rate therefore must be a demand to grow faster than implied under the principal objective of macro-economic policy. basic scenario. Higher growth in demand Finally, to accommodate the planned increase would spill over into ftster import growth and in the role of private investment, the most slower export growth conmpared to the basic important element in higher national saving scenario, say 15% and 13.5%, respectively. should be higher public saving. These growth rates would imply that by the last year of the Plan the trade deficit would be 2.27 Public sector investment (the sum of nearly $8 billion larger than under the basic capital expenditure in the development budget scenario (equivalent to a difference of almost and public enterprises' investment financed by 5% of GDP); over the whole Plan period the their own or domestically borrowed funds) is total trade balance would be nearly $20 billion projected to decline slightly as a share of GDP worse. Ibis gap would have to be financed by during REPltlTA vi. The projected decline is additional external debt or slower reserve the net outcome of two processes. First, growth, compared to the first scenario. Such RBPEUTA vi programs increased government a deficit is likely to be unsustainable, investment in transport, urban services, particularly in view of the implied rise in debt schools, health facilities, environment and and the slower reserve growth. The contrast poverty reduction (see Chapter 3 for details). between the first two scenarios and the third Second, there will be a gradual slowing of indicates that ensuring a sustainable current investment in public industrial enterprises and account deficit depends on continued use of a shift of some traditionally public services to fiscal and monetary policy to restrain aggregate the private sector, changes which also account demand. for some of the rise in the ratio of private fixed investment to GDP. The pace of these changes E. Ftunding REPELITA VI: Domestic will depend on the pace of the Government's Saving and External Finance design of appropriate regulatory frameworks and subsequent privatization. In some areas, E.1 Domestic Saving competition from existing local producers and imports provides a reasonable "regulatory 2.26 The link between achieving the current framework" and privatization would be maidy account target and tight demand management a matter of restructuring, organizing adequate also is clear in the projected investment-saving incentives for voluntary downsizing of the balances, which also highlight the need for labor force, and managing a competidve sale. tighter fiscal policy/higher public saving. In the areas of more traditional public sector During RiPE;lTA VI, the projected investment infrastructure, it is a much more complex and rate (on the World Bank basis) is slightly time-consuming task to design a regulatory higher tan the average investment rate during framework that ensures both attractive returns the last five years. With a slight rise in the to private investors and reasonable fees and investment rate, any reduction in the current adequate service to users. The actual rate of account deficit (the opposite side of the public sector investment will be the net of these country's net external borrowing to finance two processes. Hence public sector investment investment), requires an increase in national may be more or less than shown in Table 2.5. 38 Chapter 2 Table 2.5: Indonesia: Investment and Saving Balaces Selected Years a (% of GDP at current prices) Average 1992 1993' 1994 ' 1995 P 1998 P 1994-98 Gross domestic investment 29.7 30.6 30.3 30.5 30.5 30.5 - Fixed investment 28.3 29.1 28.8 29.0 29.0 29.0 - Change instocks 1.4 1.5 1.5 1.5 1.5 1.5 Gross national saving 28.2 28.5 28.3 28.6 28.8 28.6 Savings-investment gap b -1.5 -2.2 -2.0 -1.9 -1.9 -1.9 Publc sector Gross domestic investment0 9.5 9.8 9.7 9.7 9.4 9.6 Public savings 8.3 8.5 8.7 9.1 9.4 9.2 Savings-investment gap -1.2 -1.3 -1.0 -0.6 0.0 -0.4 Private sector Gross domestic investment 20.3 20.8 20.6 20.8 21.0 21.0 - Fixed investment 18.9 19.3 19.1 19.3 19.5 19.5 - Change in stocks 1.4 1.5 1.5 1.5 1.5 1.5 Savings 19.8 20.0 19.6 19.5 19.4 19.4 Savings-investment gap -0.4 -0.9 -1.0 -1.3 -1.6 -1.5 Source: Central Bureau of St.atistics, Bank Indonesia, and World Bank staff estimates. d All data converted to calendar-year basis. As a result, the data on the current account deficit and the public sector deficit differ slightly from other tables. b The negative of the current account deficit for the calendar year. ¢ Fixed investment only; investment in stocks is assumed to be by the private sector. 2.28 To funace this public investment, containment of current spending; and while accommodating higher private containment of off-budget spending. Although investment, REPEUTA VI programs a higher REPEuTA vi programs a decline in the role of rate of Central Government saving. Accotding the public sector, there remains a substantial to the Plan, Central Government saving under amount of public enterprise investment in gas the budget would be sufficient to cover external development (including on-going projects), debt amortization and roughly two-thirds of the electricity, telecommunications and water and development budget, compared with sewerage treatment. Only part of this amordzation plus about one-half of the investment is covered in the budget (transfers development budget during the last Plan. plus the external borrowing that under current arrangements is done by the Central 2.29 There are three key issues in achieving Government). The remaining investment will higher public saving; greater self-financing of be financed by direct borrowing, locally or public enterprise investment; tighter offshore and enterprise surpluseslsaving. Thus implementation of the budget, particularly it would be desirable to enhance the surpluses/ An Overview of REPJTA W 39 savin by raising average tariffs, which also 2.32 Off-budget public sector spending does would benefit efficiency and, in many cases, not undergo the discipline of pre-budget the environment (see Chapter 3, Sect. C). scrutiny, let alone feasibility or cost-benefit analysis, but it does raise aggregate demand, 2.30 Improved budget implementation also and usually increases the current account deficit b an issue In achieving higher public saving. and the external debt burden. Off-budget In the last two fiscal years, expenditures spending would worsen the public sector substantially exceeded budgeted levels, saving-investment balance compared to particularly routine expenditures for personnel programmed levels, crowding out private (see Chapter 1). At the same time, revenues investment or increasing external debt above from oil & gas were less than budgeted and programme levels. For reasons of macro- domestic non-oil and gas revenues, although economic stability, project efficiency and larger than programmed, did not make up the transparency, it would be desirable for all difference. The net effect was that government spending to be brought within the budget and saving (excluding amordzation of external debt) fully scrutnized in comparison to other was 20-25% below budgeted levels. In order spending, with the objective of maintaining to achieve the levels of public saving totl spending within the level of public programmd in REPEUTA VI, Central expenditures programmed for REPEuTA vi. If Government budget execution of current this is not done, then it will be necessary for expenditures will need to be tightened. the budget to achieve a surplus equal to net off- budget spending, in order to reach the public 2.31 Moreover, achieving the revenue sector saving and external debt objectives. icreases programmed in REBPELTA VI are likely to require frther improvements in tax 2.33 A rise in public sector saving also administration and tax effort. Non-oil & gas would be desirable from a longer-run revenues are projected to grow very rapidly, standpoint. During REPEUTA VI, 20-25% of about 4 percentage points per year faster than the Budget is still being financed from taxes on nominal non-oil & gas GDP. Revenues from depletion on natural resources. Hence, at least oi and gas may be less than programmed (see that proportion of the Budget should be saved Section F). If total revenues begin to fall and invested, simply in order to ensure that the below targets, then the Government will need public sector does not run-down the national to resort to additional measures, for example wealth (see Chapter 6 for a further discussion). larger-than programmed increases in foresay This implies that some increase in the rate of royalties and stumpage fees that are brought public saving/investment, over planned levels onbudget, or increases in property taxes, would be desirable. In addition, the aging of which are low by international standards. Both the population, and the need to finance publicly measures would improve efficiency and at least a part of their old age pensions (see environmental outcomes, as well as raise Chapter 7), argues for an increase in the rate revenues. The Government also will need to of public saving/investment. restrain the growth of routine expenditures. 'he least desirable option to finance a revenue E.2 External Finance shortfall would be higher-than-projected exernal borrowing; this would make it difficult 2.34 The current account deficit and the to reach the targets for reducing the debt importance of external debt are projected to burden and, in light of the existing large decline relative to the size of the Indonesian external debt, might prove difficult to economy during 1994/95-1998/99-these are Inplement. two of the principal objectives of IPEUTA Vi. 40 Chapter 2 Nevertheless external finance will continue to important source of external finance during be a critical factor in achieving Plan targets. REPELITA VI. within the context of the Despite the reduced relative importance of net declining reliance on external funding. Private borrowing, an average of $16.2 billion of gross capital inflow to the private sector is expected external finance will be needed annually to to increase both for trade finance and medium- finance the projected current account deficit, and long-term funding. replace annual anortization, and increase official reserves as prudendy required with the 2.37 Direct foreign investment also is economy's increased openness. In addition, programmed to increase. The importance of short-term debt, esimated by the World Bank foreign investment goes much beyond funding at $18 billion at end-1992, needs to be rolled- for the balance of payments and investment. over each year. The availability of these After all, if direct foreign investment were less fumds, despite Indonesia's already high external than projected, then imports likely would fall debt will be a critical factor in Indonesia's from projected levels by similar amounts, and growth. The Government's management of profit remittances would drop in later years, this borwing also will be critical, both In leaving the overall balance of payments not terms of ensuring the productivity of the large much worse. The main contributions of direct borrowings by the public sector and private foreign investment lie in the transfer of mega-projects dependent on Government technology that it provides, which will be concessions, but also In terms of simply critical in generating the projected productivity carrying out the necessary volume of public increases, in the links to export markets that it sector borrowing annually. Finally, the provides, which will be important in achieving Government will need to encourage a rapid the projected rapid growth of non-oil exports, increase in direct foreign investment, in order and its risk sharing nature. to ensure the technology transfer and access to external markets required for a 16.8% annual 2.38 Overall, private inflows are projected growth in non-oil exports. to provide more than half of the gross external financing during REPEIHTA VI. In addition, the 2.35 Net borrowing by the public sector substantial stock of short term credits must be will initially be about $2 billion annually, but renewed annually. While these flows are small is projected to decline to less than $1 billion by relative to international capital markets, they the end of RBPuTA vi, in line with the cannot be taken for grantedtheir availability Government's objective of reducing the role of will depend on external perceptions of exernal debt. Nonetheless, gross borrowings Indonesia's creditworthhiess and attractiveness by the public sector are projected to average $7 as a destination for foreign investment, in the billion per year. Disbursements from official context of an economy that already has a heavy lenders are projected to remain roughly external debt burden. constant in dollar terms, at about $3.7 billion per year, beginning the Plan about $2 billion 2.39 The combination of continued restraint above amortization and declining to below $1 in borrowing and rapidly growing exports and billion net by end-Plan. Official sources also ODP leads to a substantial improvement in are assumed to provide grants of about $400 Indonesia's debt and debt service indicators, million annually (included in current account despite a projected rise in international interest transfers following standard IMF balance of rates. As noted above, the ratio of medium payments methodology). and long term debt service to exports of goods and services falls from 31.5% at end-1993 to 2.36 Private capital inflows are 22% by the end of the REPELITA V:, assuming programmed to become an increasingly non-oil exports grow at 16.8% per year and no An Overview of REPELTA VU 41 Table 2.6: Indonesia: Projected External Fnance for REIEUTA vi (IJS$ billions) Average 1996/97- 1994/95 1995/96 1998/99 Uses of External Finance 14.1 15.8 17.1 Current Account Deficit 3.1 3.3 3.7 (of which MLT interest) (4.2) (4.5) (4.4) Principal Repayments 9.4 10.1 11.4 Official Borrowers 5.2 5.7 6.0 (of which CGI) 2.0 2.2 2.6 Private Borrowers 4.2 4.5 5.4 Increase in Net Foreign Assets 1.6 2.4 2.0 Sources of External Finance 14.1 15.8 17.1 Direct Foreign Investment 2.2 2.4 2.9 Public MLT Borrowing 7.5 7.4 6.8 of which CGI a 3.7 3.7 3.8 Other 3.8 3.7 3.0 Other Pvt. Capital (mcluding portfolio and short-term) 4.4 6.0 7.4 * Excludes grts, which e included in the current accout fboowing BE methodology, and non-concessiand finds. ciarnge in exchange rates compared to end- in official international reserves. The 1993. (With 13.5 % p.a. non-oil export growth Government considers an increase on reserves and 12% import growth, the ratio would still prudept liven the open capital account, the fall to 25%, as noted above.) The increasu%ly open current account, the need to inprovement in these indicators clearly ensure the rollover of large amortization and depends on continued rapid non-oil export short term debt, and the economy's potential growth; if this growth is achieved, then vulnerability to external shocks. Indonesia's creditworthiness certainly will improve. Indeed, if non-oil exports grow as 2.41 Official assistance will play a major rapidly as projected, then the supply of foreign strategic role in the balance of payments during capital may increase beyond what is REPLTA vi, although nt bilateral and programmed in REPEuTA vi, stimulating higher multilateral inflows are projected to decline growth and widening the current account deficit relative to the size of the economy over this somewhat; debt indicators would period, in line with the Government's objective correspondingly improve somewhat less rapidly of reducing reliance on foreign borrowing. than shown in Table 2.7. Coninued high levels of official assistance will be desirable to show the donor conununity's 2.40 Another factor improving Indonesia's support for the Government's continued strong creditworthiness will be the projected increase development efforts. Such official flows will 42 Ohapter 2 Table 2.7: Indonesia: Medium- and Long-Term Debt Indicators a (%) Average 1992 1993' 1994' 1995' 1998' REPEIJTA V7 DOD/GNP 57.2 55.1 51.7 49.1 38.8 45.7 Public 43.9 42.1 39.5 37.7 30.1 35.3 Private 13.4 13.1 12.2 11.3 8.7 10.4 DOD/exports b 179.0 183.3 168.6 155.3 109.2 139.8 Public 137.1 139.8 128.7 119.4 84.8 107.9 Private 41.9 43.5 39.9 35.9 24.4 31.9 Debt service/exports b 30.3 33.5 29.7 28.0 22.1 26.0 Public 21.8 22.8 18.3 16.5 13.2 15.4 Private 8.5 10.7 11.4 11.5 9.0 10.6 interest/exports b 9.7 10.1 9.2 8.7 6.3 7.9 Public 7.8 8.0 7.0 6.4 4.5 5.8 Private 1.9 2.2 2.2 2.3 1.8 2.1 Source: Bank Indonesia and World Bank staff estimates. EstFmated. S Based on exchsage ats as of December 31, 19. Pirojeed b Duominato is gross Oxports of goods and services. ensure that debt service does not rise too only help to raise per capita income, but help rapidly as amorzation payments on official aid reduce this poverty and provide social services and private capital rise. To the extent the for the poor. Official assistance will support official assistance flows are concessional, they REPUTA VI projects in hunmn resource will keep financing costs maageable and help development, infrastructure, and the limit the growth of debt service, despite the environment that will reduce poverty and rising importance of private creditors. This improve Indonesia's productivity and will enhance Indonesia's access to private competitiveness. These improementswill not markets. Official assistance also will be only benefit the poor, they will add to important in light of the possible weakness of Idonesia's creditworthiness. international energy prices, which still affect about 25% of Indonesia's exports (see Section 2.42 The financing plan for REPBTA VI F). Finally, despite Indonesia's strong described above assumes th anmual official performance in terms of growth, stability, and assistance disbursements from Indonesia's poverty reduction, per capita income is still Consultative Group (CGI) will remain at least only $670. Absolute poverty, defined as the at $3.7 billion in loans plus grants of about income necessary to purchase a minimum diet $400 million. Assuming an appropriate mix of and basic necessities, is still the condition of project and sector assimance, and further 15% of the population. Official aid will not progress in improving project implementation An Overview of REPEUTA VI 43 and disbursements, this translates into CGI 2.45 Each dollar decline in oil prices commitments of about $5 billion. The priority worsens the balance of payments deficit about areas for this assistance will remain human $330 million (assuming gas prices move resource development, p-)verty reduction, proportionately to oil prices, and taking into environment and infrastructure. account the savings on oil imports). This is equivalent to about 0.7% of total exports. The F. External Suurces of Uncertainty Government budget deficit worsens by the equivalent of about $280 million, assuming that 2.43 Sound economic policy, strong domestic prices of petroleum products are economic growth and diversification have made maintained at current levels (otherwise the the economy less vulnerable to external shocks decline would be nearly $500 million). Oil than in the 1980s. Nonetheless, Indonesia prices worsened sharply at the end of 1993, to remains vulnerable to external shocks because: about $14 per bbl. Although oil prices have since rebounded, oil revenues must be regarded * external debt already exceeds $90 as volatile. billion-about 45% private and over 20% short term, with nearly 50% of 2.46 The Government recognizes the public debt denominated in yen, or country's external vulnerability and has taken linked to the yen in multiple currency measures to deal with it. One response has loan:. Nearly $25 billion of rollovers been to accumulate a prudent volume of official (including short tern debt) are needed reserves, equivalent to about 4.8 months of each year; imports (c.i.f.) at end 1993/94, as well as other net foreign assets, to use in the case of * oil & gas prices are weak, and oil & negative external shocks. The other has been gas exports still account for about 25% to adjust monetary policy quicldy. Ihe of exports, and 30% of Government adjustment to the foreign exchange revenues; consequences of a transitory fall in oil prices, to $14, or even $12 per barrel could be eased * the open capital account, which has by some additional foreign assistance but could the great benefit of encouraging larger be managed with the traditional measures . foreign investment and disciplining policy makers and should be 2.47 Continued low oil prices would require maintained, but which does expose the a more difficult, but still manageable balance country to expectational shifts, for of payments adjustment. Jn general it would example related to a pronounced be undesirable to try to offset continued low oil slowdown in non-oil export growth or prices by external commercial borrowing; this doubts about policy. is particularly true given the already high level of external debt and the uncertainties in the 2.44 Thus an appreciation of the yen, or a market. Moreover, if speculators and private sharp fall in oil prices worsens Indonesia's external lenders feel that adjustment to such balance of payments and its Government shocks is slow, then Indonesia could experience budget. Roughly speaking, with nearly 50% of a secondary loss of foreign exchange reserves. public debt linked to the yen (including the yen A better, feasible approach would be a mix of denominated part of multiple currency loans), tighter fiscal and monetary policy, somewhat a 10% yen appreciation increases debt service slower-than-planned growth of reserves, and in dollars by about $160 million. 'Mere would measures to stimulate non-oil export growth. be a similar worsening of the Government Again, additional foreign assistance could ease deficit, unless other measures were taken. the adjustment. This set of policies would 44 Caa 2 allow Indonesia to manage the foreign that keep the growth of aggregate demand exchange consequences of low oil prices even paralleling the growth of capacity. The main for the whole of the RPE3TA VI. difference between REPwETA Vi targets and the past is the projected faster reduction in reliance 2.48 Adjustment to the budgetary on foreign capital inflows, with a consequences of low oil prices would be more corresponding need for higher domestic saving. difficult. Again, official assistance above programmed levels could help bridge the gap. 2.50 Past strong performance was the msult Nonetheless, the main adjustment would have of prudent macroeconomic policies that to come in the Government's budget. maintained stability and created an attractive REPUTA VI, dready programs a rapid growth investment climate, and of deregulation. The of non-oil revenues (17% p.a.), and deregulation packages promoted growth by expenditure growth at roughly the sane rate as encouraging high investment in physical capital GDP. Offsetting a larger-thm-programmed loss and productivity increases from better resource of oil revenue would thus be difficult. The allocation and more external and internal approach would be to intenslfy the measures competition-greater macroeconomic effi- described above to increase public saving: ciency (See Chapter 1). This combination of further improvements In tax administration, policies, in turn, led to a significant reduction fu-ther increases in forestry royalties and in poverty. In the futre, stumpage fees for the budget, and more rapid- than-programmed increases in property taxes, * continuity of macroeconomic stability combined with expenditure restriction, and growth will depend on tighter particularly current expenditure, and higher fiscal and monetary policy coordinted public sector tariffs. To ensure that the with exchange rate policy, and dampening of expenditure does not overly slow continued prudent debt man agemnt; productivity growth. Further improvement in project selection and implementation would be * continuity of efficiency Improvements essential. While these adjustments would not and productivity growth will depend on be easy, Indonesia has demonstrated a strong further improvements in the Incentive capacity to adjust in its rapid response to the fraaework througb deregaton; to much larger shocks of the 1980s. imprve resource allocation and promote competition; further G. Policy Options to Atin RErEL1TA improvements In the public sector vi's Objectives Investment process-the selection of high productivity public sector 2.49 REPEUTA vi's targets represent a investments and improvements in the continuation of Indonesia's recent strong implementation of public sctor performance, as discussed above. Thus the investment; and further institutiona targets are consistent and should be atainable development. given appropriate policies. Continued rapid non-oil export growth, albeit at a slightly In sum, continuity wi requre change. reduced rate compared to REPmIA V, is the most critical element in reaching the Plan's G.1 Macroeconomic Policies for Stabili targets for growth, employment and reduction and Growth of the external debt burden. Rapid non-oil export growth also is important in reducing the 2.51 lighter fiscl policy would make an current account deficit, but the most important important contribuion to stability and growth, factor in achieving that target will be policies as discussed in Chapter 1. Tighter fiscal An Overview of REPfTA VI 45 policy would avoid a 'crowding-out' of the and current, tighter conditions in international welcome rebound in private investment. Such financlal markets. In general, monetary policy accommodation would limit aggregate demand should be coordinated with exchange rate pressures and renewed overheating in the form policy to achieve balance of payments and of worsening inflation and balance of payments capital account targets, the areas in which deficits. Tighter fiscal policy also would ease monetary policy has its greatest effect in the the burden of contra-cyclical policy that Indonesian context. With regard to aggregate monetary policy has often borne, which has demand management and inflation, monetary had some undesirable side effects (See policy generally should complement the Chapter 1, Section C). direction of fiscal policy, rather than take the lead. In the Indonesian context, excessive 2.52 Considerations of macroeconomic reliance on aunqary policy to offset fiscal stability, as well as the need to offset depletion policy or adjust akgregate demand can have of natural resource capit31, imp!y that public some undesirable consequences-the open saving should rise, to reduce net public capital account means much of the effect of borrowing and accommodate rising private monetary policy is offset by capital flows, and investment. Increased public saving will changes in monetary policy feed rapidly into depend on efforts to limit Government changes in international reserves and central spending to the levels proposed in REPELITA VI, bank liabilities (See Chapter 1, Section C). and to achieve the ambitious revenue targets. Regular spending will have to be carefully 2.54 Exchange rate policy should be aimed managed to stay within budgeted levels and at maintaining a strong balance of payments reduced if revenues do not grow as fast as and coordinated with monetary policy, with projected. Off-budget spending should be fiscal policy and, to a lesser extent, monetary brought into the budget and subjected it to the policy the main instruments for maaging same scrutiny as other spending. Achieving aggregate demand and inflation. The exchange the revenue targets will inply continued rate regime should aim at maintaining the improvements in tax and customs profitability of non-oil exports, as other administration. Further increases in property economies have done (See Chapter 1). Ihis taxation, through further improvements in policy will contribute to growth of GDP and assessments and higher rates, would not only employment, to reducing the current account raise more revenues but improve the uniformity deficit, and to a sustained easing of the debt of tax treatment across sources of income and burden. The band at which Bank Indonesia help to slow the domestic orientation of the buys/sells in the foreign exchange market could current upswing. Finally, greater reliance on be widened further. A wider band has been 'win-win" pricing, user charges and fees for used in some developing countries and the public services-for example higher electricity European Community to reduce foreign prices, water and sewerage prices, and, above exchange speculation, by forcing short term all, furtier increases in forestry royalties and speculators to bear more exchmge rate risk. stumpage fees (which are brought into the budget)-vould have the benefit of improving 2.55 Prudent external debt/foreign direct incentives for efficiency and reducing environ- investment management will be needed to mental degradation and depletion, as well as ensure that lidonesia's limited external raising revenues. (See Chapters 1 and 6). borrowing capacity is used effectively during REPLTA VI. Indonesia's already-large 2.53 Monetary Policy needs to be tightened external debt limits access to new borrowings, to complement tighter fiscal policy and to particularly commercial borrowings. Indonesia remain consistent with exchange rate policy can ill-afford to waste this capacity on or pay 46 Chapter 2 debt service on uneconomic projects. This is to improve debt statistics, develop in-house particularly so when exporters need external capacity to analyze various international funds for capital goods imports and trade scenarios, investigation of ways to mitigate finance. To ensure that the limited borrowing currency and commodity risk that would be capacity Is used effectively, the Government consistent with the need to avoid large will need to limit public and publicly costs/losses from fnancial management, and guaranteed external borrowing to only the most the strengthening of debt-stock management productive projects. Private mega-projects that group to use these analyses and investigations depend on Government concessions also need in the management of the debt stock and close scrutiny and management, whether macroeconomic policy. fmanced through debt or equity. Smaller alternatives, though perhaps technologically G.2 Improving Incentives to Raise less efficient, often are less risky and, because Macroeonomic Efficiency greater competition can be enforced in bidding and service delivery, mean shorter negotiation 2.57 Further improvements in the and implementation schedules, ultimately incentive framework, through further resulting in lower-priced delivery of services. deregulation, would stimulate the efficiency Trarnsparent bidding processes and well-defmed gains that 'e needed for projected growth in regulatory environments, including agreements GDP, non-oil exports, and employment, and to on the prices to be charged by so-called public reduce the debt service burden. Particular utilities and enforcement of competition to the areas of attention, discussed in detail in greatest extent possible, will yield the largest Chapter 4, are increasing competition by benefit to the country, at the lowest cost. In eliminating non-tariff barriers (except those for order to carry out these functions effectively, health and safety), reducing protection by the Commercial Offshore Loan Team (COLT) topping down high tariffs to a single, lou needs to be continued and strengthened. The level, eliminat export barriers, elimining Government also needs to inprove Its capacity the negative list (except for areas affecting to evaluate large, potentially unproductive public health and safety) for domestic and projects, whether in the public or private foreign investment, and deregulating L.-. sector, and to develop more effective distribution of agricultural products and procedures to manage the bidding for imports. Maintenance of an attractive climate concessions. for direct foreign investment would lead to technology transfer and provide access to 2.56 In addition to continuing to improve foreign markets (Chapter 4). the management of new borrowing, the Government will need to improve its capacity G.3 Improving Investment Efficiency to manage the large, existing stock of debt, taking into account the large volume of private 2.58 More effective investment, within the debt and bearing in mind the large volume of context of a stable macroeconomy, would raise roll-overs needed annually. During 1992 roll- national productivity and growth. The overs (not always from the same lender) programmed increased reliance the private amounted to $5.5 billion of public m,dium and sector in infrastrucure and areas that long term debt, $2.6 billion of private medium traditionally have a high public sector presence, and long term debt, and the $14.3 billion of using the full range of options from debt under one year maturity existing at the management contracts to BOT (Build, Operate, end of 1991 (according to World Bank Transfer) to privatization of inefficient public estimates). Improving the management of the enterprises, would add to productivity (See debt stock will entail institutional improvements Chapters 3 and 4). Public investments should An Overview of REPETA W 47 aim at eliminating cridcal infrastructural G.S Reducing Poverty and Preserving botlenecks in areas where the rrivate sector is the Environment unable or unwilling to provide services. Targeted public investments also are necessary 2.61 Reduction of Poverty and Inequalty, to reduce and avoid environmental problems in major goals of REPELTA VI, will be furthered areas such as the provision of water and by continuation of stability and rapid, broad- sanitation. based economic growth. Avoiding inflation, which taxes the poor most heavily, represents 2.59 Additional investment in human a major contribution to poverty reduction. capial, through public spending in the areas Rapid, broad-based growth, led by non-oil of health and education and improvement in exports, is fundamental to the provision of the quality of services, in particular for low me and better jobs for the growing labor income families. Such investment in human force. Thus, policies to promote stability and capital raise the quality of the labor force, as growth also will contribute to further poverty well as improve equity and the quality of life reduction. In contrast, policies that thweaten for those in the lower quartile of the income stability and reduce growth, in the name of distribution. reducing poverty and improving equity, are likely to be unsuccessful. G.4 Improving Implementation 2.62 In addition, poverty reduction will be 2.60 Better program implementation strengthened by further improvements in social would help raise public investment sector services delivery, particularly if Otese productivity, as called for by President can be targeted more to those services tdat are Soeharto in his 1994 Budget Speech. One used most heavily by the poor, for example institutional improvement that would help rural healn services and primary education. ensure hat limited public investment funds are The broad extension of primary education and devoted to the highest productivity projects primary health care has had major benefits in would be the prior feasibility studies of all improving not only general living standards, large public sector investments, including but also in raising large numbers out of public enterprise projects and any projects that poverty. In REPELITA VI, it will be desirable to remain off-budget. Such studies would continue to improve these social services facilitate project comparison and the rejection broadly; greater targeting on services used by of low producdvity projects. A number of the poor and building human capital among the approaches could improve project poor would bring additional benefits in the implementation, including greater use of reduction of poverty and inequality. In many transparent, competitive bidding for contracts; eases, services for the poor also could be better scrutiny of technical assistance; and improved by increased decentralization of speedierimplementation. Expostevaluationof management and delivery. Finally, in remote, projects would provide lessons to improve resource-poor areas-such as some parts of the fture projects. Improved better project Eastern Islands-where poverty is more selection and implementation would provide entrenched, carefully designed interventions more and better public services from same or will help to address the issues of raIWng less spending. (The allocation of public agricultural and non-agricultural incomes, spending under REPELITA VI and measures to buildingsmall,community-basedinfrastructure, improve investment efficiency are discussed in providing credit, and delivering social services. Chapter 3). The IT program is a special program trgeted qea 48 aapter 2 on poor villages, which seeks to use sufficient in many cases, such as clean air and community based prograns to deal with these water. Here it will be ecessa to use a mlx issue. (See Chapter 5). of regulatory policies (emphasizing less expensive, "top-of-the-pipe* changes, rather 2.63 Environmental Objectives play a key than more expensive, "end-of-the-pipe" clean- role in =PELA VI. Ite Plan targets ups) and market-based policies such as improvements in the management of natural polludon charges to limit environ l resources and minimization of pollution as key degradation. These policies will encourage objectives. AcZaeving these goals will entail a private investment in pollution control. In the three-pronged approach focusing on policy, pub1ic sector, investnts in reducing investment and institutions. Successfu: coJngestion, and in wntpr, sewage treatment, environmental and natural resource and sanitation will be key factors in managemt depends on maximizing the links, maintaining a healthy urban environment. between sound economic policies and sound Finally, ai 'ving REPuTA vi's environmeal environmental outcomes. In particular this goals will entail improvements in the design, entails ng full advantage of 'win-win-win" scope and eftectiveness of institutions charged pricing policies that reflect the true value of with meeting those goals, coupled with fuels and energy, forests, water, and land to information campaigns to enlist the support of the county. A good example of such policies the public in the sound management of the was fte 1993 increase in the price of petroleum environmnt (For details, see Chapter 6). products. But moving to market prices is not REPElJTA U: Investiag Effecdvely for Growth 49 3 REPELITA VI: INVESTING EFFECTIVELY FOR GROWTH A. Introduction allocation of this financing among various sectcrs, in accord with REPEUTA VI 3.1 Sustaining high growth and fnrher development priorities, is discussed in Section reducing poverty will require sound C of this Chapter. 'he third and final step in implementation of the REPETA vI investment this process concerns the effective program in the broadest sense. Given tight implementation of the investment allocations. budgets and the large external debt, it will be This final step is discussed in Sections D and essential to increase investment efficiency. E. Section D discusses issues bearing on Special effort is needed in the supply of efficient implementation of sectoral investment traditional public goods, where allocative programs, including: investment allocation efficiency between and within sectors needs to within sectors, balancing competing claims of be complemented by greater market-orientation sectoral priorities and programs; incentive of investment-better pricing, exposure to framework improvements, such as reforms in competition and increased private sector sectoral pricing and regulatory policies, that p.articipation-and improved project foster efficient public investment and private implementation. Increased investment participation in the sector; and institutional efficiency would help attain REPI3UTA Vi's development and reform at the sectoral level. development objectives, while supporting its The discussion in Section D covers the major goals of maintaining macroeconomic stability sectors of public investment. Fmally, Section and reducing the external debt burden. Even E discusses issues relating more narrowly to with improved efficiency, increased public efficiency of public investment planning and investment will be needed in support of private implementation at the project level. Thus, sector development and poverty alleviation. raising the efficiency of investment, in its The broad priorities for increased public various dimensions ranging from allocative to investment are infrastructure and human technical and from macroeconomic to resource development, which will complement sectoraUproject-level, is the underlying theme private investment and improve the supply of of the Chapter. basic public services, especially to the poor. This Chapter begins by summarizing-in B. Main Investment Challenges Section B-the main investment challenges that Indonesia faces as it embarks on its new 3.3 The investment agenda comprises three medium-term development program. key challenges: 32 Meeting the investment challenges may * raising the efficiency of investmnt, be viewed as a three-stp exercise. The first both private and public; step is the identification of the available financing, in the light of the macroeconomic * ensuring complementarity in private constraints. Issues associated with this step and public investment, focusing the were discussed in Chapter 2; they ,oint latter on infrastructure and human towards a total public sector investment of resource development; and about 9.6% of GDP, which is consisten; with REPIITA vr. targets for the government * fostering increased private participation development budget. The second step, in the provision of public services. 50 CYzapter 3 3.4 As discussed in Chapter 2 (Table 2.5), 3.5 The private sector will need to provide a strong investment effort will need to be the bulk of investment in directly productive mantained to achieve the Government's activities. Consistent with this, the public objectives for growth and poverty reduction. sector would reduce its role in these activities, However, an equally important challenge will by limidng new investment and divestiture. be to increase the efficiency of investment. TL.e private sector also should be called upon Carrying out the most productive investments to play an increased role in the provision of at least cost is essential to improving the traditional public services. Its role in economy's competitiveness and ensuring that providing social services is already substanial, growth targets are achieved with the resources but there are possibilities for an increased role available. Enhancing the productivity of in both existing and new areas, e.g., vocational private investment wIll require further reform training (imcluding employer-based training), of the incentive regime, to provide a more and health insurance. The public sector will outward-oriented and competitive market remain the dominant prov'er of physical environment, as discussed in detail in infrastructure, but increased private Chapter 4. Raising the efficiency of public participation would contribute to raising investment will require continued progress on efficiency, by introducing competition, and several fronts: alleviate pressures on public institutional and financial capacities. Ihis includes not only * Public investment needs to be allocated privatization but also contractual arrangements in line with development such as Boo/DoT schemes, franchises, and priorities-the foremost being subcontracts and leases. Irdcastrcure services infrastructure and human resource are often near-natural rionopolies, and the development. policy and regulatory framnework for private participation needs to be carefully designed to Public pricing policies need to be generate competitive pressures and protect the based on economic costs, including public interest. The scope for private environmental costs-important to provision is largest for those services that can private incentives for the use of the be provided in a competitive market setting, services provided, the efficiency of such as transport, telecommunications and investment, cost recovery, and power generation. sustainability. 3.6 The share of the private sector in total * Adequate provision needs to be made investment thus should continue to increase, for operation and maintenance (o&M) but the role of public invesmenet will remain of existing investments. important. Complementing private investment, the priorities for public investment are * Public investment needs to be exposed infrastructure and human resource to greater competition from the private development, areas well-suited for public sector, and greater reliant v could be investment because of their public-good nature placed on the private sector for and important positive externalities. Increasing carrying out and managing public rnatonal and international evidence supports the projects. complementarity of public infrastrue investment with private investment and overll * Investment efficiency would beneflt economic growth (see Aschauer and World from institutional reforms to enhance Development Reporr, 1994). Infrastrucure is project planning, implementation and an importan element of government's role In management capacities of investment providing an enabling environment for private agencies. enterprise, as shortages of public infrastructre x w7 : Invesfing Effectively for Growvh 51 raise private sector costs. Supporting human consistent with the continuing change in the resource development is an equally, if not an structure of investment in favor of the private even more, important role of goverment. sector. Despite the decline in the overall rate Considerable evidence supports the importance of public investment, the Plan seeks to ensure of human resource development in increasmg adequate funding of priority development productivity and growth and reducing poverty, programns through directing investment pointing to high rates of return on investing in allocations more toward these programs. people (for evidence on Indonesia, see Chapter 1, Section D; and Chapter 5, and the works 3.9 The bulk (about three quarters) of total cited there). public investment is implemented through the Central Government Development Budget. C. Investment Size and Sectoral Allocation Ihe size and composition of this component of public investment are described in detail in the 3.7 The size and composition of investment Plan document, and are summarized in Table envisaged in RBEuTA vi are broadly consistent 3.1. Total government development spending with the priorities outlined above. As reviewed during the next five years is programmed at below, the Plan seeks to maintain a robust Rp. 176 trillion, equivalent to 8.1 % of the lnvestment effort, with an increased emphasis projected GDP. Roughly 85% of government on improving the efficiency of investment. development spending represents capital Within total investment, an increasing role is expenditure, implying investment through the envisaged for the private sector, including in Central Government development budget of the provision of public services. Tbe Plan's about 7% of GDP. The difference between this broad sectoral allocations are, in general, well figure and the projected total public sector designed to support Government development investment of 9.6% of GDP represents priorities. investment by public enterprises (e.g., in energy and telecommunications) that they 3.8 Investment Levels. During REPELTA fuiance through their internally generated funds vi, the projected overall investment rate is or direct borrowing, plus any off-budget capital about the same as (the World Bank's estimnate spending by the Government itself. of) the average rate over REPEUTA V (about 29.5% of GD), implying the continuation of a 3.10 Indonesia's development budget has strong investment effort (see Table 2.5). been on a declining trend in relation to GDP Given efficient implementation, the projected during much of the past decade (Table 3.1). investment rate should be high enough to REmUTA IV planned development spending effectively support the Government's growth averaging 14% of GDP between 1984/85 and and development objectives. At the same time, 1988/89. In the event, adjustment to the sharp as discussed in Chapter 2, it is consistent with fall in oil prices led to a major curtailment of the goal of maintaining macroeconomic spending, to 9.1% of GDP in REPEUTA v and stability as the implied investment requirements 8.5% in REPBL1TA V.' A small further decline are within the resource envelope that is likely is projected for REPEUTA VI, to 8.1 % of GDP. to be available. Witiin the projected total Offsetting these declines in government invesmnt, the private setor share is estated investment spending (relative to GDP) has been to rise from around 66% at the start of a significant improvement in the developmental REPELITA vi to 69% toward the end. Public impact of such spending. For example, in the investment will decline gradually relative to mid-1980s, some 10-15% of the development aDp, from about 9.8% of GDP at the start of budget was spent on mining and industry; the Plan to 9.4% of GDP toward the end, another 5% or so was on fertilizer subsidies; 52 Chapter 3 Table 3.1: Indonesia: Sectoral Distribution of Government Development Expenditures (in percent of total government development spending) REPELTA IV .EPWL v REPELfTAv7 Budge Plan Actual a Plan Actual a, t Plan 1994/95 Agficuture & Forestry LI 8i 1 l6 ,X Insry & Mining L.6 La 3. 4 L, L 1du 5.4 4.8 2.0 4.1 1.7 1.6 Ming 3.2 2.2 1.1 0.5 0.3 0.2 _iructure0 cL 3" 4I 40 412 Water Resource Developmentd 8.4 6.7 7.5 7.1 7.4 7.5 Energy 12.3 12.8 9.3 13.5 12.1 12.8 Tansport & Comm. 12.6 19.3 19.1 25.0 21.3 21.5 Human Resource Dev. c22 i. 9 16. Edue., Youth & Cult. 14.7 12.4 15.8 9.6 11.6 11.7 Health, Welfare & Family Planning 4.5 2.9 3.8 3.8 4.9 4.8 Regional Development c , 1 CZ0 1Q& Transmiglration 4.92 a 2A 2. la 3. Oer, of which: 2197 X.{ 18.1 16.1 Technology & Resech 2.2 2.7 2.5 2.2 2.1 1.9 Nat. Defence & Security 6.7 4.1 5.4 5.0 4.5 4.2 dmstration 1.3 2.4 0.6 2.5 2.1 2.0 Trade & Cooperatives 1.2 3.1 1.3 2.4 2.9 2.7 Tota 100.0 100.0 100.0 100.0 100.0 100.0 Total at current prices 78.6 53.7 107.5 109.9 175.9 27.4 On trillion of rupiah) (as % of DP) 14.1 9.7 9.3 9.5 e 8.1 7.9 a The act columns include estimated Government off-budget spending, and are therefore not fully comparable with the Plan columns which include the planned development budget only. b Budgeted amounts for 1993/94, actuals for the other four years. c Infrastructure and human resource development spending also is undertaken by regional governments. Fianced from grants from the Central Government, these expenditures represent the bulk of the Regional Development Expenditures. A precise sectoral breakdown of Regional Development Expenditures is not available. d Includes irrigation, other water resource development, and environment. * Includes allocations to the Development Reserve Fund. Sowrce: PsmA and Budget documents, and World Bank staff estimates. REPEumwA U: Investing Effectively for Growth 53 and around 10% was spent on general infrastructure facilities. Currently, most of administrative services. By 1993194, spending these facilities are either operating close to for industry (including science and technology) capacity or are overloaded. RIUTA VI had shrunk to less than 4% of the development recognizes that in order to sustain the budget, for fertilizer subsidies to 1% and for dynamism of the private sector in the 1990s, general administrative services to 7%. Savings on which the achievement of the growth targets from these expenditures were reallocated to will hinge, substantial investment in new higher priority programs in physical and human infrastructure capacity will be needed, as well infrastructure development. Also offsetting the as improvements in the quality and reliability decline in government investment spending has of infrastructure services. In view of the been the increase in private investment and pressure of rapidly rising demand on existing self-fnanced public enterprise investment. capacity, expansion of power supply and development of urban infrastrucure will 3.11 Sectoral Composition of Public command an especially high priority. Investment. Overall, the sectoral allocations Increased private participation is envisaged in of REPELITA vI are in line with Indonesia's all infrastructure sectors, especially in power development priorities. The largest allocations generation. Key issues in this regard are: are made for infrastructure power, transport, development of an adequate telecommunications, water resource investmentlregulatory framework; whether the development; and human resource development private sector will respond sufficiently rapidly; (education, health and family planning, poverty whether private sector efficiency will lower alleviation programs). Together, these account costs enough to offset the risk premia that they for about 70% of the total government are likely to demand; and how the public sector development spending planned over the next will respond if answers to the foregoing five years. This includes spending questions are unsatisfactory. classified as 'regional development' in Table 3.1, the bulk of which is for physical 3.13 The emphasis on human resource infrastrucure and social services in the development and poverty reduction is regions. Spending on infastrucure, including intensified in the new Plan. The proportion of the regional component, accounts for nearly government development spending allocated to half of the planned government development education and health is to be increased budget. It should be noted that the share of compared to the estimated outcome for the infrastructure in planned total public investment previous RPE3UTA period, particularly taking is higher than this figure, as much of public into account the higher spending on *regional investment financed by public enterprises development' (Table 3.1). With substantial outside the government development budget is progress already made in expanding access to for infrastructure, especially power and physical facilities, new investment will be telecommunications. Of the likely total public directed increasingly to improving the quality sector investment during REuPLITA vi, of services. REPLuTAVI provides for stepping infrastructure is estimated to account for about up efforts to reduce poverty, to meet the Plan's 60%, and infastructure and human resource ambitious goals in this regard. As discussed in development together about 80%, mainning detail in Chapter 5, the Plan's strategy for the strong emphasis these areas have received poverty reduction supplements the promotion in overall public investment in recent years. of continued strong economic growth conducive to broad-based employment 3.12 Indonesia's rapid economic growth of generation wit. more targeted measures for recent years has placed heavy demands on difficult-to-reach concentrations of poverty. 54 Chaper 3 The latter will be supported through a new agriculture, a sector that still provides program of lNPRES transfers targeted at poorer livelihood to the majority of Indonesians and villages (INPRES Desa Tertinggal). will continue to play a key role in poverty reduction. The focus of the Government's 3.14 Alongside poverty reduction, the new investment in the sector will continue to shift Plan accords increased emphasis to r'gional from direct involvement in production to development, in particular to the development provision of well-designed support services, of Eastern Islands. This objective will be such as extension and research. In industry, supported both through development allocations from the government development expenditures, carried cuat by the Central budget, appropriately, are much reduced from Government and through transfers to regional the level of some years ago. However, mnuch governments to help finance development of public investment in industry is undertaken programs for which the implementation by public enterprises, outside the development responsibility rests with these governments. budget. Over time, efficient and transparent The latter is reflected in substantially increased divestiture of these enterprises would make allocations in the new Plan to the category sense. In the interim, fresh government "regional development" in Table 3.1. investment in these enterprises should be Continued decentralization of development contained, consistent with the need to channel planning, finance and implementation adequate funds to higher priority areas for arrangements wili be an important policy thrust government investment within the available supporting region. development. An initiative resource envelope. taken in the 1994/95 Budget toward that end is to provide more of the Central Government D. Ensuring Effectiveness of Sectoral development funding to regional govermnents Investment Programs in the form of block-rather than specific-grants which give the recipient 3.16 Ensuring the efficiency of planned governments greater flexibility in the use of the investment spending will be fundamntal to the funds, enabling them to better match attainment of REPEIITA Vi's development expenditures with local needs. The basis for targets. The efficiency of sectoral invesnment allocating grants among the regions was also programs will depend on: allocating improved. REPElTJA vi also programs an expenditures in line with sectoral priorities; increase, though a more modest one, in the reforming underlying sectoral policies to allocation for transmigration (Table 3.1). The promote more efficient economic production case for this increase, however, seems and exchange in that sector; and developing questionable, in the light of the high cost and and adapting institutions to enable them better marginal effectiveness of these programs in the to meet evolving sectoral needs. Such issues past. are the subject of this section, which reviews the Government's sectoral investment programs 3.15 Consistent with the complementary under REPELTA Vi. This review is not all- roles private and public investment need to encompassing; it concenrates on the major play, REPEUTA vi provides for a continuing sectors of public investment. decline in the share of public investment allocated to directly productive activities Agriculture (Table 3.1), leaving them increasingly to the private sector. Despite their declining share in 3.17 Indonesia's advances in agriculure governmentdevelopment spending, government during the past two decades have been expenditure programs remain important in impressive. Agricultural growth averaged wRix w: Investing Effectively for Growh 55 Table 3.2: Reient Agricultural and Water Resource Development and REPELIrAV Targets Up to End of Targetfor REPELITA V a 1994/1995 REPEfUA V Agriculture (growth rate in % p.a.) Overnll sector 2.9 3.? 3.4 Rice 3.0 2.o 2.0 Palm oil 15.1 7.6 8.1 LIvestock 4.8 5.4 5.5 Irrgation (000 ha): O&M of networks 5700 5920 6300 Rehab. of networks 2900 140 700 Construction of new vetworks 1600 100 500 SwAmp development > (000 ha) 1200 135 670 Other water resource development River wodcs (ncm) ... 370 1850 Major reservoir development b 7 1 a Except the growth rates which are averages for the Repelita V period. b including rehabilitation. Sow-e: REPELTA vi documents. about 3.8%, self-sufficiency was achieved in shifting world markets for commodities add a rice production, and there was a striking dimension of uncertainty. REPrUTA VI reduction in rural poverty. RPEuTA VI recognizes th, to meet these challenges, a envisages 3.4% p.a. agricultural GDP growth, flexible and dynamic agricultural sector will be which represents an increase compared to needed. Additionally, the Plan emphagizes REPELiTA v (Table 3.2). It will not be easy to agro-industry and agro-business as a means of achieve this target. The easily-attained gains in achieving product diversification, strengthening production have already been made (stemming linkages to the industrial sector, increasing from expansion of irrigation and introduction value added, and providing wider employment of fertilizer and high-yielding varieties of rice); opportmities Cable 3.3). many highly productive rice fields in Java are being converted to housing and industrial uses; 3.18 During REPELITA Vi, continued strong and the cost of constructing new irrigation investment In agriculture will be needed. schemes off-Java (or in upland-Java) is much However, the lead should increasingly be taken higher than those already in place and their by the private sector, with the Government productivity is lower. Economic growth is- performing a policy and regulatory role and expeed to generate a more diversifled pattern providing public support services. REPEUTA Vi of food demand, with consumption of subscribes to this genwral philosophy, with a tradiional staples declining and demand for decline envisaged in the share of agricultue in income-elastic foods, such as meat and other public development spending (Table 3.1). preferred foods, increasing. Moreover, Despite this decline, there appears to be 56 Chapter 3 scope fo- further savings, primarily by early distribution of fertilizer. Moreover, elimination of the fertilizer subsidy, which restrictions need to be relaxed on private would save almost Rp. 400 billion annually. manufacturing and marketing of certain farm This would cut spending and reduce pollution, equipment (such as small tractors, pumps, without endangering the national goal of rice sprayers and harvesting equipment), which are self-sufficiency. Higher world rice prices are expected to be in greater demand in the future. likely to provide an opportunity to carry out The Government also needs to consider setting this reform rapidly. up coordination arrangements between the Agency for Agricultural Research and 3.19 The Ministry of Agriculture needs to Development (AARD) and the private sector to redefine its role in agricultural development, ensure that AARDs research program is client and redesign its organizational structre to responsive and to identify areas where the effectively tailor agricultural support to private sector cars take on increased changing sectoral needs. The Ministry's role responsibilities for research. should focus on: creating an enabling policy environment to foster private sector Irrigation and Water Resources development, and production and market efficiency; funding-but not necessarily 3.21 Irrigation and swamp development providing-public goods such as research, accounts for the bulk, almost 60%, of extension, and rural infrastructure, and targeted government spending in this sector (Table 3.3). interventions necessary to correct market REPTA Vi provides for a reduction in the failures or address acute poverty or food share of new irrigation schemes, but there security issues; and building its institutional remains room for further reduction without capacity so that the remaining public-service endangering national goals, such as rice self- functions are performed efficiently by the sufficiency. In contrast, expenditures on public agencies. Redesigning government's operation and maintenace of irrigation role and public agencies will require a review networks are, appropriately, projected to of the whole range of policies and public increase sizably. Ihe program also includes expenditures that affect agriculture, and rehabilitation of six dams and construction of realignment of public expenditures to nmch the five new dams. In this area, careful attention redefined long-term role. Greater emphasis needs to be paid to dam safety. Also, would need to be placed on human resource resettlement issues, especially in Java, deserve development and promoting the types of greater atention. institutions that would ensure that markets function properly and the public/private 3.22 The Plan recognizes important sector partnership succeeds. issues relating to efficiency and allocation of water supply, environmental damage and 3.20 While the Government will continue to pollution, the need for institutional provide infrastructure to support the pdvate strengthening, and wider participation by sector, it needs to review its role in production, beneficiaries. In this context, the following marketing, and provision of inputs and support areas call for particular attention: services. Possibilities for privatizing the public estates (pris), including joint ventures with * Pricing Policy: Supply and demand the private sector, are discussed in Chapter 4. for water need to be brought into better Regarding input supplies, the Govermnent balance through appropriate pricing could privatize urea factories and introduce policies. There is consideraole room more competition into the wholesale and retail to improve charges for water, both ZfPEU r : *n8 lvestg Etvey bfor Growth 57 Table 3.3: Indonesal RPEUTAvi Subsectoral Investment Aflocadons for Agriculture and Water Resources (in trillion of rupiah) Seceor: BRdget Aflocaon for Alocaton aw SuJbsector 1994/1995 REPELrrA V % of Tool Agriutur 1.0 6.0 36.4 Of which: huteated land development 0.5 2.9 17.6 Agro-buiness 0.2 1.3 7.9 Resources, Facilides 0.3 1.8 10.9 and Infrastrctr Water Resoures 1.7 10.5 63.6 Conseaton & devlopment 0.3 1.5 9.1 Water supply 0.2 1.0 6.1 Maiteance of river works 0.3 2.0 12.1 Irhigation 0.8 5.3 32.1 Swamp development 0.1 0.7 4.2 Tota 2.7 16.5 100.0 Sour: R1EPEUA VI documents. Irrigation and urbanindustrial water managemnt of te water resources supply, to better recover costs and sector under a recety esblished allocate scarce water among competing burea in DAPPBNAS, following several users, i.e., rural irrigation versus years of operation wifthin a more urban and industrial uses. With the compartmentaaized institutional increasing demands on water resources stmcture. This broadening reflcts (Chapter 6), appropriate incentives for recognition that hIportant isues wihin water use will be a key issue. this sector cannot be rolved by actions focussed on Individual * Resource Development and subsectors (such as urban water Management Plans: A supply, sanitation, rigation). Furth comprehensive, integrated and Instutional reform would include: enforceable set of water resource plans reorganization of DGWRD frm a sub- is importan for effective resource sectoral to a regional approach; settn management. Priorides include up of river basin management unis; continued progress in the following creation of a dam safety organzation; areas: setting out spatial policies and itegration of groutndwater and sfe plans petaining to urban, industrial water monitoring and management; and and agricultral activity and location; preparation of a Water Code that refinement of provincial resource and would consoldate the exisng many specific basin plans, reflecting water laws, regulations and decres. applicable national and provincial policies; and enforcement of agreed Electric Power flture resource uses. 3.23 Indonesia's power sector has expanded * Institutions: The Government has rapidly during the past decade, at a pace broadened its framework for matched by few couties. Since 1980, the 58 Ohapter 3 public sector generating capacity has nearly private enterprise as well as cooperatives, with quadrupled; the number of customers has special mention of the need to extend village increased by more than seven-fold; the number electrification. of electrified villages has increased by over fourteen-fold; and electricity sales have grown 3.26 A number of significant issues exist in In excess of 15% per year. analyzing plans for the power sector. First, some international evidence suggests that KWrs 3.24 Despite this impressive record, many estimates of demand may be on the high side, challenges lie ahead. Per capita consumption even after allowance for the need to raise the (estmated at 220 kWh per year) is low quality of Indonesia's service towards levels compared with Indonesia's neighbors (which enjoyed by Indonesia's higher-income range from 450-2000 kWh per year); neighbors. For example, in Korea in 1966-76 household and village electrification rates (of (when per capita income was similar to 39% and 49%, respectively) are also low by Indonesia's today), the implied elasticity of regional standards; and some 40% of total electricity sales with respect to manufacturing installed generating capacity is in the form of output was around 1; with respect to total GDP, privately-owned captive plants, much of which it was close to 2 (Hassan and Rao). In Chile, is sub-optimal in scale. Only about half of where GDP growth has averaged over 6% in the industrial energy consumption is currently met last 10 years, the ratio of growth of electricity by ", the national electricity company. sales to GDP or manufacturing growth has been Also, supply is somewhat less reliable than in 1-1.2:1. This evidence suggests that power the regional peers-average service consumption is likely to increase 1-1.2 times interruptions of 12.3 per customer per year in faster than industrial growth or at most twice Jakarta and 14.3 for all of Indonesia compared as fast as GDP growth, which would imply a 25 to around 10 for regional peers. Waiting times percent slower growth rate than the 16% per for new connections need to be reduced year assumed in REPEIlTA vi. A second, firther. Furthermore, significart potential related issue is the rate at which self-generators exists for efficiency improvement in PLUT' should be brought into the grid. In line with diesel power stations. the objective of greater reliance on the private sector, it may be better to encourage 3.25 To address these issues, PLN has drawn wntinuation of self-generation by developing up ambitious investment plans (Table 3.5). appropriate pricing and regulatory Total capital spending in the sector during arrangements for private sales into the grid, REPRLTA VI is projected to increase by a factor rather than encouraging self-generators to buy greater than 3, but with only a small proportion from the grid. (ess than one-quarter) of the total financing to be provided by the Goverrnent Cm the form of 3.27 A third issue is the financing plan for equity and offshore borrowing). These plans PN's investment program for RS1LTA VI, for capital spending are consistent with PLN's which includes a large residual component of projected growth of demand, and the nealy Rp. 40 trillion. Even after careful Government's share of finacing is in line with technical review of PmN8 investment program the budgetary sectoral allocations in and a more realistic allowance for domestic RPLITA VI. In addition, REPEITA vi financing, k is esimated th a financing gap recognizes the importance of electricity as a on the order of Rp. 20 triillon would remain means to boost economic activity and people's for REPELTA vi (Table 3.5). Part could come welfare in both urban and rural areas. In thi" from the domesic market, part offshore if context, roles are recognized for government, PILN's status is changed to allow it to borrow REPEUT U: Investing Efetively for Growth 59 Table 3.4: Indonesia: Main REPELITA Targets for Infrastructure Development Projected Total Ratio: Sector for Targeted for REPELITA WI Target Indkcator REPEUTA V 1994/1.5 tEPLJfTA V REPELTA V Electric Power: Power plant capacity 4580 1539 9522 2.1 (MW) Transmission network 3743 1866 10548 2.8 (kms) Distribution network 117324 67025 330058 2.8 (kms) Rural electrification 11600 3341 18619 1.6 (villages) Telecommunications: Telephone lines 2.1 0.8 5.0 2.4 (millions of lines) Transportation a (kms): Arterial & collector roads 1807 1050 4900 2.7 District roads 344 650 1840 5.4 Toll roads 223 51 310 1.4 a New constuction; excludes road rehabilitation, maintenance and improvement. SoUrce: REPELITA documents. Table 3.5: Indonesia: Power Sector Investment and Financing (In trillions of rupiah, 5-year totals) REPLffTA JVV a Mationd a Esbntae Capital Expendiue 8.0 20.0 64 60-65 Financing: Self-Finacing 1.0 4.2 14 18 Government Equity 3.2 7.6 10 10 Total Borrowing 3.8 8.3 40 1S Offshore (1.1) (3.0) (2) (8) Dowestic (2.7) (5.3) (38) (7) Finaning Gap - - 17-22 Public Inv.Private Inv. - 12.3 2.2 a Prelimninay pnN projections. Sour.e PLN and staff estma. 60 OCapter 3 directly. But this would raise difficult * Increased self-financing: nLs questions of the Government's obligations. internally-generated funds should rise Increased private participation, as discussed substantially from 20% in RBPUTA V below, wiil be necessary in filling the to, say, 30% of its total investment, investnt financing gap. A final issue is, .f which will still be moderate by the course, how the Government will respond if standards of regional peers. Xncreasing the private sector falls to respond as quickly, P-'s self-financing will require both: or with as low prices as hoped. adequate and timely adjustments in tariffs to improve cost recovery; ad 3.28 With these issues in mind, the intensified efforts to raise the Government will need to enter RBPEUTA vi efficiency of P1Ns operations. with a two-part strategy. One part would be to Improve demand management by a fumer * Greater equity partipon by the pricing policy and by stepping up incentives private sector: Issuance of stock and campaigns for conservation and consumer shares could be another means of efficiency. Evldenct from other countries financing, provided the legal status of suggests dtat aggressive conservation measures P1N were changed from "PuRUM" to could reduce capital requirements by about 5% 'PERSERO' and a other requirements by the end of the decade. for public and private offerings were met. 3.29 On the supply side of the two-part stategy, it wil likely be necessary for the * Stretch-out time schedules: Government to pursue a mix of options for REPELTA VI appears to incorporate an increasing electricity supply, if the targets of ambitious schedule for increasing PLNT' RmETA vi are to be met. The *..ain elements share of industrial power use, which include: may need to be stretched-out over a longer time horizon. Optimizing the mix of public and prate supply: Private power supply * Household/rural electrification: This needs to play an increased role, component of PFus program is an including in the outer islands. For important element of overall poverty examwle, more private utilities need to alleviation efforts. Inovative meas be engaged in bulk power supply. to meeting these needs, e.g., using Odter possibilides include: establishing cooperatives, local business enties and a window for unsolicited power supply local community organizations as proposals; publishing power purchase private sources of supply, will need to tariffs for self-generators with excess be actively explored and utilized. power to sell; and greatly simplified coning procedures. 3.30 There are several important insttional reforms that N is undertaking * Nurturing private supply: The to improve efficiency. For example, P1N Government needs to avoid ad hoc expects to decentralize its operations along negotiations for private sector functional and geographical lines to create participation. An appropriate, clearly associated profi centers; segregation of defined regulatory and pilicy accounts along these lines, together witi framework is needed to maximize autonomy and accountability at the regional private sector supply response, while units, could greatly increase efficiency. Along protecting the public intrs similar lines, the Govermnment plas to separate RnZfAl: W 4InStisng Effidwly bfor Growh 61 its commercial from regulatory functions in the * Increased Effiiency at Competitive sector, while unifying and broadening the Tariffs: Increase the efficiency of scope of the latter, including periodic and investments and operations so as to timely adfustments in the electricity tariff. In offer services at competidve prices additon, a clear accountn system should be Introduced for socially-directed programs (such * Broadened Access to Service: Exploit as rural electrification) to enable better emerging technologies to correct the targeting of subsidies. Steps are also being imbalance in access to service between tak1en to facilitate the bulk sale of electricity to urban and rural areas. distribution licensees, as well as the bulk purcse of electricity by Pis from 3.33 REPEL1TA Vi targets installation of 5 independent producers (the recently agreed million new telephoine lines, compared with Moo project at Paiton is an important step in just over 2 million estinated for the previous this regard). Plan (Table 3.4). Of the 5 million target, Pr TELKOM plans to provide 3 million units; the lelecommunications balance would be installed by the private sector. Both of these targets appear to be 3.31 Indonesia's accomplishments in the within range, if they are supported by an telecommunications sector are ;"npressive. The appropriate policy friamework. new-customer connection rate rose from 9% in 1988 to 18% in 1992; investmnent costs per new 3.34 To achieve the sector objectives, the line dropped from US$2,060 in 1988 to Government needs to address three key issues: US$1,500 in 1992; and labor productivity improved from 48 to 30 staff per thousand o The development of keener lhes between 1988 and 1992. Nevertheless, competition to foster innovation, much remains to be done. Fueled by rapid reduce costs, accelerate access to basic economic growth and modernization, demand networks, and provide an array of for telephones is outpacing supply; choices to the customer. sophisticated telecommunications services-which are needed for business to * The establishment of a regulatory compete in the global marketplace-are in their framework that will attract private infancy; the efficiency of operations remains equity to the sector and ensure even- low; service quality and reliability are below handed competition for all existing and tiat of more advanced, well-dimensioned potential market participants. networks; and telephone use is well below regional comparators C(able 3.6). * The mobilization of managerial and financial resources to efficiently 3.32 The Government's main qualitative hiplement an investment program of objectives for sectoral development are as Rp 15-20 trillion during REPEUTA VI follows: (ncluding investment by the private sector), almost three times the level of * Improved Services: Rapidly build investment in REPTA V. telephone penetration, significantly improve quality of service, and provide 3.35 REPELuTA Vi recognizes the importance the range of telecommunications of high-quality telecommunications services, services that customers want. and some important steps towards sectoral 62 Chapter 3 Table 3.6: Indonesia: Intenational Comparison of Quality and Availability of Telecommunication Services, 1991 Service Telephone Density Personnel Cowmy Contpledon Rate per 100 Inhabitants per 1,00' Uines (in %) Indonesia 18 0.6 32 Japan 71 58.6 6 Malaysia 50 7.2 18 Singapore 70 37.0 8.8 Australia 65 11 ITU 50-70 reform have been undertaken in recent years.2 service, repair and maintenance, inventory However, a more comprehensive approach management and workforce relations. toward sector restructuring needs to be nIplemented, based on competition policy and 3.37 Overcoming the deficiencies in the increased private sector investment. There are regulatory environment will require several ways to increase private participation in establishing transparent regulatory rules and the telecommunications sector, including: procedures, as well as finding means of DoOror schemes; issues of deb. or equity separating the Government's role as owner swcurities by Pr TELKOM to private investors; from that of regulator. Ihis is likely to require joint ventures with private investors; or full a regulatory famework that is codified in privatization. Of these, the Government has legislation, which would serve to reduce rejected full privatization, preferring to keep currently perceived economic risks on the part r TELKOM within the public sector for the of potental private entrants. It will also be tim being. important that such a framework be admistered by an independent regulatory 3.36 Various options exist for introducing agency. To this end, it would be desirable to fresh management and technical expertise into give the agency direct access to a source of PrFTBLoM (e.g., management contracts, joint funding, which could be in the form of a ventre, joit operation and privatizaon). Of license fee charged to the various operators. these, the most potent approach would be for a leading foreign telecommunications operator to Transportadon take an equity stake in Fr TE1KOM. Such an operator would bring hands-on experience to 3.38 The capacity, standards, and efficiency the development of local human resources, of Indonesia's transport services and skills and institonal capabilities. It would infrastructure have improved significantly in open the door to procurement of equipment at recent years as a result of large public lower prices than under Pr TEOMws current expendiures coupled with concerted efforts to arrangements. It also would Fring new improve the legal and regulatory framework, expertise in such crucial areas as billing enhance the capabilities of government agencies systems, administration, marketing, customer and public enterprises, and facilitate private sector participation. However, the transport RIMA vM: Investhg Effecthvlyfor Growth 63 sector faces greater and more complex extension is a lower priority than proper challenges during REPBrA vi than those in maintenance of existing roads. previous plan periods. Susained rapid economilc growth will necessitate increased 3.40 Railways have the potential to play a investments to expand the transport system's more important role in Indonesia's wansport capacity, although there is considerable scope system, pardcularly in Java; this will require for deferring investments by utilizing existing continuing improvement in efficiency and transport infrastrucure more efficiently. quality of services and, in tr, the futher Likewise, pursuit of more balanced regional corporatzation of Perumka coupled with very development-and particularly accelerated carefully prioritized rvestments. The development of the eastern part of efficiency and quality of maritime transport Indonesia-will necessitate substantial services has in general shown considerable investmens in extending the coverage of improvement as a result of the deregulation of transport networks to improve access to rural shipping services and the corporatization of the areas. Regulatory issues also will be important public port enterprises, although there Is in promoting increased, efficient private significant variability beween regions. investment in the sector. Construction of urgently needed additional port capacity in Java has been hampered recently, 3.39 Roads are the dominant transport mode however, by lack of a clear port development in Indonesia, and competiton among road straegy coupled with lack of appropriate rules tnsport operators is generally intense. for involving the private sector. Likewise, However, high accident rates and heavy development of the national shipping industry overloading of trucks contribute to high social continues to be constrained by restrictions on and economic costs that are not retlected in ship purchase decisions. The air transport tariffs. Despite recent moves in the right subsector faces the fewest probems in terms of direction, road user charges for commercial capacity and quality of services, wifth under- vehicles remain far below the infrastructure utilization of assets hurtng financial costs atributable to them; apart from the performance in some areas. Most state foregone opportunity to mobilize more transport enterprises-which continue to resources for road maintenance and dominate subsectors other than road-still development, this also impedes efforts to require fnacial support in the form of attrat traffic to other modes, such as rail. increased government equity, with the implicit Traffic volumes on many key inter-urban subsidies so provided often not reaching the roads, especially in Java, are already at or neediest. close to their capacities, and major invesmennts in widening links or constructing new ones will 3.41 The policies, sectoral targets, and sub- be required during REPEUTA VI. Fast growth sectoral allocations of REPLTA vi all move in of urban populations, coupled with rapid the direction of addressing these issues (Tables motorization, is creating severe traffic 3.4 and 3.7). Spending on most major types of congestion in the larger cities, outstripping transport infrastructure is expected to rise their capacities to provide additional road space appreciably in real terms, with the road and consequently impacting adversely on subsector given the highest priority. Within productivity and health. The district and the subsectoral allocations, selection of projects village road network density remains will need to be very carefully prioriftzed. comparatively low, constaining efforts to Iprove rural incomes, although network 3.42 Sectoral policies during REPUTA vi will need to address the underlying causes of 64 OJi*fp:er 3 sectoral inefficiencies. In particular, hr Is a not yet capable of meetng. Many state continuing need to improve the regulatory transport enterprises and regional agencies have framework and to enhance the capabiliMes and limited authority over important invesUtent and effectiveness of the isitutions responsible for operatng decisions, and are unable to respond Table 3.7: ladoneIa REZTA Subsectoral Ailocatots for Traportation REUrM IV WeErlT V WEU74A V' % Clange pa., a (in bions of rupiah) Total oaa 9.1 19.0 33.1 11.7 4.2 11.9 22.2 13.3 Land banqpmt 1.6 2.3 3.8 10.1 Sea trasort 2.0 2.2 3.0 6.6 Air tnsport 1.3 2.6 3.9 8.6 Other ... ... 0.2 ... Cm % of total rasportation) Reads inrastructue 46.3 62.7 67.1 ... Land transport 17.5 12.3 11.4 ... Sea traport 21.6 11.4 9.0 ... Air tauport 14.5 13.5 11.7 Other ... ... 0.6 a RMBrA VI rtive to REPEIA V. So9r REPELIrA docments. its administrion and enforcement, and to quicKly and appropriately tc the changing and adt plaming capabilities to an environment in vaded needs of users. which there is greater decentralization and private participation. Iappropriateregulations 3.43 The scale of Indonesia's transport (e.g., or. tariffs, operator and route licensing, development challenge dictaes further investment choice) impede the development of expansion of the role of the private sector. an efficient transport system. New transport Public poilcies and spending programs need to laws were passed in 1992, but these still give be framed in a way dtat permits private sector the Government considerable authority over participation to be secured quickly and commercial-as distinct from public efficiently. It will be importat that the interest-aspects of transport service provision. Government put in place a satisfactory At the same time, administration and supporting legal/regulatory framework and enforcement of regulations designed to protect develop insiutional capacities for plwag the public interest (e.g., truck overloading, negotiating and supervising private vehicle safety and exhaust emission standards) participation. There is particular need to remain weak. Across the board, the increasing ensure competition among potential private sophListication of transport technology Is participants, especially as regards the provision creating demands for highly skldled personnel of infrastucture with monopoly characteristics that domestic vocational training initutions are (e.g., Tanjung Priok port facilities). RNEurA VV Inveswlag Effecawyffor ST. h 65 3.44 With increased responsibilities for (TABorADEm) alone comprising some 17 million service provision devolved to public and persons in 1990. private enterprises, the principal task for Govenment should be to mutre a climate that 3.46 By the 1990s, infrastructure service promotesthedevelopment' fefficinttransport levels were not much improved relative to a markets, suitable for private participation. decade earlier, owing to the failure of spending Govermment intervention should be resticted to keep pace with rapid urban growth and primarily to protecting the public interest (in inadequate maintenance. Only some 20% of such areas as environment, safety and user urban households have piped water rights), and to the provision and maintenance connections; less than 1% have public of relevant physical assets, while minimizing sewerage connections; and solid waste direct intervention in the investment, management, drainage and flood control are operational and pricing decisions of enterprises. scant. The urban population is expected to By way of exanple, much of pas. public expand by at least 4% p.a. through the end of expendiure on urban bus services has not the decade and standards of living will rise, been very effective, and the market needs to be placing additional strains on urban opened finrter to private operators. Similarly, infrastructure. in maritime transport, the emphasis should be on encouramgn competitive private operations, 3.47 REPTA vi recognizes the urban and promoting competition and efficiency in challenge both in terms of the urbanization shipbuilding by reducing protection. Sizable process and infrastucture requirements. With public investment will continue to be needed in regard to urbanization, policy objectives parts of eastern islands. In air transport, include: a) development of an urban system opportuiies for the private sector should be which differentiates urban areas in terms of opened fwrther. The expansion of Garuda's their roles and functions and defines 87 fleet capacity needs to be restrained until the wstrategic towns3 that will be given priority arrier's efficiency approaches that of other during REPEUTA VI); b) increasing urban regional carriers and its competiiveness productivity; c) developing local government improves as a result, human resources and community participation; d) increasing the financial capacity of local Urban Public Services governments; e) the capacity for integrated urban development planning, 3.45 Indonesia has a difficult task to provide progna ing and implementation at the local and maintain an adequate level of urban public level (as a continuation and improvement of the services. During the 1980s, the Government Integrated Urban Infrastructure Development invested significant amounts in urban approach initiated in 1987 and to be infrastructure, but could not keep pace with implemeed during TETA VI); t) growth in the urban population which, at 5.4% development of urban planning, laws and annually, was the fastest amongst East Asian regulations; and g) improved environmental counties (Table 3.8). The urban population management In term of infrastrucre, rose from 33 million, 22% of the total RPxLTA Vi gives pnority tD water supply and population in 1980, to 55 million, or 31%, by sanitation, and urban transport (development of 1990. Much of this growth came not from mass transport in larger cities). Table 3.9 migration but from expansion of cities into provides a summary of the targets for water formerly rural areas. Ciies and towns supply and sanitation. accounted for some 70% of total population growth, with the greater 1rkarta area 66 a4wffe3 Table 3.8: Indouuaz Interonal Comparison of Urbanition 197@s, 19"0s and 199O Urban Populaton Average Annual Glroh as % of Tlal _ Ra;te of Popuation Regions/copwarator Populaton letw Urban countris 1909 1970 1980s 1970s 198 Inldnesia 22 31 2.3 2.0 4.0 5.4 Middle income countries Total 45 60 1.9 1.8 3.3 2.8 Asia 22 22 2.4 2.0 4.8 3.9 Low itomecountries 22 38 2.2 2.0 3.6 8.3 compuartor tries Phippines 37 43 2.7 24 3.7 3.8 Maaysa 35 43 2.5 2.6 3.3 4.8 Tbailand 17 23 2.5 1.9 3.4 4.6 India 23 27 2.1 2.1 3.7 3.7 So~. Word Bank AnRe dabase, cited in lndonesi: Urban Public Ifratuctr Servioa, Wodd Bak Report No. 12154-IND, dated September 30, 1993. Tabe 3.9e. Indonesia: REPELTAVI Targets for Publi Water Supply UPEUrA V 1994/95 WEIJA W Access to Sa&f Wa (% of pOpUlation) SD n.a. 75 Acoess to Santon (% of population) 25 a n.a. 54 Water Leakage (% of processd) Major cities 38 35 25 Smaller cities 40 35 30 Service Expansion (water supply) Increasm in capacity (liters/detk) 20000 2300 30000 Increase in service population 27600 1600 22000 (000 perions) Souwe: ItPEUTA VI documents. 3.48 During REA VI, it would be it would imply an increase on te order of desirable tuh urban infastucureistment at 250% over actual spending during REUTA V, last be similar in real tms to the amounts which fell well short of the planned levels. that had been planned for REPEUTA V.' The bulk of the feasible increase in urban However, this would be difficult to achieve as infastructure investment in R LuTA Vi should wiwrn v.: Invsdng 9e,lvdyfor Growth 67 be concentrated in sewerage and water supply, connected to a public system. Also, assistance with spending on urban roads holding roughly under long-term contracts with successful unchanged. Also, a signiflcant increase (but sewerage companies in neighboring countries less than a doubling) will be needed in the would be worth exploring. In solid waste maintenance budget, whose persistent disposal, opporunities for the private sector in underfunding has resulted In short lifetimes of waste collection need to be exploited, including assets. In financing the increases in through increased cost recovery. Recycling investnent, increased central government needs further promotiQn. Moreover, greater funding will need to be supplemented by investments would be desirable in the stronger resource mobilization by local construction and maintenance of drainage and governments land improved cost recovery by flood control systems, especially in coastal water enterprises. Institutional capacities of cities. sector agencies also will need to increase. Even if this occurs, the Plan's targets for watr 3.51 In Urban road and transport, service and sanitaon appear ambitious. expansion has proceeded faster than in other yes of infastructure, but the scope for 3.49 In Piped water supply, the system's improvements and cost reduction is still large. expansion needs to be supported by Examples include making better use of existing improvements in operational efficiency, cost facilities through traffic management and recovery and financing arrangements. A major further efforts to restrain traffic growth through meas to achieving these goals will be the municipal charges for the use of road space water enterprises' increased reliance on the and parking. In addition, the needs of non- private sector through management contracts, motorized vehicles and pedestrians often have service contcs, leases, concessions or joint been neglected. Funally, adoption of anti- ventures. The debt and equity structures of the pollution measures is urgent. enterprises need to be reviewed; greaer use of borrowing may need to be allowed for viable 3.52 At present, urban infrastuctre enterprises as reliance exclusively or spending is predomintly fmianced by the predominanly on self-financing will make public sector, while execuion of some expansion at the desired pace difficult to activities is contracted out to the private sector. achieve. Nonetheless, there is substantial Realistically, only a moderate proportion of scope for increasing self-financing by raising total investment requirements in urban public water rates to better match costs. Household services will ever be met by the private sector, connection fees (official and unofficial) owing to the public-good naure of the collected up-front could, on the other hand, be services. But, considerably more private reduced and collected in monthly istallments sector involvement is possible in the direct to enhance access. At the same time, efiorts provision of some of these services, provided will be needed to reduce reliance on well that a competitive legal and regulatory water, which by depleting aquifers causes franework can be put in place. Also, the settling, a particularly important issue in fiture scope for private sector involvement will coastal areas such as Jakarta depend in substantial part upon perceptions of the success of early initiatives in this area. 3.50 In waste disposal, drahge and flood Consewquently, it is important that the control, a priority is to increase finanLg for Government closely monitor on-going public sewerage systems.4 Cost recovery initiatives with a view to ensuring transparency should be improved, possibly including in process, even-handedness in the treatment of environmental fees on households not prospective private participants, and 68 Chapter 3 consistency in meeting the resultant contractual less in health centers. In addition, private obligations. spending has probably been inhibited by the non-availability of bealth insurance.6 Healtb 3.55 This situation has been aggravated by 3.53 Indonesia's early progress in improving problems in the design and implenentation health appeas to have slowed. For example, of public programs. In public health and the country's infant mortality rate (Ia), which primary care, there are wide inter- and dropped by a third between 1972 and 1982, has intra-provincial differences in access to shown little further downward movement facilities and staff, and in the coverage of during the past decade.' Reproductive risks programs such as anti-malaria control. Futher remain high in many parts of the country, problems ir.clude the inexperience of health while adolescents and adults remain susceptible center doctors; extensive but low quality pre- to diarrheal illnesses, tuberulosis and malaria. service and in-service training of health Of special concern is the continued incidence workers; a fragmented and rigid planning and of various traditional health threats, while budgeting process which makes it difficm.lt for costly diseases and conditions linked to aging, the ranking district health officer (the 4okabu) income growth and urbdanization, such as to concentrate resources on priority acivities; cancer, cardiovascular diseases and sexually the unclear division of labor between asmittddiseases, gain in prominence. province-based central staff and local government workers; lack of attention to 3.5A In part, ths unsatisfctory situation is incentives for serving in remote setts; and atibutable to low leves of health spending. inadequate coordination between health-center Only 2% of oDP is spent on total (i.e., public based programs and the centrally run vertical and private) health care, which is roughly half programs. To its credit, the Ministry of Health of that spent in other couo-tries of comparable (MOB) has explicitly recognized these average incomes. Of this spending on health problems, and is expected to respond to them care, the Government accounts for roughly in the course of REPuTA vi by, inter alia: 35%. At $4.2 per capita in 1990, public starting a hiring scheme for newly graduated outlays on health were below those in low doctors (to be extended to include other staff) income countries such as China ($6.6) and on a contractual basis; decentralizing India ($4.6), and well below spending in operations; improving the quality of hospitals middle income countries, such as Thailand by converting them into autonomous, pardy ($16) and Malaysia ($32). Such low levels of self-financing entities, under the -wat- public spending have made it difficult to sustain swadana" scheme; and undertaking several various programs and to operate the network of province-specific projects. hospitals, health centers and sub-centers and staff these facilities with skilled personnel. 3.56 REPEA vi provides for a step-up in Consequently, the quality of heal services efforts to improve the coverage and quality of has not increased sgnificantly, though there health services. Some key program targets are has been some improvement in recent years as summarized in Table 3.10. To meet these a rsult of increased attention to O&M needs in targets, REPBLITA VI allows for a large increase the allocation of funding. The relatively low in spending on all major components of health service quality has contributed to low usage. services (Table 3.11). Nevertheless, it appears Heal spending has been held down in part by that an increase of even this order of magnitude low fees at public facilities-cost recovery .s will fall short of the spending necessary to only 20% in government hospitals and much deliver an adequate package of basic public REwuX w.: Investing Effeiwvely for Grow:h 69 Table 3.10: Indoneia: REPEfTA Targets for Human Resource Development (% of relevant population) Sectoral End of End of Indicator WPFLJTA V REPEJJTA VI Health Service: Child-birth assistance By trained assistant 50 55 By medical assistant 65 75 Check-up of pregnant women 81 90 (at least 4 times) Contaeption service 66 70 Care of aged persons 35 50 Prevention of disease: Immunization of infants 75 80 Incidence of: Malaria in Java/Bali 0.1 0.01 Malaria outside Java/Bali 4.0 3.0 Tuberculosis 0.24 0.22 Education: Participation rates a: Primary (net) 93.5 94.0 Junior secondary (net) 39.9 49.6 Senior secondary (net) 24.7 30.4 University (gross) 10.5 12.8 a Net participation refers to the % of the age cohort in attendance e.g., 7-12 year olds attending primary school, gross to total enrollment, divided by the age Rohort. Source: REPELrA vi documents. Table 3.11 Indoneda: REpsLTA Subsectal Spending AMloation for Human Resource Development (in trillions of napiab) REMA IV REP$IJA V REPEUff VI % Chwge Ailocadon AIocawion Alocadon per auana Health, Welfae, etc. 3.5 4.1 8.6 16.0 Health 2.1 2.7 6.3 18.8 Pop.&Fam. Planning 1.0 1.1 1.7 9.0 Social Welfae (incl. women) 0.4 0.3 0.5 13.0 Education, Youth, etc. 11.5 17.0 20.4 3.7 Education (incl. youth) 10.4 15.7 18.8 3.6 lnomal training (i.7 1.2 1.3 1.4 Culture 0.3 0.1 0.3 29.2 a REPELA VI over REPUErA V. Souror. REPELfA documes. 70 Chapter 3 ilue3.1: 3 NDONEv I PER CAPTA CosTs OF BAsiC HEALTH INTmERENONS Interventions Expanded Immuniztlon . Program Maon ement et School Health Maternal Health Tuberculosis AIDR Prwventton Family Planning _ ProvItion of Clean Wate: & Sanitation Service. Llmtta Curatton Care Other Pubilc Health Antl-Smoklng Campaign 0 1000 2000 3000 4000 5000 6000 Rupiah/Year health services. By way of comparison, signfcant change in the composition of expenditre estimates have been developed health outlays. Spending would need to shift, using the limited package of public health and for instance, away from the subsidies currently clinical interventions that is recommended for allocated to various non-essential hospital all low-income countries in the 1993 World services and training actvities. The regional Development Report (WDR). These estimates, effects associated with the adoption of a basic which are based on information collected from package imply less spending in large urban MOH tecmical units, indicate that the WDR centers where most major hospitals are located package would cost roughly US$10 per capita and larger outlays in peripheral areas. in Indonesia (see Chart 3.1). Adoption of the Stepped-up spending outside lava and Bali also package would require a 250% increase in seems necessary, especWly in areas of endemic overall public spending on health and a five- malaria and/or continuing nutritional problems. fold increase over what is currently spent on the included activities. Such an increase is 3.58 Adoption of the basic package beyond the financial resources of the described above would need to be accompanied Government, and exceeds the implementation by actions to improve the effectiveness of the capacity of MOH. However, it is indicative of delivery system. In this regard, actions related the order of magnitude of the problem faced by to decentralization need to be accelerated, Indonesia in this sector, and underscores the particularly in areas such as East Java that have need for efficient allocation of spending, and strong provincil teams. Stepped-up cost for steps that would improve the effectiveness recovery will be needed across the health of service delivery as well as raise additional system to provide additional financial revenues. resources. It will be important to use exemptions and differential pricing to protect 3.57 Besides a large increase in spending, the poor. In the case of hospitals, reform the basic package, noted above would involve a efforts need to be driven by the goal of sharply MPNT V: WInwedtng Effei vlyfor GroWM 71 reduckng subsidies to the non-poor. The ni on increasing access to schooling opportnitie, swadan (self-management) concept needs to centered on an extensive school building be extended to health enters and the district program. As a result, net primary enrollmen system. Also, it will be important to develop reached 92 percent in 1992. There have been indicators which can be used to monitor equally impressive achievements at other levels perlbrmance at the individual and facilit of education. Net enrollment for junior and levels. senior secondary education was estimated at 40% and 25%, respectively, in 1992. At the 3.59 Pre-paid health insurance also has tertiary level, gross enrollment of 10.5% was considerable potential, but its application achieved in part by making available at least e somewhat prolematic. AaSK, the one public university in each of Indonesia's 27 government-run scheme has had financial provinces. These achievements in raising problems, and various pilot initiatives aimed at enrollments compare favorably with Asia as a private employees have not been able to whole and with other East Asian countries operate without a subsidy. Consequenty, the (Table 3.12). Public expenditures for rapid movement towards mandatory coverag education averaged 3.5% and 3% of 3DP under the JAMSOSTE scheme of the Ministry during REmPELTA Iv and v, respectively, with of Manpower (MoM) iS prematre and risky. nearly half of the amount allocated to prinary Despite its wide-ranging mandate, As=IK lacks education; these amounts also compare the capacity to administer the health insurnce favorably with many developing countries. and service provision aspects of the new social securit law. For exmle, although collection 3.61 Notwithstditng past inm , of funds began on July 1, 1993, discussions major educatonal challenges le ahead. About with care providers, including public and 23% of those who enter grade 1 (mostly private hospitals, on service packages, pricing children of poor families) never complete their ai rehibursement procedures and levels, are primary education; every year, 1.2 million still at a very prelim stage. In addition, children drop out of primary education; every the affordability and btudgetary impact of the year, 1.2 million prmary graduates do not very generous benefit package specified in the continue t secondary schools; secondary legislation needs review. By cona, MOws school itke has been faltering in the past five apach to health inance (under the years, resulting in sluggish enrollments at the insurance program known as JrKM) has many junior and senior secondary levels; and, in atractive features, including th use of prepaid higher education, low qua . and efficienc are payment systems, tho emphasis on preventive a concern. T challenges indicate that series and quaWity assurance, and the revised strategies, largely recognized by inteded provision of a limited stadad REPUTA Vi, will be needed in the fuure. package of benefits through public and private suppliers. JPKWs goal of reaching universal 3.62 Cental to meeting these challenges is coverage over the medium to long-tenn is also the enhancement of the quality of education. appropriae. To do so, the population would At the primary level, with the expansion of be grouped into ever larger risk pools, access already achieved. the focus needs to beginning in iarge urban areas, with shift to raising quality. The present low cross-subsidies used to make health care quality is reflected in low wage differentis affdable to the poor. between workers with and without primary education (MacMahon and Boediono). Also, Education the past strategy of providing uniform inputs to schools may need to be supplemented by 3.60 In Indonesia's first 25-year delivery of well-targeted differental inputs to development plan, educational policy focused support under-served, resource-poor schools 72 aOpter 3 Table 3.12: Indonesia Total Numb EnroDed as Percentage of Age Group Populao (Gros inroiment Ratios in Percent) Repcia V Ado &ssa*d Repclia 1 Aera,ge AKma Thaiand Oana Ptkppn (PlnJ) Pnnd 1991 1975191 19S 99 199 Ptinq dhcadto 110 115 JOS 107/107 96 135 111 Junio bScoda 53 66 (67) 45 ' 56/8' 30 ' 48 73* Senior SeeA 33 40 Educatio (45) T.riuy Education 1O.S 12.8 6.5 9.6/40.5 19.6 1.7 263S (I1) a AU Secet. Sme: RepeWu V and Repe VL UNESCO Y.adook (1992). (see Chaper 5). At the secondary level, a higher education, with emphasis on staff new strategy is needed to boost the quality of upgrading; placing greater emphasis on education in the light of recent flagging science and engineering programs as well as enrolment rates. Again, the present low research in higher education; increasing access quality *f junior secondary education is to pre-school education through eanced reflecteG in low wage differentials beteen community pardcipation; increasing emphasis those with and without such education. on vocational secondary education; and Corroborating evidence is provided by reducing subsidies to higher-income groups by inteational comparisons, which show that charging theem higher fees. Indonesia's primary and lower secondary school student lag behind their regional 3.64 Preliminary Bank analysis suggests that counterparts in reading competency tests(Fable resources required by the Goverments 3.13). At the tertiary level, the role of public RF.JELITA vi targets could be more ta instittions needs to be redefined in order to twice the amounts actuaRy spent during the provide efficiently diversified, better-quality previous Plan period, which is appreciably services for post-secondary education. more than the allocation in RlELTA VI (see Table 3.11).7 In addition, closer examination 3.63 The Government has put forth of progran options indicates tgat sone ambitious targets for Rm%uTA vi (Table 3.10). inaestments may not be fidly cost-effective. Key goals include: expanding ao for Major issues in this regard, as discussed junior secondary education with a view to below, relate to the main source of the achieving universal 9-year education with;n the increased resource requirements under the next 10 to 15 years; targeting the poor, Plan-an ambitious scheme to expand junior especially in prmy education; providing secondary education through abolishment of quality-ehancing inputs such as textbooks fees for both private and public sector studn and a better incentive system for tachers; and a major school building program. improving educational conte to ensure zelevance, especially for primary and 3.65 Junior Secondary Education. Given secondary education; improving quality of the high prinary enrollment and the challenges WELJTA W. lnveswg 4cdWdy fior Growth 73 that industrialization poses for Indonesia's * Deivery Modes: Cost saving labor force, it is timely for the Government to possibilities should be explored through include junior secondary education as part of the choice of delivery modes.' At the its focus on basic education. However, the same time, quality consideradons need current plan for universal junior secondtary to be given high priority. education comes in an environment of weak demand by the low-income population, which * Teacher Training: S&condary is determined in part by perceived low returns education expansion is not likely to to additional schooling compared to require additional investents for immediately seeking employment. In such capacity expansion of teacher trairing. citcumstances, expanding accsandreducing Indonesia's schools are well-supplied fees may not bring significantly more with teachers by intnational standerds children into schools. The expansion strategy (an average ?upil ratio of 16.8). Also, Should explicitly ronie the unpredictable the current acher education output of nature of individuals' responses, and make 40,000 per year should be sufficient allowance for on-going assessment of such for the envisaged expansion even for responses, with provision for subsequent t- the ambitious expansion scenario of adjusunent of policies. This is particularly reaching universal basic education important for poor students (Chapter 5). A within fifteen years. The more prudent approach would be to establish some important qualitative issues include: level of targeting to avoid infusion of funds special training programs for teachers where they may not be needed, to pilot in new delivery modes, such as SMP different delivery mechanisms, and to Kecil, to enable them to tach more complement investments for expansion with than one subject; and quality investments for quality improvement along the improvement of teachers through a following lines: review of existing teacher education institutions, and attracting better Qulity Improvement: As recognized candidates into the teaching profession. in Repelita VI, more attention needs to be given to quality improvement 3.66 It will be important to review the measures such as increasing impact of policies on private educationa availability of textbooks, upgrading the institutions, which account for 35% of content of curricula, and improving the children at the secondary level. A major quality of teacher training. program of public school construction carries the risk of crowding out valuable private * Targeting the Poor: The large efforts, unless accompanied by careful disparities in gross enrollment rates planning. Also, the regulatory framework for between inco ie groups (in 1992, 96% fees wil have an important bearing on and 37%, respectively, for the richest incentives for future private investnent. For ten percent and for the poorer half of example, in Korea, the introduction of tuition the population) suggest that targeting ceilings led to a financial crisis in many better public resources to the poorer alf of private schools, and some converted Into the population would be more cost- unregulated senior secondary schools. effective in achieving obligatoy junior secondary education (see Chatr 5 for 3.67 Prima Education. Future policy further discussion). should emphasize quat improvements, 74 cJetAr3 Table 3.13: Reading Achievement Test Scores, IM Cowwy Mean Score (%) Indonesia 51.7 Philippines 52.6 hiland 65.1 Singapore 74.0 Hong KLong 75.5 Source: Vincent Ganey, Lteracy Standards In Indonesia (processed), 1992. especally for the poorer segnts of society. 3.68 SenIor Secondary Education. For Wmprovements in quality will be needed to senior econdary education, the main source of reach levels of leaming achievement now cost-saving for the Government lies in effective attained by other East Asian countries, and thus use oZ the private sector, which has been a contnue the shift from a natural resource based significant partner in providing education. As to a human resource based economy. is the case for junior secondary educaion, the Projected declines in enrollnents due to Government's program for tht coming years dereasint fertility rates represent opportnities needs to indicate explicitly what it expects from for some cost saving, but they should not private schools. A policy for encouraging detract from the importance of improving private schools to upgrade their quality also primary education. Of particular note in this needs to be ardculated. One element of such a regard are: late starters, whose incidence is policy may be a careful monitoring of the high in the poorer regions; high dropout ras accreditation system currently in place, and attributable to perceived low quality, especially linking public assistance to private schools to among the poor; ana considerable disparity of specific performance indicators. access to quality-enhancing inputs such as textbooks (over 90 percent of sudents in the 3.69 Vocational Soeondary Education. In richet docile in the population own at kast one a r ¢ Idly industriazing oconomy such as textbook; by contrast, only slightly over 40 Indonesia, vocational training to address sdill percent of staients in the poorest decile own at shortages is important. However, conventional least one). Targeting services to the poor, for vocational secondary education can be an example, pre-prinary education and textbooks, expensive program to develop and sustain. might help to correct these differentals. Inrnational experience shows that vocational Secondary and teray education quality secondary education programs often do not depends on the foundation of skills and address the fundamental problem of mpafin knowedge Wd by primary schools. Savings life skills to children, especially for young from declining enrollments should be re- children. It would be preferable at the junior invested in programs to upgrade quality, secondaiy level, if policy were to focus on especially in rural areas. The decline in imparting atudes necessary for work, enrollments presents opportnities forachieving especily in the modern sector, and developing furher efficiency gains through school basic sldlls to be able to learn new vocational consolidation, closures and better teacher skills later in life. For senior vocational distrion. Also the challenge of providig schools, the cost-effectiveness of exisdng equal quality will require increased capacity in programs as well as options for ensring local-level planning and management of inputs. relevance through effective linkages with WEmL&A w: Investing Effectvelyfor Growth 75 employers should be reviewed before iaunching on issues that affect planning and into aggressive expansion. implementaion of projects across sectors in Indonesia. 3.70 TertiaryEducation. Giventhegreater resource requirements of basic education, 3.72 As recently studied in detail in a World terdary education cannot expect to have an Bank report (see World Bank, July 1993), increased share of education's sectoral ineffective project planning and implementation allocation. If the goals of quality improvement are costly for economic development. Poorly and quantitative expansion are to be attained, a planed or inadequately designed projects considerable burden would need to be borne by waste scarce public resources. Delays in private firacing, including higher fees. implementation raise the cost of projects; Public resources should complement private World Bank estimates indicate that the cost of financing in, for example: quality enhancing a 2-year delay in project implementation could inputs, especially staff development; higher- drive up the cost of a project by some 20%. cost science and engineering programs, Quality lapses may reduce the lifetime of including technical subjects in polytechnics; projects and subsequendy drive up maintenance fmancial assistance to poorer students; and costs. Failure to deliver expected results research and graduate education. Re- engenders cynicism within the local community albocafion of public resources in line with and disheartens aid donors. Such issues these priorities needs to be complemented by relating to the efficiency and quality of project polies to build structural foundations for planing and implementation in Indonesia are future growth. These include: greater discussed below. financal autonomy for universities in raising and utilizing resources; introduction of Plroject Planning performance-based criteria in provision of government funds; and improved remuneration 3.73 A central need in enhancing capacities and career incentives for teaching staff. In to undertake an expanding, high-quality order to provide an enabling environment for progran of investments is to develop the use of effective private sector participation, future appropriate project identification and policy should also provide for: quality- appraisal procedures. Investment proposals sensitive accreditation and public financial should be subject to the discipline of support linked to objective measures of quality systematically prepared project feasibility upgrading; information dissemination on the studies, with this requirement firmly and quality of programs to facilitate decision- uniformly enforced. To promote the adoption making by private individuals; and greater of suitable procedures, guidelines to line opporunities for staff upgrading through ministries and agencies on project preparation graduate education. and selection will need to be strngthned, supported by necessary upgrading of the E. Improving Project Planning and capacities of their planning units. These Implementatilon actions need to be complemented by adequate provision for central review and qualit 3.71 The preceding section discussed control, both to scrutinize individual projects investment priorities and policies that bear on and to assess the macroeconomic-and the efficiency and effectiveness of overall intersectoral-consistency of the planned sectoral investnent programs, focusing on the investments. The Ministry of Fmance and major sectors of public investment. This Bappenas have a central, coordinating role to section examines issues that bear on efficiency play in this regard. It would be useful to of investment at the project level, with focus develop an inventory of project profiles, 76 Cawer 3 employing standardized formats, which could effectiveness. Second, as much as possible, be regularly updated. This would improve the project designs should be kept simple, to basi of investment planning, enriching the facilitate implementation. In the case of the project content of the public Investment decentralized public services (particularly in the progran, and also facilitate fiscal management urban and social sectors), the need for by providing systematic information on the simplicity of project desigo is even greater, magnitude and timing of costs associated with given the generally weakee institutional ongoing and new invesunents. capacities of local governments. Implementation would be facilitated if projects 3.74 Recently, the Government has had fewer objectives and components, based tightened project scrutiny for investments upon simple, proven, technologies, in line with requiring offshore commercial loans (which are the capacity of local executing agencies. subject to approval by the Commercial Multi-agency projects tend to be more difficult Offshore Loan Team). Appropriate feasibility to implement, but are often necessary, e.g., studies are in general prepared for projects that integrated urban imnprovement projects. are supported by official external assistance. Effective inter-agency coordination is important Such studies are also prepared for some of the to the success of such projects. domestically-financed projects, but systematic evaluation of investment proposals needs to be Project Implementatio extended more widely to these projects. Moreover, such evaluation should not be a 3.76 While sound project preparation and requirement only-or mainly-for projects that selection are important to investment are large in size. Government investments efficiency, equally important is effective financed off-budget need to be brought on- implementation. Without it, even well-planned budget, so that they also pass through the projects will fail to achieve the desired results discipline of the budgetary process, including in terms of maximizing beefits and comparison with potential rerns on altemative minimizing costs. Major issues in project uses of the resources. In carrying out its implementation in Indonesia may be grouped oversight role vis-a-vis public enterprises, the under four broad headings: financing Ministry of Finance needs to ensure that sound procedures; procurement; land acquisition; and project appraisal procedures are adhered to by project monitoring and supervision. Box 3.1, these enterprises, not only for investnents for on irrigation works, provides an illustration of which they seek government funding but also some of thu issues faced in project for those they finance themselves. implementation, especially on small-scale projects involving decentralized execution. 3.75 Two other aspects of project planning Progress has been made in recent years in and preparation, especially relevant to projects improving project Implementation; some of the implemented at regional and local levels, bear actions that have been taken are summarized in emphasis. First, efforts should be made to Box 3.2. However, a substial unfinished involve local communities more in project agenda remains, as outlined below under the formulation. Increased local participation four headings. Two policy thrusts that cut offers two main advantages: it gives planners across this agenda are: a better understanding of local needs, priorities and constraints; and it mobilizes community * delegation of greater authority from support for project objectives and community central planing and finance agencies help with implementation. lhere is a growing to the project implementig agencies, body of evidence that shows that greater local coupled with improved inter-agency participation enhances development coordination; and ARU W: In.' s*ing Nee"y for Growth 77 simplification of procedures relating to Refonns along these lines would need to be proect financing and Implementation. complemented by efforts to build instiuional and staff capacities v. ithin the Impeenting agencies. Box 3.1: Improving Investment Quaity: Lesons from Irrigation Works in Indonesia Qulity contol is a complex and difficult task in infrastuctuul proects. If quaity is poor, dim completed wor deteriorate rtpidly and high cost repa become necsy. Cosoeqetly, quaity of conuction is critical to achieving value for money. In small-scale irigation wo*s, as with other small- scale infuure investmet, the problem is complicated by implemeion over wide ars and an exteded peniod of time. Constuction standards are generally good in Java, but are lower in the outr islands where regionally-based contractors and institutions are weaker. Anayis of irgation projects suggests the following aes f impovemnt infrastrcture projefts: * Project mana t In sveal instances project manage staff have not been blse to control he imple on poss well enough to ensure high standards of work. * Surveys, lnesigatlons and deign: Inadequaies in these respet tend to result in faulty constucfion unless revisions are made dudng constrution. Often, sufficient accout is not take of site conditions and the operational and maintenance capacity of users. * Procurdeme On occasion, regionally-based contracwts, who lak expernce and tcbhnic skills, are selected because of weaness in prequalification and bid evaluation. * Admiisr of cont: Often there is reluctnce to take punitie sctions to invoke contcta remedies to resolve problems. * Qualit of couu ln input he needs to be more rigorous evaluation of condtults' proposas, and more flexible application of the 30:70 ratio for foroign and local consultants. * Budgetary provio: Tese are often inadequate relative to OWM and land acqusition needs, dlthough in recent years o&M provisions have been uiproved in irigation * Community and far involveent: Earlier involvement of direct beneficiais would assist in quality control and accountability of coneactots. - In irigation, the Gomnt and the Wod Bank are woing togeth on a progm of actions for tho Govemmet and donors to overcome tho factors noted above. lho first essetial step is to create a system of delegation, responsbility and accountability at all levels of goverment and beneficiares. IThis will be strengthened through technical, procedura and institutional imptovements, wich are beig suppord through a World Bank loan. The program will serve as a quality assurance system and monitoring framework for both the Govenmt and the aid donors. This approach may be useful also in other inrtuctr areas. 78 Chapter 3 Box 3.2: Recent Actions Taken By Indonesia to Improve Pro3ett Effectiveness * Expedtig Project Srt-up: Govermen is proposing to reduce delays by (i) discussing Annual Work ProgaMs (AwP) for ongoing projects during project budget review with te agencies concened and uAPPaNAS; and (ii) including, staing in April 1994, some contingency fiuds in the development budget (DeP) and designating project ianagers without waiting until after loans are formally approved. * Timely Budget Rdease: Some projects have not boen provided with the required countpat funds. The use of the Work Program review mechanism has been helpful in making progress in this area. Similarly, in his new budget spch to Pariament, President Suhato emnphasized the impotunce of adequate operations and maintenance funding. * SimplIation of Project Design: The Government has reacwted positively to reducing the scope of some projects that appear too complex to execute. More progress is, however, needed in this area, which would requie closer participation on the part of the agencies involved thro'aghout the project cycle. * Procurement: (a) The Government has revised its main procuremeat regultons (replcing KEPPRES 29/1984 with IKEPPREs 1611994) to improve the efficiency and intgity of procurement; (b) the Government has started using Stadard Bidding Documents (SaD) for IcB; and (c) the Government has decided to establish a Procurement Resource Center to improve procurement management both at the cenial and provincial project agencies. * Technical Asshbtem To reduce delay in consultants' appointment and improve their effectiveness: the Government is considering abolishing the regulation on biling rates ceilings which has been strdtly implemented since 1989; ToRs and short-lists for consultants are now prepaed prior to loan negotiations and approved during negotiations, which will expedite appointments; and the Government has begun to use pricetogetherwith technical evaluation as criteria for seection of technical assistanceconsultauns for many projects. * Land Aequlition and Resetlment: Some progress has been achieved in land acquisition but there sre still delays undera few projects. Attention is also being given to acquiring land in a timely manner for the people to be reseted. * Cost Reovery and Prices: The Governmet has, for cxampk: (i) increased fuel prices (except kerosene) to their intenafionl levels; Ci) issued decee on changing road users' taxation; iii) improved collection rate and area coverage of irrigation service fee; and (iv) incrcased electricity tariffs to meet target rate of run; * Costruction Quality: The Government has taken medial actions which have icnproved the quality in several cases. The Ministry of Public Works has requested support for their proposals for productivity and quality improvement underprojets/programs implemented by the Ministy. In their public announcemen, high klvel Government officials have emphasized the importance of quality enhancement. * Improved Interagency Cordiation: The main instrmCnt for this has been decentralization. In sevaal sectors, the Government has taken specific steps to delegate more responsibilities for project planning, funding and implementation to provincial and local governments. * Country Portfeoli Performance Review: The Government, in conjunction with multlal lending institutions, has undertaken a major review of the effectiveness of its projects financed by these institutions. Specific actions have been agreed to address identifed problems, including restucturing some projects in the light of implementAtion experience and dropping projects with questionabk qualiyaty-ety. WEIJTA wI: Inwesling Effecdvely for Growth 79 3.77 Sb ing Flnandng Procedures. especially on larger project. Feasible targets Project implementation is hampered in virWally for time-saving in these areas could cut proJet all sectors by difficulties in budgeting and delays, and associated costs, considerably. finance, stemming largely from the fragmented Costs could also be reduced by better applying naure of the budget system.9 Ihe problem is competitive procedures in procurement. Long more acute in the case of projects implemented delays are often encountered in the by subnational govermnents, for which funding procurement of consultant services as well. s sourced both from (often multiple) Central The effectiveness of technical assistance often Government budgetary channels and from also suffers from deficiencies in the selection subnational governments' own budgets. process and rigidities in hiring policies. Consolidation of funding sources into fewer budgetary channels would greay facilitate 3.80 A major reform step recently taken by planning, monitoring and implementation. the Government is the introduction of a Greater powers could be delegated to agePcies substantially revised set of regulations for to shift funds within expenditure categories procurement, pre-qualification, bid (subject to post-audit control), and delays need evaluation/contract award, and the budget to be mnimized in payments to suppliers and cycle. The revised regulations, contained in consultnts, following satisfacory delivery of KEPPRES 16/1994, became effective on March services. Moreover working knowledge of 22, replacing regulations contained in KEPPRS budgetary and financing procedures needs to be 29/1984 that previously defined policies and improved. This would be helped by procedures on these matters. The new devloping and disseminating among project E introduces improved regulatons and agencies clakr guideiines on budget and fiance procedures in key areas of reform: greater procedures, including loan agreements and decentralization of procrenent functions and disbursement rules for donor-assisted projects. implementation decisions; open and competiive environmen for contracting; and greater 3.78 Also, some modifications to the DIP flexibility for multi-year contracts and DIP process need to be explored. For example, an revisions to enable thiely start and issue is how to accommodate better the needs uninterrupted progress on implementaion. of projects requirig multiple-year execution These are significant steps. However, their within the framework of an annual impact will depend on close attention and appropriation process. Also, a mechanism is matching comminent by project agencies, needed to provide for local budget financing during project implementation, to the following before a loan becomes effective, as a means to factors: use of competitive and transparent allow preliminary aspects of loan preparation to procedures and standards in bid evaluations and be undertaken. To be sure, some risks are award decisions; careful prequalification of involved in this approach (e.g., the loan might contracts and supervision of construction never be declared effective). However, the works; and careful evaluation of quality of amounts of money involved are likely to be works built and goods supplied, in terms of small; the risks would be minimal for quality durability and serviceability, in relation to the projects; and the potential gains would likely approved contracts. be well worth the risk involved. 3.81 Tecbniicl Asss e for public 3.79 Improving Prouemnt. Despite the investments in Indonesia is substtal, with an progress made in expediting procurement in increasing role being played by domestic recent years, long delays still occur in the consultants. But it has not always been processing of many works and goods contracts, effective. A key issue is how to economize on so caapter 3 fte use of technical assistance and improve its reduce delays. More carefil planning is efectiveness. Modification of the billing rate needed for any resetdement resulting from land ceilings and introduction of price as one of the acquisition. For large projects, where delays factors for consultant selection (Box 3.2) would are costly, land must be fully acquired before be steps in the right direction. At the same the start-up. me, the following improvements would help raise the quality and development impact of 3.83 Streamlining Project Superviion. technical assistance: promotion of design of Increased delegation of authority to technical assistance that responds effectively to implementing agencies increases the importance the particular nature and needs of an of an effective project monitoring and assignment; avoidance of delays in appointment supervision system. Many elements of an of consultants, especially in contract implementation monitoring system are already negotiations after an award, and timely in place: the Ministry of Finance keeps data issuance of payments; careful review of the on the release of funds to project agencies; credentials of consulting firms-foreign or Bappenas maintains a project monitoring local-and exclusion of system; and several sector agencies have unqualified/incompetent firms from short lists, developed management information systems to together with an unbiased evaluation of track the physical and financial implementation consultant proposals; and elimination of of projects. These systems, however, do not "forcedu joint ventures between foreign and produce standardized management reports. local firms and of prescribed mixes of foreign Recognizing the need for standardized and local consultants, as these hamper the reporting, the Ministry of Public Works is efficient design of technical assistance. pioneering a procurement/disbursement monitoring system which, upon successful 3.82 Facditating Land AcquWison. Land implementation within MPW, could be extended acqusio for projects (especially in Java to other ministries. Satisfactory completion of around major towns) is a complex, time- this initiative would appreciably strengthen the consuming process. Administrative procedures basis for systematic project monitoring. In the need to be simplified,10 and land registration context of decentralizing procurent, needs to be accelerated. Also, price supervisory agencies also need to negotiations are a drawn-out process, often establish/strengthen systems of quality because land owners are pressured to accept assurance, supplemented by independent low prices. A more market-oriented pricing technical audits of a sample of completed system and prompt payment policy would works. xBp&nx w. InvestJng Effectelyfor Growth 81 Eudnotes 1. These eimates includo spending through the Development Budget only, and, therefore, differ from those shown in the last wow of Table 3.1 which also include estimated Govenment off-budget development spending. TheREPELrAV budgetay developmentexpenditureestimate (8.5% of ODP) excludes alloations in the Development Budget to the Developmant Reserve Fund (CAP). 2. For example, new regulations open satellite and cellular telecommunications to private entry, and provide for new financing methods for network expasion by prvate parties jointly with TmUCOM. Also, terminal equipment and non-basic services can be prwided by the private sector in competition with TBlUOM. Nonetheless, progress has been slow due to lack of clear guidelines, complicated licensing procedures and limited network facilities. By way of example, the absence of competition in the provision of cellular phones has led to excessive prces for handsets, Uttle incentive for good service, and an ad hoc approach to allocation of radio frequencies. The ceilular subsector needs a thorough review by oor. 3. Ihe category of 'Urban hiblic Services' is a composite category that is difficult to identify, especially in earlier RxmEm.rAs where the sector received less attention. Consequently, the discussion in this subsection overlaps to some extent with other subsections, and it is not possible to be precise regarding allocations-and changes over time in allocations-to this category. 4. There is no provision for constucting a sewerage system for Jakata duing RErsA VL S. donesa's m is well above that in other ASEAN countries and in low-income countries such as China and Sri Lanka It reflects the continuing incidence (especially in some regions and among the poor) of duiaeal diseases, acute respiratory infections and neo-nal tetanus as well as pockets of severe malnutridon and mironutrient deficiencies. 6. Insurance-based (risk sharing) mechanisms accounted for less than four percent of total health spending in 1990, and were limited mainly to civil servants, the military and their families. The scope and scale of pvate spending may soon expand, owing to inmsurance initiatives being purued by the Ministy of Health (MoH) and the Ministy of Manpower (MOM). MOH has been authorized to lienso pr-paid, managed care schemes which have estabished satisftcty primary care and hospital service arragemts and which meet other critera including compliance with the principles of an embryonic comp ive health insurance program (JPKM). However, MOws initiative wil need to be aligned with the health sunce component of MOM's newly enacted, mandatory social security scheme, JAMS=M which is to be admin iered by Pr ASF Most key features of AmSOST s health component remain unclear and the subject of considerable debate. 7. It should be noted from Table 3.1 that estimated actual expenditures during REPLUA V were well below amounts that had been allocated in RBPBLA V. Consequently, the relatively small inctem in REPMLrA Vr. allocation relative to that of RusrA v, shown in Table 3.12, un the increae actually projected for REPemrA vi. Acwal expenditues were not available at the level of disaggrgon shown in Table 3.14. 8. The main options include smP Kecil, Terbuka (ie, 'open schools or learning-at-home) as well as the use of Packet B. However, the existing Terbuka scheme appears to require high recurrent costs and needs to be reviewed. 9. For example, investment funding is canndeled through a number of sources, including: Dip alloeations to central sectoral d-partment; nPES grants for regional governments (with a split beween various block and sectoal programs); external loans channlled through various special accounts; and off-budget financing. 10. Procedures of the national land board (BPN) require that each project application for land pass through the Provincial governor and the Bupati to the kabupaten teaim. Trme could be saved if applications wvere et directly to the abupaten teams, wbose mbers need to be increased (cumetly there is only one team per kabupaten). Swtabdng Growda ImproWng te Incenive Frmwork and Efflicency 83 4 SUSTAINING GROWTH: IMPROVING THE INCENTIE FRAWORK AND CCY A. Introduction rates of protection of 28% and 23% respectively in manufacturing. The high rate 4.1 Indonesia's recent rapid economic of effective protection means that fims that are growth reflects not only investment in physical 50% less efficient than their international and human capital, but productivity gains and competitors can survive in the domestic technical progress (Chapter 1, Section D). market, though they cannot, of course, export. Sustaining the 6-7% GDP growth envisioned in High effective protection also creates an REPEUTA VI and competing In increasingly economywide anti-export bias: resources are competitive world markets will depend on a drawn from internationally competitive continuation and intensification of this exporters toward domestically-oriented firms. productiv.ty growth. Figure 4.1 PRODIIN SUIJEOT TO iORT UCB 4.2 Past productivity gains reflect inprovements in the incentive framework contained in the series of deregulation packages that began in 1985. The new incentive tructure generated interindustry efficiency gains from reallocation of the stock of resources into more internationally competitive activities as well as an improved allocation of the additions to the stock of resources. At the firm level, increased competitive pressure from opening the economy and reduction of investment restrictions led to improvements in resource allocation and technological we U m n VW u "ran " a&* progress.1 r X 4.3 Continued deregulation would furither gure4.2 inprove incentives and increase competitive Average Tariff Plus Tariff Surcharge pressure leading to productivity growth. 10 However, the deregulation packages since 1991 appear to have had only a limited impact on standard measures of the structure of oD\ incentives. Progress in reducing non-tariff barriers (NTss) has slowed; they continue to protect 30% of manufacturing and 35% of g. agriculture. Progress also has slowed in reducing average tariff protection. Nominal tariff plus tariff surcharge protection has 1 l hovered around 20%. Effective protection, the more relevant measure of protction, still o_l_,_._. _._ ._ .__ averages a high 52% in manufacturing, the IM Ion W I= uses AmW * 69 highest rate in the East Asian Miracle countries-Korea and Malaysia have effective 84 Oper 4 Box 4.1: Effective Protection, Nominrl Protection and Cascading Effective protection is defined as the protection, in percent, accorded the factors of production working in an industy-the difference between the value of output at protected prices, less the value of material inputs at their protected prices, divided by the value of outputs less inputs at internwtional ptices, minus one. Effective protecion, not nomial protection, detmines whether factors are attracted into or out of an activity. Even low rates of nominal protection can provide high rates of effective protection, and thus distort rsource allocation substantially. This is particularly true if inputs represent much of the total cost of output. For example, suppose a product priced at Rp.1000 in the world market requires Rp.900 of material inputs valued at world maret pnces. If the final product is then protected by a nomina tariff of only 10%, its price would rise to Rp.l100. Because only Rp.900 of inputs would still be required if inputs were not protected, this would imply an effective protection rate of 100%. The firms in the domestic industry could have non-matra input costs that were twice as high as intemationally competitive firms and sti survive behind what appears to be a low nominal tariff. It also is interesting to note the potential negative impact on downstream users of tariffs on inputs. In the exsmple of the product above, if there were no tariffs on output, then a 12% average tariff on inputs would make the domestic producers uncompetitive with imports, even if the domestic firms transformed inputs into final output as efficiently as foreign firms. Domestic firms can compete with imports of the final product ony if they also ae given protection to compensate for the protection-induced, higher cost of inputs. This is called cascading. 4.4 Within manufacturing, effective Realized foreign investment rose from $0.4 protection ranges from 34% on textiles to billion in 1987 to $1.7 billion in 1992 and 120% on food processing. High sectoral approved foreign investmentjumped from $1.5 dispersion of effective protection causes billion to over $10 billion in the same period resource misallocation. Not surprisingly, the (the 1992 data reflect the reclassification of the sectors enjoying high effective protection are $1.6 billion Chandra Asri petrochemicals inwad-oriented (food processing, engineering) project from a domestic investment to a foreign or dualistic (textiles, footwear) with inward- investment following the Government's 1991 oriented firms co-existing with firms oriented decision to halt the domestic mega-projects to toward the export market as a result of policies slow the growth of external debt). Most of the that provide them with a duty-free growth occurred in investments in environment. In some of these sectors, for manufacturing. However, approved foreign example food processing, the high protection investment fell by 21% in 1993, with approvals on inputs and outputs may be inhibiting in the manufacturing sector falling at nearly potential exports. Further deregulation to open twice that rate (again, reflecting the 1992 highly protected markets could raise Chandra Asri reclassification). Although actual productivity and, thereby, growth of non-oil inflows continued to rise, to $2 billion in exports and GDP by stimulating foreign 1993/94, there is concern that the decline in competition and inducing resources to move approvals reflects a more competitive into more internationally competitive activities. environment for foreign investment, especially following the opening of investment 4.5 Foreign investment responded strongly opportunities in India and the socialist to the initial deregulation packages, helping to economies in transition, China and Vietnam. transfer technology and market exports. Foreign direct investment is projected to Sustaining Growth: Improving the Incentive Framework and Efficency 85 increase by 10% annually during the next five 4.8 Among the measures that would yield years (Chapter 2). Implicit is the assumption significant gains In the structure of protection that further deregulation will open new and incentives, this Chapter identifies: mor-e investment opportunities in Indonesia. rapid elimination of mrma (with replacement, where necessary, by temporary tariffs); a 4.6 In sectors where competition can larger reduction of all high tariffs (including regulate market t ehavior, notably agriculture surcharges) to a stated maximum, at most and manufacturing, privatization could increase 20%, over a specified period to provide efficiency. Inernational and Indonesian producers time to adjust; and elimination of evidence suggests that private firms generally export restrictions (except for auctions to operate more efficiently than public enterprises. allocate textile quotas and taxes on some Private investors have expressed interest in species of tropical hardwood where Indonesia many of the industrial public enterprises, has monopoly power, combined with higher including those operating in the cement, royalties and stumpage fees to improve fertilizer, glass bottles, and shipbuilding and efficiency, the environment and government repair subsectors. The need for a Government revenue). A trade deregulation along these presence to guarantee adequate supplies of lines probably would require a period of more these 'strategic" commodities has lessened as rapid depreciation of the real exchange rate to a result of Indonesia's greater opening to the smooth the adjustment to a lower average rate world economy through international trade, and of protection and higher exports and imports. further deregulation, especially elimination of The structure of incentives would also benefit trade restrictions, would ensure a competitive from further reductions in the special environment that would protect the public restrictions on direct foreign investment, for interest. example, divestiture and minimum investment requirements. This would hasten technology 4.7 An across-the-board approach to transfer and improve access to foreign markets. deregulation would help generate the increase Fmally, taking advantage of the opportunities in productivity growth needed to achieve the for privatization and greater commercialization goals of REPELxTA VI. Such a program would of public enterprises, along with improvement be particularly appropriate in view of the in the system for regulating enterprises possibility that oil prices will remain low, the operating in imperfectly competitive markets, increased competiton for export markets and would improve efficiency. direct foreign investnent as other countries deregulate, and the opporunities provided by 4.9 The rest of this Chapter discusses these the recently completed Uruguay Round of the measures. Deregulation of international trade GATr. In this environment and given the need is the focus of the next three sections, which to reduce the external debt burden, Indonesia analyze non-tariff barriers, import tariffs and needs to become more internationally export restrictions respectively. As discussed competitive. Reducing NTs and tariff below, removing trade restrictions has great disparities represents a neutral way of potential to raise the efficiency of resource use, promoting the most internationally competitive stimulate non-oil exports and promote resource activities. Building on Indonesia's agreement shifts into higher value added production. under the Uruguay Round to bind almost all Section E looks at the scope for furtier tariffs at a ceiling rate of 40% and phase-out deregulation of investment. The final section non-tariff barriers over a ten year period, discussesprivatizationofcommercially-oriented firther autonomous trade liberalization public enterprises to raise their efficiency. following an across-the-board approach would hasten the improvement in competitiveness. Chapter 4 B. Trade Deregulatlon: Removing BuLoG's monopoly trading rights on paddy and Non-tariff Barriers milled polished rice contribute the most to production coverage. Excluding these, NTB 4.10 Restrictive import licensing Is the most protection drops to 10% in agriculture, 13% in prevalent non-tariff barrier in Indonesia. After non-oil manufacturing, and 8% economy wide. the October 1993 deregulation package, nine Paper products and engineering also receive restrictive import licenses cover 318 products significant NTB protection. Protection on or tariff lines. 7he producer importer or IP motor vehicles, including the IU or IrrAT license restricts certain imports to producers license on completely built-up vehicles, who require the product for their production accounts for the high share of engineering process (118 tariff lines). The approved production covered by NTBs. The production importer or rf license restricts some imports to coverage of NTmu in the paper and paper approved importers (63 tariff lines). The sole products subsector is explained by the bans on agent or AT license limits certain imports to imports of foreign printed material. Because of sole agents approved by the Ministry of their importance, much of this section wiUl Industry or general importers (holders of a focus on agricultural NTBs. non-restrictive w license) approved by the sole 4.12 Self-sufriciency related to the goal of agents (17 tariff lines). Products covered by food security is the principal motivation for the DAHAA license, the BULOo license, or the restricting international trade in agricultural PBRTAMIA license can only be imported by, commodities. However, self-sufficiency in respectively, the Dahana Corporation, the sole tradable foods is efficient only when a country agent authorized to import explosive products has a comparative advantage in producing those (3 tariff lines), BULOG, the Bureau of Logistics foods, otherwise it is excessively costly. of dte Government of Indonesia (32 tariff Moreover, food secrity is achieved only if all lines), or Pertamina, the state oil company (3 hoeholds have the ability to buy the food. tariff lines). Import bans cover 36 tariff lines, Thus, there is no necessary link between self- mainly from Chapter 49 of the tariff code sufftciency and food security. As discussed (foreign printed material). The June 1993 bency ave raised As dicessed deregulation package replaced import bans on below, NTss have rassed consumer prices of completely built-up motor vehicles with a new sugar, soybeans, soymeal, wheat and wheat license, wU or IT/AT, and high tariff and tiff flour. Policies that keep food prices above surcharge protection, an example of efficiency levels (world prices) runcounterto suriffichation proteonIf anmotor vexwnle of other policies that have served Indonesia well, tarifflcation of NT.as. If a motor vehicle is notably poverty reduction trough economic assembled in Indonesia i may be ilported by growth based on rapid and productive growth general importers. Motor vehicles not of emp!oyment. Eliminating NTss on the assembled in Indonesia are subject to an IT/AT above commodities would give a boost to license. The new license covers 46 tariff lines. com modith, would wiv e ctive The 318 tariff lines subject to restrictive import competition and grow*t, which, weit effective licenses represent 3.4% of total tariff lines in targeting of existing public eadendssure the Indonesian tariff code, but protect 30% of programs toward the poor, as discussed in mangand 35% of agricultural Chapter 5, wlould sustain the remarkable production. progress i alleviating poverty. 4.11 The evolution of the sectoral NBs on Rice: BULOG at a Crosroads production coverage of NTBS is shown in 4.13 Rice has a special economic, social and Table 4.1. The large share of production cultural importance in Indonesia. The New protected by NTBs can be attributed to Order Governmet's rice policy represents one protection of a few agriculural commodities. of its major successes. Through it, the rice . Swabg Gmi& Improving the hweni FAwn rk* and Effien87 Tabb 4.1: Prducdon Coverwage of Restrictive Import Ucealng a prcent of 1987 production) 19851-0 a ors Descrttpon 1989 1990 1991 1992 June Oct. 1-32 Agiculture 44.7 44.7 35.5 35.5 35.5 35.5 1-12 Food crops 64.7 64.6 55.7 55.7 55.7 55.7 13-27 Estate & other crops 25.7 25.7 14.5 14.5 14.5 14.5 28-32 Livestock 7.3 7.3 0.1 0.1 0.1 0.1 33-38 Forstry & Jihlng 12.5 63 0.0 0.0 0.0 0.0 39-51 Mining & quarring 0.2 0.2 0.2 0.2 0.2 0.2 (Ind. oil and gas) 52138 Manufacturing 38.1 32.8 31.8 31.1 31.6 30.4 (ted. oil and gas) 52-74 Food beverages & tobacco 62.9 61.3 59.8 58.7 60.7 60.7 75-83+89 Textes clothing & footwear 8.0 6.5 6.5 5.4 5.2 5.2 84-88 Wood products 0.0 0.0 0.0 0.0 0.0 0.0 90-92 Paper products 37.6 37.6 37.6 34.6 34.6 34.6 93-100 Chemicals 5.5 2.6 2.6 2.6 2.6 0.2 101-102 Oil and gas 0.5 0.5 0.5 0.5 0.5 0.5 103-112 Non-metallic products 19.5 1.0 0.0 0.0 0.0 0.0 113-114 Basic metals 17.2 5.0 5.0 4.6 4.6 4.6 115-131 Emnineering 49.2 36.3 33.9 35.1 31;6 24.2 132-138 Other manu 3.0 3.0 3.0 3.0 3.0 3.0 TOTAL 27.9 25.4 22.3 22.1 22.3 21.8 a Iludn motr vehicles subject to the Iu or rITAT lCenS. Sowrce: Official Decrees and World Bank esmates. maft ngcondidons thatprevailedin theearly BULOo has achieved food security at the 1960s-4ow and unstable prices, poor tranport national level. and counications, local surpluses and shortages, local monopolies and an overall 4.14 Ihe dramatic tranformation of th deficit requiring variable levels of Indonesian rice market is atritable to many impor-have virtually disappeared. Today factor. Among the most important have been the rice market is well-integrated across most the expansion of high-yielding rice vaieties, of Indonesia: transport and communications increased use of chemical ferdUzers and are good, prices are relaively stable, and pesticides, large-scale government investment traders respond quickly to imbalances between in Irrigation, and rural infrastu , supply and demand in different locadons. transport facilities, comnications faciliies, 88 COpter 4 rice mills and grain storage facilities. Credit, Figure 4.3 seeds, fertilizer and pesticides have been provided at below-market terms (pesticide Rice Prces: subsidies have been eliminated). Finally, Rps Indon sa mandIntational (Rp BULOG has guaranteed floor prices for 7ao . _o -s o unhusked rice sold by farmers and rice sold by cooperatives. I \ I\ 4.15 A major part of DULoo's success has been its role in developing the private sector rice marketing network. By allowing a 1- sufficient margin between the floor price for unhusked rice and husked rice, BULOo is 4 ^ J/° credited witi fostering the development of an integrated, competitive private sector presence in rice marketing that now handles 94% of rice __ production; only 6% of the annual rice harvest JmmJlh4uMJN,Jm,,uJSHJM NJMUJ8HJM3 is procured by BULOG for its price stabilization 1W. 1 1989 1990 I 1i99 1 1992 119I objective (for more details see Ellis et.aL). From the early 1970s until the recent period, 4.17 Other developments independent of fte BuLoG's pricing policy maintained domestic GAT already have broadened and deepened the rice prices within the international price band world rice market. One is the diversificafion (Figure 4.3), a policy that m s of exporters and importers. Vietnam has distortions to producer decisions. BuLoG's aim become as a major rice exporter. Several non- of insulating consumers from international rice Asian importers also have emerged, especially price fluctuations also has been achieved Brazil, which has imported significant amounts (Table 4.2), though the greater volatility of in poor harvest years such as 1986 and 1991. world rice prices also reflects the aggregate Thus, during the late 1980s and early 1990s consequence of many major countries world rice trade varied beteen 12 and 14 individually insulating their domestic markets million tons annually, an increase of about 1 from changes in world prices. million tons over trading voluies in the early 4.16 Recent developments in the 1980s. This was accompanied by a significan international trading system have begun to decline in price variability (Table 4.3). transform the world rice market. Under the Uruguay Round of the GA1T, the main East 4.18 BULOG'S success coupled with Asian rice consuming nations are proposing to developments in the international market and allow access to their highly-protected markets trading system have brought rice policy to a to imported rice, albeit in limited amounts. crossroads. Since late 1991, the domestic Indonesia has imposed a tariff of 180% wholesale rice price, a reasonable proxy for the (declinin to 160% by 2003) on rice imports return to rice fanning given the competitive and given access to 70,000 tons with a tariff of rice marketing network, has excded the 90%. (However, if rising international demand import parity price (Figure 4.3), the benchmark leads to higher world prices and exchange rate for efficient pricing of commodities in deficit policy maintains export competitiveness, supply locally. If this trend persists, it would Indonesia could become a steady rather than mark a departure from the policy followed intermittent rice exporter. Thus, it is not clear since the early 1970s of keeping the domestic if rice imports would be competitive (or how rice price within the interrational price band. the imports would be handled)). SusJnbg Growh bIprovtg the Incentve Framework and Efficency 89 Table 4.2: Monthy Variability in Nomial Rice Prices DomaeM (Cmra,n) nce Intionan Wca P7a1s 25% IOkn) Averoge MoatMy Mce Data - Pp/KS Date Mea= Pue tand,i Coeficit Men Stndard Co f Deatation OOice Deviain Varadce 1979 170.31 12.75 0.07 194.68 18.24 0.09 1980 198.39 10.16 0.05 250.14 10.71 0.04 1981 226.19 8.24 0.04 265.40 27.18 0.10 1982 254.92 14.40 0.06 166.61 11.40 0.07 1983 304.24 13.28 0.04 226.35 37.81 0.17 1984 330.97 6.22 0.02 242.54 13.43 0.06 1985 322.0; 7.80 0.02 221.25 5.27 0.02 1986 345.24 16.29 0.05 222.0S 36.62 0.16 1987 386.86 28.44 0.07 333.6S 53.10 0.16 1988 469.20 20.93 0.04 478.15 10.56 0.02 1989 486.56 8.04 0.02 526.42 S3.78 0.10 1990 525.17 7.74 0.01 469.26 39.22 0.08 1991 562.00 12.85 0.02 475.93 23.92 0.05 12 622.90 11.78 0.02 587.00 9.72 0.2 1979-1992 371.79 122.58 0.33 332.82 126.26 0.38 ' MeasureM the teadec of any year's price to deviae from the period avapprico. ;:urm StatsWk ULoo 00 ah 1969-1991, Jakrt, Indonesia, and BuLoG for 1992. A policy that keeps rice prices above the 4.20 In the remainder of he 1990s the main efficiency level would raise the number of challenges are likely to be redefining Se urban poor. concept of food security and avoiding 4.19 The financial cost of Indonea's rice becoming a high-cost rice producer. lhe 4.19 lefnnilcs fIdnsasrc broadening and deepening of the international policy also has become large (Pearson). The sice are teemerg of a signifiont mnain source of financing BULo's rice rice market, the emergence of a significt operations is through the budgetary transfer for competdtive private sector rice mrketn rice allowances, which are provided as part of patte.-ns as per capita income rises have created compensation to the budget groups-civil new opportunities for implementing rice policy. service and the milituy. Through agreement n particular, fUI could increase reliance on with the Ministry of Funance, BULOG annually te private sector to market rice, including negotiates a "shadown price intended to cover ternate tr to rke nd shift the cost of rice allowances. The rice allowance interinadonal trade in rice and shift to in the 1993/94 budget was Rp.905 billion ineatoa tr~ade as a means of stabilizing rice in430 t lo.he 1993/94budiffetwasR between th prices. This approach would leave Indonesia ($430 million). The difference between the better positioned in the event world prices rise shadow price and thie floor price at which to make Indonesia a net exporter. B1ILOo procures rice, muldplied by the volume of rice allowances is a financial transfer to 4.21 BULoG could begin by consolidadng its BULOG. This transfer, estimated at Rp.171 operations in a small mumber of well-chosen billion ($80 million) in 1993/94, generally makets, and allowing greater variability in covers 80-90% of the costs of rice domestic prices. The private rice marketing operations-suLoG has 7,700 employees system would tansmit signals resulting from worling in 27 regional offices and 94 district targeted interventions In the selected markets offices. across all locations and seasons. Alowing 90 a)pter 4 Tabl. 4.3: Variability of World Rice Prices (_.% Thai broken, f.o.b. Bangkok) Period Cwrent US$ Constant 1990 US$ Coefflet of Variton (%) 1960- 64 139 657 8.5 1965 - 69 179 793 17.2 1970 - 74 262 791 73.0 1975 - 79 318 608 17.0 1980- 84 348 490 27.9 1985 - 89 256 298 18.2 1988 - 92 302 304 7.2 Source: World Bank, Market Outlook for Major Primary Commodities, Report No. 814/92 (October 1992). greater variability in domestic rice prices Indonesian food processing industry. Although would permit lower average stocks to be held the sector is large, accounting for about 10% and reduce the financial cost of rice storage. of economywide gross production, it exports Recent experience suggests consumers and trivial amounts of processed food products. producers are now capable of absorbing larger Processed food exports were only $430 million price changes, as occurred in the second half in 1992, and over the last five years have of 1988 when BuLOo was unable to prevent a averaged only 1-2% of non-oil exports. The large jump in consumer rice prices. As a next contrast with Singapore is intresting. Despite step, wULo could shift to inernational trade as the fact that Singapore must import virtually all a meas of stabilizing rice prices. In time, the raw materials, tie value of its processed restrictions on international trade could be food exports is over five times Indonesia's. lifted and the marketing of rice left to the With Indonesia's large and highly protected private sector. domestic market, there is little incentive for producers to enter the low margin and very 4.22 Replacing storage with international competitive world of processed food trade, or trade for rice price stabilization would also cut the cost of sales in local markets. High- facilitate the consolidation of BuLOG'S cost processed food will exert a drag on functions. In particular, it would be possible industrialization If It translates into higher to eliminae the task of providing rice wages. Further, the poor, who spend a large allowances to the budget groups. fraction of their income on food, especially the Compensation in te form of rice makes little urban poor, are most disadvantaged by policies sense today, except as a means of disposing of that keep the local prices of processed foods BULOG'S rice stocks and the goal of budgetary high. transparency would be served by replacing rice allowances with financial compensation. 4.24 A marked improvement in the perfornance of the food processing sector NTs on Sugar, Soybeans and Wheat Impede would require a significant reduction in Processed Food Exports protection and a re-orientation toward the export market. Food processing is a key sector 4.23 Trade restrictions have contnbuted to in the next five years, particularly for the high costs and inward orientation of the absorbing labor leaving primay agricultre. Sswanig Gohwa: Improving the Incentlve Framework ane Efficency 91 The recent growth of the food processing and the domesdc price of Rp.1037/kg, this sector has been in line with overall economic implies a transfer from consumers to sugar growth but the elasticity of employment with farmers and mills of Rp. 1.1 trillion. In respect to value added was only 0.1 during addition, there are welfare losses from the fact 1985-90. If the sector remains oriented toward that protection reduces the value of sugar the domestic market it is unlikely to be able to consumption by more tian the value of the grow much faster than overall non-oil GDP, transfer to farmers and mills, and from the fact projected at about 7% annually. This would that protection encourages domestic sugar imply employment growth of less than 1%, production at levels where the cost of which will not be sufficient for the food producing it exceeds its price in the world processing sector to succeed in the larger role market. There are 67 sugar mills in Indonesia, envisioned for it in REPEUITA Vi. of which 60 are state-owned. There is little Re-orientation toward export markets is the competition and, consequently, little incentive most assured path for achieving a significant for efficiency. Only six have sufficient increase in growth. Re-orienting the food capacity to be considered efficient. If processing sector requires that output be protection on sugar is to be reduced, an competitive and profitable at world prices. assessment of the restrncuring needs of the NTBs, which raise input prices above import inefficient mills, especially the 57 located on parity, and export restrictions (discussed Java, is a priority. below), which reduce input prices below export parity, would need to be phased out. 4.27 Use of sugar as an input represents 21 % of total demand for sugar, two-thirds of 4.25 The NTBs on sugar have a large which comes from food processing subsectors negative impact on food processing. Sugar is (based on data from the 1985 input-output a significant input into many processed foods. table). Sugar's high protection raises the costs The high protection on sugar has cascaded of these industries and the final price to the downstm to these users. Price controls and consumer, reducing the competitiveness of the BULOG restrictions on international trade-only food processing sector and the economy. BULoG is allowed to import sugar-are Table 4.4 lists the six food processing Government policies for achieving sugar self- subsectors for which sugar is a large input: sufficiency. Insulation from world market Non-alcoholic beverages, Chocolate and forces permits the government to set the confectionery, Syrup, Milk products, and farmgate price to sugarcane growers, the mill Bread and bakery products. Next to each buying price and the ex-factory price. In product, the Table lists the nominal rate of addition to price controls, the smallholder protection (NRP), whether the product is subject intensification program gives farmers to restrictive import licensing-denoted by a subsidized inputs but forces them to cultivate (Y) after the NRP-and the effective rate of cane periodically in order to ensure adequate protection (mep). The table also shows all supply to the (state-owned) sugar mills (prior large inputs, their input weight as a share of to the program, farmers were forced to lease gross production, their NRPs, and whether they their land to the mills). are subject to import licensing or an export restriction (denoted by a (Y) after the NRP). 4.26 When compared with the landed import Non-alcoholic beverages and Chocolate and price, sugar prices in Indonesia are too high. confectionery are the largest internediate The nominal rate of protection on sugar has users, with weights of 18.2% and 14.1% fluctuated between 40% and 80% since the respectively. Syrup is also a large user. The 1980s and was 75% in 1992/93. With Bread and bakery products subsector, in domestic consumption of about 2.5 million tons addition to being a large user of sugar, is a 92 CWer4 large user of wheat flour, another BULOG food security effort. The Government set self- product, for which it pays 50% more than the sufficiency in soybeans as a national goal in import equivalent price. 1985. The policies for achieving soybean self- sufficiency are the Supra-isus soybea 4.28 Those subsectors illustrate the tendency intensification program, which provides for high protection on upstream products to subsidized fertilizer and credit, extension cascade downstrea to intermediate users. services and high-yielding seeds through public With the exception of the syrup subsector, all seed corporations and price controls supported the subsectors have high nominal protection, by trade restrictions-BULOG has the exclusive exceeding 30%, and three of the five are also right to import and market soybeans. The proeced by restrictive import licensing. lbe BuLoG-set price for imported soybeans reason seems obvious: enterprises effectively determines the floor price for disadvanged by having to pay well above the domestically produced soybeans. In 1993 the world price for an impOrtant input obtain tariff BuLoG-set price was about 55 % higher than the protection on their products by arguing that import parity price. As a consequence of tese they should not be made to bear the cost of trade restrictions, soybeans are one of the most Government policies to promote sugar self- protected commodities in the Indonesian food sufficiency. Although this approach can system. Major users of soybeans include protec ihe domestic producers, it raises prices soymeal and soymllk producers. High to the final consumer, effectively taxing the protection on sugar and soybeans has cascaded poor and middle class more than the rich downstream to the milk products subsector becase they spend a greaer portion of their (Table 4.4), making it a high-cost industry. income on food. This approach also deters Users of soymilk, such as working moners, eots, direcdy because the sector cannot are adversely affected. Processed soybean comPete iernationally because of high costs, producers include thousands of small-scale, and indirecty because high cost food raises labor-intensive twipe and tahu producers. wags. They are adversely affected by high cost soybeans and sugar (Table 4.5). Moreover, 4.29 Intrestngly, in these subsectors, the average protection on processed soybeans is proWction on final goods tends to over- less than the average protection on inputs; compensate for the high input costs, resulting effective protection is negative and trade policy in magnified protection on value added. disciminates against these producers. Nominal protection on sugar (and other inputs) cascades downstream to final products, leading 4.31 Approximately 90% of soymnal is used to hig defcdve protecion In the food in modern, commercial poultry production. processing industry. Fou of the ffve Poultry is one of the most dynamic sectors of subsecors Shown in Table 4.4 have very high the Indonesian economy with anmal production Mis. Ihe cause is not very high output growth of 25% recorded in the past decade. tariffs. Rather, it Is because the tariffs on their Moreover, it is an importantpotental source of outputs exceed the average protection on their high-quality protein in the local diet. inputs, including sugar. Because the pWoportion of value added is small, even 4.32 Prior to 1988 all soynwal was imported slWy higher tariffs on outputs than the (by BULOG). Since the first (and only) aveageon Inputs leads to very high efrfective domestic crushing plant opened In 1988, protction. Government policy has been to save foreign exchange and move Into higher value added 4.30 Trade in soybeans and soymeal is also soybean processing by protecting te donmic subject to controls as part of the Government's crusher. Soymeal is subject to a local-conent Sstaing Growth: Improving the Incemnve Pmework and Efficiency 93 Table 4.4: The Cascading Effects of pk-hCost Su gar on Downsteam Food Prxsors ,,,uy 1 Sdor I o10 NRP Nu-AIce Bevwwes _30 M M 7.3P ) 6S11 Sugar 18.2 75.0 (Y) 67 Prooossod Tea 4.7 0.0 (N) 93 aio Chomicas 4.2 8.0 (Y) 109 has and Glasswao 3.9 41.0 (N) 119 Othr Mea Prducts 6.8 16.0 (N) 140 WAter Supply 4.1 7.0 (N) 146 Trade 9.7 2.5 (N) CAoookitad CWediamy (NJIUP32 (); E I41.3) 26 Other Estate Crops 27.3 0.0 (N) 63 ___ar 14.1 7S.0 (Y) 14i; Trato 8.4 2.5 (N) t . ~~~~~~Synp (NRP-15 (N); ERP-9.0) ,, 63 Suga 14.1 75.0 (Y) 93 Basic Chemi¢als 14.1 8.0 (Y) 99 Other Chemiial Products 5.6 16.0 (N) 101 Oil Refining 6.0 0.0 (N) 109 Glas and Glasswae 3.3 41.0 (N) 146 Trade 9.1 2.5 (N) 157 Bavkig and Fmancial 3.9 4.5 (N) ik Produas (NRPI43 (0; EPJW=6( 9 Soybeans 9.3 55.0 (Y) 16 Coconut 3.5 0.0 (Y) 18 Palm Oil 3.5 0.0 (Y) 30 Milk Livestock 7.0 33.0 (Y) 53 Milk Products 16.1 30.0(Y) 63 Sugar 8.7 75.0 (Y) 119 Other Metal Product 4.8 16.0 (N) | 146 Trado 10.8 2.5 (N) Beavd Bakay hadu tRP40 M9; ERP=13.5) S7 Millod Polib Rice 3.4 0.0 (Y) 58 Other Millod Xoerals 7.9 4.0 (N) S9 Wheat Flours 23.9 50.0(Y) 63 Sugar 6.7 75.0 (Y) 146 Trade 10.8 2. (N) 94 azapter 4 Table 4.S: The Cascadglut Effects of HMh-Cost Soybeans on Downstream Food Processors I &dtor 1-0 NRP hProw* S&oAm= iN 14 n9 W-37., 9 &Sybans 56.3 55.0 (Y) iS Brown Sugar 10.1 33.0 (Y) 146 56 S.8 2.S scheme in which holders of IP licenses may is grown in Indonesia so it must be imported. import soymeal for use in a 60:40 ratio with In 1971 and 1972, thmree flour mills were soymeal purcased from BuLoo, which obtains opened in Jakarta, Surabaya and South it from the domestic crusher. The domestic Sulawesi. Since the opening of the mills, marginal cost of soymeal is a combination of wheat flour imports have virtally ceased and the costs of local soymeal (40%) and imported imports have been almost entirely in the form S iyneal (60%). In June 1993 this blended cost of wheat grain. Indonesian wheat imports have was Rp.569/kg, implying a nominal rate of grown rapidly, from 0.5 million tons in 1972 protection of 14%. In addition to receiving to about 2.6 million tons in 1993. Nearly all protectdon through the local-content scheme, wheat is desdned for human consumption, the local crusher is allowed to retain and primarily by middle and upper income market the soybean oil that is a by-product of households in the urban areas in the form of the crushing process. noodles (55%), bread and baked products (25%), biscuits (10%), and home use and 4.33 The positive nowinal protection on snack foods (10%). soymeal is attributable to the high cost of domestically produced soymeat. B3ULO sets 4.35 The domestic wheat flour market is the domestic price and in June 1993 it was highly regulated ftrough an administered price 23% above the import parity price. The system supported by trade restrictions. BULOG impact of high price soyme on downstrem is fte sole legal importer of wheat It allocates users is shown in Table 4.6. As already noted, the wheat grain to each mill, and the processed ihe Animal Feeds subsector is an important wheat flour around the country to control retail user of soymeal. It, as well as the Other flour prices. Flour distributors are licensed by Foods subsector, the other subsector where BuLoG, which also set the ex-factory price soymeal is an important input, have high they must pay for flour. The ex-factory flour effecdve protection. As in the other examples prices are close to the transport cost-ajusted from the processed food sector, te high nPs c.i.f. prices of imported wheat flour so that are due to the tendency for nominal protection nominal protection for wheat flour millers is on the output to over-compensate for high cost close to zero. However, effective protection is Inputs. Eliminating the local content scheme high because the price that mills pay for wheat and the import license requirement would grain is well below the import parity price. lower the domestic price of soymeal, which The cos. of the grain input subsidy is passed on would translate into a lower costs of animal to consumers through a Ministry of Fmmce feeds to the benefit of the growing poultry surcharge on the approved BULOG flour industry, livestock producers, and ultimately distributors. expors and domestic consumers. 4.36 The protection of wheat flour millers 4.34 Consumer demand for wheat flour has raises costs in the Other Foods (Table 4.6), as risen with per capita income. No wheat grain well as in the Bread and Bakery Products Susabang Gowth: Improing the Incenive Famew* a4nd Efficency 95 (Table 4.4) and Noodles subsectors flour millers with three other private sector (Table 4.7). High effective protection in these groups. Two new vlieat flour mils are sectors can be traced to the tendency for planed, with production aimed to meet protection on the output to over-compensate for growing domestic demand. Deregulation of the effect of tariffs and non-tariff barriers on trade would lower wheat flour costs, input costs. benefitting consumers and forcing producers to improve competitiveness. Further 4.37 Restrictions on investments in flour improvement would follow the elimination of milling-new projects were obligated to export licensing controls on wheat and wheat flour 65% of output-were lifted in the June 1993 imports, the administered price system, and all deregulation package and new investments in licensing requirements in the distribution chain. the industry are being planned by the present Table 4.6: Tbe Cascading Effects of High-Cost Soymeal on Downstream Food Processo I& , , , 1-0 NMRP Odr Foo, (WRP21 M EWP=7 1 56 Refined Vogebble and Anima Ois 8.1 0.0 (Y) 57 Milled Polish Rice 8.f 0.0 (Y) 59 Wheat Flours 3.0 50.0(Y) 60 Other Flou 10.0 17.0 O 68 Proesd Soyban 3.0 14.0 M 101 Oil Refming 4.4 0.0( 146 Trade 9.4 2.5(N) AnimF Pea& (R-12 (N); W=60. 2 ize 11.7 10.0(Y 7 Dried Cassava 11.1 0.0 56 Refined Vegetable and Animal Oils 9.2 0.0 (Y) 57 Milled Polished Rice 8.6 0.0 58 Other Milled Cereals 5.1 4.0(N 60 Other Flouo 5.6 17.0 (Y 68 Procesed Soybean 4.8 * 14.0 ( 146 Trade _ 9.0 2.5( Table 4.7: The Cascaing Effects of High-Cost Wheat Flour on Downstm Food Processors IndySecvo 1-0 NRP Moo"zdu (NRP-36 ; WtP-53.1) 59 Wheat Flours 48.4 50.0 (Y) 60 Other Flors 11.4 17.0 (Y) 146 Trade 10.0 2.5 96 Chater 4 mss in the Engineering Sector because nearly one-third of all items In tat sector have a tariff plus surcharge In the 100% 4.38 NTs cover 25% of engineering to 300% range-high tariff plus tariff surcharge production (Fable 4.1), virtually all of which protection is not a characteristic of the protect motor vehicle and motor cycle Indonesian tariff code. Excluding the vehicles assembly. The automotive deregulation in the sector, 40% is the effective maximum tariff. June 1993 package (Pakjun '93) replaced the previous local content scheme (the "deletion 4.41 Although nominal protection is not program'), in which local assemblers of especially high, it is highly variable. The commercial motor vehicles had to reduce their coefficient of variation of unweighted average import contet and faced Increasing tariffs for tariff plus tariff surcharge prowtection has failure to meet the deletion schedule. In the exceeded 80% since the deregulation reforms new scheme, the tariff on motor vehicles and ,ere launched in the mid-1980s. The high their components varies inversely with the dispersion causes high and variable rates of share of domestically produced components in effective protection (Fable 4.8), which leads to the final product. Bans on the import of resource misallocation by encouraging the completely built-up vehicles were replaced with protected activities to expand beyond the point a surchage (and, for some models, a where the output, measured at world prices, is restrictive import license). profitable. By favoring import-competng activities, resources are drawn away from 4.39 The system introduced in Pakjun '93 is exporting activities, creaftng an anti-export more likely to achieve the objective of bias. developing a competitive automotive industry than the deletion program. One reason is the 4.42 The principal cause of high tariff taiffication of the import bans on some brands dispersion and effective protection is the of completely built-up automobiles. The tendency of nominal protection to cascade from Govenment's aim is to review amnally the upstream to downsteam products. An example level of tariff plus tariff surcharges on these Is the procsed food industry, disced products and to reduce it over time. As above, where protection on final goods exceeds nominal protection fails, the industry will be the average protection on inputs. Protection on exposed to greater competitive pressure. value added-effective protection-thus is Anounement of a schedule for reducing, then umagnified, particularly when inputs represent a eliminating, the high tariffs and tariff large fraction of the final cost of production. surcharges would give a positive signal to The Indonesian footwear industry provides Indonesian vehicle consumers that deregulation another example. The footwear industry is of the automotive sector will lead to reductions dualistic; an export-oriented industry with few in the high domestic prices while giving links to the rest of the economy co-exists with producers time to become competitive. a large domestic industry oriented to the less demanding internal market. High-26%- C. Trade Deregulation: Tariff Reform average protection on the inpUts used by the footwear industry imposes high costs on the 4.40 The initial deregulation packages made domestic industry, which is over-compensated significant progress in reducing tariff by a 40% tariff on footwear products. As a protection. Unweighted tariff plus tariff result, effective protection in the domestic surcharge protection fell from nearly 40% in footwear industry exceeds 100%. Export- the mid-1980s to about 20% by 1991 where it oriented footwearproducers import virually all has remained (Figure 4.2). Moreover, outside their input needs-even products that are the vehicles sector-an importat exception produced domestically such as leather, canvas Swdnag Growhd: ImproWng the Incentive Framework and Efficlency 97 Table 4.8: The Structure of Protection in Manufacturing (percent) Nommnal and Effective Rates of Protecion 1987 Output NRV RP Sector (Rp. llion) 1987 1990 1992 1987 1990 1992 Manufacturing 39.4 17 13 12 68 59 52 Food, Beverage & Tobacco 18.0 14 13 12 122 126 120 Textiles 4.3 32 12 12 102 35 34 Wood Products 2.8 2 -5 -5 25 33 33 Non-metal Products 3.1 17 14 13 57 49 44 Engineering 4.9 40 38 28 152 139 82 Other Manufacuring 0.3 40 26 26 124 79 80 Source: World Bank staff estimates. and polyester are imported either because trade removed tarffs and tariff surcharges on inputs policy has raised their domestic prices above into the electronic components industry. competitive world levels or, in the case of leather, reduced the domestic price and, 4.44 The use of the tariff code to provide thereby, the incentive to produce export-quality "tailor madem protection for individual firms or products (para. 4.50). Export-oriented activities Is likely fiuther to raise the dispersion producers thus are dependent on the smooth of tariffs and increase resource misallocation. fnctioning of BAPKSA, the import duty Sigficant impronement in the structure of eemption and drawback system, to obtain protection would follow the adoption of a their inputs at world prices on a timely basis. rules-based approach: elimine non-taiff barriers (where necessary, replace them with 4.43 More recently the Government has temporary tariff surcharges)s announce a begun to use the tariff code in a discriminatory schedule for bringing the maximum tariff way to protect particular activities. One down to 15% or less and elminate long-ived example that is noteworthy because of the size tariff surcharges. A lower tariff structure of the projects involved is the petrochemical would eliminate much of the strain on industry (see Box 4.2). Another example is the BAPEKSTA, the duty exemption and drawback growing use of split tariffs; identical products system. Evidence from Canada-U.S. trade that have a different tariff depending on the indicates that many Canadian exporters forego importer. Split-tariff positions were eliminated applying for duty drawbacks on imports from in the June 1991 deregulation package. They the U.S. because the tariff rate on those were re-introduced in the June 1993 automobile imports is low. Bonded and export processing deregulation package (the tariff surcharge on zones, which are attractive to the extent that inported completely built-up automobiles conditions inside the zones are less distorted depends on whetier they are manufactured than in the rest of the economy, would be less locally or not) and their use expanded furither necessary as a way for exporters to obtain in the October 1993 package, which completely inputs at duty-free prices. 98 Chapter 4 Box 4.2: Jmport Substton Polcy in the ethnls Sector Ihe petrochemicals sectors offens an example of the use of trad policy to promote a partcula activity. It is noteworthy beas of the size of the projects but not becous it is a lone ianee. mm large6 capital Intensive natue of petrcheiial projects undesor the need to ensume that produe now benefitting from protection from foteign suppliers eventually becomi strng enough to be able to compete with these ame suppliers in export markets. If they cannot, protection of the Indonesian petrochemicals secto is likely to lead to an Iward-oriented sector, depedent on domesc demand. Downstrm intermediat consmers would be saddled with ligh input costs, reducing their competitivenes. The puallel with agriculture-food processng-where high protection on key agricultwua commodities has cascaded downsteam helping create a high-cost, inws:4-oriented food procesg sector-is obvious. To reduce the risk that the infant petrochemical producets remain high-cost, the Government could pr-announce a limited period during which import protection will be in effecL Indonia's first polyethylene factoty began operating in February 1993. -In the fmewor of stimulating the domestic polyethyleno and styrene monomer indusry... the Ministy of Finnce prmlgatd Decree No. 2741m0OO/1993 (Febnuary 27, 1993) imposing a 20% surcbarge on polyethylene imports. With the existing 20% import duty, nominal protection rose to 40%. Polyethylene is a basic mateial in the production of plastic. Cable mnucu, large user of polyethylene, naturally proteded that they would be disadvantaged by the surge. Ministry of Finanec Dcree No. 227/hCLOO/1993 (February 27, 1993) ganted import relief and an import surharge exemption an polyethylene imports for the cable industry, so that the nomin tariff plus su81ag on polyethylene imports for these users became zero. The Indonesian Plastic Industry Association has complained that the high protection on polyethylene inhibits its memberW ability to export and has asked the Government to rMll back the surcharge. Plasticware is already a high-cost sector, with nominal protction of 40%, tho effective maximun in the Indonesian tariff code. With high protection at every stage of production, dIe 1oi plasc sector is In danger of becooing a high-oost iudustry. Indonesia's first polypropylene plant also opened in 1992. More plants are proected. Protection for polypropylene was increased in the July 1992 deregulaion package, which imposed a 209% tariff ad 5 % taiff surcharge (previously both were zero). Then, in February 1993, "within the framework of encouraging tho growth of the domestic industry, Ministry of Finance Decree No. 122=1c0011993 (Febray 10, 1993) raised the srchawg on polypropylene imports to 20%, pushing nomina protection to 40%. Still more recently, in March 1993 a minimum dutiable price was imposed on polypropylene. h mnmm dutiable price is about 20% above the prevaiig export price, so the nominal protection effectively tose to at lem 48%. Compasons of polypropylene (item number 3902.10.200 in the tariff code) prices in Jakart and SingWore show that the pnce in Jlata is 47% above the price in Singapore. The Minity of Industry also is considering giving import protection to the sole domsic producer of ethylene glycol. The Jakarta import c.i.f price of ethylene glycol is $390/ton and domestic use in 1993 is projected at 140,000-170,000 tons. The domestic company produces 80,000 tons at a cost of $560/ton Two options are being considered to prtoect the producer. The first would involve imposng a 10% tariff and a 10% tariff surchag (both cuntdy are 0%) and allowing only approved importers to import ethylene glycol (the ir icens category). TSe second would Involve sttng the domestic price of ethyleon glycol at 20% above the import-panty pnce. Ethylene glycol is a major input in polyester fibre and polyester fibve prduces would be severely disadvantaged by mesu that raised input costs. In the words of the secretuy gsal for the Indonesian Textile Association, higher protection on ethylene glycol as contemplated by the Ministry of Industry would mean *the destrton of the textile industry fiom upstram to downsteam Sutanng Growtd. Improving the Incende Framrk and Efficlen:y 99 D. Trade Deregulation: Eliminating instrument for controlling exports subject to Export Restrictions quotas in importing counties and, in some instances, to protect endangered species. 4.45 In conta to the easing of import However, they are not appropriate nstrumn restrctions over the past nine years, Indonesian for the other objectives. As discussed below, exports have been subjected to increasing they often have unwanted side effects or large regulation and control. Export restrictions now welfare costs. An appropriate course for cover half of total non-oil exports (Figure 4.4). stimulating exports would be continued he export restrictions take four forms: export deregulation to eliminate a bans, bans (72 products), Regulated Eorts, which regations, taxes and other restrictions on can only be exported by exporters approved by exports. In light of the analysis below, the te Ministry of Trade (1,827 products), only export restrictions that would remain are Supervised Exports, which require approval by those on textile exports while they renain the Ministry of Trade (105 products), and subject to Multi Fiber Arrangement quotas export taxes (80 products) (see Departemen (with the quotas auctioned) and the bans on the Perdagangan). Most of these restrictions are export of endangered species. For a few select directed toward agricultural exports. Products products (some species of tropical bardwood accountng for nearly two-thirds of the $4.1 and some spices such as nutmeg) it could be billion in agriculura exports, including all the argued that the natre of long-term demand and lare cash crops-rubber, palm oil, coffee, and Indonesia's market share offer scope for the copra-are subject to some form of export possibility of export taxes to influence restriction. Trade associations also affect the favorably world prices by implicitly taxing markeing of some, primarily agricultural, production. However, the potentia benefits commodities. must be weighed against the real costs of determining and enforcing such meaes. Figure 4.4 Export taxes create an incentive to smuggle and effective control of smuggling is difficult in the c ->aot nm-ce eIndonesian archipelago. so- - 84.5% 4.47 Promoting higher value added downstream lndusties. Export restictions are used to lower input costs and hereby promote downstream industries. Ihis leads to resource misallocation from under-production of the input and over-production of the processed good. The export restrictions on logs provide a good example of how export No nc W P restrictions to promote higher value added AgbA_ TWO"VIOPdownstream activities leads to resource misallocation and welfare losses. Ihe expor;t 4.46 Five reasons are cited for using export of logs was banned from 1985 to 1992 wben restrictions: (i) to deal with quotas imposed by the ban was replaced by prohibitive export importing nations; (ii) to conserve natural taxes. The ban on log exports lowered their resources and endangered species; (ii) to domestic price, which increased the incentive promote higher value added dowmsn (effective protection) for log processors. idustries; (iv) to raise the quality of the However, rather than encourage the highes exported products; and (v) to regulate domestic value added processing such as woodworking supplies. Export restrictions are an appropriate and furniture production, the ban benefitted l3 OCapter 4 activides tgat profit from high throughput of renewals, would need to be de-linked from logs, mainly plywood mills. The granting of processing capacity, and existing concessions log export quotas for the 1981-85 period only free to sell logs on the domesdc market to to logging concessionaires who had wood processors. The royalty rate would need to be processing facilities in operation or under raised annually to reach international parity constucdon also encouraged the development levels. As discussed in Chapter 6, stumpage of the plywood sector. These policies were fees would also need to rise to encourage forest successful in capturing the intemnational tropical conservation. The prohibitive export taxes on plywood industry from Japan and Korea. logs and sawn timber would need to be Since the log ban became futly operational in replaced by much lower ad valorem export 1985, the value of plywood exports, helped by taxes. To ensure th domestic log prices rise, world price increases in 1987 and since 1990, a target date-for example, the year has increased rapidly (Figure 4.5). 2000-would be set for opening the log market to exports. F%' 4.5 4.50 Indonesia applies ad valorem export S m|wumto toe. Pywod ad hflsmad oge taxes to a number of products in which it has 4 SW0 no world market power. Exports taxes at rates YAW mm26 of 5%, 10%, 20%, or 30% apply, variously, on exports of light pepper, chinchona bark, hides and skins, sand, and waste aluminum and scrap. Chinchona bark, hides and skins are o00 also subject to an additional 20% export surchage. The Impact of these taxes Is to depress exports and export revenue, r-allocate supply to the domestic market and thereby is9 -s-l lower the domestic price. Minimum export prices are used to detmine the amount of the tax to prevent under-invoicing. If such 4.48 Domestic log prices remain below minimum prices are set too high, they can world prices after eight years of export bans increase the welfare losses from the export and prohibitive export taxes. The failure of taxes. Because they are discretionary they log processors to bid up domestic log prices to increase the uncertanty of export returns, the world level reflects a lack of competition in which reduces the attractiveness of investing in the domestic industries. Ihe plywood export the taxed activities. As in the wood industry, maretn system indirectly controls entry to the export tax on skins has encouraged the plywood idustry through its power to extensive rather thaintensive use of raw allocate plywood export quotas. High export materials, which has hindered the acqito of taxes on sawm timber restrain demand from technology capable of producing export-quality aother large potental demander of logs. leather. Thus, the export tax has slowed the Their main benefit has been to increase the creation of linkages between exporters and supply of heap logs to the plywood industry.2 domestic suppliers of raw materials, which reduces the commitment of export-oriented 4.49 To increase the efficiency of resource footwear manufacturers to Indonesia and use in the plywood industry, log users need to retards progress toward moving into higher face the world price for logs and entry barriers value added production. The objective of the into the domestic log market need to be export tax on light pepper was to provide low reduced. New concession licenses, or cost raw material to an oleoresin factory in Sustaining Growth: Improving de Incentive Framework and Effciency 101 South Sumatra. Howvever, the oleoresin primarily of medium- to lcw-grade coffee. fatoory has gone Cwough various Etages of Coffee exports must pass a quality test and low nacivlty and, despite years of infant Industry grades may not be exported. However, dhis protection, remains uncompetitive. policy has not succeeded in raising the share of high-quality coffee exported by Indonesia. The 4.51 Exports of many cash crops, including quality regulations make the domestic market sme of the largest export-earners-crude palm the only legal outlet for low-quality coffee. oil, crude coconut oil, cottonseed oil, and They also provide an incentive to export lower- copra-are regulated to ensure an adequate quality coffee Indirectly by blending it with supply-that is, to provide protection-for the export-quality coffee. Exporting coffee of an domestic food processing industry. For uncertain quality probably does more harm to example, crude palm oil exports, which have Indonesia's reputation than expordng medium- averaged $340 million annually over the last to low-quality coffee of a consistent quality. five yean, are supervised by the Ministry of Further, the production and domestic marketing Trade. Increasing domestic palm oil prices In of smallholder coffee are competitive (Bennet 1992 and early 1993 resulted in a cut in and Godoy). The poor quality of coffee exports of crude palm oil by state-owned produced by smallholders is a response to plantaions in 1993 in order to put downward supply and demand forces in a market in which pressure on the costs of domestic cooking oil price fluctuations in the growing season producers. The edible oils industry also represent a major risk to farmers. In this benefits from 30% nominal protection (tariff market, the price differential from raising plus surcharge). The wholesale price of quality does not cover the higher costs to cooking oil exceeded the world market price by frmen. Further, there exists abwund over 20% at end-1992. As with other demand for low-price, average quality coffee in processed foods, the result is that a high-cost importing countries, which use It to produce industry is protected at the expense of for the rapidly growing instant coffee market. consumers. Deregulation and measures to help the market work better, for example development of a 4.52 Raisilg quality. Export restrictions futures market to permit smaliholders to hedge sometimes aim at improving quality. price risk,' would be more effective in However, they are an inefficient instrment for inducing higher coffee quality than export ihis purpose. High quality, if sufficiently restrictions or ainisive measues to denanded by consumers, will be reflected in shorten the coffee marketing chain. the prices they are willing to pay. Competitve marketng chains will transmit their demands to 4.54 Natural rubber provides yet anotier producers, who will saisfy them. Atempts to example. Indonesia is the second largest improve quality by regulation or fiat are natural rubber producer in the world (after unlikely to succeed and are likely to have Malaysia) and rubber exports have averaged $1 adverse side effects. billion anually over the last five years. About 70% of production comes from smaloldehs. 4.53 Coffee provides an example. Indonesia Exports of low quality rubber are banned in is the world's largest producer of robusta order to raise the quality of rubber exports. coffee md 3.5 million smallholders produce However, as in the case of coffee, smallholders 93% of it. " Unhealthy compedtion among do not produce higher quality rubber becae domestic coffee exporters has been blamed for the price premium they earn is insuffcient to quality problems affectng Indonesia's coffee cover the higher costs (Barlow and Tomich), exports, which have averaged a little over $400 which, in turn, are related to the intittional million a year over the past five years, and infrastuctural conditions of smallholder 102 Cwer 4 rubber growers. A more direct 4.57 Export restrictions on cement, approach-targeting the problems faced by ferilizer, salt, and pulp and paper are only one malholder rubber farmers and providing part of a regulatory framew rk whose aim is to incentives to the processing factories to demand ensure adequae supplies of these strategic* higher quaiy natural rubber-is more likely to commodities for the domestc market. The succeed in raising the quality of smaliholder Government has recognized ta Indonesia's rubber production (see World Bank 1989, greater openness has made these regulations pp. 71-3). unnecessary and is committed to reforming them. The reforms involve withdrawing the 4.55 Regulting domestic supplies. The state's presence as a producer, allowing private Minister of Trade supervises the export of sector entry (see Section F), and the some industrial commodities-cement, elimination of subsidies, price controls and fertilizer, salt, pulp and paper-in order to restrictions on domestic and internaional trade. ensure sufficient domestic availability. These products atually are all import-competing and 4.58 An equally bold approach is wrra1ted the export restrictions are due to supply for the other commodities subject to export distortions arising from domestic price controls restrictions. Export restrictions are not the or production subsidies. Cement, for exnample, appropriate instument to promote higher value is a highly regulated industry with sae-owned added downsuteam industries, raise product enterprises accounting for 30% of total output quality, or ensure the domestic availability of and the private firm, Indocement, accounting key commodities. In addition to welfare losses for another 50%. The Government intervenes from resource misallocation, their effects are by setting benchmark prices (through the Local often opposite of what was intended as Reference Price (mS) system), allocating described in some of the examples above. All market hares and authoring exports. Despite export restictions could be eglmied, their aim of ensuring adequate cement supplies except those on textiles, which are justified at Jzir" prices, these interventions have not becase of export quotas, and the export prevented the emergence of periodic cement bans on endangered species. Ad vaore shortages, most recently in 1993 during which export taxes on logs and san timber (along cementprices roseby 20% toalevel exceeding with an inrease in the share of foresty the border price of cement This led the rents captured by Goverment) would Govenment to restrict cement exports. benefittidustry,theGovernmentbudgetand the environment. All other produws subject 4.56 The market for fertilizer is also highly to export or domestic trade restrictions-bans, regulated. Fertilizer supply is a state regulation, supervision or taxes-should be monopoly with production, ditribution and deregulated. The total _nber of products prices (both farmgate and ex factory) regulated subject to export restrictions would decline by the Government. The six state producers from over 6000 to about 2000 and their non-oil share the domestic market on a geographic export coverage would fail by 25%. basis, while exports are allowed only after domatic demand has been met. One of the 4.59 Indonesia's significant world market producers, P.T. Pusri, is the sole distributor up share in some commodities provides theoredcal to the wholesale level. At the retail level, grounds for introducing opdmal export taxe to distribution is assigned exclusively to farmer shift revenue from the rest of the world to cooperatives. Over-regulation has reduced Indonesia. However, high administrative costs incentives for efficiency and service and the danger of regulatory falure-stting an hnprovement, as seen in the condinued need for incorrect rate of tax-are likely to outweigh the large ferilizer subsidies. benefits of the practical exercise of market Sustng Gmw* Improving the Incentive Frawork and EffcIency 103 power In most Itances. The persistence of E. D peregulatlo of Foreip lvestment low world nutmeg prices in part reflects an ncorrect (unplicit) export tax rate applied 4.61 Foreign investment is important as a during 1986-90 when world nutmeg supply was source of externa financing, technology efectively cartelized. Although the high world transfer and marketing know-how. Foreign price could not be sustained, it provoked a investment ncreased sharply after deregulation long-term contraction in demand for nutmeg began In the mid-1980s. However, there is and world prices have yet to recover (Marks now greater competition for foreign and Pomeroy). investment, especially from India, China and Vietnam. Foreign direct investment is 4.60 Deregulation would also ensure that projected to increase by 10% annually during membership in commodity associations the next five years. Further investment and would be voluntary and not be a condition trade deregulation to open new investnent for exporting or engaging in domestic trade. opporunities as well as an open regulatory An odary business licene or sui should environent probably is needed to ensure t be the only prmit rewhed. Although the projected level of inflows materializes. importance of commodity associations in product marketing has diminished since the 4.62 Recent deregulatory measures signal May 1990 deregulation reforms, associations the Government's detennination to compete for continue to try to control trade in some foreign investment in the rapidly growing but commodities. Thus, the Association of increasingly competitive world market (see Indonesian Coffee Exportrs seeks to control World Bank, World Debt Tables, 1993). A coffee exports under the Stock Retention Plan significant component of the October 1993 Indonesia has acceded to as a member of the (Pakto '93) deregulation package was the Association of Coffee Producing Countries.- It easing of bureaucratic investment licensing would be preferable to determine export quotas requirements for domestic as well as foreign consistent with the obligation under th- stock investments. Previously, the processing of retention plan and auction the quota rights, applications to undertake investments in leaving all other production and markedng accordance with the Foreign Capital Investment arrangement up to fanrers and traders. If, as Law (PMA investments) or the Domestic seems likely based on previous experience, the Investment Law (JMDN investments) was carel breaks down, damage to Indonesian complex and time-onsuming. It involved coffee producers-primarily smallholders-and obtaining Government approval, nume marbetng arrangements would be minmed. permits-operating permit, import permi, The Association of Indonesian Nutmeg approved Manpowe plan, building and work Exporters would like to resurrect the nutmeg permits, land right certificate, nuisance cartel by secuing monopoly trading rights. permit-and regional licenses. An objective of The practical difficulties of exercising market Pakto '93 was to reduce the provinces' role power-amply demonstratd in the case of and allow investors to start their projects once nutmeg by the failure of the previous they obtained approval from the Investment attempt-is sufficient reason to resist efforts to Board (BUM) and the other local licensing intfere in the nutmeg market. Ihe domestic steps (location license, building permit, marketing of cloves and Kalimantan citrus are building construction license, and Nuisance Act monopolized in order to raise product quality license). and fanner incomes. However, by reducing competition among buyers, the trade 4.63 The initial implemetaion of te restrctions have had te opposite effect on Pako '93 provisions bas not been smooth. farner incomes. Local governments have not been keen to see 104 alapter 4 their authority diminished and some have foreign investment in some way. In Malaysia, moved to re-impose it. Leadership and for example, the maximum share of foreign guidance from the Central Government will be ownership in a project is determined by the needed to ensure that the Pakto '93 objective of share of production that is exported. For sinplifying investmnent licensing procedures example, 100% foreign ownership is permitted materializes without sacrificing local concerns provided 80% of the production is exported. about issues such as resettlement, the However, there are no divestiture or minknum environment and land acquisition. capital requirements. In Thailand, the maximum foreign equity participation cannot 4.64 The October 1993 measures also exceed 49% of the registered capital of the included a lower minimum capital requirement entity for ordinary investments but, o itside of for 100% foreign-owned companies this, foreigners are allowed to establish almost ($2 million) provided they produce intermediate any kind of business (there are a limited goods or components that are used by industry. number of sectoral restrictions) and there are This measure Is aimed at Inducing components no divestiture requirements. Moreover, 100% manufacturers to relocate from developed foreign ownership is pernitted in ventures that countries. export 80% of their output or are located outside of Bangkok and the restriction 4.65 Pakcto '93 eased some foreign reportedly have been relaxed, and case by case investment regulations and tightened others. exceptions are frequently granted. In Korea, the period to achieve divestiture was foreign investments in sectors not on the lengthened and the minimum capital negative list require Government approval but, repuireet for some investments was lowered, once approved, face few restrictions apart from The possibility of divesting by selling shares in a small minimum intia capital requiremen the capital market was also introduced. This (Won 50 million or about $65,000) and tiere would eliminate any forced matching of foreign are no divestiture requirements. investors with domestic partners, which had been the source of some complaints from 4.68 All of these countries, except Korea, foreign investors. have been successful In attracting foreign 4.66 At the same time, Pakto '93 increased investment despite differences in their foreign the share of ownership that maust be divested in investment regulations.4 In view of increased some casharesof Fownership foreignmue divesunednn competition from other countries in the region some cases. For 100% foreign investments for foreign investment and the strong need for with minimum paid-in capital of $50 million, investment resources to sustain industrial 51% of the ownership must be transferred to irvetn furer relwt in industrial Indonesians-up from 20% pre-Pakto growth, further relaxation of investent '93-within 20 years of the start of commercial regulations may le wafranted. Additional steps operations. The process must start 10 could include: fuirther easing, or even opearais-up.m yeaproess str scommercial elimination, of the divestiure requirements; years-p from 5 years-after socat elimination of the negative investment list, operations begin. Companies located in which now covers 33 sectors (Table 4.9) bonded zones or export-processing zones may except for investment in sectors that needs to remain 100% foreign-owned for 10 years after be restricted for health or security reasons; and commercial operations begin, up from S ydeas reduction of the minimum capital requirement pre-Pakto '93. ARer that, they mus divest for all 100% foreign-owned investments. Even 20% of their shares within 10Oyears. $2 million, the equity contibution now 4.67 With the exception of Singapore, which required for foreign investment in electronic has no special regulatons on foreign components manufacturing, rmay be too high to investment, many East Asian countries regulate attract smal, high-skill, high-tech firms. Sustatning Grovi* Improvlng the Incendfve Framework and Efflclency tO5 Table 4.9: Indonesia: A Summary of the Negative Investment List (post June 1993 deregulation package) Category I. Sectors closed unless certain requirements are met 13 II. Sectors closed for expansion and new projects 2 unless 6j% of the production is exported m. Sectors closed for expansion and new projects 4 unless 100% of the production is exported IV. Services closed to foreign investment 8 V. Sectors absolutely closed 6 TOTAL RESTRICTED SECTORS 33 F. Privatization to Improve EMciency 'missions"' economic development, and In Commercially-Oriented stabilizatlon. However, overall growth has Public Enterprises been increasingly driven by the private sector and the role of PEs has correspondingly 4.69 Theory predicts that private firms will declined, particularly in commercial sectors operate more efficiently than public fums (s such as industry and agriculture. In fact, it 1992). Recent World Bank research confirms may be argued that in these sectors, PEs now that, even in cases where firms do not operate actually hamper economic development by their In competitive markets, privatizadon can have relatively low efficiency and productivity, a significant favorable impact on enterprise which limits their competitiveness, and by their efficiency, as well as on investment and drain on the governent's budget and consumer welfare (Galal et.al).' Evidence managerial personnel. Deregulation, especially from Indonesia also shows that private firms opening to international trade, also has made generally outperform their public sector their stabilization mission less relevant. cowteparts. This suggests that privatization Greater openness, in addition to raising of commercially-oriented public enterprises competition and efficiency, has created a more along with deregulation to ensure a competitive diversified economy. Thus, the rationale for playing field would yield efficiency gains. retaining the commercially-oriented PsM in the public sector is greatly reduced. 4.70 The Indonesian Government holds majority ownership in more than 180 public 4.71 Of the more than 180 public enterprises entepres (PMs) in various sectors. In recent operating in Indonesia, 28 are years the role of Ps has been defined as conunercially-oriented industrial public three-fold-profit generation and two enterprises (n'ss) supervised by the Ministry of 106 OChpter 4 Industry (MoI), with total assets of about return on sales in 992, compared with an 18% Rp.9.7 trillion ($4.8 billion), employing around average for the cement ms. in in pulp and 47,000. Government also holds minority paper are operating at lower capacity utilization stakes in nine industrial joint-ventures with than their private counterparts and are total assets of Rp.3.9 trillion ($1.9 billion). experiencing declining sales in both domestic Fertilizers, cement, pulp and paper, and export markets. Whereas private pulp and shipbuilding and repair, and textiles accourt for paper companies increased their production 95% of in assets. as control the domestic capacity more than two-fold in 1990-92, the supply of fertilizers, account for roughly half capacity of pulp and paper s fell by about the market in shipbuilding and repair, one third 5%. They also suffer from low labor of cement and pulp and paper, and a minor productivity and high production costs. In share in textiles. Smaller IPEs have significant textiles also, IP performance lags behind that market shares in salt production, industrial gas, of private competitors. gs in this subsector and glass bottles, and are minor players in operated at a loss during 1991-92 and are caustic soda, industrial estates, and industrial shrinking in asset size compared with private engineering. Apart from the enterprises listed textile companies. Only in the industrial supervised by MOl, there are ten manufacuring gas subsector does the iP perform favorably enterprises under supervision of the Agency for compared with its closest private competitor. Supervision of Strategic Industries (9mIs)as well as three pharmaceutical enterprises under the FSgue 4.6 Ministry of Health, and three prnting and Rdums on AMts and on Equltv publishing companies under the Ministries of IEs wv Pd Manufuolldng, 1992 Finance, Education, and Information. The share of all manufacturing public enterprises in 14 manufacturing value added has been estimated at 15% in 1990, down from 20% In 1985. 12%- The contribution of the 28 majority staeowned 10%. IsS to manufactring value added is an estmated 5-7%. 6-% 4.72 In terms of overall financial perfrmance, tn results lag those of the 4%- - private sector. Compared withn manufactring _ _ firms listed on the Jakarta Stock Exchange, which realized an average 6% pre-tax 0 _ accounting reurn on assets in 1992, ms PuA"MOs Rom an inE achieved a 4% return (Figure 4.6). After-tax MM gPvL bwBd Mt I= return on equity was also considerably lower Soe a#0wE1993 ar duodAdoz for nes compared with the private listed manufacturing firms. Except for fertilizers, ins operate in domestic markets with private 4.73 As with is, the Government Estate compettors. In subsectors where public and Corporations or Fms are less efficient than the private industriak enterprises compete, private best private sector companies. There are 26 firms are more efficient. In the cement ms employing thrfequarters of a million subsector, private sector financial performance people and producing 17% of agricultural oDp is better. The cement division of P.T. and 3% of non-oil exports. Comparative Indocement, the largest private cement analysis of four ms and a private estate producer, realized a 37% operating profit showed the private estate outperformed the Sustaining Growth: ImproWng the Incendve F)ame k and Effickncy 107 Ps by 30-80% in oil palm productivity and management talent-for priority areas such as 7-23% in rubber yield per hectare. The private education and primary health care. Continued sector estate had significantly lower costs in all ownership of commercially-oriented PES would categories, Including plantation maintenance, require Government to provide future fnanci harvest and transport, processing, marketing support to develop their operations in and overhead. Not surprisingly, the private increasingly demanding markets. Additional estate's profits were higher. The average capital (equity and debt financing) will be profit of the private sector company in palm oil needed for future WE investment to replace and production was about 2.5 times better than that modernize current plant capacities, and to of the ms. In rubber the difference was even expand activities where n's have developed a more dramatic. International comparisons tell competitive edge (for example, production of the same story. The Fris had lower average urea fertilizer). Failure to invest in such profits than Malaysian estates despite their activities would jeopardize their contdued lower costs-Indonesian labor costs are much operations. In light of Government's policy to lower and fertilizer is subsidized (see World restrict future fmancial support to ms, an Bank June 1993). important consideration for divestiture of u's is the need to attract private capital for future 4.74 A strategy for improving the efficiency investment in the enterprises. and financial performance of the commeicially- oriented PBS would involve a three-pronged 4.76 Any privatization program brings with approach: it a number of political, technical and process Issues which must be resolved If the prime goal * fiuther deregulation of industrial and of efficiency gains Is to be maimized. In the agricultural product markets to enhance Indonesian cqntext, three issues would reqire incentives for improvement of special attention. These are: (i) widespread vs enterprise efficiency and protect the concentrated ownership; (ii) transparency of public interest through greater privatization transactions; and (Iii) capital competition, which will reduce prices; market considerations. * withdrawal of direct public sector 4.77 Widespread vs concentrated mvolvement in commercially-oriented ownership. Indonesia faces potential problems s including through "going public", related to the limited number of technically and divesting management and qualified, domestic and foreign investon with ownership to qualified private sector sufficient financial resources to buy the owners; and privatized enterprises. Ihere is concern about furhaer concetration of ownership of * in commercially-oriented PBs that privatized companies in large business groups, remain to be privatized, separation of particularly if the new owners have limited non-commercial activities from experience and knowledge of the sector. This commercial activities, improved problem is further exacerbated If privtzaton incentive-basedmanagercompensation, facilitates anti-competitive behavior by the new and cessation of Government finance at private owners. The challenge facing the below-market terms. Governnmnt is to resolve the inherent confUict between the benefits which a strategic 'core' 4.75 In addition to improving their investor can bring to an enterprise in tersn of efficiency, privatization of the commercially- management and industry expertise and the oriented PBS would free Government need to seek widespread ownership and populr resources-particularly scarce capital and participation in the privatzation process. The 108 Capter 4 solution would involve a combination of investors face in finding a ready exit strategy ownership participation by qualified foreign through the secondary market as a result of the investors, involvement of broader segments of weak retail market for shares, and the absence the population in divestiture, and attention to of suitable mutual fund vehicles which would the transparency of privatization transactions be attractive to smaller investors seeking to (see below). Further dereguladon of markets spread their risks. Another issue concerns the would also enhance a competitive environment protection of private minority interests in for efficiency improvement. partially privatized enterprises. Tbis is normally done through transparent rules 4.78 Transparency of privatization administered by the local stock exchange or transactions. Transparency is critical for securities exchange commission. In particular, gaining broad support for the privatization minority private investors normally seek program among the investor community and protection or right to consultation over fture the population at large. Some of the recent share issues which could dilute their ownership privatization transactions in Indonesia rights. Finally, the restrictions on limiting reportedly have not been fully transparent and foreign ownership of listed companies to 49% thereby have contributed to resistance to of the shares is an important disincentive to privatization. International experience suggests foreign investors wishing to take an active role that the main transparency concerns include: in the strategic management of a company. As bidders with insufficient information and time part of broader capital market development, to prepare bid documents; sales of enterprises divestiture of P8s would benefit from: (i) steps at low prices thus affording large short-term to upgrade the stock market clearing and gains to the buyers; a lack of clarity concerning settlement systems; (ii) legislation to introduce the evaluation of bids and undue emphasis on open-ended mutual funds into the market; (iii) non-financial subjective criteria; and a protection of minority shareholder intrests perception that the shortlisted bidders were through transparent regulations; (iv) reducing selected on the basis of political connections current restrictions on the share of foreign rather than technical competence. In ownership for enterprises; and (v) efforts to Indonesia, the challenge will be to establish increase the public's confidence in the stock procedures that address the issue of market by continuing the intiatives to upgrade transparency in such a way that interest in the auditing and financial disclosure rqurements privatization program and timely for publicly listed firms. The Government has implementation is not sacrificed to overly already started to address some of these issues. cumbersome procedures. The implementation of the proposed PE divestiture program would help accelerate the 4.79 Indonesian capital market development of the domestic capital markel consideraions. An important factor in determining the Government's divestiture 4.80 The privatization of commercially- strategy will be the strength of the domestic oriented PEs would take time and there are capital markets. With a market capitalization measures that could be considered to hnprove of about $40 billion at end-1993, the Jakrt the operating efficiency of firms waiting to be Stock Exchange Is small in relation to the size privatized. These measures apply with equal of the domestic economy. In addition, shares force to firms that are likely to stay in the of only about 20 of the about 160 companies public sector for a longer period. First and listed on the exchange are traded on a regular foremost is the need to deregulate these basis. TIis is exacerbated by the manual stock sectors. Other measures are unlikely to have trading and settlement systems currentdy in much impact on efficiency in the absence of place. Related obstacles are the difficulty deregulation. Swtadnlg Growth: Improing the Incenive Framework and Efficiency 109 4.81 All public enterprises need clear Cost control, including wages, may rewire objectives. Saddling public enterprises wi retrenchment. Retrenchment is a sensitive, noncomnercial objectives creates the difficulty indeed potentially explosive issue; all of assessing the cost of those objectives. For governments that have succeeded in downsizing wansparency reasons It is preferable to finance labor forces have paved the way by devoting noncommercial objectives directly from the special attention and resources to the Governent budget. The main reason for construction of a social safety net woven of clarifying the objective of public enterprises is severance packages, training, credit schemes, to be able to assess the performance of public and resettlement programs (see Shirley and enterprise management. Management Nellis). accountability for commercial performance of the public enterprise is impossible when 4.83 Another critical element of successful managers are burdened by other objectives. A public enterprise reform is higher incentives for proven way to hold enterprise managers managers. Bonuses and more decisionmaking accountable is to isolate the factors that arls- autiority, clearly linked to performance, have within their control and judge them according proven useful in many countries. The to those ftctors. corollary, of course, is that the Govemnment must have the means to assess enterprise 4.82 Employment generation is a common performance and be ready to dismiss managers noncommercial objective of public enterprises. who fall. 110 Oapter 4 Endnotes 1. Opening the economy may also have raised productivity growth by increasing specialization though an expansion of the range of inputs available to domestic finns, an important source of productivity growth in Korea according to recent research. (Feenstra, et.aL). 2. High specific export taxes were applied on sawn timber in 1989 in an effort to drive raw material into woodworking, moldings, and funiture where value added is highest. However, after an initial expansion, investment in secondary processing seems to have peaked, while the number of saw mills has shrunk. 3. The development of a futures contract in robusta coffee would serve as a price discovery mechanism for smallholders. Cwrently the London Commodity Exchange Coffee Coutact is used as tdo basis for trade discussions at all points within the marketing chain for Indonesian robusta coffee despite the fact that it is considered to be more closely linked with African robusta marrkets than Indonesian markets. Lack of a close link with Indonesian robusta increases the basis risk-the risk from differences in price developments for the physical commodity and the standardized futures contract-of hedging ndonesa robusta using the London market. The potential for the development of futures markets in Indonesia is discussed in World BanktuNCrD (December 1993). 4. According to Westphal, the Korean Government has used the investment approval process to limit shaply inflows of foreign investment. 5. Among the above-mentioned countries, only Indonesia imposes a divestiture requirement This may stifle re-investment by the foreign owner as the time for completing divestiture approaches, thereby limiting the benefits to Indonesia of the foreign investment. 6. The research concludes that in the cases of twelve enterprise privatizations reviewed (electricity generation nd distribution, telecommunications, airlines, port services and transport), the improvements were most important in the foUlowing areas: increases in investments post-privatization; increased productivity rsulting from improved incentives, better labor-management relations, a reduced labor force and intera reorgaiza_tion; output prices moving closer to scarcity values, or remaining stable thanks to competition and effective regulation; and diversification of output into activities offering economies of scae. Reduwng PoVy Darg REPRUTA W Ill REDUCING POVERTY DURING REPELfTA VI A. Introduction 5.3 What factors led to the 'great ascent' by the poor? Section B looks back and 5.1 Indonesia's record of reducing poverty analyzes how economic growth, jobs, rural- is unong the best in the developing world. urban links and migration, and Govemment Absolute povert incidence has fallen from expenditures on infrastructure, education and about 60% to about 14% of the population, and health contributed to the decline in poverty the absolute numbers of poor from about 67 between 1970 and 1990. million to about 26 million during 1970-93, according to official estimates.' Other 5.4 The past does not, however, provide a es_tates confirm rapid declines in poverty full blueprint for fiture action to red'ice (World Bank, 1990; 1993; Ravallion)2, as do poverty. Indonesia's very success has altered comparisons of contemporaneous accounts. the nature of poverty. Intad of mass, Ihe fall in poverq coincided with enormous generalized poverty, poverty in Indonesia is uprovemes in nutrition, life expectancy, now increasingly localized-by geographical basic schooling, and health of the poorer 40% location, occupation, household size, age, of the population. Despite this success, a key gender, educatiorn, and other chacteriscs. objective of 1PEUTA vi is to reduce poverty Consequently, it ,s harder to reach the poor by furher. The Plan sets an ambitious goal of general growtf programs. To furter reduce reducing poverty to about 6 percent of the poverty, it is necessary not only to maintain population (or no more than 12 million poor) broad-based growth, but also to identify who by 199819. and where the poor are more carefully than in the past, and then reach out to them. Section 5.2 Ihere is a perception in Indonesia that C of this Chapter discusses the issue of not enough progress has been made on identifying the poor, based on household reducing poverty, inequality, and expenditure surveys. Poverty alleviation unemployment In a rapidly growing society, programs need to reach the poor more perceptions are often shaped more by effecdvely. Such a strategy has three main aspirations than by past standards and inter-related elements: (a) improving the quality achievements. Indonesia's very achievements of public services used by the poor (e.g., have contributed to the public's identification education, health, and inucture); (b) wifth and aspiration to still higher living designing more effective and targeted programs stndards. The reality is that impressive for the poor, and (c) allowing poor progress has been made, and continues to be ommunities, households and especally, made, in reducing poverty and increasing women, to have a decision in what services employment opporunities for the poor. This they need. In this context, section D first Chapter tries to put these issues in perspective. discusses the Government's program for It then discusses what can and needs to be poverty alleviation under RIuTA Vi. The done-by way of continued rapid, labor Plan envisages economic growth and intensive growth combined with targeted employment, humanresourcedevelopmenet, and interventions-to maintain progress on the still the targeting of poor villages and areas as the substantial challenge of reducing poverty main planks of an overall strategy to reduce fiurher. poverty further. Section E discusses 112 aujpter 5 implementation issues related to the MM credit and other essential services; Desa Teribnggal, (wD) the Government's new program targeted at poor villages. Section * Third, targetng such services will F discusses how to improve the effectiveness of require both more fmancial resources basic public programs in health, education and for programs that primarily benefit the other social services. poor (and by the same token, a reduction in public subsidies for the 5.5 The last secdon turns to the Issue of better-off given budgetary limits), and addressing povert in remote and resource-poor increasing decentralization of regions, such as the eastern part of Indonesia. management and delivery of services In Java, and to an extent, in Sumatra, the (e.g., in education, health) to local ongoing ruralurban-industrial trasition and administrations, communities and long-run demographic changes (i.e., lower organizations, including Local family size, higher female participation) Community Organizations (LCOs); and promise to provide a substantial improvement in family incomes and living standards (as they * Fourth, in remote, resource-poor are already doig) through the 1990s and the regions where poverty is more first decade of the 21st cenury. Provided the entrenched-such as the eastern part of growth process remains broadly-based, thiS will Indonesia-carefully designed continue to pull the poor out of poverty in interventions will be needed that raise large numbers. 'Me challenge for areas outside (sustainably) farm incomes and Java, and outside Java-Sumatra, will be more productivity and non-agricultural difficult. There, the demographic factors incomes (e.g., tourism, handicrafts, leading to lower family size and the urban- services), build small, community- Industri transition are still not evident. based infratructure, reduce population Migration (of the better educated) to the growth, and improve basic health and mcreasingly labor-scarce areas of Java-Sumata education. may be a partial answer. The other, more important issue will be to fmd the policy B. The Great Ascent: How The Poor solutions to develop a sustainable growth Rose Out of Poverty, 1970-9 process in these remote, resource-poor areas. 5.7 Long-term trends in poverty in 5.6 'he Main Polity Messages. The Indonesia by broad regions, and by urban and section that follow in this Chapter cover a rural areas are shown in Figure 5.1. As I large ground. The main policy messages, evident, the initial (1971) incidence of poverty which are in line with the approach of was severe, especially in Java. During the REPELTA VI, are the following: 1970s, poverty declined in all regions, although the decline was faster outside Java. * First, continued broad-based and high rates of economic growth will be 5.8 In the 1980s, the pattern reversed. central to raising average Incomes, Poverty in Java fell by more than one-half increasing employment and reducing (from 47% to 19%). Outside Java, the decline noverty farter; in poverty slowed. Still, by 1990, the incidence of poverty in both Java and outside * Second, the poor will, nevertheless Java was about fte same level, and much lower benefit from more targeted than in most other developing counties. inmerventions-to help them secure Widespread poverty had virtually disappeared, beter incomes, schooling, health, except in a few remote or resource poor areas. Reducing Poversy During RPEUTA W 113 Fg. 5.1: Indonesia: Trends in Povt Incidence, 1971-1990 (Millions and pe tges of poor N10 ws JAVA J10A B92 tF 1||°1 Source: WofId Bank Staff Esifmates based on SUSENAS da. 114 COapter S 5.9 lhis enormous decline in poverty workers can fid jobs more easily, auch as in the incidence is not merely statistical. In the 1960s, booming construction industry which pays daily much of rural Java (over 67% of the population, wages that are higher than the equivalent for (Sayogyo, 1977) was desperately poor: in the public school-teachers. The hours of work are words of one demographer, it was 'asphyxiating now about 10 hours a day for 6 days a week; for want of land" (about 40% of farm poor urban settlements (kampungs) often have households were landless) (Keyfhtz quoted in some drainage and electricity, with water served Booth, et al); In the words of another, to the by vendors and stump-pipes; pey urban trading extent that fertility rates were declining, it faces lower risks from the municipal authorities; reflected a feeling anong the poor that "they no and incomes of the bottom 20% of urban. longer wished to bring another beggar into the households are twice that of mral households. world' (Penny ad Singarimbun). A regional survey of then pri ominanty rural Yogyakarta, 5.12 In the Outer Islands in the early where poverty was among the highest in 1970s, poverty incidence was much less severe Indonesia, found the prospects 'rather than on Java. The main reason was ihat the disheartening" (Mubyarto and Partidereja). Rice population density was much lower, less than 80 was a staple only for the relatively well-off, persons per square kilometer, or about one- while the poor ate maize and cassava for most of twentieth that in Java. The major populated the year (Booth). provinces-North, South and West Sumatra, and North and South Sulawesi-were agricultural S.10 In urban areas, the situation was only surplus regions. Smallholders had relatively slightly better. About 56% of the urban large (over 1 hectare) landholdings, and casherop population were poor. The urban poor were cultivation was well-developed. For exanplc, often temporary migrants from rural areas, their North Sumata had extensive tree-crop prncipal sources of earnings being daily labor, plantations, while West Sumatra was a surpls scavenging, becak driving, and petty trading; rice producer. Still, rural poverty was they often lived in a small room with no significant, at 43%. During the 1970s, there sewerage, water, or lightig, and worked 12 was a large faill in rural, and an even larger fall hours a day for 6 - 7 days a week (Jellinek, in urban, poverty. By 1980, poverty incidence 1977); more permanent poor city dwellers were in the Outer Islands had fallen to about 27%, or no better-off, living on untitled, easily flooded about 60% of the rate on Java. land, and often working in illegal, petty trading subject to risks of confiscation by municipal 5.13 In the 1980s, however, the decline in authorides (Jellinek, 1973). poverty Incidence in the Outer Islands slowed, especially in the eastern part of Indonesia where 5.11 The above situation is probably still poverty rates remained high. There were applicable to many of the very poor (see several reasons, as discussed subsequently (para. Box 5.1). But what has changed dramatically is 5.89): rapid population growth on a fragile, and general conditions. In rural Java today, although in some cases, shrinking, stock of land average incomes remain low, there is a shortage resources, a slowdown in agricultural growth, of agricultural workers compared to the past, lower w,orld prices, lack of alternative non- unemployment of landless people is not a serious agricultural opportnities, and a significantly problem, and rice is a cheap staple for virtually poorer human resource base than on Java. Still, aU (Collier, et al). Rural poverty has fallen to poverty incidence In the Outer Islands condinued about 24% (Figure 5.1). In the cities, poverty to decline, to less than 20%, about the same as incidence has fallen to about 12%. Unskilled on Java. Red4ucng Poverty DUing REPEUTA VI 115 Box 5.1: Facs of Poverty In Judonesia 1. Staits do not oonvoy the reality of poverty. ill-lhalth, but mrdy useatoe puskeamas-mainlybecause la an attempt to undestand the naturo of counct povrty of cost. Pamily planning has not touched the household. is Indonesia, small background study was conducted in December 1993 of Wo poor households in Jakatta, and 3. The second household head, Pak B, migrated two nual households in xrr. This box descnies the to Jakarta from Surabaya in 1986 and made his ling findings. from scavenging, tho easiest activity to enter. Earlier, eanings used to be about Rp.5000 a day, but with 2. Urban Poverty, Jakart. Thw hous4-old head mported waste, prices are falling. B gave up scavenging of one famiiy, Pak R. is a 60 years old dock worker. 6 months ago-since his incomc fell to at most Rp.2,500 Pak R came to Jakata 40 years ago from Central Java. a day, below sustsinable needs. He is now a shoe He separated from his first wife, after the infant death of repairer and also a ata8 bak (dealer in second-ha thdr child. He maried again and this marriage was goods). He laims hbe makes Rp. 2.500-5,000 per recair, chidless. Pak R adopted a neighbor's daughter, M, after and likes his newer occupation better and has more ttua his second wife's death. M is 39 years old. The for the family. Pak B's wife contributes to income as a household now consists of 10 persons, Pak R, M, M's helper in a nearby foodstall, for which she gets some husband, N, and M's 7 childrn, ranging in age from 4 food for the family's meal. Compared to some of her months to 14 years. In his youth. Pak R had a steady neigbors who send out their children as beggars, this income as a dock woker. Today, the competiion for hmily is worse-off. So far, the couple have r ed dock labor is tough-since contabiners are now used, only withdrawing their daughter from school to join the other 3.4 gngs of worers are needed to oad/unload a ship children in begging. Pak B and his family live on publc compared to 10 gangs carlier, and since there are bnd along the railad tack in Senen, taen over by younger and many more claimants for work. Each shift thos referred to as gelwndaagan (homeess). that ho is able to wowt earns him Rp.3,400, half of Intermitten evictions were common till the ourremt 133 wich he gives to his daughter to manag the household. households were finally recognized as legl idts M's husband, N (45 years old) also came to Jakata as a with proper dentfication (i) cards. Pak B's family migrant from Cirebon. He works as a guard at a lives In precarious conditions, like their neigbbors. The shoppig center, for 3-4 days a wek and arns about temporay sheler is on a plot 2 by 1.5 mets, roofing Rp.10,000aday. Twooftheolderchildren(14and1l) is of corrugated Iron and scrap plywood, walls of work aftlr school, one brings home Rp.5-8000 a day cardboard and floor covered by recycled pla sheet. irregularly. Ihe per capita income of the family is about The family obtains water and does personal cleaning in Rp.35,OOO per month, marginally above he poverty line public mac (bathing, washing and toilet) for Jakart (about Rp.28,000 in 1993). Companed to the facilitie-where a fee is charged of Rp.100 each time. other 3 families surveyed (below), Pak R's family is Life in the neighborhood is tough with frequent thefts bdeoff. The family share a brick-constructed room 5 and robberies and other factors. Pak B's daughter, 10 metes by 3 meters, divided into two parts. Water it yeas old, is a second grader in a private school run by supped from a public standpipe. Public bathing and a neighborhoodvoluntary organization, and a few onths tolDet fiities are shared with the community. Only ago became elible to a scholarshir o attend a public luneh is cooked and shaed as a meal in the house. The school under the rank aswd (volunay donations) rest of the nmeaJ are obtained outside the house, on ste scheme, but because it was father away and unfiliar, food orNna. All of Pak R's gradchl e go to school has come back to her old scbool. Pak B's family cannot orgaized by the dock workers foundation in their afford iaoderm beal faciliies. Two of the family's complex in North Jakata. Th oldest attends junior children have died (one from cholera, and another seonday school at sbout the right age group for the shorty afte birh, probably due to infection from level. The tof the children are behind (e.g., 12 years unstrilized equipment used by the dukw benak or old at 3rd grade of elementary). The family is visibly in traditional birth a)ttda). Their daughter looks malaourished and ties easily. continued 116 Ozapter 5 cortinm tionf f'M BOX S. 1 4. Rdl Poverty, mT. Pak N's family lives in However, neither family uses the public health system a vilge in mwr, and owns about on quatter hectre of much, going relying on traditional mns of treaument or agricultural land on which they get about 1,000 corn dmply untreated. However, both fiamilies have used the cobs per harvest. To supplemant this mneger harvest. puskesmas at times (e.g., for malaria). Pak N works as an agricultual laborer, i ritumr for whicb he is givea 200 oobs or cash equivalent (Rp.50 per 6. Ile survey raise the issue of an iter0eertlnl cob). His wife helps Pak N in te field, and hauls water vicious cycle of poverty: 'the poor are doomed to maise some balf a kdlometer away, besides household chores. their children in poverty, meaning that as a result of the She also taWes care of cattle for other., for whicb she parents' Umited resources, chldrn find it difficult to roecoes Rp.30,000 p.a. They have only 1 son, 10 years benefit from even publicly subsidized social services of old, who goes to the local public school. 'Te parents education and health. The inability of poor cidren to are unsure how long they can afford to keep him there, obtain aocess to quality education and healbt sets them as tho fees are burdensome and as soon he will be a apart in the ever increasingly competitive labor markt valuable source of eanings. Poor health is mt so visible Consquently, for the majority of the currently poor one in the family, unlikte thfamilies in Jakata. Te N should expet tht. over the fth r nainal devlopmnat family ivs in a house made of nipa palm leaves, which prooess, they shall remain at the lower steps of the is wel ventilaed and clan. it is about 3 by 3 meters sratification lJder. Like in any population, there shall house and provides enough space, and the family has bea few who can escae this poverty trap. The question sweral equipment and self-mde furnture. is how can such jewels be foundl (Mayling Ooy- Gardiner, 4 al, 1994.) S. Another poor family in rutal Nrr is headed by Ibu T, a 60-year old grandmother who lives with her 7. More en.uraging conclusions aem, neverhes, gmadson. She cultivates her own one quarter of a possible. The good news is that the four families, hetare of land with maize and usually gets about 1000 although very poor, appear to have just enough incomes cobs per harvest per year. As another sturvival strgy, to obtain the minimum necessary food and surval smilar to the other 3 families, lbu T also accepts oers equirment of shelter, water and clothing. Compared to weave 7tnorese lo. Trades bring her raw to povecty in other parts of the world (and in bidona mateals and pay her Rp. 13,000 or equivalntthereofin itself some two decades ago), this in itself is an some rice for 1 meter kngth of cloth. During the lst achivme Th second good news is that all children year, she produed 8 such pieces, whdic gives her the of the four families aem asending school, despite acute cash incote she needs. Ibu T has similar livg povaty. This signals thedimorto of thexepanion of oonditions as th N family, and also owns the weaving the basic education systen, and the effort by the equipment. Her grandson is a 12 year old, but only families themselves for better lives for th¢ir childrn. It attends third grade in a pubic school about a klilomer is, nevertheles, also evident that the health system is not away. Tou T still owes the school ast year's school reaching the poor, and that a strategy to tedueo poverty uniform costs and the BP3 fees of about Rp.SOOO, which will continue to require resources and ted puble can be paid in instalents. As she is getting old, she is interventions to those who need it most. Theelimnaion uncertia how long her gandson will stay in school. of all shool fees, and possibly augmented subsidies for Although in relatve isolation, both the N family and Ibu poor children would be major steps. So would nutition ra family can aocems public health servica through the supplmenbt (e.g., either at health centres or at school puskems system which is some 12 krs away and cosb and income-arning opporqtunit for t very poor. about Rp.1000 travel charges (or walking time). 5.14 How did these dramatic transformations and incomes, initially in ruMl areas, come about? How did the vast numbers of subsequently In the cities. Second, relatvely poor, some 40 million people, escape poverty free and unhindered labor markets allowed between 1970-90? There were ihree principal workers to migrate to the jobs, especially from reons. First, rapid economic growth rural to urban arev. TIbrd, basic generated rapid growth in demand for workers infrastrucure, health, education and human Recig Poverty During REP2UT4 VU 117 services were expanded and made accessible to effects were a dramatic improvement In mral the majority of the population, raising incomes, employment and consumption, not productivity and the quality of life, as vwell as only on Java, but also osT-Java (where rice braking down barriers to the movement of production increased by 5.5% p.a.). In the goods and people. All of these factors relatively land-abundanw Outer Islands, an contributed to the large observed fall in poverty added impetus was rapid growth in tree-crops incidence. production, which increased by over 6% p.a.. With most of the population in the Outer 5.15 Growth, Poverty and Equity. Islands owning and operating land, povert Idonesia has achieved a sustained and high incidence in the Outer Islands declined rate of economic growth averaging over 6% markedly in the 1970s. In Java, where nearly p.a. between 1970-90. What is most important 40% of the rural population was landless, and is that this growth was also broad-based, where typical landholdings were small (0.25 resulting in rapid improvement in living hectares), the effects on rural poverty were lss standards of the poorer 40% of the population. pronounced, but still sizeable. Multiple Mmree factors were crucial: cropping and increased yields stimulated labor demand as well as improvements in harvesting * First, the Government placed consistent methods. emphasis on improving the agricultural sector, on which the livelihood of the 5.17 in the latter part of the 1980s, greatest numbers of people, especially agricultural growth slowed to about 3% p.a.; the poor, depended. agriculural incomes were also hit by the slump in international prices of many * Second, the shift to rapid industrial commodities. In the Outer Islands, this was a growth in the mid-1980s emphasized a factor in the slowdown in poverty reduction. much more labor-intensive, outw, .d- On Java, a different growth process began. orientated path of industrialization. Mamfacturing took-off, growing by about 12% p.a. The combination of a series of trade * Third, both of the above growth deregulation packages, th.e large exchange rate processes multiplied service sector devaluations and the opening to foreign direc jobs, in non-farm activities, and in investmnent led to dramatic growth in relatively urban trade, construction, fnances and labor-intensive industries. Manufacturing other services. employment increased by over 7% p.a. versus 4% earlier. Nearly 80% of ranufacturing 5.16 Each of the above factors has played a value-added originated in Java and most of the decisive role, in different points of time, in growth occurred in Java. 'Me effects were a ensuring a broad-based, labor-intensive pattern large increase in non-employment and incomes, of growth. In ggrjidhure, between 1971-83, especially in urban areas. The impact of the average annual production of rice, the most av,ricultural and manufacting growth on important crop, increased by 5.3% p.a., or by srvicestor growth were both diret and nearly three times as fast as population growth. indirect. The direct effect was that trade, The combination of the rice-intensification transport and financial sector activities programls (e.g., the BwAs), the rapid spread of associated with growth in agricultural and irrigation, the subsidizatior. of key inputs (e.g., industriai production increased at least the swe fertilizers, seeds, credit), public procurement rapid pace. The indirect impact was tdat and price stabilization, and the spread of high- growing incomes provided strong demand for yielding varieties ensured this outcome. The services sector output-e.g., in retail trade, 118 auywer 5 housing, and other services. As a result, the that the poor have been doing well, and far services sector grew by about 8% p.a. both In better than In most other developing countries. the 1970s and 1980s. 5.20 The improvement in consumption of 5.18 What was the overall impact of this the poor is also evident, indirectly, from the patten of growth on poverty? The broad- very substantial rise in aggregate food based growth described above appears to have consumption, indicated in Table 5.1. As the been the main factor in reducing poverty rich have low income-elasticities for food, (Ravallion and Huppi); GDP growth directly especially staples such as cereals, most of any led to poverty reduction since measured large increase in food consumption must inequality did not increase (see below). But originate from rises in general consumption of the crucial point is that the particular growth the population at large, especially for lower- process was related to the outcome on income income groups who have high income- distribution. In this sense one cannot really elasticities of demand for food. The more decompose' Indonesia's poverty reduction into detailed comparison of estimated consumption changes in per capita incomes and inequality - patterns of food over time by different income the growth process was one of higher incomep groups clearly illustrates the proposition of fte aid higher labor demand which generated no improvement among the poor; it shows that increa-e in inequality measures. that food consumption of the poorest has improved fastest, especially for basic staples 5.19 Measuring poverty, through household such as rice (Table 5.2). expenditure surveys, is a difficult task. Measuring inequality-the gap between the 5.21 Jobs and Poverty. A central reason rich and poot-is even more complicated, why the poor have escaped poverty in very because of under-reporting and under-coverage large numbers is their expanding job of expenditures and incomes by different opportunities, combined with demographic income groups. Bearing this caveat in mind, changes leading to slower growth in the supply standard measures of income indicate that of labor (Table 5.3). This has probably been inequality has fallen somewhat. The Gini- the single-most important factor behind the coefficient of expenditure distribution has been observed decline in poverty incidence over the low and has fallen slightly, from about 0.35 in last two decades. 1970, to about 0.34 in 1980, 0.32 in 1990, and 0.30 in 1992. Similarly, the ratio of the 5.22 The demographic changes of lower expenditures of the bottom 20% of the birth-rates in any society only reduce labor population to total expenditures covered by force growth after a considerable lag-since household expenditure surveys has been rising those entering the labor force are the children steadily, from about 6.94% in 1970, to 7.7% born a decade or more earlier. Moreover, the in 1980, 8.9% in 1990 and about 9.5% in increase in adult life-expectancy tha always 1992. Thus, the growth process over the last accompanies lower birth rates, has an two decades has improved the expenditures of immediate positive impact on labor force the poorest, which is faster than for the growth. In Indonesia, population growth was population as a whole. These figures imply a high in the 1960s; as a consequence, the substantial reduction in inequality, unless the growth in the potential labor force-i.e. the unxdercoverage of the better-off has worsened increase in the populon aged 10 years and considerably. If the main policy concern is over-in the 1970s was correspondingly high, how the poor have shared in general about 2.9% p.a. Each year, the potental labor prosperity, then the evidence clearly suggests force increased by about 2.7 million people. Reducing Poverty Durilng REPEUl W 1)9 Table 5.1: Indonesia-Apparent Per Capita Food Consumption, 196848 )WYM tw malm Wheat Caw $wWet POaet Soybena Peans Ft Vegetbe Fish Meat a 1968-70 99.7 20.0 3.4 70.1 18.4 3.3 2.1 26.2 16.7 10.0 3.4 '941 197840 122.4 23A 6.5 63.3 13.6 4.8 2.9 27.1 15.6 11.3 3.5 2341 198648 141.7 29.8 9.3 54.3 11.3 7.4 3.0 34.1 21.4 14.1 5.8 2675 X inc. 42.1% 49.0% 188.2% -22.9% -38.6% 124.3% 42.8% 30.1% 28.1% 41.0% 70.5% 37.4% 1968-1990 (Ine in iy Calore Supply (%) - bnonesia 49% - HiSh Human Developmt CoutdWe? 15% - Medium Human DevelopAmt countries 30% - Low Human Devlopment Countries 10% - AU Deveoping Cobunts 19% ( calori spply was shvady high in 1968) Sxwe: PAO Agrea, 1992; and UNDP, Ranan Devepment Repot, 19M. Table 5.2: Indonesia: Trends in Food Consumption By Different Income Groups, 1965-90 (per capita kgs/month) P? VeBbkkL -Flsh Meat 1965 1984 1990 1965 1984 1990 1965 1984 1990 1965 1984 1990 Botom 15% Pop. 0.5 6.1 7.8 0.36 2.9 3.5 0.03 0.4 O.S 0.01 0.02 0.03 Next 15% Pop. 1.0 8.2 9.S 0.43 3.6 4.6 0.05 0.6 0.7 0.01 0.04 0.06 Next 30% Pop. 1.9 9.5 10.5 0.5 4.9 6.1 0.09 1.0 1.2 0.02 0.08 0.14 Next 40% Pbp. 2.8 10.9 10.8 0.65 8.5 9.5 0.25 2.1 2.1 0.06 0.5 0.6 Ratio: Botom 15%frop 40% 0.17 0.56 0.72 0.55 0.34 0.37 0.12 0.19 0.24 0.16 0.04 0.05 So&n: SUSENAS and World Bank staff estima. Note: Derived by using average nationa prices; since lower incomoups will be expected to buy lower-priced food items, the differtal beteen averag consumption by income-classes is likely to be smaller #m shown. 120 Chapter 5 Table S.3: Indonesia-Labor Force and Employmetat Growth, 1970-90 (millions, unless Indicated otherwise) 1971 1980 _ 1990 Male Femak Total Male Female Ttal Male Femak Total Populaion (10+) 39.0 41.4 80.4 51.3 53.0 104.3 66.7 68.3 135.0 Labor Foroe 26.8 13.3 40.1 35.1 20.0 56.1 47.4 28.6 75.0 LFPR (%) 69% 32% 50% 70% 38% 54% 71% 42% 56% Employed 26.2 13.0 39.2 35.6 19.6 55.2 46.1 27.5 73.6 EPR (%) 67% 32% 49% 69% 37% 53% 69% 40% 54% Famly Workers 4.7 5.3 10.0 S.1 7.7 12.8 5.2 11.1 16.3 Non-Family Emp. 21.5 7.7 29.2 30.5 11.9 42.4 40.9 16.5 57.3 EPR (%) 55% 19% 36% 59% 22% 41% 61% 24% 42% Meo Employnt Growth (% p.a.) 3.4 4.5 3.8 2.6 3.4 2.9 Populaion Growth (10+, % p.a.) 3.1 2.8 2.9 2.6 2.6 2.6 Source: CENSUS, SAlURNAS, BPS; and World Bank Estimates; Mayling OCy-Gadiner (1993); World Bank (1993). 5.23 Actal entrants to the labor force were p.a., but with a larger base, it meant that now far fewer than the numbers reaching 10+ years about 3.1 million persons were poential annual of age each year. There were two principal entrants to the labor force. However, becase reasons for this: (a) first, Indonesian society of a furter surge in education, the annual w also educating its children, and one of the estimated growth in the labor force remained at important side-effects of higher rates of about 1.8 million p.a. education is to slow-down the growth of young cildren entering the labor force; and (b) 5.25 he annual numbers entering the labor females bear and traditionally rear the children, force each year, at 1.8 million, were huge. and run the household, which keeps a sizeable How well did Indonesia cope? Table 5.3 number of females traditionally out of the labor shows employment growth for males, females market Although female participation rates and total between 1971-90, using adjusted did increase, the absolute numbers entering the population Census numbers (to adjust for the labor force (6.6 million) were still much less under-reporting of unpaid female fimily than the increment in the female population workers in the rural sector in the Census as (11.6 million).4 As a consequence, the actual compared to sAKmtNs data-see Mayling recorded increase in the labor force-those Oey-Gardiner, 1993). As evident, total looking for work-in the 1970s was much employment growth was extremely rapid, at smaller than the potential, about 1.8 million about nearly 4% a year in the 1970s, and 3% p.a. a year in the 1980s. This was much faster than growth in the potential labor force, resutng in 5.24 In the 1980s, the same kind of results rising employment participation rates, from hold. The slowdown in population growth a 49% in 1971 to 54% in 1990. Of particular decade earlier resulted in a slowdown in importance was the much larger rise in female potential labor force growth to about 2.6% employment participation rates, from 32% in Reducing Poverty Duing REPFIJTA VI 121 1971 to 42% in 1990-indicative of the 5.28 MRgration and Povesty. When increasing feminization of the work force. people are able to move in large numbers from Finally, earning-employed participation rates low-income and underemployment situations in (i.e., excluding unpaid family workers) rural areas to higher income and more inproved from 36% in 1971 to 42% in 1990. productive jobs in the urban areas, the effects on poverty reduction can be dramatic. There 5.26 Unemployment and the Poor. Rising are two-fold effects of such migration: it youth unemployment has sometimes been Improves the incomes of people who migrate; suggested as indicative of a worsening and it improves te incomes of those who employment situation in the 1980s, especially remain (becmse of reduction in mral labor for the poor. How accurate is this hypothesis? supply). In addition, migrants often send some Table 5.4 below reports the official of their income back to the rural areas, unemployment data. Overall, unemployment improving rural consumption even faster tm has risen sharply but remains low in absolute rural income. The ability of urban growth to terms, with most of the rise coming among generate jobs for millions of new entns to those with primary, and especially post-primary the labor force in urban areas has been a education, decisive factor in the reduction of poverty in Java throughout the past two decades, and has 5.27 Unemployment rates for those with been especially important in the 1980s. In higher than primary schooling have increased contrast, in the Outer Islands, the impact of sharply-close to 10%. However, they are such migration and rural-urban links has been definitely not the poor. Those who have been much less significant. educated beyond primary schooling usually come from the relatively better-off parts in 5.29 The importance of non-agricultural, society-as indicated by SUSENAS household non-rural employment opporunities for the surveys-because the costs of continuing poor in escaping poverty Is shown in Table 5.5 education weigh heavily for the poor. Further below, which estmates migration from rural alysis is needed on whether rising areas to urban areas, and by the main Island unemployment among educated youth are due groups, between 1980-90. Since there is no to: (a) lack of jobs; or (b) poor quality of official information on such migration (i.e., education; or (c) simply, higher search-time for from rural to urban areas), it is estimaed by job-seekers in a rapidly charging economy, for the following method: (a) the 1980 Census job seekers who are able to afford to wait. A population figures are first taken; (b) the 1980 recent study suggests that significant search Census population numbers are multiplied by times may account for a large part of observed an assumed rate of naturd populadon growth, educated unemployment (McMahon and to derive an expected population in 1990 (the Boediono). But this issue is iiportant as the assumed rate of naural population growth is Government moves ahead on Its planned target differentiated by Java and the Outer Islands, to universalize junior secondary education. and by rural and urban areas (I.e., higher For the poor-typically those with no population -rowth in the Outer Islands, lower schooling, some primary schooling, or in Java; and higher in ural areas, lower in completed primary schooling-unemployment urban areas, using differences in total fertility rates continue to be very low (less than 2%); rates reported ,the Demograhic and Health the problem is more underemployment or low Survey, BPs 1992); and (c) this expected wage employment, which will be best corrected population is then subracted from the acual by rapid growth of labor demand. 1990 Census reported population to derive 122 CWpter S Table SA: Indonesia: Open Unemployment Rates, 1980-90 1980 1990 Male Femal Total Male Female Total AS R Utmalov (B) Unemployed (10+ millions) 0.5 0.5 1.0 1.3 1.1 2.4 Unemployment Rates 1.4% 2.3% 1.7% 2.8% 3.9% 3.2% fil By Education Lovels No education 1.3% 0.9% Primary school dropouts 1.6% 2.0% Primary Shool 1.8% 2.5% Junior High 2.8% 5.4% Seniw Higb 4.1% 9.3% Academy/Diploma 2.0% 6.5% University 1.5% 8.6% aaiAi) Mali frmala Ml EBmago 10-14 2.6% 3.9% 3.9% 9.5% 15-19 3.5% 4.1% 8.2% 9.9% 20-24 3.1% 3.8% 8.0% 10.0% 2S-29 1.3% 2.2% 2.7% 3.7% 30-34 0.7% 1.7% 0.9% 1.3% 35andover 0.6% 1.3% 0.6% 0.8% SOWrc CENSUS, SAKERNAS (BPs); Bank staff estimates; op.cit Table 5. estmted in-migration or estiated out- about 5% of the rural population, between migration (i.e., if the actual reported Census 1980-90. Although the urban areas in Sumata population is higher than expected from grew by 2.6 million, nealy one-half of these calculated expected naural population, then net migrants came from elsewhere. In the there is in-migration, and vice-versa). The other islands (e.g., Kalimantan, Sulawesi, klan results of this exercise are shown in Table 5.5. Jaya, Maluku, and Nusa Tenggara), the mobility of people was even less. The nual 5.30 Table 5.5 shows tha in Java, there areas are estmated to have shown only a 3% was a huge out-migration from the nral out-migration; in some of the indiidual areas, esdmated at about 14 million, 21% of provinces, there was, in fact, significant in- the nru population in 1980s.' Most of these migration from elsewhere, such as in Irian rural migrants are assumed to have moved to Jaya, Southeast Sulawesi, and East Kalimntn; the urban areas on Java, which received some while urban growth was relatively high, most 11.6 million in-migrants. The balance, some of these migrants probably originatd from the 2.5 million out-migrants, probably moved to other islands. the Outer islands. Nothing like this scale of migration from rural to urban areas was 5.31 The numbers in the table are only evident in the Outer Islands. In Sumara, fte indicative of the likely dicion of canges. net out-migration from the rural areas was only Much more careful analysis Is necessary before about 1.5 million rural residents, i.e., only we can be sure about these results. For Reducing Poveny During REPEUTA VI 123 Table 5.5: Indonesia: Estimated Migation from Rural to Urban Areas, and By the Main Ilands, 1980-90 (millions of people) JAVA SUMATRA 07THER ISANS Rural Urban Total Rural Urban Total Rural Urban Total Net Migration: -14.1 11.6 -2.5 -1.5 2.6 1.2 -0.7 2.0 1.3 As %9ofPopulation -21% 30% -3% -5% 27% 3% -3% 29% 4% Soura: Bank staff estimates, and CENSUS, BPS. Note negative numbers denote out-migration, and positive numbers denote in-migration. example, some areas classified as rural in 1980 The rural population on Java remained virtually were simply reclassified as being urban in unchanged at about 68 million between 1980- 1990, and this may exaggerate the migration 90, and increased only very slightly from 62 out of rural areas on Java. However, the million in 1970. During these two decades, broader picture remains valid (see Box 5.2). agriculture growth in Java was high and non- Box 5.2: Urbanization and Poverty Reduction 1. Published statistics suggest that More importantly, about 30-40% of the recorded urbanization has been extremely rapid (over 5 % a growth in intercensal urbanization could be simply year), presumably drawing large numbers of people due to the reclassification of previously nual areas away from rural areas at high rates. as urban areas. 2. Evidence suggests that reclassification of 3. Although greater research is needed, pnreiously rural areas into urban areas (urban areas there appears to be fairly compelling evidence to now defined as areas with more than 50% of the suggest that urbanization in Java has contributed workfore employed outside agriculture and greatly to rural poverty reduction (in some contrast posession of 'urban facilities" such as to the situation in the Outer Islands)-by providing hospital/clinics, schools and electricity) is a major a much larger range and number of jobs; at the reason for the recorded fast rates of growth in the Same time, this has not been accompanied by new urban population, rather than true migration. A large levels of poverty in the urban areas. more careful attempt at tracking urban growth and nual-urban migration (for Jabotabek and Bandung) shows 1ta (a) there is relatively slow growth in (Source: Urbanization. Urban Growth and Po_vet population in base-line (1980) urban areas; and (b) Reduction in Indonesia, Peter Gardiner, January much of urban growth is in the urban fringes. 1994, Background Paper). agricultural rural activity also improved. With goods and services and daily and more a relatively unchanging population base, this permanent migration of labor became much meant that rural incomes were improved more prominent, as portrayed by 25 years of rapidly. At the same time, the links between village studies of changes in rural Java rural and urban areas, in terms of movement of (Collier, et al). 124 Caapter S 5.32 None of these factors were at work on about 14% of total consolidated cenrl quite the same scale In the Outer Islands, governent expenditures in the md-1970s, to especially outside Sumatra. In the Outer about 22% by the early 1980s. Since total Islands, the rural population continued to central expenditures also increased incrase exponentially, from 36 million in dramatically, from about 17% of GDp to about 1971, to 46 million in 1980 and 55 million in 25% of GDP, and with GDP increaing by about 1990 (see Figure 5.1). Migrating from rural 6.5 % p.a. during the period, real central areas (and absorption of rural areas by urban transfers on these Infratuctre and social areas) was small. The links between the rural services increased about three-fold between and urban areas remained weak, partly because 1975-83. The result was a massive Increase In of the dispersed population and remoteness of the access of such services for the poor. many areas. Between 1978-87, primary school enrollbents among the bottom 40% of expenditure groups 5.33 What is evident is that a combination rose from 78% to 90%, lower secondary of favorable demographic factors (i.e., lower enrollments jumped from 42% to 65%, and the population growth, migration out of rural areas utilization of health services doubled (but to urban areas) and rapid economic growth has remains low). been providing a major engine of poverty reduction on Java in the 1980s. In the other C. Identifying e wPoor islands, especially in the eastern part of Indonesia, neither of these factors was at work 5.35 The process described In the previous in the 1980s. Rural population remains large. section has changed the naure of poverty in This maW go a long way to explaining the Indonesia. istead of mass poverty, the poor persistent poverty in these regions. are now more dispersed and potenly more difficult to reach (than in the past). In 5.34 Public} Expenditures, Human Capital designing any strategy for poverty-alleviation, and Poverty. In addition to expanding labor it is essential to lkow who, and where the poor market opporunities, human capital gains also are in Indonesia. conmtbuted powerfully to poverty reduction (Manning, 1994). People became better 5.36 Considerable efforts are being schooled and achieved better health-allowing undertaken by the Government to identify and them to participate in growth. Much of the locate where the poor are, by means of dramatic gains in human capital came as a household surveys (the susENs surveys), and result of public expenditure decisions to expand by other means. These efforts reflect may education and health and other social services years of work by BPs staff to technically design nation-wide. The oil-boom years, especially better survey methods, with the help of the after 1978, provided the Government with the donor commity. In many respects, a sea- wherewil to expand public infrastructure and change in knowledge about the poor is social services dramatically. A series of occurring, In geographically locating the poor special programs, the INPRES (or Presidential more acaely and more finely, and by Instruction) programs, covered the country side multiple social Indicators-better th in nmo with roads, primary schools and public other developing counties. Some immediate health facilities. Primary schooling was problems and difficukies remain. In th near made compulsory, free textbooks provided, fuure, considerable further advances in minimum health facilities mandated, and rural lkowledge about the poor are expected. The roads built and maintained. Regional transfers description of who and where the poor are which financed these expenditures jumped from provided below Is on the basis of Information Reducng Poveny Durng REPEUTA VI 125 as of 1992-which in broad terms is unlikely to contrary to official estimates which suggest change much. greater numbers of urban poor). The poor in Indonesia are overwhelmingly engaged in 5.37 The Social Setting. Some common farming and other primary activities. More sodal characteristics of poor households are: than 40% of the poor in Indonesia earn their (a) larger family sizes, on average; (b) larger livelihood from farm activities, including number of dependents per household family- fishing (a community that is often very poor in earner; (c) lack of education of household Indonesia). Poor farm families are those who head; (d) poor nutrition and health status; and own no land and work for other people's lands (e) single (divorced or separated) women- (or boats), i.e., are laborers; and second, those headed households. lThese are almost universal who own very small landholdings, often characteristics of poorer households around the without clear title, and/or operate marginal world (Lipton). But they create a cycle of agricultural lands. Another one-quarter of the poverty: larger family size means less incomes poor come from households where the women and consumption per head, larger number of members are engaged in home-making, and dependents creates the same effect, lack of lack any outside income-eaning opportunities. literacy or education reduces the earnings Another nearly 10% of the poor are those who potential, poor nutrition of the family means report themselves as not participating in any less ability to participate in work, poor gainful occupation, or are effectively outside nutrition of children reduces their learning the labor-force. These 3 categories together ability, and being single-parent women-headed account for over three-quarters of all poor household reduces the household's income and individuals in Indonesia in 1992. social standing in the community. 5.40 Location. The pattern of regional 5.38 The most telling social indicators of poverty is portrayed in Figure 5.2. Provinces how the poor differ from the non-poor are the with high poverty rates, but low populations large and growing gaps in education at higher are clustered in the upper left-hand corner. levels. The gap in net primar school Provinces with average or low poverty rates, enrollment rates between the poor and non- but large numbers of poor are in the lower poor is relatively small, about 20%; but the right-hand corner. A third group is those prinmay school completion gap is larger-about provinces with average poverty and low 40%. At higher levels of education, the gap population. Provincially, the mree most widens even more drastically. Other gaps are heavily populated provinces in Java-Central evident in nutrition, child health, contraceptive Java, East Java and West Java-together use, and fertility rates. All of these factors account for more than 50% of the total lead to a situation where the poor will numbers of poor in Indonesia. Java, inceasingly fall behind, inter-generationally, in therefore, still has the greatest numbers of the incomes. These gaps indicate that human poor,-despite an impressive reduction in capital interventions must increasingly target .pverty-incidence. Other major provinces by the poor if future income-inequality is not to numbers of poor are Lampung in Sumatra (7% widen in Indonesia. of the poor); South Sumatra (4%); East Nusa Tenggara (4%); and West Kalimntan (4%). 5.39 Occupations. Poorer households tend to be clustered by occupations. Many more of 5.41 When we tur to a different the poor in Indonesia are rural (87%), than measure-the proportion of poor in the urban (13%)-despite concerns that urban provincial population-the poorest provinces poverty might be rising (and somewhat in Indonesia appear to be East Timor (48% of 126 Chapter 5 FIgure 5.2 Indonesla: Regional Patterns of Poverty (1992) 0.6 0.45 0.4 0~~~~ 0.43 0.35 J 0.3-_ S C [m 0.25 ND B "Us" g0K1mna O o Rim 0a B- SS 0 N SuSw _P 0.15 S Ka_lm 0 Sty Vtfaowd 0S~~ 0.1 fla I, 00 - -- t1 0.05 0 0 0.05 0.1 0.15 0.2 Provincla Contribution to Lowest National Quintile Soufce: Wodd an staff stimatse, based on SUSENAS 1992. Reducing Poverty During REPiTA W 127 population In poverty); East Nusa Tenggara poor villages selected by the PODES (or Desa (48%); West Kalimantan (47%); Maluku Potensi) Survey, 1993. (43%), Iran Jaya (41 %), and Lampung (38%), according to World Bank staff methodology 5.43 In 1994, the new 1993 SUSENAS and estimates. Because of generally small household survey will become available. A sample sizes, and other difficulties in obtaining much expanded sample means that district-level reliable Information in some of these provinces, poverty incidence estimates will be available. these estimates are indicative only. The Moreover, an expanded and more carefully official statistics for the 1993 SUSENAS suggest designed 'core' questionnaire will also give lower levels of poverty in these provinces. more reliable and useful information on other Still, the eastern part of Indonesia (Timor, characteristics of households, such as Nusa Tenggara, Malult, Irian Jaya and education, health status, nutrition and labor- Sulawesi) generally have a higher incidence of market characteristics. When the results of this average poverty, compared to Western exercise are combined with the earlier 1993 Indonesia. Nevertheless, because of the low B (PoDBs) survey of poor villages, It should population weight, the eastern part of Indonesia be technically possible to generate a much together account for only about 8% of the total more reliable location of poor villages, which numbers of poor in Indonesia. is the administrative target for the RBEUTA VI poverty-alleviation program, the InPS Desa 5.42 Lecating the Poor at District level, Tertnggal (T, see further discussion below). and Below. For the purposes of targeting, the provincial distribution of poverty is too broad. D. Implementing A Poverty Alleviation A province represents too large an area. Straegy-The Challenge However, fully satisfactory definition/profile of the locational distribution of the poor, down to, 5.44 The Govermnent has an ambitious say, the kabupaten (district) level, or better still program for reducing poverty further in at the sub-district level, is not available. In R1HTA Vi. It plans to reduce poverty preparation of its REPELITA VI program for incidence nationally to about 6 percent of the poverty alleviation, the Government has tried population; or less than 12 million people to devise nrr 'sures of poverty-incidence at the (compared to about 27 million in 1990).' As district levL , and at the village level. A the REPELITA VI document notes 'specifically, survey was undertaken by BPS (PODES) to the objectiv of poverty alleviation ... s to solve identify poor villages (eventualy termed as the absolute poverty problems in both rural and desa tertinggal or villages left behind). This urban areas ... ; the efforts for increasing the survey was done by using 27 indicators distribution of development and poverty including qualitative evaluations by the village alleviation will be done through policies administration. Some 20,000 villages, out of applying across the whole of development about 67,000 villages, were identified as being fields, and acting with balanced, integrated way left behind in various degrees. Despite its with various macroeconomic, sectoral and attempt at more careful evaluation, the regional policies". As oudined in REPLITA VI, identification of poor villages remains there are four main insents with which the problematic because of many conceptual Government intends to reduce poverty furither. difficulties. A mapping of villages by other social indicators (as was dor,e in East Nusa 5.45 The first and most nIporta insrumnt Tenggara) such as infant mortality, female is continued rapid, labor-intensive eonomic contraceptive prevalence, malnutrition, etc., growth. Sustained broad-based growth of does not show a close correspondence to the 6.2% p.a. is expected to generate employmt 128 Chapter 5 growth of about 3% a year, or some 12 mIllion 5.47 A third plank of poverty alleviation new jobs (i.e., 2.4 million new jobs a year). under REPELITA VI is a sizeable increase in On the other hand, the increase in labor public spending for regional development, and supply, according to World Bank staff for the development of poor villages. Indeed, estimates, may be about 1.8-2.0 million the largest budget item (16% of the total) in the persons a year, given an expected slowdown in development budget under RExUTA vi is the growth in population, and rising school reserved for regional development. As enrollments. Consequently, if the Government indicated in Chapter 3, this is about three times successfully achieves its labor employment as large the actual spending in the previous two (demand) targets, there would be ample scope Plans, and reverses a pattern of falling regional for rising rates of female participation and spending during REPEuTA V (necessitated, in increasing shift from low-wage/underemployed part, by a fall in oil revenues). Much of the status to more productive employment. Both regional development funds are for special would contribute centrally to reducing poverty. mRsS programs-a new program for poor But generating even 1.8-2.0 million new jobs villages (QNPRWs Desa Tertnggal), as well as a year will depend on continued change. In the grealy increased allocations for existing past five years, rapid growth in labor-intensive nuses for village grants, and for level I and manufacturing jobs, and urban services jobs II local government regional INPRESes, to take has been spurred by economy-wide over the allocations to primary school and deregulation. If this falters-and this health InPREses, which have been substantially underscores why sound overall economic reduced. The President's 1994 budget speech policies are essential-it would endanger the indicates that they reflect changing priorities, engine of job creation. away from building more physical facilities (since most primary schools and h.ealth centers 5.46 The second plank of the Government's have already been built) and towards more poverty alleviation strategy is human resource local responsibilities for maintaining and development. There is an emphasis on improving the quality of services. The universalizing primary education, extending it npREses for local road improvements and to junior secondary education, and raising the maintenance have similarly been transferred to quality of education at all levels (see local governments. These are steps in the right Table 5.6). The effects, if these targets are direction, and signal increased decentralization achieved, will be to raise the average of, and increased local accountability for, the educational attainments of the workforce delivery of essential social services to local significantly, and thereby improve incomes and communities. How the local governments reduce poverty-continuing the trends of the adapt to these changes over time will now past two decades. Ambitious targets have also become more crucial for poverty alleviation been set for improvements in community and human resource development in Indonesia. health, and especially the health of the poor-in child and maternal health, reducing micro- 5.48 A fourth plank of poverty alleviation nutrient deficiencies, access to health centers under REPELITA VI is the intent of the and sub-centers, safe water and sanitation, and Government to target central development related targets for reducing population programs to poor vilages and areas. Again, growth-all of which will be central to the emphasis appears to be on geographic reducing poverty. The poor will be expected targeting of resources and services, and to share in these programs as much or more towards the poor. Examples of such targeting than the non-poor, provided public programns are the ambitious village mid-wives (bidan are well-targeted at the poor. Reducing Poveny Durng WEPEU7A VI 129 Table 5.6: REPEUTA VI Targets in Educaton and Health 1993/94 1998/99 Pimary Net nrollment Rate OM)R)( 93.5 94.0 Junior High School NER (%) 39.9 48.6 Seoior High School NER(%) 24.7 30.4 University Gross Enroment Rate (GER) (%) 10.5 12.8 Total Fertility -ate 3.0 2.6 Conraceve prevalence (%) 66.0 70.0 Child birti attendance (%) 50.0 55.0 Immunization for tdanus (%) 64.0 85.0 Io supplementation (%) 63.0 85.0 Coveg of high-risk births(%) 20.0 50.0 Maternal mortality ate (per 100,000) 450.0 225.0 Child immunization rate (%) 75.0 80.0 Malaia outside Java (per 1000) 40.0 30.0 Diafheal inc (per 1000) 330.0 280.0 Access to sda water (% of population) 50.0 75.0 Access to santationi (%) 25.0 54.0 Health insurance coverage(%) 5.0 15.0 Pop. per health center ('000) 40.0 25.0 Subentwr per health center 4.0 3.7 Lifo expectaucy at birth (years) 62.7 64.6 hn1fnt Moralit rate (per 1000) 58.0 50.0 Sourc: JwPzNs, Govemnment of Indonesia, REPEA vi, 1994. desa) progam, the program for providing free such a strategy will now be a crucial health to needy families, and the programs to determinant of success. Issues and options target infrastructure to IT villages. regarding the implementation of the Government's program for poverty alleviation 5.49 As evident from the above description, are discussed further below. economic growth, job-creation, and broad- based human resource development remain the E. Targeting Poverty: 1he iNpD Desa most important instruments to address poverty. Ter&ngal However, worldwide experience suggests, that it is harder to reduce poverty by general 5.50 An important innovation in REuTEA VI growth strategies as the incidence of absolute is the emphasis on a special program for poverty declines to about 15-20% of the poverty alleviation, the iNpREsDesa Terdnggal population. Given Indonesia's success in (MT). This is seen in the Plan document as the reducing mass, generalized poverty, a shift to major new initiative for poverty alleviation in a stategy that includes more targeted Indonesia over the next 5 years. interventions for poverty alleviation, regional development and human resource development 5.51 Background. The Wr was established is warranted. RP1EITA Vi ineorporates such a by a special Presidential iuction In October shift in strategy. Sound implementation of 1993. Its objectbe is to accelerate poverty 130 Ohapter 5 reduction in poor (or left behind) villages In a provide group solidarity and cooperation. sustainable way. lhe JDr consists of a fund-termed 'seed capital"-given to the 5.54 Implementation. hbe implementation communities in these identified poor villages to of the IDT is coordinated by a National Team mobilize their capacity to help themselves. with representatives of Bappenas, the Minitr The funds are to be managed by the villagers of Home Affairs, and other agencies. he themselves, with the assistance of the National Team has to decide the overall immediate local administration and existing policies on planning, coordination, monitoring, village bodies such as the Village Planning Implementation and evaluation. At the Board (LKMD) and the women's group, the provincial level, the Governor also is Family Welfare Promotion body (PmmK). The responsible for implementation and ir Is an extension of similar programs in the coordination of sectoral programs with the DT. past. While the xur itself is an attempt to The sub-district (kecamatan) head has the expand capital and credit in poor villages, other responsibility for synchronizing the DT NPRES, sectoral and regional programs will be program for the villages, and can appoint increasingly targeted to IDT villages, with the facilitators (field staff from other agencies) at objective of maxhnizing the Impact of the mr the village level to help the KMS. The village plus these other programs on poverty chief, with the help of the LKM, identifies the alleviation In these villages. poor, and with the help of the facilitator, encourages the formation of the KM. The 5.52 Poor Villages and Target Groups. projects of XMs are appraised by the village Some 20,000 poor villages have been selected, chief through discussion who then sends of which about 2000 are to be covered under approved projects to the kecamatan head. The the conftinuation of the existing PKr (which will actual project is implemented by the Km with become part of the Ir program), while the the help of the LKMD and the facilitators. balance 18,000 villages will be included in the mr proper. The per village grant, distributed 5.55 The Self-Help Village Groups (we), equally rather than on a per capita basis, is and Facilitators. The selection criteria on Rp.20 million (or about US$10,000) per village who can join a KM is to be discussed and anumally. With an average village size of agreed among the local people, and about 500 persons, the per capita allocation identification completed and KMS formed by works out to about US$10. April 1994, when fte program starts. The role of the facilitator is seen as very important in 5.53 The use of the fimd is left to the helping to form the group, and to dvelop village community. The Government expects sustainable projects and organize the credit and that the funds will be used for generating other programs. The facilitator can come from incomes and employment in very small any of the official agencies staff, or from enterprises and activities, and that a substantial LCOs (Local Community Organization), part of the funds may be used as credit universities, and other social organizations. schemes operated by the villagers. This target The IDT fund is delivered directy to Kms (the group will be comprised of the poor who will treasurer of the KM) through the nearest bank form a self-help group (the KM, or Kelompok branch of BRI, after it has been agreed at the Masyarakat). Each KM will consist of about 30 discussion foumn UDKP (Unit Daerah Kerja households at the village and sub-village level, Pembangunan). The MT fund given to the KM and several such KMS could be organized per is delivered to its members as a loan under village, but up to a maximum 3f about 10 per tenrm to be agreed by them-so that the fund village. The KmS would be expectd to revolves. Reducing Poverty During RWEJrA W 131 S.56 Reporting and Monitoring, and * The selection of poor viges is based Evaluatiou. The mM is supposed to maintain on a special PODES survey undertaken a log-book of its activities (including names of in 1993, but there remain some members, types of business, disbursements and difficult issues of whether the poorest receipts of funds). Based on this, the KM villages were indeed chosen. leader files a simple report to the village head Improvements in the selection of thc who summarizes and forwards it to the camar poor villages, by integrating the PODES (kecamatan head). The camat files a monthly indicators with the 1993 susENAs report on all the KMs under his jurisdiction survey, would be very important. with similar details of names of XMs, businesses started, and disbursements and * The allocation of DT grants by an receipts, and problems and possible equal amount per village is solutions-to the district head (the Bupati), who problematic. Many villages in bigh then every 3 months reports to the Governor, population density areas (e.g., Java) which office then every 6 months sends a are likely to have population sizes report to the Directorate General of (e.g., 10,000 persons) much higher Community Development in the Ministry of than those in low-population density HIome Affairs, representing the Central areas (e.g., 100 persons). One Government. The monitoring function remains solution would have been to allocate on with the provincial officials from the village a per capita basis, corrected by some chief to the Governor. In addition, the approximate differential in cost-of- National Team also conducts a program living between different provinces, so monitoring and supervision with the assistance that the real per capita allocations were of a Working Group. The national evaluation more even; another would be to of the IDT program is to be conducted by partition large villages into separate, National Team, each year in each province, smaller units (e.g., by kelurahans). and periodic monitoring at the provincial, district, sub-district and village level-to * It is unclear whether urban areas are improve iDT for the next year. excluded from the program or not; in any case, the issue of poverty in urban 5.57 The IDT program, as described above, areas cannot be fully ignored, although is an attempt to provide assistance directly to poverty is by and large rural. the village community level to undertake grass- roots poverty alleviation programs. It: (a) * The actual amount of the wr grant entusts village communities to participate in on a per capita basis maybe too small the planning process In deciding which to make a meaningful difference to activities are to be implemented for priority poverty in poorer, remote and needs; (b) keeps procedures potentially simple economically depressed areas. In such and lets the village community decide for itself areas, programs other than credit about who benefits and how; and (c) increases would be possibly much more the size of discretionary resources granted to important, especially social programs the village sizably (4 times the village (education, health, nutrition, fanmily development grants, which will remain in planning) and those to provide a boost place). However, some key issues remain, in sustainable income potenti (e.g. which will hopefully be addressed over time, agriculture, transport). Going national as the Government learns more from the with an uniform program may not implementation of the IDT: provide the most effective use of 132 Chapter 5 scarce resources given the differences successes and failures of the Mr (since between Java and the eastern part of different variants might be thrown up by the Indonesia. nation-wide exercise of implementing the IDT). Seen in this context, a careful monitoring and * lThe community decision-making evaluation exercise by technically competent process on transparency and and independent experts, and designed and accountability may need further careful planned well in advance of the implementation thought. It is unclear from the program of the IDT (i.e. have baseline surveys, choose whether the truly poor within a village control groups, use SUSENAS survey methods, would be targeted and selected, or and supplement by randomly-selected intensive whether the non-poor would socio-economic surveys of KM formation, the appropriate a large share. One uses of the grants, the credit schemes viability, possibility worth investigating is using income growth, access of the poor, etc.) would social group pressures to further this be very important. Only then could the JDT be aim, which may be possible though improved. One fundamnental lesson of significant community publicity about successful poverty alleviation programs around the intent and objectives of the MT the world, is that learning from both successes scheme. Periodic public reporting to and failures in implementation is critical. the community itself of the schemes' selection of people and results may F. Reorienting Basic Public Programs also help. The role of local officials Better To Address Poverty and facilitators (appointed from the agencies) remains large, and the 5.59 In addition to the special targeted potential role of LCOs is underplayed. program described above, Indonesia reaches 'Me role of LCOs could have been much of the poor through its basic health, useful to provide expertise and the education, family planning, and social safety inensive help that KMs of the poor programs. (Box 5.3 describes the major might need for sustainable income- poverty programs in Indonesia). However, for generating activities (see Box 5.5). these to be effective, two structural barriers Again, as the lessons of the ma and need to be broken. First, it needs to be more other successful credit schemes show, explicitly recognized that the poor, and not the ensuring a sustainable credit scheme non-poor, need help. And second, in order to takes very careful effort and design. reach the poor effectively, traditional top-down Do the facilitators have much approaches to poverty alleviation are unlikely experience in this? The role of to be sufftcient; more in-depth, participatory women, a key to success of so many (community-based) and grass-roots assistance poverty alleviation programs around will be needed. The lessons of international the world, is not emphasized. It may and Indonesian experience show the imporance have been useful to consider formally of these factors. using a pre-selected share of the IDT gra for women' KMS (say 50%). Fl. Setting Public EXpenditure Priorities for the Poor 5.58 Perhaps the most important issue is the need for careful monitoring and evaluation of 5.60 Any Government program for poverty- the scheme. Given the resources committed alleviation that seeks to reach the truly poor (some US$600 million over 3 years), it would faces obstacles. The most important difficulty be important to try and learn from the in a low-income society is distinguishing Reducing Poverty During REPFIJTA Vi 133 Ibox 53: Indonesia: A Compgadon of Past or Ongoing Programs for the Poor I/ As in other large countries, Indonesia has had a planning and ante-natal services; (b) a food d arge number of programs for the poor (apart from nutrition program involving setting up viW those already cited in the text). lhese progams are demonstration plots managed by village le wonwn's annotated below. The list is by no means exhaustive, association (PKK); (c) social wolfare activities at the and is only indicative of the wide range of vilage level; and (d) non-formal education initiativ. interventions that have been tried, some with great Coverage of the scheme is now quite extensive, success, others less so. covering 230,000 PoSYAINDus in 35,000 viages in aull provinces. An UNICEF evaluation sugststhat only hInmes SD. and oths. The special Presidental the POSYANDU initiative was efective; the Instucdon (MMn) progams-pviding block and agricultural and other components showed very lite sectorat g4ts to the regions-started in the 1970s progress. and expanded rapidly (with the oil boom resources) til the early 1980s. Tho ORMS SD supports the Social Welfare Inittives. he Deparet of expansion of primary schools, and has been the most Social Welfare (DSw) runs a program for tribal people successful progmr in providing basic school facilities (an estimated 1.5 million people distributed over 20 throughout the country. The other sectoral pReses, provinces), implemented by the DSW or by private for health, rural roads, and sanitaion, although less social organizations. Another program trains sucessu, have also been a key to sprading basic, voluntary socia workers who are maLnly based in minimum standards of services in all provinces. The vilages and supported by a Social Field Officer at th innt scheme has been an unique and innovative way Kecamatan level. The objectives of the DSW arm to transfer subsatil social spending to blal levels, generally to raise setf-respect, self-reliance, and self- targeted at specific public services. sufficiency supported by welfar programs for the destitute and very poor. Generally, the efforts are too Health Services. The National Health Conferenoe small to have much impact and do nOt involve the in 1976 agreed that the Ptm scheme (village health local community much. At the kabupaten level, the development) showed great promise and should be DSW promotes a number of social extenion expande. The result was the YuOsMAs (primay programs, together with private soial welfire health center) based health services designed at the organizations. kecauman level for a range of services to the villages. This has now become a nation-wide effort for the FrePg&ML The DepartmentofForety delivery of basic health series. rnS programs specifically for shiftng culatos. According to the Department, there are some 1.5 Inteemted Health and social services: A policy million households dependenton shifing ultivation in iniative started under REPELIA V was the P3D forcsted areas of Indonesia. The two basd piogrms progrua for the upop (Family Nutrition Improvement run by the Department are (a) resettaen activiies Progrm) for even distnbution of basic services, (tmnsmigration, housing and vi resettlemet; and providing integrated health, nutrition and education (b) non-resettlement activities (reforcstation, creation services and information to poorer communities. The oontinued intended coverage was 1000 villages, using a ranking devised by UNICEP. The P3D system relies on: (a) 11 This compilation of programs draws heavily on upgrading and extension of the POSYANDUS (family the report, MarA Farmer Community welfare centers) to provide-integrated preventive Develomnent Poect, Phase I Report, submitted health services (immunization, nutrition to the Government of Indonesia, ADB and suppImentation, diarrhea control, family Hunting Tehnical Services. 134 Ohapter 5 cortinuation from Box 5.3: of new rioe-growing areas, HPH ooncession holders' Java) has been a major program of the Govenment. The development of vilages near forest areas, and program has moved some 3 million people from poor sedentuy cultivation). A total of some 150,000 communities, with extensive outlays for housing, land households have been assisted. Under the mPH development, irrigation, agricultural services, credit and scheme, the private sector is heavily involved. None other subsidies. It has generated some controversy about of these progams have met with much success. the net benefits, given the very large outlays involved, largely due to lack of effective community the impacts on the local environment and people, and participation. questions about austainability. As a tesukt, the targeb have been substantially scaled back in recent years, and Village Develonment Progam. The Directorate more emphasis is now being given to voluntary' General of Village Development (BNaDEs) in the transmigration. Ministry of Home Affairs has a multi-sectoral approach, coordinated by the kecamatan head. The eceamaan Tie KaMnung Imrovement Program. This is the level identifies the local potentials, plans and implements only signiScant urban development program with a programs, and evaluates progress. One of the main decided bias towards the poor, and has been a notable programs is the management of village development success. funds, under the IPE (Special Presidtial Intctions). The amounts were Rp. 2.5 million a yesr Tho P4K Prozam for Marinl Farmers and for each vilage, which is spent on projects commended Lanless. This is a joint project of the Ministry of by the village heads (Kepala desa)and the ULam (village Agriculture and DRI. The first phase covered 1979486 development commktee). The PM (village lvel period, and 11 provinces in Java and outside. The women's group) fails under the CMD, which also second phase began in 1989 and has a more resrieted propose projects for support. The amounts of spending coverage. The basic objectives are to increase incomes are very small, and the projects are mostly decided by of small farmer setf-help grups (Km) and to organize the village administration and kecamatan admnistaon, them to gain access to formal credit, funded by ]FAD and and the development impacts have been appareny small. participation of M31. There is an eligibility means- testing. After a slow start, and with substal Ineeriated Area Develooment Proerams. The overheads, progressis nevertheless improving, with good inategted area development program, or ncr, was repayment rates (95%) and significant improvemen in designed to assist villages or groups of villages which incomes. have specific problems, mainly infrastructure related. Therieria by whih the villaes are choseninclude low on-Pormal Educaion. The non-formal education development impact, a low level of acemssibility, per progrm was statted nearly 20 years ago by tho capita incomes below average for the Kabupaten, ovrment to improve adult literacy rates among classified as one of the poorest villages, are new millions of people. A set of materials called Paket A transmigmtion sites, have no narket orientation, and are covers a phased program of masering literacy, based on situated near international borders, in remote islnds, in community based laming groups, with volunteer tutors. costd lnd, in overpopulaed areas, etc.. Activities are The program has been a major factor behind the success planned at the district level based upon aspirtions of the in literacy. In the early 1980s, a new scheme was loalvillage communities. Results suggest that the cr added, the Kjar Usahas On) scheme, for income- programs have been expensive, funding is spit under geatg activities and vocaio training. The resuts several depantamts resulting in lack of coordination, and of the Ku scheme have not been generally successful, nor progress in coverage has been slow. those of the apprneship schem-argely because of unsuitability of centraly managed official programs to Tmansmiemaion Pron.m Over the past decades, such efforts. New approaches were adopted to improve official transtnigration of people from overpopulated e schem in 1991, and progress on the small enterprise areas (mainly in Java) to underpopulted areas (ortside and vocational training aspect remains weak. clearly between the needs of the poor, and The latter are politically more importan than those wio are relatively better-off, albeit still the poor and are able to divert programs to with low incomes by interational standards. tiemselves. The assistance that may be needed Reducng Poverly During REPEUTA W 135 by the poor to escape from one or more of the generally available? Specific measures in the structural causes of poverty may be relatively education sector are: (i) eliminating all fees small. For example, meeting the nutrition-gap associated with school attendance (primary and of the noorest 15-20% of households through a junior secondary schools) of the poor, publicly-provided food program is in almost all including admission fees, uniform fees, cases a small cost. Yet, providing such examination fees, and BP3 fees; (ii) offering assistance has proved difficult in all countries, vouchers or scholarships to cover not only and especially in low-income countries, fees, but also out-of-pocket costs of school becae leakages to the non-poor are large. attendance, such as for books and writing materials; (iil) perhaps even offering an 5.61 One of the tools to evaluate whether *augmented" subsidy for the poor to attend social programs are meeting this challenge is to school. The costs of (i)-(iii) could be offset by atemnpt to measure how much of public reducing subsidies for the relatively better-off spending on social prograns reaches the poor, at all levels of schooling, which in itself would and how much goes to non-poor households. be a desirable cost recovery. In the heal In Brazil, where total social spending is as high sector, the swra lurah system of granting as 25% of GDP, it is estimated that the poorest exemptions from fees for the poor is failing. 20% of the population receives only about 6% The recommendations are to: (a) strengthen the of all such social benefits (World Developmnt publicity of the existing system; (b) employ Report, 1990). In Indonesia, there has been geographic price discrimination and/or little explicit targeting of social spending on the screening mechanisms, with fees in facilities poor. The poor have benefitted from social primarily used by the poor being re 4d to spending, primarily because public nil, and fees in other facilities being ir.-ased expenditures have stressed basic education and substantially; (c) use self-screening mechanisms health. Still, benefit-incidence calculations much more in urban areas, such as charging show that in public education spending, 29% of low fees at health sub-centers and progressively the public subsidy is received by the richest higher fees at higher levels; and (d) encourage 20% of households compared to 15% by the the private health insurance system so that the poorest 20% (World Bank, 1993). Primary relatively better-off opt out of public health education and health sub-centers are the only systems. The Government has recently tw categories of public social spending where announced plans to provide health cards to the poorest 20% benefit more than the richest poor families (replacing the surat Wr)- 20%. In all other categories of significant entitling them to free medical care. The social spending-such as health centers, scheme will target the 20,000 villages kerosene subsidies, hospital outpatient care, identified as poor villages under R1PELTA VI. junior secondary schooling, hospital inpatient The community leaders, rather than district and care, senior secondary schooling and, above village chiefs and officials, are to determine all, tertay education-the richest 20% of which families will be issued health cards. households receive benefits that are many times greater than the benefits received by the F.2 Improving the Delivery of Basic poorest 20% of all households, mainly because Public Services For the ooQr the poor consume these goods much less than te rich. 5.63 Strengthening the above mechanisms would go a long way to improving the impact 5.62 How can the redirecting of social of public expenditures on poverty reduction. spending on the poor be achieved, while But more efforts will be necessary to address ensring that public services continue to be the structural causes of poverty. Poor families 136 Chapter 5 need Income-earning oppornmities, credit, 5.66 There are several interrelated reasons better delivery of school services and health why health status is lower than wht is care, better nutrition, improved social achievable in Indonesia, as discussed earlier, infrastructure (low-cost and sustainable water and these reasons impact particularly on the supply, sanitation, rurl roads) and better poor. First, public health service utilization, delivery of family planning programs and child especially among the poor who need health and maternal care. None of this will happen care the most, is low. Second, public health unless the efficiency and effectiveness of expenditures often are spent on services that delivery systems is improved. are relatively cost-ineffective in terms of their potential impact on health outcome measures. 5.64 Health. Generally, Indonesia has made Third, this allocative inefficiency is progress in extending health services a-id compounded by a government health delivery making them accessible to the majority of the system that is operationally inefficient and population. However, as discussed in Chapter wasteful. And, fourth, the quality of health 3 the health status of the community remains services being provided is low in that weak, and this is especially true for the poor. compliance with minimum standards for effective care is low. The above factors are 5.65 The status of child and maternal health highly interrelated. For example, poor quality and nutrition in Idonesia-key indicators of of health services often leads to low health care community health-is only about the average utilization by the potential recipient. Low or below the average for other low-income quality of care and service utilization in tum countries with similar per capita incomes. The are largely due to inefficiencies in the way official infant mortality rate of about 60 per government health services are being thousand births is about the expected level for organized, managed and provided. Further, Idonesia's per capita GNP and has been the combination of these factors has a stagnating in the past few years. Pre-school multiplicative impact on the effectiveness of the child malnutrition (mild to moderate) levels are public health system in improving community high (44% of the age group). The maternal health. mortality rate, at about 450, Is one of the highest in the world. Three-quarters of births 5.67 What factors explain the low utilization take place at home and only one-half of births of public services despite a high degree of are attended by qualified medical staff; and subsidization and the accessibility of facilites? only one-half of all women of child-bearing age Non-availability of critical staff, drugs and practice some form of modern contraception. instruments account for performance shortfalls The majority of the population suffers from and low facility utilization to some extent. micronutrientdeficiencies (iron, vitamin A, and However, analysis of 1991 health center iodine deficiency being the most common). service statistics as well as a special survey Eighty percent of Indonesians have at least one conducted in Kalimantan Timur and Nusa form of intestinal parasites, and 60% have at Tenggara Timur suggests that a major least two types. Only 58% and 22% of all explanation for differences in facility utilization households have access to safe water and also lies in the way existing staff and resources sanitation, respectively. These are all signals are managed within the health center. Here, that Idonesia is performing poorly on health major concerns include insufficient attention to compared to other countries, especially given crucial local health needs and challenges (such Indonmsia's better performance in basic as maternal and child health); neglect of the schooling and incidence of poverty. quality of services and client interaction; Reducing Poverty During REPEUTA 17 137 reinterpretation of health center purposes, roles issues that are critical to the efficient and jobs which can lead to systematic disregard provision of basic health services. of important tasks, the emergence of defacto These initiatives should be used to norms, standards and activities that are at odds deveiop innovative networks of highly with achieving acceptable service levels and motivated health providers, including quality, and under- and inappropriate use of improved health centers and subcenters staff resources. as well as private practioners and contractors, to support the delivery of 5.68 In health, the following strategy Is basic health services. In this respect, recommended in order to reach the examination of the experiences of REPxLITA vi objectives of improving equity. various LCOs and private ventures The Government should seek to maximize may yield helpful Insights. It is also improvement of health status by: important that Indonesia looks abroad for appropriate lessons, particularly at (i) directing government health subsidies attempts to improve service provision at the provision of a well-defined, in public facilities by linking staff highly cost-effective health services income to performance (as measured and ensuring that these reach the by technical quality, productivity and greatest possible number of people. patient satisfaction), and by giving user This would improve allocative constituencies a formal role in health efficiency of spending. Of course, the center planning and decision making. actual mix of subsidized services may These efforts would have to be vary depending on local accompanied by a more vigorous push epidemiological, social and economic towards decentralization and integrated conditions. But all localities should be planming and budgeting that would give able to access the same list of provinces, districts and health facilities subsidized basic services. This policy more power to deploy staff and other would entail a systematic shift over resources in accordance with their time in the distribution of health assessment of local conditions. subsidy benefits towards the poor, underserved population through 5.69 A key additional need for improve efficient targeting and the institution of health in most communities in Indonesia, rural a policy framework regulating the use or urban, is better access to safe water and of health subsidies and the pricing of snitation. Currently, only about 22% of the services. Consensus on what services country's population have access to sanitation, should be eligible for subsidy and how and about an estimated 58% have access to safe resources should be allocated at water (which may be an overestimnte). As in various levels needs to be forged; the case of other health services, considerable potential exists for improving community- (ii) improving the efficiency and based, low cost water supply and sanitation effectiveness of government-funded services in rural areas. In urban areas, there is health services delivery and ensuring little choice but for the expanded public compliance with acceptable standards provision of these services. In either case, of care. This means support for Government social expenditures will need to systems changes and innovative target a substantial improvement in water and experiments geared towards resolving sanitation services in both rural and urban health delivery, organizational, areas. management, and quality assurance 138 Jawp:er 5 5.70 Education. Thanks to the spread of situation of the poor; and (b) the qualitY (and school facilities, Indonesia has achieved near hence expected returns) of primary schooling. universal primary school enrollment. However, in order to consolidate these gains 5.72 Improvements of overall economic the Government needs to improve the quality conditions of the poor are tied closely to of the educational services. This is because the continued broad-based economic growth, as poor are characterized by starting school for discussed elsewhere in the chapter. With their children at a relatively late age (beyond respect to quality, research in other countries six years of age), high dropout rates in primary suggest that improvements in quality of schooling (about 25% of the children who enter education lead to higher expected retrns of prinary school do not complete the full six primary schooling. Various interrelated reasons years of primary school), and low transition explain the uneven and often low quality of rates to junior secondary school (nearly 40% of primary education in Indonesia. First, all children who graduate from primary schools allocating the satne amount of public funds to do not go on to enroll in junior secondary all schools, regardless of communities' schools). Why do the poor not complete economic resource base, has resulted in an primary schooling, and of those who do inequitable financing system, with resources complete it, why do a large proportion not lacking for improving classroom teaching and continue to junior secondary schools? The learning in the poorest communities. Most answers to these questions are of special poor communities can make little fmancial interest since the Government is embarking on contributions to schools comnpared to private the universalization of nine years of schooling support in regions of 'good' quality schools in REPEUTA VI. (where such contributions make up to 60% of school funds). Less than 5% of public routine 5.71 Prmary and pre-primary schooling. expenditures go towards meeting schools' A recent Bank study (1993) suggests that the operational needs, and the primary school 20 percent differential in primary school net subsidy is inadequate even to maintain acrrent enrollment rates between the poorest 20% and quality standards. Second, poorly educated the richest 20% of households may have very and trained teachers lack professional support little to do with official fee charged for and promotion opporunities, as well as the use attending school. A reason is that the abolition of adequate materials in the classrooms. of official fees in public primary schools has Third, the budgetary and institutional resulted in an evening out of costs. Tne framework is weak and fragmented. The private costs of attending school-admission budgetary and planming process is divided fees, examination fees, uniform costs, BP3 among several agencies and a multiplicity of fees-are nevertheless high, about 38% of per budgetay sources, so that national and capita income for the poorest decile. These provincial policy makers do not have an should be eliminated for the poor. However, overview of allocation and expenditures. The removing all types of fees may not increase the process is top-down and rigidly earmarked, enrollment ratios significantly. Simulations with a lack of realistic standards for suggest that raising net enrollment rates for the determinirng total funding requirements for a poorest children now also have much more to quality-oriented education system. do with the overall incomes of the household and the expected returns from primary 5.73 In order to address these issues schooling, than from school facilities and successfully, the role of the Government nmst pricing. 'Te question then turns to what can change in the delivery, financing and be done to improve: (a) the general economic management of education. Strengthening the Reducing Poverty During REPEUJTA W 139 delivery mechanism can come about with numbers of primay graduates)l The Increased decentralization, so that textbooks explanation for this counter-intuitive reult reach the classrooms, decisions on teacher must be the much higher opportnty costs of deployment are made at the local levels, etc. schooling for the poor in wealthier province; The use of community-based decentralized both fees and also the greater possibilides of education initiatives, such as those employed employment in these provinces. This suggests by LCO's or other private sector groups, would that an augmented subsidy, covering fte enhance the ability to adapt to local conditions. opporunity cost of school attendance, would be Consideration should also be given to providing needed to close the gap in net enrollments resources and support to community-based pre- between the poorest 20% and the richest 20% schooling: support to communitybased pre- of households (World Bank, 1993). The schooling of, say, about 2 years, since children importance of this result is that istead of in primary schools in Indonesia start abolishing fees for all students at the junior compulsory school at a relatively late age, secondary level, it would make much more about 7 (an age by which educational sense to abolish fees for the poorest households psychologists say that learning capabilities and provide additional subsidies. Finally should already have been well-formed) and educational quality-raising the value of a since children from poor households start at an degree-is an important factor in increasing the even later age. More efficient spending of demand for junior secondary schooling. public resources also needs enhancement, so that resources reach the school level. 5.75 Vocational Trainig. The case is Underserved schools need to be given higher often made that expanded vocational training of priority in the allocation of funds forprimary some kind may be the answer to improve education. An immediate start could be made relevant schooling for the poor. However, in improving the existing local capacity to where even primary school drop-ot rats of manage primary education, particularly by the poor are high, there is little likelihood that simplifying the financial planning an^d expanded vocational education would prove of budgeting processes. much value to the poor. Second, the costs of providing vocational training are high, much 5.74 Junior secondary schooling. Costs higher than for general education. Third, matters greatly for the poor. At the same time, vocational schools often have lower quality the opportunity costs of schooling become than the general education schools. For all much higber-because children are now these reasons, vocational education is not very entering the earning age cohort. Some relevant to the poverty issue. On a regional estimates suggest that abolishing all direct basis, however, it may be important to impart school fees would raise the net enrollment rate basic training to small frms and individuals in among the poorest groups by about 12 local construction and simple techniques, using percentage points (from 37% to about 49%). local materials and capabilities: in housing, Subsidizing all school-related fees (e.g., BP3, water supply, and sanition. Lao may be able uniforms costs) would raise it even more. But to play a role in these activities. This may the opportuity costs of schooling are also a allow local capabilities to emerge for significant factor limiting enrollments. An undertaking small public works. examination of provincial age-specific enrollment rates shows that in wealthier 5.76 Adult lteracy programs would have provinces, junior school enrollment rates immediate impacts on existing poverty without among the poorest quintile actally are less waiting for children to be better educated. than the rates in poorer provinces (adjusted for Although official literacy rates are high, there 140 Chapter S remains questions about the assessment and suggests that for those who really need it, such standards of such literaqc, especially outside small employment guarantee schemes may be Java-Bali. Moreover, the existir.g literacy valuable, e.g., for very poor coastal fishing programs in Indonesia are faltering and need households in southern Java, and for very poor urgent attention. Preoccupation in these communities outside Java, such as parts of NMT programs with non-core services-such as (where localized famine condidons can and do vocational taining and credit subsidies which sometimes happen). The budgetay the education agencies are ill-equipped to consequences can be significant for an provide-have diverted them from the employment guarantee scheme. In emphasis needed on basic literacy and Maharashtra, the financing is obtained by improved reading materials. taxation on more prosperous urban areas. 5.77 Transfers and Safety-Nets for the 5.79 For the handicapped or the aged, Poor. Not all of fte poor can benefit from people who cannot participate in the labor policies to increase their incomes and force, a different scheme may be necessary. participate in growth. In the first place, it may Significant numbers probably fall into this take a long time for some of the poor to be category. In the West, social insurance has able to escape poverty. And second, there will been the answer. In developing countries, the always be some who will remain acutely translation of this has generally not worked. vulnerable to adverse events. The first group Even in Latin America, where experience with can be helped through a system of (gradually old-age or handicapped social security is the declining) income transfers. The second group longest, the schemes have failed to reach the require a safety net. For these populations, the poor and generally only reached the employed lessons of international experience suggest that in urban areas, where they often have led to three sets of interventions can be useful. First fraud over disabilities. Chile and Costa Rica Is the targeted schemes of nutrition, health and are the exceptions, where the political and education for the poor, which we have already social commitmn seems to be the strongest, described above. The second is public and where coverage is universal. In Indonesia, employment schemes. And the third is some such coverage, as in the JAMOSTK scheme, form of social insurance. probably will turn out to be very expensive and may end up providing protection only to the 5.78 Rural public employment schemes (as relatively well-off. in most developing in Maharashtra, India) have two functions. countries, formal wage systems are not large The first Is to maintain and create rural enough to support formal social security infrastructure-examples are road-building, systems. Therefore, transfers based on irrigation, sanitation, soil conservation, and indicators of need that can be monitored and afforestation. Ihe second, and more important implemented through local health care and function is to create employment to those in community-based systems appear to be the need. In these tasks, public employment more promising route. Preventive and basic schemes are often cost-effective. Since only healdt-care can be provided to the infim and poor people are willing to work at low wages, elderly or other very vulnerable groups, public employment schemes can screen out the supplemented by cash or in-kind transfers when non-poor so that resources are used effectively. necessary. Self-selection and careful These types of schemes may not be amenable screening devices are essential. On the whole, to the social conditions in Indonesia-where such arrangements are rare, but in rural China, being poor and reliant on public schemes is the community has a moral responsibility for viewed negatively. But the same characteristic providing basic necessities for the vulnerable, Reducing Poverty During REPEITA VI 141 and the central government helps poorer The well-known Gramneen Bank experience in areas cary out their responsibilities. In Bangladesh which has served the poor Indonesia, another possibility is small amnounts extremely well-83 % of the loans are to poor of earmarked land and wealth taxes collected women-has used group lending and a very locally and distributed through local religious careful organizational approach to achieve or other centers. repayment rates exceeding 95%. F.3 Promoting Income Earning 5.82 The sXK (Badan Kredit Kecamatan) Opportunities for the Poor scheme in Central Java also has worked well, but did not rely on group credit, nor on Lco 5.80 A broad-based growth strategy remains involvement as in Bangladesh. It lends to the most important approach to promoting individuals but contain costs by relying on tiny economic opportunities for the poor. loans (US$5 was the initial limit, but the Assuming this is in place, what narrower average loan size has since gone up to about interventions may still be necessary and useful $35) made on the basis of character reference for the poor? Many countries, including of local officials, a 1 page loan application, Indonesia, have experimented with numerous processing of loans within a week, and very interventions, mostly with disappointing simple and easily understandable book-keeping. results. But some interventions have been It also relied on public seed money from the successful, even dramatically so, and it is provincial government and donors such as usefil to focus on these types of interventions. USAID. Because the seed money was limited, it quickly forced the scheme to be self-reliant. 5.81 Increasing access to credit. Credit is It charged high-enough interest rates to cover one of the most valuable resources for the costs, decentralized its operations to 1-person poor-to help them accumulate productive per village units, and placed a strong stress on assets. Transaction costs of extending credit to repayment. Because of high interest rates non- the poor are potentially very high, and the risks poor looked elsewhere for credit, and are also high because of lack of collateral. collection rates were high (overdues of about Consequently, formal banking systems have 2% of loans). The KK scheme serves 41% of rarely extended credit to the poor; informal the villages in Central Java, and earned profits. systems have been the mainstay, but these BEK did receive some implicit subsidies in the typically involve very high interest rates. form of concessional transfers on its seed Large-scale, subsidized credit from the capital. The majority of the loans were for Government has proven to be ineffective. small trade and farming, and the majority of Successful credit schemes for the poor, instead, borrowers were women. rely on positive features of the informal system, such as: (a) knowing who the 5.83 As the descripton of the schemes borrowers are; (b) simple procedures to reduce above show, success in lending to the poor and transaction costs to both lenders and rural areas is possible. However, careful borrowers; (c) high enough interest rates to preparation is needed. Worldwide, many more cover relatively high transaction costs (and special credit schemes have failed than have risks); (d) repayment links to future borrowing succeeded, especially where some form of or some other form of social sanctions (rather Government subsidies were involved. In than collateral) so that repayment has high Indonesia too, the Bimas (rice-intens!fication incentives. In addition, they often involve scheme) and KIKmKP (small-scale enterprise some degree of joint or group liability; and lending) were ineffective small-scale credit encourage savings as much as credit, so that a operations. sustainable source of funds can be generated. 142 Chapter 5 5.84 Improving Access to Infrastructure benefitted many small farmers around the and Technology. Public investment in world. Indonesia is one of the most successful infrastructure and technology is critical to examples. However, outside Java and raising incomes and reducing poverty. The Sumatra, and other than for rice, the extent to which the poor benefit, kowever, acceptance of high-yielding varieties remains depends on the design and effective low, depressing agricultural productivity and implementation of the programs. This suggests incomes (e.g., eastern part of Indonesia). The that implementation of infrastructure projects heavy emphasis of a centralized research and could be improved by delegating more extension service on irrigated rice, and absence responsibility to the local level for their of support to non-rice activities and crops identification, administration and maintenance. needs to be changed. This will necessarily require building local institutions, involving local people, developing G. Addressing Poverty local construction capacity, decentralizing and in RemotelResource building a flexible budgeting process for Poor Regions financing such projects, and designing infrastructure projects with these needs in 5.87 There is by now an increasingly mind. In Indonesia, the top-down model of compelling case that on Java-Bali and to a building local infrastructure appears have to significant extent in Sumatra, the growth reached sone limits and major constraints. By process is working relatively well and the time that central procedures are followed, producing good results in reducing poverty. too much time has elapsed and too little Added to this, the demographic transition of spending has been actually made on sustainable lower population growth and fast urbanization projects to have a meaningful impact at the should reduce poverty fiuther. The Outer local levels. The fear of central officials is that Islands, and especially the eastern part of poor project selection and implementation will Indonesia, present a different picture. This occur in decentralized projects, because of section discusses briefly the growth-related limited capacity at thie local level. In fact, the poverty prospects and issues in the Outer limited capacity to handle a vast number of Islands and Eastern Indonesia. projects at the central level, and the delays, may be more costly than capacity problems at 5.88 Poverty incidence in parts of the Outer the local level. Islands and the eastern part of Indonesia-covering the provinces of East and 5.85 The importance of local institutions are West Nusa Tenggara, East Timor, Maluku, shown by the results of the Aga Khan Rural Irian Jaya, South Sulawesi, Southeast Sulawesi, Support Program in Pakistan. There, the LCo- Central Sulawesi, West Kalimantan, Central managed project supports commercialization of Kalimantan, and Bengkulu and Lampung in agriculture in subsistence villages. It has Sumatra-is significantly higher than in the rest created village organizations, built productive of the country (Figure 5.2). And there is a physical infrastructure, and provided support growing gap in regional income disparities systems for training and marketing. between these areas and the rest of the Encouraging small enterprises in West Africa country-the average mean household is another example (see Box 5.4). expenditures in these 12 provinces was about 36% below the mean expenditures in the other 5.86 Adapting agricultural technology to the 15 provinces. These are challenging issues. needs of small farmers in diverse locations is Poverty in parts of the Outer and eastern part also critical. The Green Revolution has of Indonesia is more intractable, and could Reducing Poveny During RWPEUTA U 143 Box S.4: Encouraging Small Enterprises in PubUt Works In West Africa, Governments are in payments will bankrupt small enterprises. encouraging small enterprises to undertake Because Agetip bypasses inefficient public local public works and thereby generate agencies and red tape, and makes prompt employment-especially for younger people- payment, the costs are about 15-25% less, and and small business growth. The emphasis is the projects get done quicldy and efficiendy. on public works in urban areas. In Senegal, a Agetip only employs some 20 people- central agency has been established termed the engineers, lawyers, financial advisers-all of Agency for Execution of Works in the Public whom are Senegalese, and are recruited from Interest, known as Agetip by Its French the private sector, which is a key to Its acronym. Agetip has started a minor success. One result is that previous urban revolution, goading ministries and slums now boast clean water, schools, municipalities into rethinkingtheir fundamental sanitation, electricity and efficient solid business processes. Borrowing the idea of disposal. It keeps a growing roster and "delegated contract management" from France information on small construction businesses. and Germany, Agetip takes on commissions, A similar program in Indonesia could be and sheltered from political pressures, hires possible, to improve local public works (roads, consultants to prepare designs and bidding health centers, water supply, sanitation) in documents, calls and evaluates bids, watches both urban and rural settings, and improve progress and then makes sure that contractors local employment and small business are paid in less than 10 days-because delays development. worsen, unless a clear strategy is formed on 5.7). Between 1970-90, the population growth and development there. Increasing base, on a declining resource base (see nubers of poor people are living in these further below), has doubled, md ofien resource-poor or isolated regions that continues to grow rapidly. have limited agroclimatic potential and are environmentally fragile. * Subsistt ace-Agriculture Dependent Labor rorce. At the same time, this 5.89 Understanding clearly why poverty is population explosion has had littde more intractable in certain areas in the Outer choice, but to remain on dt land. Islands and in the easter part of Indonesia is About 83% of the popubtn in the essential, before policies are formed and remote/poor provinces are rural, and programs developed. Five principal long-term the proportion of fte labor force in factDrs appear to explain why the poverty agriculture in these provinces was situation is more difficult: about 73%, compared to about 50% nationally, and 45% in Java-Bali. With * Rapid Population Growth. Population low productivity of land, nearly one- growth rates in these areas are high. half of that in Java (e.g., see Table 5.7 Average population growth in these 12 for maize yields), incomes are provinces (between 1980-90) was about probably deteriorating. 3% p.a., 50% higher than the national average of about 2% p.a., and nearly * Margal Lands and Shrinkig double that in Java-Ball (see Table Resource Base. As a relatvely careful 144 Ohapter 5 study (ADD, Hunting Technical populated Java-Ball. Services,1993) suggests, may areas in the Outer and eastern part of Indonesia 5.90 These areas need a special development are best termed as marginal lands. strategy, for two reasons. First, average Tropical areas do not have soils with incomes are low and their potential for growth high ntural fertility, except when they is linilted. Second, environmental degradation are volcanic soils or alluvial plains along in these regions adversely affects the immediate the rivers (as in Java or parts of areas. Well designed schemes are especially Sumatra). Other than old forests, or important for such areas, where poor people some tree-crops which are naturally are relatively isolated from markets and suited to these areas, a slash-and-bum services. In order to reach these areas, it may shifting agriculture is a natural be essential to work with local organizations economic choice, and sustainable, and groups to build-up the productive provided there is unimited lands relative infrastructure and income-earning opporunities to the population. The land frontier has they need most, such as small Irrigation also been shrinking with rapid schemes, or water supply and sanitation, and population growth, large concessions low-cost roads and/or viable agricultural granted to forestry operators, and intensification schemnes. Many such small, but pressure from transmigration effective projects are now being tried in the settlements. In some areas-such as in eastern part of Indonesia by locat LCOs (often Nusa Tenggara-the long dry seasons with support from extemal donors and and severe water scarcity are a problem. organizations, such as the Swiss Development Along coastal areas with populations Corporation and o=z). These efforts need to dependent on fisheries, overpopulation be further encouraged and supported by the and shrinking fish catches are another Government. problem. 5.91 A Framework For Addressing Yet another problem is the decline in Growth and Poverty. Given the nature of tree-crop prices-such as foa coconuts, the problems, there are no 'quick-fixes' to cloves, coffee, rubber and palm-oil-and revitalizing growth and reducing poverty in hence in cash incomes. Local barriers these remote and/or resource poor regions. to trade are an added burden. The Large scale industrial, mining, foresty- regional ODPfigures suggestcontinued processing or irrigation or infirastucture fast overall economic growth, but lot of investments are not likely to be able to address the incomes leak out (e.g., from the problems. These investments typically forestry), and the reliability of the create few sustainable jobs or links to te numbers may be doubtful. remote areas where most of the population resides. Instead, they are capital-intensive, * Poorer Education, Health and skill-intensive (attracting further in-migration), Infrastructure. These areas also have and will probably further damage the fragile much lower schooling, health and environmental base and the land resource-base infrastructure (see Table 5.7). The for the people. The creation of 'growth- remoteness and relative isolation, and poles" or special economic zones to atau the low density of population, means private investment also is unlikely to make added problems in providing such much difference without better transport services, in contrast to densely- facilities. Reducing Poverty During WEIZA W 145 Table 5.7: Indonesia Differences Betw Remote, Poor Areas and Others Re /oge/Poor provics Java-Bal National Mean Household Exp. (Monthly, adj.)33,000 48,000 39,000 % of Pop. in Povetty 35 19 20 Total Population (millions) 33 110 179 Total Poor (millions) 12 20 35 Populatio Growth (% p.a.) 3.0 1.7 2.0 Population density (sqkm) 64 1745 93 Urbanizafion (%) 17 36 30 Labor Fore (% of total): -in Agrculture 73 45 S4 -in Services 22 41 35 -others 5 14 11 Primary Schol compi. (%) 61 86 76 nfant Mority Ratw 82 70 71 X sever child malnutrition 13 10 11 Yields/ha: -paddy 30 S1 44 -maz 16 24 22 -cassava 104 128 122 Ferilizer Use(kgs/&a) 170 380 312 % Households electrified 24 48 44 JUseofkerosme 11 31 27 Road denity/'000sq.km 0.16 0.75 0.54 Road density/'000 pop. 3.4 1.0 1.7 Tel. lines/'000 pop. 2.5 6.0 S.0 % of good roads 28 39 31 Sorce: World Bank staff estdmats based on Bps dat Notes: Poor/remoto provinces include West and SaW Nua Tenggar, Maluku, Ikan Jaya, East Timnr, West Kalimntan, Central Kalimantaa, South Sulawesi, Southst Suwesi, Central Sulwesi, Bea*gu and Lam . Most data are for 1992. Meas of poverty incidence differ frm officid sources, becu of choice of different poverty lines and egional pce inices, and arme t to indicate rl magnitudes only, not to provide an accurate meu of povery incidence. 5.92 A more careful study is needed of the farndng systems and nonrice activiies local potentials for development In each of tfie (including fisheries), and efforts to accelerate different provinces. At this tine, it appears growth In agriculture through improved that the best stratcgy would be a combination faming practices and Intensification of of: (a) accelerated research into the traditional agriculture (e.g., for small food and cash needs 146 Cupter S in maize, cassava, soybeans, smaliholder tree- poor areas is uncertain. It is probably more crops, livestock, fisheries, etc.); (b) building likely that tourism (domestic and foreign) will small community-based infrastructure, such as play a more important role in some areas. local roads, small irrigation works, safe water Remote, sparsely populated areas with special supply and saritation; (c) a special and local customs provide a particular niche that accelerated effort on reducing population some areas may be able to exploit well is.g., growth, integrated with farming systems, Kalimantan, Sulawesi, Maluku, Nusa nutrition, and community child and female Tenggara), especially since there are fewer health; and (d) improving primary education such areas left in the world. Central Java and access and its quality. These efforts will work Bali are good examples of the potential impact better if the Government works closely with of tourism. As for migration possibi;ties, the LCOs and others who have experience and st policy would be to continue to raise knowledge of local conditions (Box 5.5). education and human resource development Building local capacity will be a key, whether generally. Rapid continued growth in Java-Bali it is in improving farming systems, or may provide significant opportunities for improving family planning and health, or migration for the better educated, and hence undertaking small public works. The need to more mobile parts of the population. carefully work with diverse local cultures and settings will be important, since they differ so 5.94 The answers continue to lie in sound, much from the familiar model of Java-Bali. long-term, sustainable local economic development that relies on the basics of 5.93 A issue that is often raised is the progressively improving income-earning region's need to become more integrated with opportunities, building human resources, and the rest of the world, and trade and export improving local infrastructre, and relying on more, and possibly even include migration of private investment and technology inflows from significant parts of tlee population to other fast- the rest of the world. This may take tme, but growing areas of the country (if local growth is is preferable to "quick-fix" solutions th may insufficient). What role export-oriented growth be unsustainable and/or damaging to the can play-other than the exploitation of community's way of life in the remote, minerals and forests-in the remote, resource- resource-poor areas of Indonesia. Reducing Poveny During REPEurT VI 147 Box 5.5: LSMs and Their Activities In Indonesia, a large number (an Swadaya, LP3ES Klaten, Bina Desa, BK3I, estimated 3,000) of LSMs (Lembaga Swadaya Dian Desa, Yayasan Purba Danarta, and Masyarakat-private voluntary agencies or others. Their activities are also often local community Prganization) have emerged associated with support of international NaOs since the 1970s. They are increasingly playing (Save the Children Fund, Oxfam, Ford an important role in reaching the poor, and Foundatio-., and others). Among the many helping to organize community-based, projects and activities of such Lups are: rural grasroots self-help activities. In some cases, credit cooperatives (started in early 1970s, they have also become actively associated with covers 20 provinces); small business supporting Government program. The development (W.;-togiri, Central Java, Government has yet to establish a formal cooperatives of sma.; business); coastal area information system on the larger LCOs, development (demonstration/nursery plots for nationally and at the provincial level, which pond based fisheries); self-help projects (viable have significant organizational and financial financial services in cooperation with Bank resources, and can carry out activities that Indonesia, a=, and local LSMs); communy would support the Government's development forestry (in Java aad elsewhere, supported by policy initiatives in many areas. However, the Ford Foundation); child and maternal health Government is becoming increasingly open to (supported by Save The Children Fund); the possibility of working with iOs, and such sustainable forestry management and an information system would possibly help it environment; women's participation (umbrella to develop further cooperation with Lco in the groups such as Kongres Wanita Indonesia, future. Women's Communication and Information Center, Kalyanamitra, and others) and health The LSMs are mostly non-profit (Indonesian Planned Parent Association, agencies, and their main functions are to Indonesian Society for Obstetricians and increase the level of community awareness and Gynecologists in family-planning); trade improve the social and economic welfare of unions; legal aid; orphanages and people with the communities, based on the concept of self- disabilities (Yogyakarta and Jepara); and determination. Many LSMs are Yayasans others. (social welfare foundations akin to public charitable trusts) which are formally regulated. There are many thousands of smaller Some of the LSMs are by now well-established organizations and activities run by LCOs in nationally and have significant activities and Indonesia, at the provincial and local levels, in operations, in conjunction with Government addition to those cited above. Most are programs and projects. Examples include Bina concerned with poverty. 148 atapter S Ekdnotes 1. Ilhe BPS officia poverty estimates uses a minimum daily caloric intake of 2100 calories (and a scaling-up of food expenaditures to include non-food expenditures) as a cut-off for estimating poverty-incideno. The 2100 calorie intake is derived from the Recommended Daily Dietary Intake of the 1978 Workshop On Food and Nutrition. This is reasonably close to the FAO norm of a minimum of 2150 calories per person per day. 2. A lag number of studies have been carred out, measuring po)verty incidence in Indonesia. They confirm that the long-eam poverty reduction outcome observed in Indonesia is generally inmariant to the selection of particular poverty line or measure. Impotant studies of poverty masurement are Sayogyo, who used a nminimm amount of conomption equivalent to 240 kgs in nual and 480 kgs in urban areas of rice per person per yeur--whicb also yields poverty lines similr to that derived from a caloric appwoach; other studies awe surveyed in Booth (BIES), and in Wodd Bank (1990;1993). In the recent Wodd Baok (1993) study different, rural and urb, and provincial poverty lines based on differential price deflators, and difernt scale-up facits for non-food expenditues are used-but they still suggest that poverty declined eno'mously. The two Wold Bank studies noted here (and their backgound papers) also contain a detailed analysis of the 'depth of povety"', as well as poverty profiles. Readers are referred to these studies for a detalded analysis of trends in poverty incidence and their meuement. 3. A simple descriptive device to identify the causes of poverty reduction is decomposition analysis. Roughly, hee can be two proximate causes of a change in poverty: a change in mean consumption at given level of inequality; and a change in the ieaitV of consumption around a mean. The former can be thought of as the 'growth effect on poverty' while the latter as the 'distributional impact' These decomposition effect have been caried out i a study (tavalhion and Huppi). The same study suest that the elasticity ef poverty reduction to growth in the 1980s in Indonesia was high: between -3.0 to -4.8. 4. Also, the female participation rates in trul areas are difficult to estimate. The data in Table 5.3 and that ed in the total factor productivity calculation in Chapter I make some corrections. Nonetheless part of the rise may still reflect under reporting of female participation in mual areas in 1970. S. A detailed statistical analysis (Martin and Warr) of the causes of a rehtive decline in agriculture corobote that 'pull fctors, rather than -push factors contributed dominantly to the relative decline in agdriulture. I other words, the expansion of non-agricultural opporuities, rather than a 'failure' in agriculturl growth, was the key feature of Indonesia's success in declining rural poverty. 6. The President's Statement, Draft State Budget for 1994-95, January 6, 1994. Natural Resources and the Envlronment 149 6 NATURAL RESOURCES AND TE ENVIRONMENT A. Introduction and be"eflts of resources (so-called win-win policies because they simultaneously improve 6.1 Environmental quality and sustainability environmental and economic outcomes). are an integral part of the Indonesian Improvements in incentives will need to be Government's development concerns. As coupled with institutional improvemens REPELA VI states: 'Environmental values particularly in forest, land and marine fihery influence all of the desirable development management. In tackling urban pollution, activities of the Second 25 Year Plan".' investments, in water and waste treatment, will play a large role. 6.2 The growing attention to these issues in the Government's development strategy reflects 6.4 Development in the coming years will an increased awareness of the costs and risks be shaped by a future fundamentally different of the worsening environmental conditions due from the past. In the past, successes in to past growth, and potendal for continued development, especially in rural development environmental degradation in the future. Past and poverty alieviation, came through a growth was heavily dependent on natural strategy based primarily on a natural-resource- resources-oil, gas and forest products. intensive growth (coupled with asbtt Although the Government has successfully macroeconomic management as discussed in reduced that dependence, the sustainable Chapter 1). Oil was a major contributor to management of natural resources and the overall growth. Rural development and environment remains a major challenge. poverty alleviation benefited from startling Improvements in rice yields on lava, and the 6.3 The environment provides two key exploitaion of forests off Java (see ChapterS). functions in support of economic activity. As laid out in Chapters 2 and 7, tie biW of First, it is a source of natural resources, both the ,futre Is one of b wnsitios, a1ray well renewable and non-renewable, for use in underway: from a dependence on ol and production. Natural resources must be agricute andforestsy to a reliance on rpi managed over time, in light of opporunities for nds onfrom a rel nr sode(v htade, to maximize sustainable growth. to a predomiantly uran one; ad fn a Second, the environment must absorb waste low-ncome to a soly mddle-income products created during the production of countby. The rasons are based Ox a goods and services. The environment's sttegy that emphasizes the inreas capacity is limited and use of ta capacity eCincy and competvenes fpredudwo must be explicitly managed because and higher productv*y In the growing lbor externalities and poorly defined property rights force. make leaving such management to the aarket an incomplete solution. This chapter taces out 6.5 These eransitions will have major the two roles of the environment as they have implications for the environment Unless evolved recety in Indonesia and how they are existing policies and practices are chunged, likely to evolve in the future. For both natural analysis of current environmental conditions resources and the environment, efficiency and and the likely impact of future growth and ainability could be enhanced by greater development indicates hat three main problem reliance on fees that reflect the economic costs will emerge that will threaten overal aDP 150 au)pter 6 growth and equity In R A VI and the 6.9 The potential consequences of these Long-Term Development Plan. issues have led to a growing awareness in Indonesia of the need to improve the 6.6 Furst, future growth and development, management of natural resources, reduce the including the process of industiization, level of urban and industrial pollution, and would increasingly strain Indonesia's stock of enhance equity in the outcomes of fulure key naurai resources (land, forests, water and growth and development. To deal with these energy) and the sustainability of critical issues will not be easy. The main challenge ecosystems (mncluding groundwater aquifers in will be to integrate environmental issues and cities, and waersheds and coastal and marine concerns into the development process, taking ecosystems throughout Indonesia). This would maximum advantage of the positive linkages. occur despite the shift away from growth based the win-win situations, while dealing effectively directly on natural resources. Moreover, wih the inevitable tradeoffs. lhis will require inefficiencies in the allocation and use of continued improvements in the policies and naural resources and the prospects for incentives for environmenaly responsible continued degradation of critical ecosystems, behavior, a substantial increase in investmnts call into question the sustainability of even in environmental protection by both the current levels of economic activity in a number Govermment and the private sector, and of key sectors. sustained efforts to strengthen the instittions responsible for enviromnental planning and 6.7 Second, pollution from industrial and management. Idonesia is fortnate in being in urban sources (human waste, solid waste and a position to learn from the experience of other vehicle emissions), already poses a threat to countries and to avoid their mistakes. The health and welfare. This thueat would increase single most important lesson of experience is because of the concentration of industry in that 'prevention Is better than cities. Moreover, continued growth of cure-especially in view of the potentially congestion and pollution in Indonesia's main irreversible loss of critical ecosystems and the cities would erode the efficiency of public and often prohibitive costs of cleaning up toxic and private sector invesutent, reduce Indonesia's hazardous wastes. Given the existing ability to attract foreign investment, and could environmental conditions, however, and the lead to strong community resistance to expected rapid pace of future growt-85% of industrial expansion, again with serious the pollution load in 2010 will come from implications for overall growth. fms that don't exist today-thi Government has a relatively narrow window of opporunity 6.8 Third, the poor are particularly in which to act. vulnerable to growing pollution and the erosion of nral resources. Lacking the resources to 6.10 Integrating sustainable use of the protect themselves, they would bear the brunt environment with other development policies is of polluted water and air in the cities and the crucial to successful completion of the falling productivity of marginal lands in the development goals set out in REPEUTA VI. But country side. The poor would also contribute before environmental concerns can be to environmental degradation through adequately integrated, the links between unsusainable production practices and the economic growth and the environment must be unsafe disposal of human and other wastes. unde,stood. One way of clarifying these links Dealing with these environment-related issues is to look at how past growth and the of equity will become increasingly Important in environment have ineracted and how such the coming years. links are likely to evolve in the fuure. Natural Resources and the Environment 151 B. The Role of Natural Resources in fishing and forestry) up by 91%. While these Growth sectors will grow more slowly over the next two decades, their total value added is likely to B.l Natural Resources and Growth increase by a fiurher 50% by the year 2010. Similarly, conunodity exports have increased 6.11 The Changing Reliance on Primary by 130% over the past twenty years, and are Commodities. Indonesia has the good fortune likely to increase in the medium term, to own vast and varied naural resources: the particularly if deregulation proceeds in world's second largest expanse of tropical agriculture (see Chapter 4). forest, fertile soil, teeming seas, prolific oil and gas deposits, and generous amounts of 6.13 Proper Accounting for Natural coal, tin, copper and gold. Ihese resources Resources. Annual value added from natural significantly contributed to GDP growth during resources is only a part of the picture linking the First 25-Year Plan. At the start of that growth and natural resources. One must also Plan in 1970, the value added in the production pay attention to the stock of natural resources. and exploitation of prixary commod Wes For a level of GDP to be sustainable, at a represented about 60% of total GDP: in minimum the capital used up in generating that minerals (primarily oil) 27%; in agriculture GDP growth must be replaced. lThis means (food and other crops, plus livestock), 28%; investment must at least equal both the and in fishing and forest resources another 5%. depreciation of man-made capital (broadly The IJbwl-stage,processing of basic commodities defined to include human capital) and the (logs into sawn wood, hides into leather, etc.) depletion of natural capital. If not, a country reprented only about 4% of GDP, and further is consuming its capital. When the stock is downsream processing (sawn wood into gone, GDP must collapse. For growth in GDP, furniure, leather into shoes) less than 2%. the growth in investment in both forms of The export of primary commodities accounted capital must exceed their depreciation. for 94% of total foreign exchange revenues. Two-thirds of the labor force was employed in 6.14 Traditionally, national accounts have the primary sectors. only dealt with this problem in tarms of man- made capital. Statisticians created the concept 6.12 lhis picture has changed significandy of Net Domestic Product (NDP), which nets in the last 25 years, in both relative and depreciation from investment and GDP. absolute terms, with significant implications for Clearly, if net investnent is negative the capital the environment. The share of value added base is eroding and NDP will decline. from primary commodities in total GDP has declined markedly: from 60% in 1970, to 6.15 Where natural resources are a key 39% today. Primary exports declined from contribuitor to growth, changes in ihe stock of 94% of the total in 1970 to about 60% today. natural resources must also be tallied. if Employment in the primary commodity sector depletion of natural resources is not properly has fallen from 65% to less than 55%. These reflected in national accounts, the sustainable trends will continue (see Chapter 7). In growth rate may be overestimated. This is absole tenns, however, the value added of because current income (annual GDP or NDP) primary commodities has more than doubled can reflect profits made from using up stocks over the past twenty years-from Rp 21,300 of resources that may be either non-renewable billion in 1970 to Rp 44,300 billion in 1990 or being used at a rate greater than is (in constant 1983 prices)-with esble sustainale or renewed. As with man-made resources (oil, LNG and other minerals) up by capital, when natural capital stocks are depleted 128%, and 'renewable' resources (agriculture, GDP will collapse. 152 chapter 6 6.16 Measurg naWal resource stocks iceasing what could be spent to recover oil rqires measuring the physical additions to and gas, incrse te amount of proven those stks through naural growth, as in the reserves. Second, higher prices and profts case of forests, or through new discoveries, as encourage higher investments in exploration in the case of oil.2 Physical reducdons munst that, when successful, increase proven also be recorded, chiefly as depletion as the reserves. stock is used up in prducdon. Depltdon is the natural resource equivaent of deprecadon. Fiure 6.2 Figure 6.1 m da Vlatia NO Sl pOW OW (Bl do US Daed by US WP) Phsica Stocks of Naul Roumo to 4t et 14 Tol * 12 ~~~~~~~~~~~~~~~~~~................... .............. ....... .. Wmmbw bms | .r -- / ~* . *!-=* is .............. urs u ur u 6.18 In combining different natural sources to derive a na capital stock, one 6.17 Figure 6.1 ghows calculations of te needs to value thie physical stocks. In physical stocks of thiree key Indonesian principle, thie economic value of a natural resources: tropical timber, oil and natural resource is the revenue thiat accrues from its gas.3 These data drawv heavily on te earlier excploitation less the minimum cost required to work of Repetto (1989) and MLHI & iPs (1993). cover retun to all the factors of production As is readily apparent, the physical stocks of used in exploiting the resource. For a resource Indonesian natural resources} ha declim4d since like oil or gas, it is fe:asible to estimate its he 1970. For tropical timber the decline is value as the diffemrence beteen the market roughly 0.8% per annum, while for oil it is price ofs th resue andthe cost of actly 0.6%. MostFofthe ropicalctib deline has epoiting it. Thi value is often called the been relaled to conversion of forest into estat resourcet's economic rent. Figure 6.2 showsthe crop plantation. The figure rises to 2% for oil reslts of doing this for oil and gas. Note hfiat if one uses the peak 1975 reserve stck as e ievaluesaebased oncurrent dollarvalue of base. The 1975 oil reserve figure i8 highe for the economic ret deflated by the us consumer t.wo reasons. Frt, for oil and gas the stimate price index. of reserves is not absolute physical resernes but proven reserves (usually abouth25% ofiphysical 6.19 Coming up wrh valuations is more reserves). Proven reserve are whiose aounts difficult for resources which are not traded in of oil and gas economically reiwable at markt, or fr complex resources suc as existng prices. Givert tis definitiQn, inceases land, forests and water, which produce a range in prices such as the first oil shock, by of outputs-some traded, some not. In the Natural Resources and the Environment 153 case of the complex resources, some products as a whole. Even with this admittedly poor emanating from them can be produced jointly; method, the value of tinber is extremely large others will preclude joint production. This is when compared to oil and gas, the naural made obvious in the case of forest resources, resources that have figured most prominenly in although it applies equally to land, marine and many discussions of Indonesia's economy. other water resources. This higher value of forests, compared to oil and gas, underscores the need for closer 6.20 One difficulty faced in valuing forests attention to forestry management. This is (or other resources) is the existence of values especially true given the renewable nature of other than the simple economic ones: amenity forests when compared to oil and gas. value (such as the non-destructive recreational use of forests); option value (the retention of a 6.23 Oil and gas figure more significantly in natural resource in expectaion of an as yet measured GDP, and for these resources, as undiscovered benefit-the commonly heard noted above, it is feasible to value the resource argument for biodiversity and gene pool stock by subtracting extraction costs from conservation in forests is an example); and market prices. Doing so reveals that the value existence value (the psychological or spiritual of Indonesia's oil stock has declined since the value society derives from the existence of a early 1980s, as international prices, and hence natural resource, aside from any physical use economic rents, have fallen. Comparing of it). Many forests, in Indonesia and Figure 6.1 and Figure 6.2 it is apparent that elsewhere, have spiritual or sacred value to despite the more than twofold increase in the society, especially to indigenous traditional physical stock of natural gas, failing rents have forest dwelling or adjacent groups. kept the value roughly constant in the last decade. 6.21 Indonesia's forests also provide economic benefits external to the holders of the 6.24 Having laid out te estimates of the resource, such as soil and water effects, in evolution of the stocks of two key natural watersheds and downsteam. Tropical forests resources, we can examine the effects of also have an enornous capacity to store depletion in these stocks on real income. carbon, and to re-absorb it when in a Proper accounting of depletion is needed so regenerating state, and this has implications for that sensible judgements on utilization can be global climate change. Were these benefits to made. Depletion is measured by valuing the be valued, they would come out to be highly annual net changes in the resources in constant significant-possibly as significant as the 1983 Rupiah. Figure 6.3 provides a timber values of the resource. Some of these comparison of Indonesia's real income between benefits, e.g., carbon sequestering, are global 1970 and 1990 with and without adjuents rather than national in natue. for capital depreciation and natural resouroe depletion. In the early 1970s, NNP is acually 6.22 Given the difficulties in arriving at a higher than GDP because of the large relevant valuation for a complex resource like discoveries of oil. In the late 1970s and early a forest, the information in Figure 6.2 needs to 1980s a negative gap between the two a*pears be carefully interpreted. Becaus significant as depletion and depreciation exceed external benefits, options, existence and investent. By the late 1980s, however, the amenity values are excluded, one canot gap is once again narrowing as the contrution inerpret the figres as evidence for the of oil to GDP declines.4 Oneinting reslt sustainable use/misuse of the foreos. To from adjustng real income for depreciation and highlight tiis, Figure 6.2 refers only to the depletion is that the growth rate of the adjusted value of timber, rather than the value of forests series actually increases for the period 1975- 154 Cauper 6 Figure 6.3 B.2 Future Challenges in the Management of Natural Resources ODP n NDP 6.26 Natural resources have played a nfidament role in sparking growth over te _AUMM last twenty years. For this role to continue into the next century will require significant ................... ............I.. .Improvements in three key areas: the ...................... ................. . ... efficency with w1v ih natWal resources are allocated and ad; the ecological sustainably of individual resources and . A........ecosystems; and the economic and socia 40 .................................. inpacts of development projects on natura resource-dependent communities and oher affected groups. In some cases, these . . .9 . * ." .9 . I . . . . . . .... challenges are complicated by the need to reconcile Indonesia's national priorities for growth, equity and sustainability with 1990. This is because depletdon as a share of addidonal concerns about global sustainability. GDP has actually been declining over this The following secions lay out challenges in period as the share of natural-resource-based maximizing economic efficiency, and production has declined. ecological sustainability while minimizing social and economic impacts across key natural 6.25 Looking ahead, the declining or resources: energy, forests, water and land. stagnant trends in the value of timber, oil and gas stodcs have important implications for 6.27 The Management of Energy sustanable grwth. If one adopts the view that Resources. The domestic demand for energy sustinability allows for substition of man- has grown very rapidly over the past 25 years, made for natural capital, then rates of man- averaging nearly 7% per anmum in the 1980s. made capital accumulation will need to increase At present, however, the energy intensity of to offset the declines in natural resource stocks. aDp is still relatively low. (With 3% of the The rate of decline tn phyial resources of world's population, Indonesia consumes only renewable resources *e limber wifl need to be about 0.3% of total energy.) The combination broughtx Ine wih Susalnablly. Fatllng to of rapid economic growth, the changing do so endangers the roughly US$4.S bon In structure of the economy and the backlog of expors and US$8 bilon I Incomt demand from boti industry and, more foretry contributes to he economy each year Lmportantiy, households means tgat ener8y (not to mention the additonal benefits demand is likely to grow even faster over the mentioned in paras. 6.20-21). Indonesia's next several decades-increasing nearly thee- readiness to adhere to green labeling fold in the 1990s, and an estnmed 14-old by requirements will be important in combining the yzar 2020. The shorter term increase may continued export revenmes with susinable even be higher. management. With non-renewable resources, eliminating declining physical stocks of oil and 6.28 Indonesia is fortae in having a large gas Is not a long-run opton. Nonetheless, base of primary energy resources, incuding increased exploraton expenditures, and the oil, natural gas, and coal, and considerable new discoveries that will flow from them, hydroelectric and geoemal potentW. In the could Incease the stocks of proven reserves past, Indonesia has relied heavily on the and hence mainn production levels and GDP. development and use of its petroleum resources Natural Resources and the Environment 155 for power generation, transport and industrial remain in Indonesia; about 56% of the total sector needt. as well as a major source of land of the country. About 60 million ha. of foreign exchange. forest is considered as having some production potential, of which 20 million ha. is expected 6.29 With the rapid growth of domestic to be converted to other uses, over the next demand, however, it is probable that the two or three decades. About 19 million ha. of country will become a net oil importer in the forest is classified as national parks, and some next three to four years (though significant gas proportion of the remaining 30 million ha of exports will still buoy the combined oil and gas forest will be categorized as permanent trade balance until early in the next decade). protection forest, for watershed and related The least-cost growth path for the energy purposes. sector, then, may require greater amounts of imported oil, or, depending on the future 6.32 Deforestation in Indonesia is a matter prices, increasing substitution toward gas and of concern. There is considerable evidence coal. Large public investments in discovering that poor and the limited success of replanting and processing oil and gas are unwise given the efforts have resulted in excessive degradation higher returns to other public investments (see of forests. The Indonesian Tropical Forestry Chapter 7). Renewable energy sources will be Action Plan estimates that some 15 million ha important but, due to technical and economic of forest has been degraded or turned to constraints, are likely to account for only about unproductive grassland, and refers to a World 10% of total energy supply over the longer Wildlife Fund estimate that some 20 million ha term. More emphasis wil need to be placed of watershed in Indonesia are now in critical on energy conservaion, with potentil saiags condition, largely because of deforestation. amoungng to up to 20% of future demand. 6.33 Logging is clearly an important factor 6.30 The expected rapid growth in in deforestation: in addition to cutting in consumption and production of energy has excess of sustainable yields, logging operators important implications for the environment. build roads into new areas, and remove The use of petroleum fuels, mosty by transport vegetation, thereby gready easing access by and industry, is coneentrated in cities and is a subsequent users. This impact spreads beyond major factor in the deteriorating anbient air the logging concession itself, into neihboring quality of Indonesia's major cities (see the protected areas, simply because such areas are fiuther discussion in Section C). The use of brought closer to road access. Illegal removal coal for power generation by PLN and industrial of logs from such areas thus becomes an firms is also a concern, in terms of both local immediate problem. emission of particulates and the contribution to global warming. Other concerns include the 6.34 The Govermnent recognizes the environmental effects of oil spills, coal mining, importance of sustaining forestry yields. The and effluents from power plants. Ministry of Forestry (MoFr) recently announced its intent to reduce log production 6.31 Issues in the Management of Forest from natural forests substantially so as to bring Resources. Indonesia's tropical forests are it back into balance with sustainable yields. second only to Brazil's in size, and represent The MoPr has also announced an important about 10% of the world's remaining rainforest. new initiative: the formation of an Institute for The resource is regarded as the richest, in flora Eco-labeling in Indonesia, which will have as and fauna, in the world. In the Indonesia's one of its responsibilities the organization and Forestry Action Plan and the subsequent implementation of independent inspection of RmLuTA document, the Government esdnwted forest operations in Indonesia Provided this hat about 109 million ha. of forest cover initiative is guarante sufficient financial and 156 OCapter 6 technical support, and independence, it will be form of planned or spontaneous conversion of an effective mechanism for breaking the regenerating areas to other uses. In the past, present cycle of exploitative short-termism and much of this conversion was attributed to poor supervision and management that plague unplanned shifting cultivation activities. More natural forests. recent infonnation and mnaiysis suggests that at least a significant proportion of shifting 6.35 Important and necessary as independent cukivation in Indonesia is actually located on inspection of forest operations is, it alone will areas which have been under this form of use not be sufficient for achieving susWinability. for a long time and cannot therefore be Two further developments will be needed: considered as recent deforestation. One competitive and efficient use of the resource estimate (see Dick (1990)) suggests that the over the long term; and prevention of the bulk of recent deforestation in Indonesia is a conversion of effectively regenerating forest. result of officially sanctioned (or at least tolerated) programs of conversion. Some 6.36 At present, concessionaires obtain their continued conversion is inevitable, and indeed logs at very low prices. By law, concessions is intended under current Goverrunent plans a linked to processing firms, and these are (see para 6.31 above). The real issue is fte beneficiar'es of the impacts of imposition of whether the decision to convert is properly te log export ban (subsequently replaced by made, and the evidence is that current logging high export taxes on logs) introduced in the activity is above sustainable levels. It is early 1980s. The net effect is that, in their interesting that the forest subjected to logging areas of operation, concessionaires are in each year (which can be roughly estimated at virually monopsonistic positions. The between 700,000 and 1,000,000 ha) is of the Intnon of imposing very high export taxes on same order as the amount of deforestation sawn timber in 1989 was to drive resources (recent estimaes put this at about 800,000 ha into higher value added processing (furniture pa). Since most areas which are deforested manu6cturing and the like). For some time it will have been logged over previously, this appeared this was achieved. More recently, suggests that success in maintaining large areas however, it appears hat this shift has stagnated under regeneration has been limited. and raw materials have flowed instead iuto plywood mills, which were already dominant in 6.38 Communities living in or near forests their control over raw material. Low log have been rnajor agents of deforestation. prics encourage waste in the use of the Unfortnately, very few such groups have resource. Capacity utilization and profitability alternative sources of income. Development of in plywood are both high at present, and the alteives is no simple matter because of the industry can afford to pay signiicantly higher complexity of the situaton. Some indigenous, prices for logs. ITbis would have immediately traditional societies are forest dwellers by beneficial effects on both revenue and resource nature and may require fte recognition of use and efficiency (see Chapter 4, Section D). traditional (ada:) titL to their areas to be Higher fees, though, would need to be integrated into forestry planning. Other accompanied by measures to open the log groups, less entitled by origin to any form of inarket more to inernal competition at least, to title, will still need to be consutted and then improve sector efficiency and competitiveness involved effectively in sustainable management, further. as an alternative to encroachmn and conversion. L am T . i zV i 7f uw mf Iz 1 mv I mr Fzw zw1 WX urn D- urr Pi 17 nZ-w 99e'? II'? 96' SW; Lsr WI aSS ow I mt uT' T - ?SE nSKw t9 gift SKm 6LT m9 m T twLS E6 I U WL Ie$ J urn? Wr , UYPS u, Z, ulS Lltn -/ I Wru W un,wt qu't suW Sw, uss cwe anV aft Ofl' NV! IW as n mnvqa~ Is,*a OlO areL *Wt 95'6 OmLT sU'* "et an? as6 fa L9' goAt~ ~ W wo M5 ~WUC wam am am mZ am am W5 I az TtC l I B1 ~~rsr n wi wi w 1 wE IZ wf I I sont aVIS 1t an 9Z UZZ #Z'LtSi TEs5T 9W!! W56 uL I WtS USS AqA nT srol Mt 3 LW? 56 St T s' I ST$I em NTo s,r# Sa on'# at W? t t ST6' wt' s! u I on vir rAp uqs inw 6 am Wm UR gm MR Lam am! NM I aS m ss'. T6'? 59£'?? 56T SW LVSi ?O5':Is 915' L16Vt StV I ISV! 5L9'?? 1 w uIrw Z §IT ZwZR innl izrn w zmrn I ulZt _ I O55' 66'£ S5'C LZE MT 9t 9fT6 MT SMT 6T I 91 T 9 us'? Lt/;t SSat ow'? S tW lei 256 Ts we I 0f 6 LWI Lu Lftsps SW? 1 tWS ss5's SWi ow' asZ us'? 95£' I uP'? ,W "pw-"n us'? we' w'? ?Os' t ' S 1t 6 ow SrIL aS Stc 1 0a ffZ aqpR 9OT9 9W?; L?O SV uWP OII! 955'? 6LXZ6fL? 59' U I ST6'T 29' _ hIa4u3 VU6T Vi 1f66 ~Vt6ffT &ffl LffT tins T as; sis usr is I ZSt us; q-,". _S__XPO_^qWWdIV*T St&Ldca Amu~ xlRflEONOEICM OhMR Dom ed o tduabv NduOid Ol at Ooadat 183M edaltPritc. 19lOl- Iq Cer 1Pd bM1*1 ~ - 1981 l Ion98 1 198 18 1987 19J8 191 1901b 1991 1992Al I van na I Uz A am U 25 am ZZ am lum amf mm Pasm tow cap 1A3 10736 I 1105 1168 1198 1V.8 241S 194 1489 13AS 1479 14. Fm atoo ap 21 2.274 I t295 23 2.SK 2.581 2,693 2435 zo868 2,911 An? 344 1a_emg 143 3S3 37m 446 Sll 562 %S 623 611 743 78 814 LkW40g*1duI-M IAN 1.7031 1754 1.80 27 O4 2.111 212 2.44" 2.3 441 240 _- &y I66 1145 I 904 894 8S1 88 9 L3 974 1.003 93 VA".iy 1.139 1.1 1 220 3 1.341 1.418 1,472 17 1.664 1.45 2 25 alt 14 Z"9 ILYA ,i3 193 no OU&uuilJa_ 15.7$,764 I321 12.103 14187 1413 13 19 14.6U2 IS.,2 10 175,06 141778 OSbr S73 6t 7 1 U04 968 1,07 t.14 t 1 1.7 1.502 I3 I.2 WAuatu 7 3 I gm 1W 1X9 lim13 1 s li 24a am Rdlmeyd 170 142 1 3S9 a6 767 927 93 981 990 1094 1.118 .14 LWO 1.712 1.781 17 2.790 2.919 223 3233 3. 3.6 483 4.2 4.5 5,9 6,1149 1 7*66S 8,663 9.?46 14S28 12064 13X7 IS.181 17.15 1902 21.2 l I at R d in5 ra 1u m mat am 1j1 nI1 I= am IW 1M Iu um atmt AM am Ra"AvhdmbW* 9,436 10S I 3 10. 10.412 11.23 10 OM3 14.447 1425 14 17.32 HO" & tAI 1, .2 1.4 160N 1.783 1987 2.161 2.351 U621 2891 3.143 3U3 3.W97 -hu_h__ t &540 L 4.1S443.487 466 .3951 i .9 VMpou 3,eS3 3.276 A M,64 4,0DS 4,032 4,178 4,394 4,624 S,lSt S.596 4.003 6,S41 Cowm _Aodf~ 226 2631 404 435 455 490 545 5So 660 m 87 954 wds db Lo 1I to Ult Wi im "a SWI I W2 AM I me p-d_~W W I £31 W 192 W 0 W 7366 £13 M rao iiaa am 2M m Lo uai l n cmz i2 am n_~~~~~~~~~~~~~~~~~~~~~~i 21M ins? 83 so =9z 9 £ _ ~~~~~~~~~~~~~~~I hbt91189,G _m.tm_d s tbd a tMeleex l pd las sltrbp Io693488 ls a@.lc tb 1348 s edla s be$ no yet bon M dIt b OMat dfoS moprabto Vb tu 1983-198 I SIwmat Ces edbweat Stad&* Annax s e '2 iS;| ^~ lii § E a^" VI 1l. j E I I j X 'I 1 j I ~~~~~~ e INDONE8^ Exo_dlhne on GDP at Contt 1968 MNet Pdns. lost - ISf ia (Rp. b,. ,,) 1981 1982 1 1983 1984 198S 1966 1987 1988 1989 lS90/b 1991tb 1992/b ; -~~~~~~~~~I Private consapidos 39,699 42,172 47,063 48,942 49,448 50,530 52,200 S4;225 S6,476 62,058 684707 69,10 Gowramntcoasumptoam 7.567 8,291 | 8,077 8,3S3 8,991 9,241 9,226 9,924 10,965 11;317 12,113 12,819 Grbafnieshtwesmeat 17S69 18,740 I 19,468 18,297 19,616 21,422 22,57 2S,201 28,568 32,732 35,040 35,907 Canges in dock IC 3,475 3,239 I 2,847 4,452 6,641 6,333 S,049 1,120 1,417 3,303 (105) (362) Bxporfgoodsand Donfat sriness 21,163 19,242 | 19,846 21,145 19,49S 22,460 2S,74S 26,016 28,733 28,863 35,46 411742 LAm Imports ofgoods and nonfadto servies 20,010 20,323 I 19,625 18,IS1 19,109 19,906 20,299 16,504 18,723 23,050 26,436 29,306 (hrom D Produ cLI I t 7LASS3 7 85.0Ra2 90D.011 5U.S318 22I 10743l7 1S.217 123.16S 3ID.9t /a In 1989, Oovernzeardeased a revtsed national aesoant serib for the peraod t983-19&8 Slnce the 1981982 seris has not yet been revis,4 it is not drecdy compamablc with the 193-1988 sri lb Prelmina figres le ReaduaL Source: Central Duau of Statss IIDOINEIA CONTR,Y ECONOMIC REPORT DIbudmn of GDP at Curent Masket Ptkes 16-10118 la () 1981 19821 1983 1964 19S5 1966 1967 1988 1969 1990db 1991ho 1992db Agdou str~ ciy, fiSeyavid1batock 23.6 24.1 | 22.8 22.7 232 242 23.3 24.1 234 21.5 19.6 192 MdlufbgAqunylng 22.7 19.S 1 20.7 18 14.0 112 13. 12.1 13.1 13.4 14.0 12. Manufactring t12.2 12.0 | 12.7 14.6 16.0 16.1 16.9 IS 18&1 19.9 208 21.0 EleeIrIty,8ps and wat 05 0.S OA 0.4 0.4 A6 06 0.6 0.6 0.6 0.7 0.7 Co _aracoa 6.0 6.0 5.9 5.3 55 52 4.9 5.0 53 5.5 S 6.0 Trampoat A commuicaton 4.1 S.1 I S3 5.6 6.3 62 6.0 5.7 S.6 5.6 6.0 6.5 Other services 30.9 32.8 32.1 325 34.7 35.6 34.5 33.9 33.9 33.4 332 33.9 Baeudiwec ie I Pdeabecu m S.6 60.7 | 60.6 602 S9.0 61.7 S7.7 S7.0 53.1 54.4 SS.4 53.0 Go _ _entcowmpdm 11.1 11.6 I 10.4 10.1 112 11.0 9.4 9.0 9.4 9.0 92 9.6 Grassdometiclavedizn 29.8 27.9 | 28.7 262 28.0 283 31.4 315 3S2 36.1 35.0 346 Netped 3.5 -0.11 0.3 35 1.8 -1.0 .S 2.5 2.3 0.5 0.4 2.7 laIn 1989. Gom ntmard arevid nakoa ocout seies fortbepepod 1933-1988. ncethe 1978192 saies hasatyet been revised, k is not d ycompnbe nth the 1983-1986 mules db fElnay figur Soumee Tan21 an d23. COUNTRY BCONOMIC REPORT Dhtribm of GDI at Cfnt t983 Vkct Pricms. 1992 Is 1981 1982 | 1983 1984 1985 1986 1987 1968 1989 1990/b 1991/b 1992/b fishaybandlisto 24.1 24A t 22.8 22.3 22.7 22.0 21. 212 20.4 19.4 M 18. MiM"& quanyln 22.8 19.4 A 20.7 20.6 182 1&1 173 1S.9 15.5 152 1S.7 14.6 Manuatv-.trg 11.0 112 I 12.7 14.5 IS8 163 172 18 18.5 19.4 19.9 20.5 E1ctriciry,psaadwat OS 0. OR 0.4 0.4 0.5 0.5 OS 0.6 0A 0.7 0.7 CoDsIucdo 6.1 62( S.9 S3 53 5.1 5.1 S3 S. S.8 6.1 62 Tranmport&coMricatkx 4.6 S.0 S3 SA 53 52 S2 52 S.4 S5 5.6 5.8 Othersbvkces 30.8 3331 32.1 31.5 323 32.8 333 7 342 34.0 33.7 33.8 Gro"DomcPredet~~n 100. nu, nu tOO. 100. tOO. 100. nu tO,Q 1.0 LOO 0. Prihatccmso_^ti= .5S5 59.1 1 60.6 58.9 58.1 56.1 552 542 52.6 53.9 542 52.8 Coanment cofsmptd 10.6 11.6 IOA 10.1 10.6 103 9.8 9.9 102 9.8 9.8 9.8 Growdownsak i_ient 323 30.8 28.7 27.4 30.9 30.8 292 263 27.9 313 26.4 172 Net cxpxl 1.6 -1. I 03 3.6 0.5 2.8 5.8 9.5 93 5.0 7.6 103 W WI MA ,A M& nu WA M& WA WA WA WA lain 1989, G rment reeased a revised nationda scunt seaes or the paod 1983.1988. Since the 1971982 sales has notyt be reved, it is not dwompamblewath the 1983.1988 sales. bPrel diostyfigres. Soure: Tabks 2.2 and 2.4. INDONESIA CO U NTRY ECO NO MIC REPORT Balance of Payments. 1078179 - 1992193 (USi million) 1978/79 1979/80 198081 1981182 1982183 1983/84 1984/OS 198/86 1 WI/7 1987/88 1988/89 1989/90 1998/91 1991192 J992193 1. NetoiIlexorts.& 3.78S 6.308 9 34S 8.379 5.788 6 016 5.845 4.004 j,j2j 2 334 1.535 .31tj L2i2 2.158 tU?Z 2. Net LN53 exports /a 22S 667 125 t.3s2 .378 1.3SS 1.971 2X119 1.1S8 1.426 1.525 1 60 3.128 2.404 2I88 3. Non-oil exports (net) .st65 .4777 8410 -12SSI .1420S -11S22 .9784 .7955 .6635 *5466 -4919 S510 -9751 4914 6076 Exports, fob 3,979 6,171 3,587 4,170 3,928 S,367 s,907 6,17s 6,731 9.502 12,184 14,493 IS,380 19,008 24.823 Ito ports, off -7543 -9028 -11837 .14S61 -15824 *14346 *12921 .11186 *1038 .11763 .13586 .16478 -21609 -24066 .26390 Services (nonfreight) t1601 -1920 *2220 -2160 -2309 2543 .2770 .2944 .2981 *3205 -3st7 3523 *3s22 4386 *4509 4. Curan accun ;1441 2 l ZBAI dS2 ;Z-A U=2 ;U 42UM =2U ;W2 2 S. Official capital disbursements _210 2.6 t684 .0tt S.793 3.5 l9 3.432 .472 4.575 6J88 .316 3986 LA5 5.755 1001 1.367 2,237 2,406 2,41S 2,903 4,25S 3,189 2,731 3,978 4,368 3,683 4,698 4.929 S,292 s,s67 Special assistance 2.169 1.807 1.S42 1,069 886 Programaid 94 239 1i1 so 21 84 52 38 48 30 23 6 0 0 0 Project aid 1,473 1,"98 2,288 2,364 2,884 4,171 3,137 2,713 3,93 4,338 3,411 2,885 3,387 4,223 4,681 ODA 814 1,106 1,20 996 1,336 1,902 1,442 1,332 1,932 2.807 2,406 2,398 2,766 3,165 3.078 Non-ODA 659 892 989 1,369 1,328 2,269 1,693 1,381 1,098 2,S31 1.00S 58S 621 1,058 1,603 NonIGGI S34 453 278 1.106 2,106 1,538 330 681 1,494 207 983 818 77 300 U8S Cash loan 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 6. Amnoizationa 632 6692 .5 6 *926 .1010 _= .2644 _= 3049 .3763 3666 .4082 4182 *4j4 7. Other caoital (netl 542 1312 361 2 t4e t.79S L1 499 572 1 232 1.709 211 375 3 856 4.133 4.2U DIrect inestiment 271 217 140 142 311 193 24 299 252 S44 585 722 1424 1,531 1,705 Oil sector 75 .1237 -68 791 1,322 n.s n.s u.s nCI .ns n.s n.s Va n.h 0.s' Others 196 .292 184 207 162 99 254 273 980 1143 .796 -147 4,432 2,602 2,579 L MI UN LO I2 £12 ZA VZA Ad LAM M M LO J* Li 9. Brorr and omisaions - t 2s 6 :20s30 * 2 t 21 - A498 *262 5 7 -1432 ! 558 263 n2s8 .129 10. Mooeta,movemients/b *794 t628 *2674 "S 3u 2070 -667 -30 738 -IU6 677 *248 *3 -981 -1439 /a Gross expot iss imports of goods aod senies, of the oil and LNO sector respectiveby. /b A pegsthe anloust reten to an acweaslo. of ssets. sowcer seekIndonesia.. Statistical Annex Table 3.2 INDONESIA COUNTrRY ECONOIIC REPORT Non - di Enort. 1984115 - 1092103 Vale (US $ I02P) 1984185 198S/86 1984187 198718 1W89 19890 190191 1999 93 Aoraculural 3.663 A j493 5.764 6f92 7.0t 7.260 7.754 W Timber 1167 1,217 1,586 2,461 2,884 3,454 3,414 3.699 4,315 a Log 135 2 0 0 0 0 0 0 0 b. Plywood 697 so 1.160 1,851 2,095 2,437 2,764 - c.8awntimb.r 320 349 321 483 592 600 90 d. Other 16 18 105 127 197 416 561 Rubber 856 714 749 1.037 1,229 956 887 932 975 Paim oli 95 170 114 114 313 279 184 349 486 Coffee 568 659 753 499 577 452 371 362 345 Tee 211 134 106 119 137 181 154 145 139 Tobacco 44 55 72 47 43 44 72 65 79 Popper 66 82 152 158 144 94 78 69 62 Copra cake 18 35 34 41 43 51 56 51 44 Taplooa 31 42 52 93 154 98 121 99 106 RA 9 80 99 162 37 0 0 0 0 HIde 40 37 4f 59 68 70 58 43 44 Othrfoodetff 98 122 122 153 202 250 324 403 421 Animal products 219 274 390 488 839 781 1,076 1,130 1,107 of which shdlmps 183 228 297 352 541 520 711 892 Otht US 14 221 234 258 302 365 387 349 MiNea 775 12 i12 11 it5S L5t5 IL i.9 L809 Tin 252 248 156 143 165 213 147 146 154 Copper 132 133 144 186 238 321 446 528 703 Nickel 121 139 112 152 438 404 326 289 1S7 Aluminum 208 23 201 245 301 267 202 159 201 Grante 9 a 8 6 6 9 14 otSe 53 49 98 379 407 371 305 570 564 Manufacured 1.469 1.739 L5V MM2 3.701 5.S97 6.680 9.562 t4M TexalDs 418 S77 713 l,2 1,571 2,129 2,731 4,011 S,9f3 Handicraft 116 30 30 67 184 250 357 489 619 Elembcal app. 134 1O9 46 55 105 176 259 544 1,075 Cement 14 23 47 54 85 128 69 6S 122 FertInor 31 109 97 117 16 167 214 291 218 Olhers 757 892 585 1,205 1,619 2,958 3,051 4,159 6.555 Unclaoffled 0 0 0 0 0 0 0 0 0 Q KL07 g02 I4 lA493im , £11 IL= 19D8 I2= U Soure: Bank Indonesia (bsd on PEB Export Delaraton Form). INDONESIA COINTRY ECONOMIC REPORT Valuo of Exodts by Pindnio Countlv of Detlnadlon. 19893-109 fms$ m_on) Countddo 196 1984 196S 19S6 1967 1o6 199 19o 1991 1991 193 Asei 73.46 2ME L2m IIII 13.91 2.92 2LIM LIU .Z Q6 4U6 Malsela se 77 S2 94 S4 220 253 342 48 566 Thaiiand 49 9S $I 83 67 1t1 234 1I0 267 $53 466 PhiIppine 242 166 19 16 71 S7 t4 t6t 168 181 2uS Singapore 3.12S 2.126 1.626 123m 1,449 1,6S3 1,SI' 1,82 2.410 3,314 3.372 Bnanei a I 2 3 4 6 11 10 2# 35 Honakonq in H 41 34s 42e Hi at1 2 ml "s Jana n 9 ; 6 1 103f3 L,A 4 im L*3a Ln 24. e2 am I OtherAsia i t2s4 L475 L.a 1A 2.4in 4 .eAM S a cm 6mm zt in in 1.41 in an an in lb 4i Am L "a! 4. 4es Lt1 we4 334 1141 13. 4 44,1 1321 Canada at 46 A a 94 a i 2n 304 PtherAmed91 Li In .41i 42 se n - 321 411 Austraia in in in El 293 in 4e3 21 2K4 I4 OtherOcela H4i 2IN I a1 41 n 5e i 39 21 EEC 92 1 4 L1L1 L"a am "2a1 13.4 "4a £211 Uitd ing m 19 168 19 7 212 349 34 517 654 844 1.005 Nethed#am 269 332 392 453 493 646 661 723 638 1.106 106A Wedt Germny i 246 255 334 361 456 493 7*0 907 "8 1.178 Begium & Luxembug 33 63 45 91 19 177 173 210 2S8 40 36 Franoe 53 4 71 93 102 164 269 26 366 495 se Denmark 4 6 3 6 1$ 20 36 54 74 9g *8 Ireiand i 4 2 2 7 17 22 35 43 46 40 Itay 120 167 1S2 1S2 175 221 234 276 362 583 61s Grege 1 1 3 6 3 2 4 9 16 29 46 Piotug 0 0 0 7 10 22 24 17 14 16 29 Spain 0 0 0 0 5 is 7s 152 10 255 3)3 DMisUnion a 9 21 a n a2 a in am Am Sar ar" 1O 1 S1t 2I 11 1M1 22 1 I 7 3 S0uoe: Cenra Bu_u of 8tisl. INDONEMA COUNTRY ECONOUC REORT VeRe of Imnors by Pdnsbal Contry of Otlin. 106WtS31 ( m llen) Countie s983 is84 b t985 1986 l987 198 199 1990 t9t 192 1993 Asean 391 t.9158 9 Lt U tMS LIn 22.464 2, 2d92 Malasfa 60 86 52 S0 139 276 369 326 407 525 5t7 Thai0and 209 53 48 7 75 96 210 IS3 278 343 235 Phipp* 182 15 23 28 82 36 63 649 41 S2 57 Singapore 3,46S I,791 839 969 947 S96 1,122 3.272 2,699 10 1,793 Bnjnef 0 0 0 1 0 1 2 0 0 1 1 Hotak4onI 6s 86 a 94 in 2 2m in 2 AM3.596 31V Z64 I=  mm? k 3767 53 C3" 6.014 UM Other AdIa 2 2 LI £i2 iA L2 2.26 6 303 3 S15 5.t56 5 .9 2 Aftka US in LO an Lan n an 202 193 an an UJSAmm 2.3 .2.6 I aAS 1,736 2 2.520 -?u Canada an 3 I" 214 303 VA in 47 3 4 410 OaherAmedca jIl 174 u9 22 at SX 48 62 4l 2 Hi 413 463 1 22 L t IM 13" i t Oth cania 2 69 2 I s .~ 21 111 11 11 a EEC 2 3 2.062 1.706 1211 W33 Wi Wi 4AAI 4.704 Ida L Unitd KIngdom 364 297 300 342 325 30 3M0 440 603 no 7S2 Nedttetands 257 266 215 IS9 316 25S 244 5s 3s0 507 626 West Germany 741 820 677 719 83 887 0 I,302 2,61 2.141 2,07 Belgum & Luxewm rg 124 102 tO1 89 142 159 167 232 254 324 340 France S91 432 284 2U1 S9 465 406 643 544 516 8S3 Dnmark 2t 20 U8 26 26 22 31 61 49 t24 1S3 Irelaid e 8 9 4 6 6 S 74 13 23 21 Ita 125 t13 101 144 237 24S 348 410 336 S58 523 Greece 3 4 0 0 2 3 3 6 S a 12 Poftgl 0 0 0 2 6 3 2 6 4 2 2 P Spelt, 0 A 0 66 120 a2 136 131 178 262 SoVIetUnlon a1 3L i S4t ±1 1 a I 4 O0ters In Eump 14 M L 4# " 6 2 1a7t /a Sic 1964 exludes to vaue of procedng deals In Om ON sector. Souce: Centra Bureau of S8 1os. SttiklAnne Table 4.1 1 itnd sO uDs lawt4 066w A 5,~S018 7t4 0t7 IB 11,71 14.02 1812 14.6 1S2. lA 11,7 0U 0.8 BOB mm an ai amn amam SW mm .Om uu mmi Arn NM UgmahI,u*bI.mI 17.7W 10,026 26.666 216 to " 3im 2.41 0 87.3 oOBI SUN4 47 W0 49.= I 06w ABO 71* 14 14066 17M M t6 2.1144S 12.6 1.1 11 saw 127 no NM am am 3M mJ 1 mUm am t 11am an m -O tWNM g 2.1 2C 2 74 2 .O 4.19 4,77 5 072 * AM a0_w A 2.7 4o7 3U 2.t 2217 t6 1i12 1.3 1341 1,00 lS Im 2612 3D- te an us 1ffm 3m 0 3m mN 4gm71 3 BR_& low 1 I3 1,7W 1, 7 1, 1.00 3 46W 4,= 4,13 6O 4,4Sg hw a 1,3810 %1 42 t,8 1,6 280 1,7 2.13 B 2S OR 1*t 1,21 1,6 N_dsbonnWft I" mg am an ir M a&M im aM to 51 13 m 6u d 1 t 11,1t 1,186 1. 1.010 107 2. 2. 260 2. 86M 2. 2 ow a U 1,7M 2 eo so 212 6t1 on64 P6 PM4 (104 (lAS ".A" P1 IOUcdebt g afaam i? am St i * a- s to n.m m (la" Al" Aft"ammum" a,C54 742 135 an 814 61 12 1 1.6 1.1 an 1.41 on 46 pubdeet_WIM am am us 3n 43W s in im t 40 U 1.064h 1,Bi 1.31 0 5.660 20 MM MM 4AS44610 4,110 4bM1 5200 eddWtb 4~~61 1,42 lAS 5* 1*1 27 21 2* 2a1 t153 2.64 2. 2.U ek&Mvmwmdmw706 US 1*1 1.135 1.311 1.61 2* 2.64 2.17 %= BSM 4UV5 017 066w As 1,4 1.87 I.81 2UN1 VW 2A07 8.a4 4.81 4.106 8.42 8*M1 SAN0 3.84 OlasrA ~ ~~~~4 4 4U 41 18 1 a so ago G&W is a7 4e t43 a 3 3 2 ao U aso aN n 2 as fl_IMwUigrd 66 16 15 71 -7 so 7? e0 74 1 66 Sl O- la 47 O$ S B? Ii 14? 166 1Joe 5 73 t1O a 21 Ut U 6 t ff l2? 111 -2 OIwA 2 n a a as a a 0 es e o ow h 48 78 77 47 11 a p q 01(1 q4 (117) (17 Nd dOL a I n a n 1 a 10 46 4e 42 41 lo 4 40 16 a lo 1 o1wA b a 42 a3 ( 0 a o (10 04 )4 (to (174 (1" A h thori_er br p'M megan ad 60613641 haas *aas, _dlyc tbu ne yin@t, 6 (bt wnain (pG Jb Endd_). A Bmapplb.'aod, u*omB ka _tU',a0tcoEAaInduhI . S9aw UWO1nSR_ _S P O t6d* dm.' Iadmpdbpbz*kdonh. Statstcal Anna Pagp I of 2 INDONESIA COUNTRY ECONOMIC REPORT Extemal Pubic Debt Outsandina a of December 31. 199 (US$ '00) Type of coedtor/ Debt outtnding Major repc creditor country Disbursed Undisbursed Total new comtt Jan 1-D0c SuMiiers' Credits Finland 8,707 8,707 0 France 33 33 0 Hong Kong 16W,460 156,460 0 Japan 1,739,600 674,895 2,408,495 241,140 Korea, Republic of 1,197 1,197 0 Palstan 1.268 1,26 0 Switzedand 1,102 1,102 0 Total suppliers' credris 192.S367 674,8N ,5772 241Z140 Fiancial Institutions France 48,873 48,873 0 Germany, Fed. Rep. of 0 0 0 Hong Kong 670.331 700,000 1,379,391 0 Italy 1,218 1,218 0 Japan 1,574,763 687,669 2.442,442 6,387 MulWple Lenders 0 0 0 Netherdands 0 0 0 Singapore 26,822 26,822 0 United Kingdom 43,934 - 43,934 0 Unitd States 0 160,000 160,000 0 Total financialinstitutions 23749931 27.689 4.102. 620 6387 Bondo Germany, Fed. Rep. of 0 0 0 Netherdands 0 0 0 Switzedand 0 0 0 United Kingdom 0 0 0 United States 98.500 98,500 0 Total bonds 99L5A 9860 Nationalizaion Nethedands 67.176 8?7176 Q Total nationalization 87.178 _ 87.176 0 Mutilatetral Loans Asian Dov. Bank 5,522,580 3,566,079 9,080,659 2,064,623 EEC 4,135 4,135 0 IBRD 11,263,401 4,329,189 15,612,590 924,100 IDA 796,191 796,191 0 Ing. Fund Agr. Dev. (iFAD) 73,700 7,911 81,701 0 Islamic Dcv. Bank 165 165 0 Nordlc Invest Bank 144,370 60,862 205,232 72.685 Totla multlateral loans 17.824.632 7 956 041 25.760.673 301A57 uaastkal Annae Page 2 of 2 COUIIII ECONIOtll IlEPORE Exe Pbic DtOm n a DeeRmber 31. 1993 Tm ed a.odr/ DbtMo rpd aemdlloroasmly Disburse Un_lsburscd Tetal newncomminianwo lan 1*. 311993 Ast 4492BI 24.694 47390 23905 Au"l 12423 - 12,423 0 BeIum e07 a7 117,847 7,237 sinal 100,00 OO,O O 0 bule 81 - 464 0 CrAda 33,406 232.826 669532 239A51 Cn.a 15.374 29,749 45,123 29,749 Cindtoe5Z 22,8011 - 22,80S 0 Demek 34A.0 21.251 58.757 0 EgyptArabRPpuble f 9O5 955 0 Franc. 829,143 137.5B9 9e6.732 2.107 Bwmimn Dem. RAp. 18.756 18,756 0 eOrwmn, Fed.RpAt 2.177m50 1.293*0 3.471352 7786642 Hungary 5.689 - 5689 0 Ida 3Ue4 3664 0 nab 138.122 54,768 192868 0 Japan 18.012,429 4.629.332 :4j1,761 1.Q27:32 Korar. Rpubpld 11JXZ3 32658 44.581 1125 KAmSk WM577 6.702 64.97 0 Ne-llesncde 1a.00722 11.210 101132 0 NeWZealand 644 - 644 0 Naonray 0 23,676 23,6S 0 Offer 20=0o 20,00 0 palmem 2=32 - 2.322 0 Poland 32.034 - 32.034 0 RbPr.aIb 4,591 4.i91 0 5audAs4 72.63 26.100 101.083 0 Spain 75s48 84,a6 160.448 40,432 wIAduid 27.167 - 27,167 0 tin(sdArab Emkrates 1.932 - 1932 0 Unied Indom 54,379 14.181 68A60 0 UntbdSt 2476085 1869 2,664,054 3,250 US8R 334,4r 334.247 0 YUoesAb 38.396 36,396 0 TOW 4 1 2e" X451,17 4,40An0 33.3.9 2Q8s1 231 Aua 478.009 193,25 671,334 182142 gdoium 153.3 21,786 175119 0 DeCnbk 3900 57B94 96,774 0 Fnlnnd 19.635 732 20.367 0 Fn 1060 e65lm 1,6a69 351,115 GQmey, Fed.Repof 77.344 17,63 96.007 0 Hang HanO 1t2s5e 53. 178.191 71,182 Japan 240650 31.610 272660 6.40 Ne d 176e201 85,053 21.s54 5,327 Now"y 0 0 0 Singapmo 0 17,310 17,310 17,310 Span 35.462 35.462 0 Swdun 106.161 106,161 0 S8wlieand 143,051 197,415 341.0 0 Unied Kngdom 637,783 741,408 1,379,191 1,159.163 Uried Slt. 322517 209.062 531,I79 531579 Totd expo ofDdha WOMANIS 25W196A8.387 2,364.430 Sbunce IBFD Csfhn Rbpoiftn Syants based an dox pwAnded by Bank bdo#osL lmoo COUNTRY ECONOUO REPOfr Servis PvManb. CommItmf Dtsbwsenwnt an Oubtsi Amots of 2bnM1 PUbis Debt Debt ouN M ndhat TMulon dedg perbd Otr Can end of period Disbursed ncicksVg Commi- - Dibburse- Ser-c Payments Cancel- d- only Und_bured ment mnt Principal Intrst Tote ltlkns menla Acfrm 10O 15.027,314 24,500675 4Z.373 2,550f505 030A4 823,811 1,763,S3 116,21 1681 15.06.456 26,053,145 4,051,129 2,429 1.054,100 900,706 2,044,s14 16320 -12S0.5 1062 16S317A4 32.007,sss 7.00s017 3,051,33s 1.104,100 1.132,201 22360 5.472 1063 21,4s3.s04 35,2s7.500 5,ese,s7s 4.07.024 1.260,672 1,233.006 2,522,se6 107.660 40,788 1064 222s4.063 38,.500,4 4,616,038 3.860.57 1s.50765 1.626.,s2 3228.677 26.234 1065 20.761.715 4297,087 4.837.615 3552660 2,344.003 1,642,726 306.73t 514.615 4.636.142 1O06 32,616.607 50,072,360 4,104.400 4.23,43 2.62,062 2.071, 4,602,661 164,000 6,006.016 1067 40636.571 60.426360 S,002347 5.420.542 3.407,650 2,273,106 5,e60.755 6S3.41 s.406.732 1988 41.176.463 60,002,203 100657 6e0,o0o 4.492.041 .5252S, ,047.037 491.92 -1.431.810 1s0 41.032.450 s,.663.292 7,131.022 6.472,05 4436.037 2.501,373 6.037,410 303o,62 -2.800002 1000 44070.155 65.153754 8,327.110 6.770,666 4.125,282 2.54S9 6.600*61 900,516 4.160.147 1061 48.732.284 6.150,957 6.143214 6s333.065 4,18186 2,646,255 6.830.110 2.005.316 2,041,162 1002 46.341.66 68305,406 6,2s7.700 6.244.564 4.711,009 2.734.866 7.44s,s64 1.31,t148 -1.020.601 1063 52.33.115 71.613,00S2 8.334,772 ,03235 6509.781 2.61.427 8.001.20 626.476 1,000.078 Proecstd 1994 53,71720 05.471.620 - S.077.633 4.622,6os 2.865,040 7,478,44 1,717.720 1.133 1005 54,070,957 o0.s70.s4 - 4.64.507 4,500.756 2676,171 7.37.027 -- 1006 s2.648,776 56,505,075 3.151.620 4,375.80 2,706,601 7,174.401 - 11 1007 50.41Z6o0 52.306041 - 1*51,973 4,266.141 2,600,640 6040,761 * 7 1006 47.043,383 47.001 64 - 1.038.480 4.407,715 2,48125 6,666,074 - 49 10M0 43.0S1.406 43,514,327 - 425,100 4,388;97 2.257651 6,644,636 - 38 2000 30.10048S 39,307.474 - 225,73 4.206,63 1.t00,371 6e20,354 - 130 2001 35.013.663 35,140.04s - 70,724 4,157.527 1.76,040 5016.o576 - t 2002 31206.787 31,428,625 - 4426 3.72134 1,532.05 5.253,360 - 1 2003 27,746,132 27,877,197 - 773 3.551.428 1,328,634 4.8790,2 2004 24,407,692 24.626,747 - - 3248.440 1.138,384 4.368.824 - -9 2005 21566026 21.600,079 - 2s2s,see 073,417 3.903,083 - -1 /a This cokumn sMoms the amount d a crt bnbalrnces In to s amot oulabndn. nWdn undibbureed, from one year to te ret The most common caude of Ibalae are cnges in exbhge tes and trans debts from one caeory to aoher in bbbable. source: IMD Debtor Peporn System, based on dam provded by Sa* kIdonseeLa OOUNTRMY EONObC REPOlRT DSVELOPUM AtSISWANCEv F OV W- t98 to§2 (US$ MM 1N97 19o 19 1990 t199 1 992 COUNTRIES Comm..b Disb. Comm. ib Di.t Comm.l Diab.lb Comm.b Dfebk Com.1b Disb. c Comm.j .I.Jc CGI ember,: AUSTILAIA 322 482 48.2 8 71.7 71.7 1062 83.1 83.1 62. 77A 77.4 t1S.7 729 7L9 99.4 77 77. AUSIRIA 17.6 0.6 O 19.2 10Q 6.9 20.7 15.1 4.4 268 343 21.2 124.1 493 Xt 31 49. 121A 10. BELGIUM 7.1 SA 58 11.9 13. 6.2 10.7 10.7 10.7 6.5 6S (14) 6.5 42.4 37. 65 82 25 CANADA 37. 45. 43.0 8.9 433 40.1 81.7 38.4 33.4 37A S1.9 48.4 14.1 45.4 42.7 37.7 40.1 33A FRANCE 46.7 43.S 37.3 137.2 67A 57.1 288.9 1t53 108.9 209.7 136.0 122.4 41. 141A 1265 77A4 1853 t68. GERMANY 139.0 140.4 61.8 15L4 190.2 97A 179.4 1388 52.4 2682 211.4 99.0 621.8 253.8 135B 2934 2614 116.4 ITALY 3.9 19B 19.4 8. 23 1.3 4&4 21.2 17.5 . 5 113 9 10 15. 143 t30.9 13R. 125 JAPAN 1.3363 941.1 703 1.701.0 t1264. 964.9 1,45S.2 1,407.1 1.1453 1.50I.9 1,131.9 867B. 1460.9 t482.5 1065.5 1,508B7 t9664 t356.7 NETHERLANDS 113.7 165.0 140. 254A 18,S 12 222.2 t19t 161 20L 2248.4 190.1 2344 IS5 13A 133 5$& 8. NEW ZEALAND 2.1 L2 2.1 2A 2.3 23 2.2 2.2 3.3 .t 1 3.1 t1 2A 2A 29 2.6 24 SPAIN - 0.1, 232 23.2 - 21.5 2L1 s0. 9.5 9.5 SWIZERLAND 168 74 7. 83 284 28. 7.0 21A 21A. 19 1 t 9.4 tA 53.4 13B 138 23W 29.7 29.7 UNID INGDOM 333 14.5 1OA #3f 21.7 17.2 45.2 I.2 14.5 317.0 26.4 22.A 103.0 42.9 389 t3 364 32.7 UNIT0DSATES 124.2 96. 360 79.8 86 22.0 64. 97n 31.0 54.2 101. 31 69A 83.0 18. 59s 840 (10 Otbw DAC el- : DENMARK O A 0 03 t.1 O 3A Its 11.1 O 5.7 4.9 0 3.0 22 20 S.9 3.7 FINLAJND 1.8 1.8 8.9 33 33 04 58 58 3.9 27 2.7 7 3.1 3.1 1.9 18 L.8 IRELAND 0.1 O o.1 . . * . . - - *.0 - 00. 0 .0 o.0 NORWAY 3.1 0A 0.6 22 2.0L 12 0.5 03 (02) 03 0.8 (02) 123 14 11 SWEDEN - ILI . . - . . . Ql Ql o0 01 02 0* OA O4 ARABCOUNTRIES 42.4 24.4 11. 19.7 27 9.1 . 2. a9 0.7 392 23. 0.4 23.1 9.0 55 225 13.0 SUB1DAL L9s7A iisa IAf mm1 LOU3 ise6 2534A0 &&s2SS 74.9 LM0 X54 2" 2 ot79 2.60A. I^9gu MTLTWERAL AS,D.L 58.2 35.0 311.0 561.1 5304 47. 694.9 700.7 a3w t.O 778.1 667B 990 655.0 446.1 t.0 554 4S3. F. F 37.2 63 63 2.9 83 8.3 1.2 13.9 13.9 261 t3.s 1 2.7 12.0 120 45.0 13A 13.0 18D 1,41t.0 1,159.9 1404t. 1.06.9 1479 1.2192 24007.4 12564 783A4 565.2 9873 436.4 1.5330 t139so 790 12563 1,0A34 326A IDA . 14.4 8.7 13 (4) L tl (7.0) - . (113) - - 0.0 O t.o o0 tFAD 13.7 16.9 1s6 03 122 10S _ 12A 10.1 21.9 12* 86 * 9.6 4 QO 9. 4.4 U.N.AGENCIES 502 44.9 44.9 47.2 404 40f 536 45.2 45.2 5Lt 433 433 S54 49.2 49.2 0.0 s.4 54 UNDP * 2L3 2t3 704 24A 19.1 19.1 - 27i 17.0 172 173 0.0 19.0 19.0 UNTA 5.1 5.1 3.7 3.7 * 5.2 52 43 4.3 - 6.7 6.7 0. 54 SB UtP 10.5 1o0 - tt9 1tt9 113 13 tO. t0.0 - 11t3 113 0* 144 14S UNRWA - . . . . . . . . . . . 8. 0.0 0. 0* WVPP 5.2 5.2 2.7 2.7 7f 1f * 8 8o * 7f 1A O0 14.7 14.7 UNIHcR * 2.9 2.9 . 1. L 2* 2.0 4.0 4* . 6.4 6. 8. 4.1 4.1 OTH 0MULtLATERAL . 53 53 . 6.7 6.7 - to1 10 * 8.4 8A 93 93 8. 80O ARABDAENCIBS . 0.2 (1.0) 03 (1.4) . (120) (1 l3 5* 2.2 13* SUBTOTAL 2.tO4A *i2M Z9 LA 2XM MM9, 2 &fl 2 i4S5 L2t4.4 I&4L M L7 21t.3123 11 LU2 Di4 WTTL i 3a3L &W I= 42 32564 &W& 4A M9Mm 53 SA I= j3 lb C4lmowt. F M Net otrqayeaotpdmEpI &1.e :OUCD :' d DEsuIm etF~miuI M to D )sw ~Co; F.ruIa4 ADB.. tBltD s.d lIA: Ddtwr Rqerpon wWwld Ii i' I iIEX w '§ 8 | | | '@; |~~~~~~- 9 r*8r .F; 3 9s gEWSW 9 #lES i i 1UsRi .-J SSa!{ ~~~~~- 3 po p I Central oernmment Recbxte. 1068134- 19S4j 1983/84 1984/8 1954 19807 1987/8 1968/8 1989/9 1990.9 199119 1997J 1993/94 19905 Taent on kinoore u..w IM- IL2 43" 12M6 n.wik 173 MM 25.494 2B.34 29.aiS nA Incom,e tex 399 451 475 2,271 2,43 3,949 5.488 4,755 9,58 11,913 15,273 18,83 Corporate tax/a 757 1.670 1,638 Corporate txaon oil tb O.S20 10,430 11.144 6,338 10,047 9,27 11,252 17,712 15,039 15,330 1250 lost5 WhUxoldlg tax lb 628 lPEDAI"oprty tax /a 132 157 148 100 275 424 590 811 875 1,101 1.534 1,629 Ozherad 16a 138 Taxes on domestic oonwumtdon 1-M I-510 3.479 43710 Lw-3 7.589 9.642 flAi 13.45 iJoj 1842 SdboAWOI added tax 575 637 2,327 2,900 3,390 4,505 5,837 7,443 8.926 10,714 12.28 13,23 ExcIes 773 873 944 1,054 1,186 1,390 1,477 1,917 2,23 21,38 2,56 262 OftrerON reuseeJe 0 0 0 1,01000 0 0 0 01 1.041 2.S19 AMleianeousm leviS 44 0 208 19 223 292 274 244 303 3M0 28S 282 Tomaxe n International trado St goa M LQM IfLM 2.M 1.759 233 Lin L4"I JLM 1.460 Import duftes 557 530 407 960 938 I,1I2 1,587 2.486 2,133 2,652 2,88 3.443 Saba UK an knport If 255 241 Expottax 104 91 Si 79 184 156 172 44 19 9 14 14 Nontwc m~~~~il 487 IA4il idA47 sail L. LM1 2J1 Lm1 2-9i ilt4!t Domestic revenue 14A13 3LM 19.15 16.41 uMMlf 23594 28.740 M$ 41=8 47,453 amIi S9-7 DevelomenitmW funds 3.478 35,52 5,5 IdA 049 9.429 O." 10.409 10.716 1,525 Liii rfgam edd is 69 4 1,958 728 2,041 1,007 1.397 1,S63 512 441 0 Prject aid Ig 3,88 3,409 3A53 3,795 5,430 7,950 8.422 8,508 8,84" 10.24 9,931 10,012 Totw IIJU iuu via~~~ uff I OM lu /a SInce i96/8 Included hiIncome tax. lb Since 1984/85 wlhoflild tax eliminated aks sepaate caWteoy and combined wlh kncme tax. lo Since Januafy 168, Ipeda replaced by land and building tax. /d Claselfcallon changed to other tax Onc1udsd In mleeianeou AoleIs Which consist of other tear and stamp duty. /. 01 subWdsld shown as Goverment expenditures from 1977/78 (see Tabl 5.3). /g SInc 1984/185 clsasfllatlon changd to value-added tax and tax on lwcry goods. /g Inckudes oomnemlal bank and suppler credts for drevelpment pmopects. Souree MinIsty of Financ. INDONESIA COUNTfW E:ONOWC REPORT Central Gwomement Exe dfilumes. 198316- 194 5 (tp. bilion) Actu_l 1983/4 1984/S 195/86 196/87 1907/88 1981OM9 1909195 1990191 1992 t192193 1993"94 19940S5 PetsonWexpoendRuMs 3m 3.047 MA 4311 4617 49 6202 7s4 8,103 9.46 1i2Um 13U0S Wages and sale.s 1,994 2"207 3,073 3,330 3,561 3.833 4,826 S,S71 6.299 s.533 9,167 10.456 Rlce ailowvice 346 407 402 406 4St Si1 ss8 640 922 s8s 9S0 1.039 Food alowa 261 271 3o 28 299 327 373 382 393 473 498 783 Olier s8 se 11 177 t7 Is$ 243 264 279 313 342 32 Edemal 72 82 110 130 us 171 190 200 259 302 4I MabrW exwondlitTe I.eS7 1.s13 1.367 36 LW- .L4 fL. L u73 2.f?0 3.e42 375 Domestle 1.07 1,134 1.310 t294 1,239 378 1,6s 1.670 2,217 2,681 28,48 3.526 Ebenal so 49 58 73 s 114 133 160 15 1i9 194 22s Subsidese o malon la U Ls4 7 2. 9 J 3.03 3566 4237 4 S 6n 6 7.ess tian Jaa 42 0 0 0 0 0 0 0 o 0 0 0 O w or egIon 1,SOS 183 2M469 2,6s0 2,S16 3.038 3,556 4.237 4.834 5283 6,796 7,095 Debt soeice pamnenb 2.103 2.7l7 3,2 e ss S20 1l0. 9 1.390 uAii IL2l T42!7& gmtI7.97 Intenal 30 39 20 0 39 78 249 2S0 251 275 121 317 Exdemal 2,073 2,737 3,303 5,058 8,166 10.863 11,79 13,145 13.183 14.942 17.167 17,652 O lhQ. erexuAa U4 i74 111 LZ LU3 3.483 4ij uos 459k fiU Food subsidy 0 0 29 o * * * Ol subsidy 928 507 374 0 0 0 0 0 692 0 0 Oftes lb 20 33 340 14S 51S 2 923 3,483 * s03 459 525 Routine expenditues .412 .429 1t.ss2 uss 17.482 2 24.331 3 2s 34.031 31.7s 42.351 Develoment expedltures 99c ta 9.952 lusi 8.332 9.477 UA25 19.452 21.714 24.13a o 27.3ss Yolal exDendSro18.311 193s81 2s 211 2if 32S9 38.165 A'9 5W9 #.2ff 6446 69.749 /a SInce 19B41/85, t itsem ssub-dided int wage/saiary and non wage/s.iare expendiures wifout iden n regions. lb This ine shows debt service transfers tb !".RTAMiNA (1976/77 - Rp. 31.0 bion, 1977178 - Rp. 86.4 billion), PERTAMINA subsi (1979/80 - Rp. 81.0 bmion) and expenditures on the genera ectn 1976/77 - Rp. 37.0 billion, 1981882- Rp. 81.0 bDlbn, 1986/86 - Rp. 40.0 ibIiion). hc For details see Tables 5.4 and 5.5. /d Included oii subs*id. Sourws: Mlnisby of Finance. COUIr EcONOMC REPORT D _vlmnu Exsdtn 19a4 - 1I9US4fJ 196344 165 1 1964 168 169 196900 19S7/8 19189 1999I9 MIN 19t940 L lZao 2, 3S MM4 WA 2 t 3^ 206 S.7 AM6 9,§4, 2 e IN. 537 56 C 1 7145 6 iLS z USA Subdd/eutOFnVWo_ 253 253 287 293 290 334 324 466 574 71t 763 1,219 i Sibddhs t oksbapatm 194 19S to9 1 23 2U 210 3 5 82S 1.02 Z419 la &abedidetoAUIg 92 93 99 46 102 112 112 1 250 317 39 w X 3. spRm m 824 754 7 2t 4An 422 53' i.m m i Pkimmy b so549 s72 526 496 193 131 1o 374 521 6S5 699 t 49 Is Hel th 87 6S III 1ie 74 99 i2 193 269 320 377 393 it 26 4 12 3 3 3 3 2 2 4 6 _ 59 61 43 3t 16 17 17 33 75 9 104 0 6S 10t n 75 164 t1e 295 679 9 .22 I.352 0 S. S 4 2 2 2. 3 2 6S7 2 2 2 2 h lbAw(:; 1a aQ IJla J1 324 M6 5 l 22 a 224 21 4!7 no us S" 1 2 121 7. 23M 232 3 3S6 213 11 141 3 422 INe 22 8, 0o 441 475 A1 2a StS 6Z9 26 a m 7e2 So 12 . . . . ~~~~ ~~~~~~~2.m 122! - 9.ll D ha 2171 :212 :III :~ 241 212Ad am I : : : 9. no sh 3 B 6S 242 UK .1 4.423 7.95 a422 AM a146 12324 2211 11213 b to hidmWsbsO twpiseIdUi7W1112 25Rp3US blOk O oImdbdimer,rf ba.IRp18AiIom midhato usamaaaYlmad d_wau RpSObhilI _blhr do Rp01.S blOom. m Idhawd~ybos itr _"Rp2J0*WlIa ud,SuwoA 'Ad i d m_(_) Rp MA.bU-n is %doi .*idI mdmmatacMa p2bUcmanm dfi mtsIhc vd.wpmea(gtoslm)Rp4SAbl. bIg9 a dddsm1e_Ihaioudbdiuillb 4. Sttstcl Ane -~~~~~~~~~~~~~~~al 5.5. tt §. Es'kEtg5 -4 _ !%ff t k§ ' 2 3 | !Es!:k!is ls' 1 I 0l ,t A i S j I K ~~~~~~~~~~~~~ii ] 1tX Si I s i Xit1 , 0 §i0 l !I' INDON_ESIA COUNTRY ECONOMIC REPORT Proleot Aid by Sector. 1083184 - 1994S95 (Rp. bIlNon) Actual Budget 19S3/94 t98485 195/8$ 1984/87 198/f88 188/89 1989/9 199U91 199192 1992193 1993194 199419S Agriculture and irrIption ISS 472 18 237 576 1.087 t.345 1.513 1,763 2,169 1.801 1,205 Induat suad mining 1.051 671 66S 632 267 327 240 409 454 709 516 338 Electric power 1.182 653 1.172 791 769 1.783 1.169 1,314 1,830 2.400 2.SS0 2,746 Transpoctation and tourism S89 601 6"8 729 845 1.424 2,174 1,976 1.507 1.388 1.786 2.271 Manpower and tranmigration 45 76 36 123 62 98 83 9I 83 52 52 146 Regional deveopment 1 S a 2S 4 45 t21 155 240 22 122 266 Education 211 180 5 346 718 1,23 1,08s5 957 1.045 t1.04 1,142 703 Population & Health 31 78 56 100 38 9 177 ISO i8 32 132 260 HouSng and water supply 5t 84 77 139 273 400 351 444 514 648 461 419 General public sS2vces 152 255 186 2S7 350 382 564 471 567 728 629 S64 Government capital participaton 4S 160 203 18S 16i 213 419 100 116 23S 180 0 Others/a 42 17" II1 231 355 8SS 594 890 539 616 560 9°S Tottal proect aid /b 3S61 3 49 3se03 3-7Ml 4 423 79S0 8.422 8.508 46 10.204 .931 10A02 la Since 1979/80 Includes natural resources development and environDent. lb Includes commercIal credits (or development programc/projects. Source: MIDtY of Pinasnee. Statisical Annex Table 6.1 INDONESIA COUNTRY ECONOMIC REPORT Money SupPIlY 1981 - 1993 (Rp. billion) End of Total Currency Demand deposits Change over period Amount (%) Amount (%) Amount (%) 1981 6,486 2,557 39 3,929 61 1,491 30 1982 7,121 2,934 41 4,187 59 635 10 1983 7,569 3,333 44 4,236 56 448 6 1984 8,581 3,712 43 4,869 57 1,012 13 1985 10,104 4,440 44 5,664 56 1,523 18 1986 11,677 5,338 46 6,339 54 1,573 16 >987 12,685 5,782 46 6,903 54 1,008 9 1988 14,392 6,246 43 8,146 57 1,707 13 1989 20,114 7,426 37 12,688 63 5,722 40 1990 23,819 9,094 38 14,725 62 3,705 18 1991 26,342 9,346 35 16,996 65 2,523 11 1992 28,779 11,478 40 17,301 60 2,437 9 1993 37,036 14,431 39 22,605 61 8,257 29 Source: Bank Indonesia. StatstcalAnnax Table, 61 INDONESIA COUNTRY ECONOMIC REPORT Changes in Factors Affecting Reserve Money Supply, 1981-1993 (Rp. billion) Public Sector Claims Net claims on official Total change in Net on entities Claims on Net Money Supply End of foreign Central & public business & other Amount Percentage period assets Government enterprises individuals items (%) 1981 149 -591 593 1,756 83 1,491 30 1982 -1,237 129 689 2,260 -591 635 10 1983/c 1,180 -1,286 -42 2,183 815 448 6 1984 3,531 .3,359 190 3,646 882 1,012 13 1985 1,750 -214 511 3,333 -115 1,523 18 1986 /d 1,870 469 252 4,547 -2496 1,573 16 1987 2,444 1,538 729 6,245 -4710 1,008 9 1988 -549 247 659 11,069 -3053 1,707 13 1989 409 -1175 1,444 22,132 -6156 5,722 40 1990 -2171 -3877 -921 35,809 -2498 3,705 18 1991 7,430 -1356 105 20,263 -12095 2,523 11 1992 419 792 -318 -666 1,121 2,437 9 1993 2,422 -22 600 5,588 4322 8,257 29 /a Refers to government accounts blocked for special purposes. /b Does not include revaluation adjustment to foreign exchange balances resulting from the rupiah devaluation of November 15, 1978. The adjustments amount to Rp. 650 billion in net foreign assets; Rp. 46 billion in net claims on Central government; Rp. 551 billion in claims on official entities; Rp. 164 billion in blocked account; Rp. 41 billion in claims on businesses and Individuals; Rp. 83 billion in time and savings deposits; and Rp. 1,041 billion in net other items. /c Does not include revaluation adjustment to foreign exchange balances resulting from the rupi.rh devaluation of March 30, 1983. The adjustments amount to Rp. 1,962 billion in net foreign assets; Rp. 131 billion in net claims on Central government; Rp. 146 billion in claims on official entities and pubLic enterprises; Rp. 106 billion in blocked account; Rp. 148 billion in claims on businesses and individuals; Rp. 620 billion in time and savings deposits; and Rp. 1,399 billion in net other items. /d Includes revaluation adjustment due to devaluation on September 12, 1986. Source: Bank Indonesia. INDONESIA COJNTRY ECONOMIC REPORT Cnididated Balace Sheet of the Moretmy System, 1981-1993 (Rp. billian) End of period 1981 1982 1983/a 1984 1985 1986/b 1987 1988 1989 1990 991 1992 1993 Net foreign assets 6811 565 87 14.119 15989 18433 17.884 182 16.122 23SS 30634 30.611 Domestic credit 5.651 8846 9.744 10345 143 1933 2f729 L9M 62131 93.142 112154 1612 159.470 anim on publicsecter Central govenment -4,330 4,193 -5,739 -9,098 -9319 -8798 366 -7036 -8309 -tZt -35 -14873 -44069 Claims on officdal entities and public enterprises 4,247 4,979 S,040 5,230 6,034 5,993 6,725 7,381 8,825 7,904 8,009 S,501 9,417 (iovernment-bodwed account -360 -252 -240 -116 -52 -81 -84 -66 -40 -24 0 0 0 Caims on rivate enterpi and individuals 6.94 8.312 10.683 14.329 17.662 229 28.454 39S3 61.655 97.464 117.727 1S2984 164.12 LoaM 5,844 7,995 10,184 13,5S0 16,392 20,409 26,072 36,502 55,933 90,109 105,599 115,190 Other dlai 250 317 499 779 1,270 1,800 2,8 3,021 5,722 7355 12,128 17,794 Asset = labflities 12,462 14,411 18,581 22,713 28,444 35,312 45,162 57,686 80,424 109,264 135,706 157,246 190,081 Import deposits 298 300 242 218 268 402 424 684 632 1,048 966 890 1,321 Net other items 2,448 3,036 3,676 4,558 5,291 7,651 11,277 15,688 21,087 23,S86 35S,681 37,303 43,161 Monv and uasi mon 9716 11075 14663 17937 233 27.66 3388 41998 58.705 8460 99059 119.053 145.5S9 Mone 6,485 7,121 7,569 8,581 10,104 11,677 12,685 14,392 20,114 23,819 26,342 28,779 37,036 Cnr 2,557 2,934 3,333 3,712 4,440 5,338 5,782 6,246 7,426 9,094 9346 11,478 14,431 Demand deposits 3,S28 4,187 4,236 4,869 5,664 6,339 6,903 8,146 12,698 14,725 16,996 17,301 22,605 5iN Quasi money 3,231 3,954 7,094 9,356 13,049 15,984 21,200 27,606 38,591 60,811 72,717 90,274 108,563 Ia Icludes changes resulting rrom the achange rate adjustment of March30, 1983 ftom Rp. 702.50 to Rp. 970 per US$. t /b Includes changes munlting ftom the embange rate adjustment on September 1 1986 fm Rp 1,134 toRp 1,644 per USS. :s Soum Bank Indoneia. INDONEAl COLNITR ECONOMIC REPORT Baning Sysfem CredRs by Economib Sector. 1981-1493 la (Rp. bMion) Sectors os8 1982 1983 If 1984 198 1t986 k 1967 1988 1t96 1990 1991 1t2 1093 Agriculture 83 L6 L.2 j 1.6 2 2f 2.657 36 5.350 7.3 8.465 1028t 12.074 In rupiah 813 1.02S 1,226 1,318 1,656 2,097 2,631 3.610 5,281 7,176 7,979 9.173 10,432 In forelgn exchange 0 0 0 0 0 0 26 38 69 192 4S6 1,106 1,642 Mnina /b 1.693 1.472 806 384 2LS 394 381 59 1 61S 743 762 z In rupiah 1,693 1.472 86 384 258 394 371 124 456 570 614 605 408 In forelgn exchange e 0 o 0 a 0 tO 20 135 45 129 157 344 Manufacturna Industry ic 2/7a 3.923 5.207 6.667 7.s9 9s00 A0M912 14.956 20.333 30ase2 33.13m 3714ss 49.608 In rupiah 2,376 3,429 4,595 6,205 7,069 8.839 1o,so3 13,994 17,654 25,002 24,828 26,197 3s,309 In oreign exchange 386 494 612 462 5S23 166 409 962 2,679 s.soo 8,303 11,261 14.299 Trade id s 062 !29 S.132 OM 7.2s5 L3 10.247 t3.sss 20.109 29.n_7 I&4 3"2" 37J1 In Uplahi 3,046 4,009 4,781 6,299 7,214 8,329 10,065 13,682 19,342 27,267 28,842 28,lo0 31,148 In foreign exchange 16 120 352 45 41 70 182 206 767 2,470 4,207 4,844 6,123 Servoe rendedna Industry /e 138s 1c 2.277 3.169 4.183 4.345 5.460 7 3S2 10.424 17_67 20,066 25.699 3S.486 In fupiah 1,382 t,860 2,253 3,08s 4,047 4,130 5,1sl 6,917 9,60 14.913 16,683 21,979 30,228 In foreign exchange 3 7 24 81 I3 21S 309 465 824 2,954 3,383 3,920 s52 Other 444 606 6 931 123 2.162 S187 3.721 Lgj 11.709 17.371 15S.74 13.10? In ruplah 444 606 651 929 1,210 2,156 3,143 3.667 1.709 11,197 16.326 14,653 13,094 In foregn exohange a e 0 2 3 6 44 54 157 S12 2,045 92n 0 IL .022 ls 18813 22.157 2e 32 U4 43.n99 5a7673 97,7 112C 122918 J49 In nJplsh 9,754 12,401 14,312 1,223 21,454 25,945 31,864 41,994 54.042 86.125 95,272 109.707 120,619 In 1oreign exchange 4es 621 987 s59 703 457 9S0 1.74$ 4,631 11,673 17,553 22,211 27,679 /a Credits outstnding end of perod. inckudes investment crdts, KiK and IMKP. Excludes Interbank credits, credits o central goverment and to nonresidents, and foreign exchange component of project aid. lb Includes credits to PERTAMINA for repayment of foreign borrowing. Since March 1979, credit In foreign eange to PERTAMiNA has been converted to rupiah credits. /c Processing of agricultural products is classified under manufacturing industry accordng to Intemational Standard Industrial Classification (iSiC 1968). Staiting 1980, credits for constucton which were previously included In -3 manufacturing Industry are now Included in servce-rendering Indusbty. /d Inckudes credits for food procurement and hotel projects. Ie Credits for eoctricity, gas and water supply are hdIuded In service-rendering Industry sector. /f includes foreign exchange revuation amounting to Rp. 251 biliion. Ig Inckbdes revaluaton adjustment due to tih devaluaton ot September 121966. Source: Bankindonesela INDONESIA COUNTRY ECONOMIC REPORT Banking Credits Outstanding in Rupiah and Foreign Exchange by Group of Banks. 1981-1993 /a (Rp. billion) 1981 1982 1983/b 1984 1985 1986/c 1987 1988 1989 1990 1991 1992 1993 Bank Indonesia direct credits /d 2.649 2.771 2.356 870 964 1.144 1 347 1L547 696 718 783 771 949 In rupiah 2,649 2,771 2,356 870 964 1,144 1,347 1,547 696 718 783 771 949 In forcip exchange 0 0 0 0 0 0 0 0 0 0 0 0 0 State commercial banLs/e 5.881 8.031 9.787 13.345 15374 17,782 21.676 28.631 39579 55826 59.861 68.236 71.760 In rupiah 5,523 7,474 8,910 12,959 14,925 17,711 21,225 27,614 37,151 50,648 52,628 58,133 59,955 In foreign exchange 358 557 877 386 449 71 451 1,017 2,428 5,178 7,233 10,103 11,805 National Private BanksfI 1.081 1.554 2.294 3.552 4.746 6.272 8.423 11.910 20.216 34.975 44.452 45,352 63.976 In rupiah 1,069 1,534 2,279 3,480 4,631 6,061 8,175 11,536 18,955 31,458 39,467 39,685 55,363 Inforeignexchange 12 20 1S 72 115 211 248 374 1,261 3,517 4,985 5,667 8,613 Foreign Banks 548 666 862 1.046 1.073 1.204 1.406 1.913 3.115 6.177 8.512 9.330 11.612 In rupiah 513 622 767 914 934 1,029 1,122 1,559 2,173 3,039 3,177 2,889 4,352 In foreign exchange 35 44 95 132 139 175 284 354 942 3,138 5,335 6,441 7,260 Total l.S 1=^2 1=.9 1=.1 L22.5 26.40 3285 UM 6ei, 9A 1 L6L9 In upiah 9,754 12,401 14,312 18,223 21,454 25,945 31,869 42,256 58,975 85,863 96,055 101,478 120,619 In forein exchange 405 621 987 590 703 457 983 1,745 4,631 11,833 17,553 22,211 27,678 /a Credits outstanding at end of pcriod. Includes investment credits, KIK and KMP. Exludes interbank credits, credits to Central Government and to non-residents, and foreign exchange component of project aid. /b Includes foreign exchange revaluation amounting to Rp. 251.0 billion. -. /c Includes revaluadon adjustment due to devaluation on September 12,1986. /d Excludes liquidity credits, Includes credits to Pertamina for repayment for foreign boffowing. E l /e Includes state development bank and liquidity credits. If Includes liquidity credits. National private banks refer to national private commercial banks and regional development banks. Source: Bank Indonesia. INDONE81A [ COUNTRY ECONOMIC REPORT Invosmnt Credits by Esonomlo Sector. 1981-1993 la (Rp. billion) End of perod 19t1 1962 1983 1984 19S5 1986 1967 198 1t989 1990 1991 1992 1993k Credits a @oved /b IW0 26" 319 450 5S" 7.966 9.814 IM1& A 263 0 2 i Z 49.44 Agrioulture 340 467 734 809 1,402 2,274 2584 3,393 S,009 6811 9,718 11534 12,32 Mining 40 54 S7 179 229 363 382 495 481 512 S17 S25 307 Manufactuing industry 911 1,39 1,963 2,374 2765 3,23 3,540 5,112 7,615 10,742 11,774 16,10 17,5S7 Trade 87 134 129 237 277 369 35S S36 1,012 2,298 3.37S 4.47S ,85 Servico rendering Indusry 516 641 986 866 1,173 1,638 2,900 3,786 4.021 4,914 6,336 7,724 10,827 Others 12 14 11 44 52 69 S3 106 125 1,163 1,116 1.165 16 Credits outstandina /b 1.436 W099 2.801 in S.471 648 .63S 1.422 14292 19.961 25748 3S.994 41595 Agfioulture 202 322 477 55S 948 1,29 1,690 2284 3,3S7 4,361 5,450 7,050 8324 Mining 26 34 49 178 224 367 342 32 3S8 372 4S9 459 305 Manufacturing Industry 741 1.9 1,635 2,102 2,781 3,09s 3,567 4,817 6,424 1,866 10,484 15,416 16,316 Trade 73 120 11S 168 396 443 43S 62 1,022 1,859 3,372 4,099 6,1 Servioc rendering Industy 390 519 S76 770 1,098 1,215 1,560 2,249 3,010 4,060 5,032 7,6 9,6 Others 4 9 9 29 24 71 41 68 121 443 9S1 1,074 16 la excludes Investnmnt credit from 3ank Indonesia; Includes State Development Bank and Local Development Banks. Data with tho same classification prior to 1980 are not available. /b Excludes Snal Scale Investment Credits, Investment credits to the Central Govemment and foreign exchange components of project aid. /c As of Novemb 1996. Sour : Bank Indonea. I INDONESIA COUNTRY ECONOMIC REPORT Outstanding Bank Funds in Rupiah and Foreign Exchange bty Group of Banks. 1982-1993 la (Rp. billion) 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Deposits Ste Banks 6,169 8381 10,035 12,916 15,193 18,111 22,527 29,731 40,638 41,812 52,600 61,683 Prive Banks 1,284 2,119 3,020 4,550 5,435 8,040 11,167 19,655 33,951 43,143 51,079 67,395 Regiona D elopmet Banks 411 498 700 S2S 797 954 1,300 1,674 2,550 3ZS 3,697 4,773 Foreign Banks 1,004 1,39 1,743 1,883 2,086 2,226 2,516 3,315 6,016 6,935 7,474 8,095 Total 8868 12.396 15.498 20.174 23.511 29.331 37.510 54.375 83.S 9S.118 114.850 141.946 Share In Tota Deposits State Banks 69.6 67.6 64.8 64.0 64.6 61.7 60.1 54.7 48.9 44.0 45.8 43.S Prvae Banks 14.5 17.1 19.5 22.6 23.1 27.4 29.8 36.1 40.8 4S.4 44.5 47.5 Regional Developmet Banks 4.6 4.0 4.5 4.1 3.4 3.3 3.5 3.1 3.1 3.4 3.2 3.4 Foreign Banks 11.3 113 112 93 8.9 7.6 6.7 6.1 72 7.3 6.5 5.7 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 Annual Growth Rate in Deposits State Banks 2.2 30.6 18.0 2S.2 16.2 17.6 21.8 27.7 31.3 2.9 25.8 17.3 Pvate Banks 40.0 50.1 35.4 41.0 17.8 392 32.9 56.5 54.7 27.1 18.4 31.9 Regin Development Banks 16.1 19.2 34.0 16.4 -3.4 18.0 30.9 253 42.1 26.6 14.5 29.1 Foreign Banks 27.2 33.1 22.1 7.7 6.5 6.5 12.2 27.6 59.6 15.3 7.8 8.3 Total 10.2 33S 22.3 26.4 22.1 22.1 24.6 37.1 42-S 14.4 20.7 23.6 /a Total funds are the sunn of demand, time and savAngs deposits. Figures differ from the monetary survey because hes include H Central Governernt accounts Rural credit banks are e uded Source: Bank Indonesia. CQJNTRY ECONOM iT Inerest Rate on Daoelte atOommarchl Sani.. 191-1893 Al Time Devoet TABANAS TASKA CeDwIs End ot Demand Savings Savings caw of Sete Sank PfkateNaional lnkA Period Depoit O s Oeot Deposisb Lte tn 3 6 i2 24 Ls tan 3 a 12 24 lb C Id A * 3 mo It moB mos mos mos 3 moe It mo moe mos moe 10S1 1.S4 8-15 ao 1e0 12.1 1.. 8D 9.0 12-15 SA4 17.4 17.0 1.4 19.0 i91 143 6-185 ao 15 7.7 8. 0.0 0.0 12-15 1S,0 17.1 I.5 19.3 16.8 1063/o 1.643 12-la .o 15A4 144 14.8 131 17.5 12S 18.7 17.4 16.8 10.7 '03 106w 1.I83 12-15 ao 18.8 18.1 17.1 17.2 . 72 1. 20.7 20.7 20.4 21.0 11985 i.a3 12-15 0o 14.t 13.4 14.A 18O tt8 A.3 14.6 i.9 17.8 .8 21.3 19S8 i.8-3 12-1 0.0 14.0 113 142 14.7 18.2 18O 14S 1U8 16.2 17.3 20.1 1087 1.4t 8.O 0.0 186 iS.5 17,0 17.3 17.0 17.4 17.3 16.6 19.3 10. 1a9 t989 1.64 Is 0. 1t5.0 18.8 18. 1S.4 18.7 18.8 20.2 20. 20.3 20.2 20.9 1080 n.e nA nA 11.3 It5i 16.2 172 19.7 16s 17.0 16o 18.8 1ta 20.5 1t00 n. na nA 15o.9 20.6 20.7 20.7 20.5 20.0 2Q.9 21.3 21.3 212 21.0 161 8S9 n"A n. 10.0 20.0 21,3 ZtS 22S 21.0 21.8 2Z8 23. 23.4 108 1032 7.2 n. nAe 18.7 14.8 18.7 17.3 18. 20.7 t18S 17.7 18. 18.8 1.8 10933 5A/h n.A nA. tl5/h 8.25 0.3 12.3 13.5 1t.9 11.3 12.8 14.0 14.5 '10. la Weighted average of Inest at selected bwn. /b From March 163, 3%toramounts aboveAp. 50 milin, 1.S%torR, to50 millon.and hdkuaftdentemlned fatmountMs sethantp. I mUlln. c 'ITAANAS' or 'Tabungan Pembangunan Nssnal Ntional Deveopment Savings) l an ordinary savings account sponsored by 'Bank Tabungan Negr (owle Saving iEnk) and oftfred by ail saet owned aend some priva naltonai commerciai bank.. and post offices. UntiJune 1, 9B3: 15% foramount of lp. 200,00or les; 8%abovelp. 2'9,000. From June 1983: 15% torRp I million or le; 12%for more tian Pp. 1 mIMn. From Juty 1t9 toNovember 1t0: 15% frefl denominaon. Therater ettio bnW deertlon. Id TASKA8 or 'Tabunan Asumnui GerangkI 'nsured Time Depoiht) lean ordinay time deposi sponsored by SanklTabungan Nega' end oferod by iheame inslrtin deeorbed In (c) eova he Mk4int of range or tais monts nt I One month tme deposi rcs used a reptesenlailve rte. /g Ceilng on tlmedepopi btntreet ates t st tblsremoved on iune 1,1 0i6 12% legal minimum rate stng in June 1063 for 24 months SWAe nktime deposit. /h .sotNofvembe 1903 Source: SnkIndonosia cCOuN5R E:OMIC RPR pfdzoll AadWNe Pr&f by Susg2. tO-190 000 to") P"duct t~~~~~~982 INS 196 Im 1" 196 1n 1 tm 1^ lhi cam 3b2 3 $,08 S.M 4$W S,M 669 1 6.934 6X>6> 7,98 C _m AM91 I2,10 14,16 0,0 t32 t4, A47 17.117 tSWO M9M t601 9w pom 1,676 2 ,23 zt6 tZ1 2,091 Z3 2, t Z2,22 I.t XON Z1 Sopbean(4 vd) 52 536 Mt6 870 t,22 1 Lt M 1j7 ,315 1487 tJSS t1St Owi _m(dwa 437 46 535 5Su 642 533 Sn 620 65t 6S2 73S Firk Srhafill t,490 tS2 1.713 tst2 t,b 2AI7 2.17 2r2 ZM 2SS 2.OS F_Gsbw 524 533 548 m7 601 653 71 t6S 7w3 $7 S44 Mestandv mat 629 6S 742 S0 860 S9 93r 97t IAS L§99 1=2 EAs 297 3t9 355 370 432 452 443 456 484 StO 57 WIDk to ill 143 19 1t2 220 235 265 338 346 360 352 Cob- Rubr 900 IW 1.03 tp55 L10 tI 1.17 U1 L2M 25 14 OM0 PWl|dl SS4 979 1147 1t243 1350 1.S6 LeOO L9s5 2,413 2.6SS 3.204 Cocnatw L11t t.604 L.750 L§20 2.114 2,075 2.139 20bS Z332 2.33? Z27 O*ef 2St 305 315 311 339 380 3S6 401 413 419 452 Tea 94 110 126 t27 136 126 132 141 tSS ISO 163 C2oveB 32 41 49 42 55 58 61 SS 66 84 iS Pqwp 34 46 46 41 40 49 S6 7$ 0 69 70 Tobacco 106 109 lot 16t I"4 113 116 S1 IS6 16t 141 Cmpro 1627 t.62S 1.S10 L89 t894 2.176 t1918 2,10 21V9 2253 23¢S CM=td U3 14 12 45 53 48 M,731 3634 3285 I3445 t14421 EqMM Tcawod 692 7n 758 7m 796 669 725 725 no 7m 765 S Otbrhoer 13236 24.10 27n76 242t7 2J403 2S2SS 2S,4S5 24.400 2s3t2 231S 52U W hb Paddyproutioadt6 S. /a Intal; _ |im Ai _nto SRo kma todie PredmsRePeXt tot PwHwt Augua16, M9 Statistical Annex Table 7.2 COUNTRY ECONOMLIC REPORT Production of Mai Crons by Tye gf Estate. t8821 raw0 tons) Product to96 1483 94 1985 1986 is87 isa 1989 1sso 1991 1s92t Rubber 86 673 704 720 763 795 839 853 913 919 92s Coowou opra 1,707 1t,ss 1,737 1,90S 2098 2,055 2.117 ,ts3 2.313 2,317 2,351 Coffee 26a2 287 291 28 316 359 362 377 384 390 420 Coves 3t 40 4s 41 53 s7 59 53 64 82 73 Tes 17 23 24 30 31 25 26 25 31 32 33 sa 137) 1249 1,39? 1450 1.417 1,744 1,499 1.621 1,609 1610 1,619 Tobacoo 97 100 104 156 1S9 110 113 77 152 157 137 Popper 34 46 46 41 40 49 56 68 70 69 70 Cotton 13 14 12 45 53 48 40 38 33 13 14 P a.nel 0 0 0 0 0 0 0 0 ° 0 Plm k _nd 0 0 0 0 0 0 0 0 0 0 Rubber 125 133 121 124 1SO 135 143 141 14S 146 t63 Coconutoopra 11 14 13 1s 16 20 22 15 19 20 21 COOeP 6 8 9 10 0o s to 11 13 13 14 Cklove 0 1 1 1 2 1 2 2 2 2 2 Tea 16 17 18 17 1s 21 23 26 29 30 32 Suar 72 88 83 106 106 109 103 181 204 2s7 261 Tobacoo 0 0 0 0 0 0 0 0 0 0 0 Pepper 0 0 0 0 0 0 0 0 0 0 0 otton 0 0 0 0 0 0 0 0 0 0 PalM l 28s5 25 329 339 3ss 352 435 597 789 684 077 Palm 1ene 47 68 a9 71 73 76 87 119 179 lot 212 a-Dnwg- Rubbr 201 208 211 196 200 194 215 217 219 220 Coconuteopra 0 0 0 0 0 0 0 0 0 0 Coffee 13 10 IS 13 13 13 14 13 16 16 18 cloves 0 0 0 0 0 0 0 0 0 0 Tea 61 70 $4 so 87 so s8 9s 97 98 Suar 182 291 30 343 371 323 316 306 306 3s6 467 Tobaeoo 9 9 4 5 S 3 5 4 4 4 4 Pepper 0 0 0 0 0 0 0 0 0 0 0 Cton 0 0 0 0 0 0 0 a 0 0 0 Pam oll 599 713 61s 904 965 1,1S4 1,365 1,368 1.624 1,774 2,127 Palm b_ 110 go 178 187 19 243 273 274 325 370 431 Iim Rubber 900 107 1,033 1055 1.109 1.130 1,176 1209 1m275 I24 1.309 Coconutoopm 1,71 1604 1,750 X.20 2,114 2,075 2.139 2,20s 2.332 2,337 2.371 Coffe, 281 30s 315 311 339 380 386 401 413 419 452 Cloves 32 41 49 42 5s 58 61 55 66 84 75 Tea 94 110 126 127 136 126 137 141 155 159 163 Sugar 1U627 1,628 1.810 1.899 1.894 2.176 1.918 2,108 2,119 2253 2348 Tobacoo 106 109 108 161 164 113 116 S1 156 161 141 Pepper 34 46 46 41 40 4 56 68 70 69 70 Cotlon 13 14 12 45 53 4s 40 39 33 14 14 Palm oil 884 9e2 1,147 1.243 1,350 1.506 80o 1.965 2,413 2658 3204 Palm kenel 157 166 247 258 266 319 360 393 504 s55 643 hS PSUPmlafflngsreA. Suo.: Supplemntn to President's Repast to Parimnt, Augstd1S. 1993. Statistcal Annex Table 7.3 INDONESIA COUNTRY ECONOMIC REPORT Rice - Aea Harvested Production and Yield. 1982-1992 Area Average Paddy Rice Year harvested yield output output /a Growth (OOO ha) (tons/ha) ('000 tons) ('000 tons) (%) 1982 8,988 3.74 33,84 22,837 2.5 1983 9,162 3.85 35,32 24,006 5.1 1984 9,764 3.91 38,134 25,933 80 1985 9,92 3.97 39,033 26,542 2.3 1986 9,988 4.00 39,726 27,014 1.8 1987 9923 4.04 40,078 27,253 0.9 1988 10,138 4.11 41,676 230 4.0 1989 10,531 4.25 44,726 29, 2.6 1990 10=02 4.30 45,179 29,66 1.0 1991 10,282 4.35 44,689 28,808 -1.9 1992 10,978 4.35 47,769 29,725 32 /a Estimated on the bass of a convesion factor of 0.68 from paddy into rice for the years prior to 1989, and a factor of 0.65 for the years 1989 and following. Source: Central Bureau of Statistics. St~IAnnax Table 7.4 INDONESIA COUNTRY ECONOMIC REPORT Area Covered Under Rice IntensIfication Proprams. 1982-1992 ('000 ha) Year BIMAS INMAS Total Of which /a /b INSUS /c 1982 1.296 5.047 6.343 2,945 1983 1,308 S.387 6,695 3,477 1984 434 6.936 7.369 3,806 1985 200 7,461 7,661 4,100 1986 258 7f533 7,791 4,480 I987 n (Wa 8,035 4,9Z 1918 ma ma 8,283 S,837 1969 n a.s 8,8Z6 6,847 1990 DA an 8,876 7,260 1991 n.a us 8,734 7,162 1992 o.a o.a 9,281 7,638 /a BIMAS - BimblaS masal (Mass dre plantingguidance pmgrasm tb INMAS - IntensAkad musual (Mm inteuitdon pragram). le INSIS = btessfill" khbsus (Special iutensfatio program) Soure Supplement to the Preident's Report to Pariament, Aus 16,1993. INDONE COUWR E:GNQUC R'OWrT lnd=oel*mubctugbProducow Sdoated Inbubv Gramn. u.-tm SA (I9IS 100) Code d Industry Dasc,ptionb 198 1967 i96 1989 1990 191 19ow 199h Group 31121 Condesed and deed m creamwy and pmcessed butter, resh and p_rewedoisam (8) 87.5 94n0 1233 122.5 1422 1S5. 160.6 9Z4 31330 MOlquorand amt (5) 94 1132 116.4 117.2 146.8 160.1 142.0 156. 31420 Co cigae (8 147.4 16.5 177.7 1962 226.4 165.5 1653 10.6 31430 Otherigt (13) 788 819 79.2 782 80.7 S54 111.3 96.8 32111 Yam and fhead 5M 129. 130.5 169.0 '02 2535 2737 3131 295.4 32112 Weang mffas xceptb weaving product (409) 130.7 144.3 1e 187.6 216.9 21S0 238.2 2238 32114 Batk (65) 95.6 81.8 63 111.1 144.0 216.5 190.0 169.4 32130 KnIg mIt (3) 2192 233.3 239.8 312. 347.2 449.2 332.0 296.7 32400 Foowe (32) 113. 91.S 111.2 184.9 206.2 230.4 324.5 274.9 33113 Pywood (40) 139.3 1927 242.1 266.2 256.7 273.7 295.7 269.5 34111 Paper mwwsctu (a inds) 1592 159.7 242.0 251.5 296. 292.2 429.8 417.7 35110 Basic chenicab (xceptfere (0C 119.0 1564 139.0 152.9 174.0 189.5 1S1.6 171.5 35120 Fsulwar (10) 166.0 121.8 129.7 143.7 158.1 158. 152.1 140.6 35210 Pan vamlsh, and lcques5 135.8 126.5 912 12939 136.6 1272 162. 2226 35232 Maches () 1067 142.3 175.5 154.4 167.3 178.5 21.O 247.0 35510 Tyreand tube CM 109.5 79.2 109.7 141.2 157.4 205A8 2238 195.5 3621O n and gas productse (21) 178.0 149.3 124.6 145.2 163.3 254.6 2368 255S 36310 Cemnt (7) 144.4 150.9 149.8 19.1 2064 217.9 244.9 247.7 37100 Bask rhn and sel Indus1rie (16) 164.9 147.1 167.4 199.0 259.1 4765 427.1 474.3 38130 mucbxa I poxducts (t10.2 116.7 1257 180.6 224.4 190.9 210.4 184.0 38312 D bycelbes (7) 123.9 115.5 15. 179.1 192.6 158.T 174.1 1738 383 Ra0 o, TVs. cassedes,sdoher oowm dmflon equlptandappuau (23) 90.6 e8 118.1 153.9 160.6 114.7 111.2 110.3 38430 Motor vhls _ assml eind mnunufate CM 114.7 126.8 115.8 132.5 200.0 21Z9 116.0 77.6 36440 Moorcyesand wwheel minovwhles, assemby"d nnmu_o (11) 96O 81.3 76.8 1060 104.9 187.5 25Z1 267.6 1enwm 1 2 8 143,5 I_C2 164.1 2A 2323 250. W lA Theannal figureshn lheeare ulaesd as i avegeo qualty iniees to Figure In b'atu ( rkNdcate Sue wiw oferlatblslusetsowred In Vis gsup~. /a Fbst_AW19s3 Sou. C001 Bul'w ds_^ s | StcaltAnna Table 8.2 II -~~~~~~~~ I I -Ii | i asfZig giiig igg aXiif i Eg i 3; i i; R 4 § E I INDONESIA COUNTRY ECONOMIC REPORT Crude Oil Produotlon 6y Comnanv. 1961-1993 ('000 bbl) Production Average Contract of work sharing daly PERTAMINA LEMIGAS Caltex C & T Stanvac Subtotal contract Total output 1961 29,515 175 255,515 1,799 13.141 270,455 2846s3 564,3 1,60 1982 27,37S 195 175,928 1,422 13214 190,564 270,055 488,189 1.338 63/a 26,947 233 191,307 1,411 11,766 204,484 28634 518,048 1,419 1984 31,002 203 1,533 4,3n 5,905 513,652 554762 1,50 1985 30,071 170 - 1,35t 5,130 6,488 453.190 489,919 1,342 s98 29,32s 193 - 1228 6,085 7,313 478,07. 514,912 1,411 1987 26,775 210 1,236 8,3s4 9590 475,854 512429 1,404 1988 24,789 /b 1,368 13,413 14,781 451,941 491,511 1,343 1969 25,567 /b . 2,044 13,233 15,277 473,341 514,185 1,409 1990 24,463 /b 1,972 l,587 12,559 496,664 533,706 1,462 1991 24989 /b 1 1,462 8,s45 10,307 545,937 581,233 1,592 1992 24,7M2 Ab 1401 8t36 9,537 S16409 s5,66 1,0 kc 1993 26,427 lb 1327 5304 6,631 518,121 551,179 1,510 kC /a Sce May 1983, onact ox data lave beeo c olaMte& /b 19, Leu s data lhabnnclued haPta /c N bervandDecember reca tIi Se b bUe(Mbuad Ese,Dbectate OeaeaOi & Gas I Parh... Pmdu _bm0 and D _mnd. 1981 - 193 -nDo bbh) 1981 1g92 1l3 1984 1960 190 1991 12 1993 1. Pnoduatkmaocrude S844 48 SW SS 489 514.9 =4 4915 54 5ml 550 55U0 51. . Qud,impmu 37.0 22.0 25.7 342 32.1 27.7 30.2 3t.2 2A1l 45.7 45 49.4 7Q8 1. 9ld 0IA St1. Sal? SW Su mu 15A4 S2! 2Z S79A VA A1 62. 4. Cudew I Is N334 320. 132 X3 2t 27.4 29no9 26 2 297 SW5 29 2 I. in1taUmWfbrMftftr441 2UA 1103Z ZI.2 25V ZMA z2324m. ~ ~ 2W7 mu2 WAZ 21 6. C)u,&mInaudeaocke (dA e -.) 44.7 6.1 25 39.7 27.1 3 16.9 03 32 169 19.7 143 23 7. e d inUrY b wlncladh,miuml (S.6) 197 ISA 1ti 1% i9A 2173 21 4« 247A m& SUA 301 10 a R.fnayazuupio 65 6.5 7.2 92 132 133 13.0 110 119 14. 1. 153 14.9 9. &ft ctg 4) 187.2 176.1 17jA 18 6.7 ml 3 23 3V.7 29.S =A 3 28 10. Exmu- cffdCdm,du (11+12) 49.9 39.0 43j 66 47.3. S52 4 SS 57.8 $0 91 5O IL Wau yidas 47.9 33.7 40S 49.9 321 34.9 42 4 406 420 43.3 536 43.8 1L BD u iL.AVlrc. 2.0 5.3 is 161 tS.2 203 20.4 tU 14.8 15.8 2. t. e2 1l A Ok fordomeicamvmim 0331. W1 M 1153 13N 149.0 I3s 1LA 1: mL 2243 231 7 14. PhmdutIMm1 42.6 28o 215 5.0 2.7 t03 133 213 239 2.8 273 46 t5. TOW2 I1v13+14) 1 6 L54 t6U 180M IU 14 16 6 M .99W6 UA 232A 301 T7h 16. D c aMU 150 16Lt 1SSM 157. LS3 1S2B6 162.9 171.3 1t36 21L4 22S4 2462 2633 t7. Cbmjasar edsack(S4161 23. 4.¢ 1, 7 -5W L6. _. I" 142 90 2.1 14.4 Su ottyotMi dEa. D6amiGeGmdf 011 &Gs INDONIE COUT# GCONOMIC REPORT DomSle Sale of P*oilom PiodiUM. I9S1-IS 1961 19t¢ 19113 1964 195S 1966 1967 198 1969 1990hb 1991 1992 1993 Ain (Isgae 110 t03 83 73 66 6 56 6e 60 59 se 54 S1 Aelon trbo 49 4,899 ,6N6 4,374 4,442 3806 4,199 4,445 4w26 4,607 4,89 5,315 603 Prendum g lkeo 392 238 247 m23 1,024 1,431 1,836 2I451M lb lb lb Regular gasolIne 25,646 257109 24830 24,99 25,206 27,063 29.048 30M 3319 39.0 43,Z3 45,36 46,73S KBm 52,497 577 482 45 43,94 43,618 43 44,664 460 41.7 573 A 0 54,2 Motr dsel 4473 AM 4,9 46 47,6 47,421 5407 59,143 64,5 72,950 37 92,61 10,460 IndK tbaW disel 9,91t t9311 9,97 1 t1,w9 5 ,9 89 9,51s 1067 100 1m38 11,445 Fuelo 17,It 19,341 21,49 A265 22, 1,004 19,04 1t8097 1 9 2847 28 29,313 3 TOt I= 1 MJ.I 1 1629I7 J 149A74 li i 2qL537 21905 23=9% t Z5J3 /a Excluding lubd cefing *I and mlar prodcts. hb Provsinal. Source: M by of Mines and Energy, Dioetra Genea Oil wd Gas. I StAslcal Annax Tabe9.1 INDONESIA COUNTRY ECONOMIC REPORT Consumer Price Index. 1979- 1993 La lb (April 1977- March 1978 = 100) End of Foodsff Housing Clothing Others TotW Change (%) /c 1979 141.1 140.9 1682 137.7 143.1 21.8 /d 1980 165.6 168.7 190.8 159.1 167.6 16.0 1981 1793 182.3 198.2 168.8 179.8 7.1 1982 192.7 209.8 205.0 189.3 197.9 9.7 1983 212.7 238.1 214.0 221.5 221.5 11.5 1964 226.4 270.0 220.6 246.5 241.6 8.8 198S 230.9 289.4 228.0 259.7 252.2 4.3 1986 263.9 302.9 250.4 275.0 275.3 92 1987 296.1 321.4 270.4 297.9 300.8 92 1988 320.1 335.4 280.0 307.4 317.6 5.6 1989 104.1 109.6 108.1 105.7 106A 6.1 1990 111.5 123.9 111.4 118.6 117.0 9.9 1991 122.6 133.7 119.S 135.0 128.6 9.9 1992 130.2 140.0 128.3 139.7 135.1 5.0 1993 136.8 163.2 138.9 154.0 148.8 10.2 /a The cosumer prke Indez for Indonesa has been aed commencing Marcb 1979 to replace the Jakarta cost of living indes. /b StatIng 1989, using new base period (April 1988-March 1989 - 100). /c End-year basis /d Peeotage change of CPI for the period Januar through December 1979 using the rate of inarease of the Jakarta cost of living Index for period January through Mamb 1979. Source: Central Bureau of Statistia. INDONESIA COUJNTRY ECONOMIC REPORT Indonesia Wholesale Price rIndex. 1983-1 993a (1983 = 100) Sectors/b 1983 1984 1985 1986 1987 198S 1989 1990 1991 1992 1993 Agrcutaure (44) 100 113 1S 128 145 163 177 191 206 225 251 MTnTng & qua ng (6) 100 109 117 125 132 143 156 169 188 201 218 Manufacturing (140) 100 103 itS 123 143 156 166 176 194 206 218 IMPO (53) 100 113 119 129 158 164 178 191 201 208 211 E3qPCUS 9% 100 111 112 8S 118 118 131 159 1S3 159 157 Excluding peteum (34) 100 114 115 130 170 183 195 195 203 212 226 Petroeum (4) 100 112 113 73 103 99 112 148 139 143 137 General rnde g(11 100 °ll 116 116 142 149 162 178 187 197 204 Genea ndexe exdudu g exo% (243) 100 111 117 127 149 160 173 185 199 210 221 General idex ecd xotsofpeoeum( ( ) 100 110 116 125 146 161 172 182 198 211 227 /a This new index paes te peous WPI baSEd on 1975. Figures sho fth aeae for year. /b Figures wIthin brackets ( )N indiate r t number of item epreeted in at sector. Source: Cena Burea of statist.s INDONESIA COUNTRY ECONOMIC REPORT Domestic Prices of Petroleum Products.1 980-1993 (Rp./llter) 1980 /a 1981 1982 /b 1983 /c 1984 /d 1985 /c 1986 1987 1988 1989 1990 /f 1991 /g 1992 1993 Aviation gas 150 iso 240 300 300 330 250 250 250 250 330 400 400 420 Aviation turbo 150 iso 240 300 300 330 250 250 250 250 330 400 400 420 Premium gasoline 220 220 360 400 400 440 440 440 440 440 /h b /hh hb Regular gasoline 150 150 240 320 350 385 385 385 385 385 450 550 550 700 Kerosene 38 38 60 100 150 165 165 165 165 165 190 220 220 280 Motor diesel 53 53 85 145 220 242 200 200 200 200 245 300 300 380 Industrial diesel 45 45 75 125 200 220 200 200 200 200 235 285 285 360 Fuel oil 45 45 7S 125 200 220 200 200 200 200 220 220 220 240 /a From May1980. /b Price Increased on January 1. /c Price increased on January 7. /d Price Increased on January 12. /e Price Increased on April 1, due to the application of 10% VAT. /I Price Increased on May 25. /g Prlce increased on July I1. /l Discontnued. Source: Ministry of Mines and Energy, Directorate General Oil and Gas. INDONESIA COUNTRY ECONOMIC REPORT Approved Foreiwi estnet by Necto. 19S1-l93 la (Us8$ MiNOM) Sector 1981 1982 193 1964 1s96 1966 197 9 1969 1990 1991 1992 1993 Aarlcufzv-e 2£ 32 3Q Q17 24 66 732 for8bv im5 n 2 I 2 A P - 2Q 1 1 21 Fibhwv 22 I 21 2 u 32 42 20 31 24 2 Minina&auanlna 29 Q Q i 2 Q Q 2 112 MapubzhwMg J34 120 2.615 1 42 22! t 52 an2 4 122 10 1241 Food 41 6 S3 77 6 34 54 231 223 99 3s2 213 107 Texfles & eallur 139 26 12 1 1 9 11U 213 531 1o94 532 5t? 419 Wood&woodproducb 124 5 13 0 0 32 45 104 106 218 62 33 50 Paper&papwrprodctsX 49 0 722 0 25 47 109 156 211 730 S22 6S6 202 Cwmicals & fubber 236 317 183 96 338 294 209 1,544 2,512 1,991 923 2,331 .172 Nonfntalcmfn.rals 20 S7 50 0 3 0 251 30 184 125 133 S37 93 Basam mtas 85 3 S36 609 65 39 7 61 106 825 197 43 186 Melal poducts 141 706 76 210 244 82 57 129 292 460 856 857 1087 O,ers 0 0 1 9 0 0 3 10 30 281 62 51 42 C2MOnstrc 42 u11 44 i 6S 42 2 16 21 2 41 2.221 Trade hobls Q 12 73 S4 22 Q 496 Is _7.4 4.9 919 Les7 Whoksa teade 0 0 0 0 0 0 0 0 0 0 0 0 692 Hobb 0 17 78 64 0 0 196 405 9S 874 419 9t9 394 T N_t& munuoafors 2 Q 2 4 2 22 213 3 1 B 32 14 8C RePAW taltand buskm ness 2 le 2 2 25 22 2Q 11 In1 9 57 L134 224 Do1 la°2 L3 t7 LM 2m l B s w a5m aiZ /a hisded Capbl lhwetmt Aamcn e wets orappnoal plus pn o mibacnwm n. Source: I_Cnom Cordhwan Board (BKP9. . IiB INDONESIJA COUNTRY ECONOMIC REPORT ApRwod Domeffo Investusent by Sector. IM61-19938 la Sector 1981 19&z m 19m4 219 1986 1987 19S8 1969 1 11 1 993 Aarleulture. flsheoHes and livestock 60 62 661 277 899 1L 1 1M U2M Foesiv V7 9 149 19 39 6 60 487 2 S2 5u __2 IS1inano 13 52 s5 8 6 3_ 69 290 111 M R a mDbhnh LM tA12 92 I= Le L sts 9JM4 t23 PM an Texis 195 110 10 127 97 253 L399 230 3563 12612 3,8 2539 3.W59 Chemicals 193 s 766 272 9a m 2A7 W9 4 1260 42 3Z2 ?7689 Eleota goods 0 0 0 0 0 0 0 0 0 0 0 0 e46 Other manufactudng 9t8 1j04 29m 933 607 SoS Z289 4399 5307 1795 14.=3 13AM9 130 Construdon 16 ,9 67 279 74 p- i 16 S? 2S 2 81 til 54 16 Z14 312 17 U 9 137 2M 4-974 3I97 1i M 1 Real eStet 74 2W 31 267 169 174 3 7fi a Othoemb 70 15J L1t1 1 296 32S s4 60 551 2,6 - 2 4 !bl .222 i z in1 2 Ui VA lm1 A Figure rto Intended apl mvetmnts, en rresent odginal appova phu apoved expansion minus oanoellsloa /b Inuesnspoton secor. Source: Inestment Ceorinating Boad. MAP SECTION r6RD 205 14R3 -<. THAILAND tid ihoF if 1,0' 1isw oo N 8On.d. AohPINSr PHIULINES ,r MALAYSIA BRUNEI , Mn / N 7 E * MALAYSIA / / : ' . SINGAPORE fMP1 -- P -Inmo 9d. d - N.. HAWAI1~~~~~RA roo~~~oooo~~i 0HAMAHER w ~~~~~~~~~~~~oo~o0 K AL I 7ANkA N18201(1" - S R blml -k ,,/, ,, BI 1 q DEK.I JAKARTA 20 SOMT WEAI JAWA BARAT A 000n0a . LA; S JAWAttiNGAH ,b IRIAN JAYA Ol. YOGYAKARTA cor" z JAWATIMUR B00kulP , A'd! 5. BENGKULU ' 1 0' SUMATERASELATAN JAMSI Java Sea z SUMATERASASAT MAK4fA DIMATERAUTARA KALIMANTAN EARAT 3 YALINANTANTENGAH MA-LRA KALIMANTAN SELATAN S-oInos _ KALIMANTAN TIMUR l JA)WA \ j SULAWESI TENGAH k8 rAWA SULAWESI UTARA YWk W SULAWriSI SELATAN 4 4-D/ES SU AWE51 TENGGARA \i f_' 9AUkAIT[N DARRATARAT M lw US^A, ENG' AA "tvIMU 22 23 "Om" i(MM OMILS no MALUKAU _"r0E.0.f0A- f _ S 4A 24 K"-% 27 In 000 0 00W 00 00o 000 ,oo IN TIMOR TIMUR TlMORtlUUR a-1b *OfPIIWun__aSs_S__S =_ rd~~~~~~~~~~~~~~~~~~~~~~~LOMETrRS 000' 100' 005' 000' 0000 120' I50' 000' 140 F_SRUARY 1991