Ramstetter: Survey of Recent Developments (BIES)

Bulletin of Indonesian Economic Studies

Vol 36 No 3, December 2000, pp. 3–45

SURVEY OF RECENT DEVELOPMENTS Eric D. Ramstetter International Centre for the Study of East Asian Development, Kitakyushu

SUMMARY Indonesia continued to struggle with institutional change and political uncertainty in recent months. President Abdurrahman Wahid delegated some responsibilities to Vice President Megawati Sukarnoputri, but subsequently appointed a new cabinet that consisted primarily of people close to him, making many wonder if he had really given up any power. The killing of UN personnel in Atambua, West Timor, led to renewed pressure on the government to rein in the militias operating there. The president also tried to increase his control over the military, the police and the judiciary, with mixed results. The economy continued to recover, with the annualised growth rate in the first half of 2000 reaching 4.6%. This growth was fuelled largely by exports and fixed investment, which markedly increased their shares of real GDP. Consumption also remained robust. If the recovery of fixed investment can be sustained, the economy could grow 5% or more for the year. There is some concern that the money supply is expanding faster than desired, and inflation accelerated in the third quarter. The fuel price increase in October will also lead to higher prices, but the annual inflation rate is likely to be 8% or less. The large domestic debt burden incurred in recapitalising the banks will raise expenditures significantly, and increased revenue sharing will reduce central government revenues from the 2000 and 2001 budgets. Finding the finance for related deficits is the major macroeconomic challenge for the government in the next few years. Rapid growth of office and electrical machinery exports in the first half of 2000 signals a notable structural change. These exports originate largely from foreign multinationals (MNCs), and their growth indicates that Indonesia is being integrated into the MNC networks that dominate these industries in Southeast Asia.

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INSTITUTIONAL CHANGE CONTINUES AT A RAPID PACE The two and a half years since the fall of the New Order regime have witnessed rapid institutional change that appears likely to continue. In the last few months the efforts of President Abdurrahman Wahid (Gus Dur) to define his role in a democratically elected government have been particularly conspicuous, though there is much scepticism about their effectiveness, and continued uncertainty about political and administrative arrangements. The President, the MPR, and the Economic Policy Making Team The August session of the People’s Consultative Assembly (MPR, Majelis Permusyawaratan Rakyat) began with the possibility that some legislators would mount a serious effort to impeach the president. His report on the performance of his administration was poorly received, most importantly because he often gives the impression of making policy statements without thinking through the issue at hand and is often perceived as meddling in affairs where he should not. Moreover, his frequent trips abroad make him vulnerable to charges that he is not giving sufficient priority to domestic affairs in general, and to the economy in particular. Partly if res`onse to these criticisms, the president agreed to delegate much of the authority for day-to-day administration to the vice president. He also streamlined the cabinet, reducing the number of posts to 26 from 35 in the October 1999 cabinet; however, three key former cabinet posts (Attorney General, State Secretary and Commander of the Armed Forces) still exist outside the cabinet. The most significant streamlining came where two ministries were combined (e.g. Home Affairs and Regional Autonomy; Agriculture and Forestry; and Manpower and Transmigration), although these mergers may not result in a significant reduction of the bureaucracy. The government is understandably reluctant to cut too many government posts at a time when the labour market is perceived to be weak. The most significant cabinet changes in the economic policy sphere were the appointments of Rizal Ramli as Coordinating Minister for Economic Affairs and Priyadi Praptosuhardjo as Minister of Finance. Other important new appointments in the economic ministries include those of Bungaran Saragih (Agriculture and Forestry) and Purnomo Yusgiantoro (Energy and Mineral Resources). Cacuk Sudarijanto was appointed Junior Minister for Restructuring of the National Economy, while retaining his post as head of the Indonesian Bank Restructuring Agency (IBRA). (In late October he was replaced at IBRA by former Citibank executive Edwin Gerungan in a move aimed at shoring up IBRA’s reputation.) A number of previous economic ministers were also

Survey of Recent Developments

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retained.1 This cabinet has been dubbed ‘all the president’s men’, because it consists mainly of people close to Gus Dur, whereas the previous cabinet was the result of political compromise following his election by the MPR in 1999. Many observers are sceptical about just how much power the president has given up in this process (e.g. MacIntyre 2000). Rizal Ramli is generally seen as a more forceful leader than the previous Coordinating Minister for Economic Affairs, Kwik Kian Gie, and this has led some to hope for a more focused and effective economic policy (ESCOM Monthly Journal, September 2000: 4–12). Nevertheless, Rizal and Priyadi are thought to disagree over how to handle the case of Bank Rakyat Indonesia, the bank Priyadi was previously nominated to head.2 In a related matter, the press has suggested that Rizal is in a ‘major turf battle’ with IBRA head Cacuk for control of Indonesia’s state-owned enterprises (Business Times Singapore, 18/9/00: 1), though this may be an exaggeration. There is also continuing strain in relations between the government and Bank Indonesia (the central bank), which is keen to protect its newly legislated independence and is campaigning for the release of its governor, Syahril Sabirin, following his detention on charges of involvement in the Bank Bali scandal (McLeod 2000: 8). Fortunately, Rizal appears to get along reasonably well with the acting central bank governor, Anwar Nasution, and the rumoured rifts between Rizal and others in the administration have not yet led to major problems. In short, there is guarded optimism that the present policy making team may be able to work better together than its predecessor, but there are many potential problems and little margin for error in the next few years. Whatever transpires, Indonesia is going through a profound process of institutional change and institution building. The political system and the policy making bureaucracy are in a state of flux as a result. This process is likely to proceed in a haphazard and sometimes chaotic fashion for the foreseeable future and, although the international community often demands institutional change as a precondition for extending assistance, a realistic assessment would suggest that many of the changes demanded (e.g. to the judiciary’s handling of bankruptcy proceedings) will take years to realise. Most of the international agencies on the ground—the International Monetary Fund (IMF), the World Bank, and bilateral agencies—appear to be aware of this contradiction, but there are some areas in which Indonesia may be forced to respond rather rapidly. Security and the Role of the Military The international community has become increasingly impatient with the Wahid administration over the slow process of repatriating East Timorese refugees now in West Timor, and the continuing activities of

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armed militias in refugee camps. The latter problem came to a head when three United Nations (UN) aid workers were killed in Atambua on 6 September. UN officials issued stern warnings to Indonesian representatives at the Millennium Summit in New York, and the US Defense Secretary, William Cohen, gave a similar warning during a visit to Jakarta, saying that a failure to disband the militias would ‘have consequences for Jakarta’s relations with the international community’. The Indonesian response to Cohen’s vague threat was generally negative. Many observers, and most of the press, complained about foreign intervention in domestic affairs, and some went so far as to suggest that the US was threatening a trade embargo against Indonesia, though there is no evidence of this (Capital, 2–8 October 2000: 6–8). In reality, failure to control the militias might have negative effects on Indonesia’s efforts to secure economic aid, but the strong strategic interest of the US, the European Union, Japan and Australia in supporting Indonesia’s new democracy makes it very unlikely that a trade embargo or any major cut in funding will result as long as the country remains democratic.3 Indonesia is now very dependent on international assistance, however, and as the October meeting of the Consultative Group on Indonesia (CGI) in Tokyo approached, the Cohen threat initially appeared to have had the desired effect of spurring a new set of efforts to disarm the militias in West Timor. Another important member of the new cabinet, Susilo Bambang Yudhoyono (Coordinating Minister for Political, Social and Security Affairs), was dispatched to New York to explain to UN authorities the actions that the Indonesian authorities were planning to take, and was given the responsibility of disarming the militias. Vice President Megawati attended a high profile collection of arms from militia personnel on 24 September, but the occasion ended in disorder when militia members stormed the collection point and took back most of the arms collected during the day. After this farce, and given the previous record of the Indonesian government, many observers were sceptical about its efforts to disarm the militias. The government continued to insist that it was serious, and during a visit to Singapore in early October, Minister Rizal emphasised that ‘a large number of weapons’ had been confiscated (Reuters wire story, 8/10/00). Also in early October, Indonesian officials detained an important militia leader, Eurico Guterres, on weapons charges, indicating that those favouring a tougher stand on the militias may be prevailing, at least in the short run. However, a statement by Defence Minister Mohammad Mahfud Mahmodin in September indicated a reluctance within the government to address the East Timor issue realistically.4


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Perhaps more important in the medium term are the president’s attempts to exercise more control over the security apparatus, the military and the police. Through the appointment of Coordinating Minister Bambang Yudhoyono, the subsequent abolition of the post of Deputy TNI (armed forces) Commander and removal of the office’s occupant, General Fachrul Razi, and the controversial (and probably illegal) dismissal of the national police chief, Gus Dur has tried to signal that he is indeed supreme commander as mandated by the constitution. However, he has apparently been unable to get his candidates appointed to top military posts (Tempo, 9–15 October 2000). The military appears highly demoralised, and it is unclear whether the chain of command really works any longer. In short, there is still considerable doubt that recent actions can be translated into the increased political and military will necessary to control militias in West Timor, to manage volatile situations in other regions such as Maluku, or to stop the series of bombings in Jakarta and elsewhere over the last six months. Some observers (e.g. The Economist, 3 September – 6 October 2000) have wondered if certain serving or retired senior military officials might be behind some of these problems, and have suggested that the president’s efforts to assert more control over the security apparatus could end in failure. The Stock Exchange Bombing, the Soeharto Trial, Bank Restructuring, and the Rule of Law The bombing of the Jakarta Stock Exchange building on 13 September created a domestic outcry. This was the latest in a series of terrorist acts that appeared to be correlated with steps in the bid to try former President Soeharto and other family members on corruption charges.5 Apparently convinced that these events were related, the president ordered the arrest of Soeharto’s youngest son, Hutomo Mandala Putra (Tommy), and another associate, in connection with the bombing. However, the then police chief refused to make the arrest, saying that there was no evidence to warrant it, though Tommy was taken in for questioning in the affair. This led to the firing of the police chief. Subsequently, a group who appeared to hail from Aceh, and who included two individuals from a special military unit, were arrested in connection with the bombing. Meanwhile a panel of judges ruled that former President Soeharto was medically and psychologically unfit to stand trial. This effectively ends the government’s attempts to try the former president on criminal charges, unless a higher court overturns the decision or another court rules differently on a separate indictment.6 Here again the president expressed dissatisfaction with the proceedings and hinted that he would seek to replace the judges that presided over the case (JP, 3/9/00: 1).

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In a different sphere, as of 27 August, the Indonesia Bank Restructuring Agency (IBRA) had brought bankruptcy proceedings in 51 cases, and civil court proceedings in 146 cases (IBRA, Monthly Report, September 2000: 5). Meanwhile, by 16 August, IBRA had had 37 legal cases brought against it. IBRA has lost the majority of the cases where judgements have been rendered. As discussed by Fane (2000a: 36–7), judicial corruption is a major problem in Indonesia, and is widely thought to be a factor in the decisions rendered in the Soeharto and IBRA cases. In this context, the president’s comments about the Soeharto trial are perhaps understandable. There is also a perception that a similar level of corruption extends to the police, which may explain the president’s desire to give specific instructions to them. However, the police chief was legally obliged to refuse the president’s order if there was indeed no evidence to support the arrest of Soeharto’s son. The president is also legally required to consult with the legislature before dismissing the police chief. More fundamentally, the fact that Gus Dur has expressed opinions about specific cases before the courts or the police is disturbing. The president does have an important role to play in the appointment and removal of judges and of the police chief, but the challenge is to reform the judiciary and police without continuing the practice of excessive executive control that existed under Soeharto. See box 1 for a brief discussion of progress with law reform. MACROECONOMIC TRENDS AND POLICY ISSUES There are finally signs that the economy may be recovering after the sharp contraction in 1998 and lacklustre performance in 1999. Indeed, it seems that first consumers and then investors have become used to political uncertainty and institutional flux, and have begun to spend more. Expenditure Components of GDP Gross Domestic Product (GDP) grew 4.6% in the first half of 2000 compared with the first half of 1999, in marked contrast to negative growth rates of –2.6% a year earlier, and –13.2% in 1998 (table 1). In 1999 and in 1996 (the last full pre-crisis year), the annual growth rate exceeded the rate for the first half. This was also the case in 1992–93 and 1995, and many observers expect growth to be stronger in the second half of 2000 as well.7 Growth in the first half of the year was still rather slow compared to the annual growth rates of 7% or more in 1989–96, but is likely to be only slightly below the rates of 5–6% in 1986–88, the last time Indonesia emerged from an economic slowdown (ICSEAD 2000: 87–8).


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Box 1 THE FAILURE OF LAW REFORM There is growing despondency among Indonesian law reform leaders. The window of opportunity that opened after Abdurrahman Wahid’s election seems to have almost closed. Few expected that the flood of statutory reforms approved by Habibie would achieve more than symbolic change, but it was hoped that a purging and restructuring of key legal institutions under his successor would usher in a new legal culture. The commissions set up to overhaul the corrupt and incompetent judicial system have, however, run headon into the lingering power of the New Order system. Some operating methods of the New Order were those of criminal gangs. The territorialised system of the petty standover criminals, or preman, was writ large as the state used systematic intimidation and corruption to extract rents to help sustain Soeharto’s political franchise. Controlling the courts was a key part of this strategy, and Soeharto was a master: barely a decision went against his government in three decades. Post-Soeharto reformasi succeeded in publicly identifying the essential criminality of much of public life and pushed many key figures into the background, but it has failed to effect any real change to the system itself. In many cases, the ‘gangs’ pushed out of the state’s systems simply went ‘private’, operating now as enemies of the state. The consequences can be seen in aspects of militia activity in Eastern Indonesia, bombings in Jakarta and the rise of vigilantism—a response to state loss of control. More subtly, it is demonstrated by the continued corruption of the courts, which favour the old elite at the expense of reformasi, as shown by the farce of the Soeharto trial and the recent dismissal of charges against three allegedly corrupt judges. So far, not one ‘big fish’ has been both finally convicted and jailed. It is now becoming obvious that the government has limited authority to control the state apparatus; it can offer little guarantee of the proper functioning of the legal system; and it has almost no ability to prevent or punish violence or corruption. Alarmingly, the president’s response is, increasingly, political intervention—ordering arrests and trials—itself one of the causes of past decay in legal institutions. Tim Lindsey University of Melbourne

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TABLE 1 Real GDP Growth, Real Per Capita GDP, and Expenditure Shares of GDP, 1996–2000

GDP growth at 1993 prices (% p.a.)

1996

1997

7.8

4.7

1998

–13.2

1999 S1a

1999 S2a

2000 S1a

–2.6

3.2

4.6

Per capita GDP and consumption expenditures in 1993 prices (1996 = 100)b GDP per capita 100 103 88 87 88 89 Private consumption per capita 100 106 101 100 102 101 Shares of GDP at 1993 prices (%) Private consumption 62.1 Foodc 34.5 Government consumption 7.7 Fixed investment 31.1 Inventory investment 1.4 Exports 27.2 Imports 29.4

64.0 35.5 7.3 32.3 0.8 28.0 32.3

71.2 39.6 7.1 24.0 –2.9 35.8 35.2

72.1 40.0 7.6 19.0 –1.3 23.7 21.1

72.2 40.1 6.8 18.8 –2.2 24.8 20.4

70.4 38.0 7.2 22.0 –6.2 27.5 21.1

Shares of GDP at current prices (%) Private consumption 62.4 33.3 Foodc Government consumption 7.6 Fixed investment 29.6 Inventory investment 1.1 Exports 25.8 Goodsc 21.7 Servicesc 4.1 Imports 26.4 Goodsc 21.5 Servicesc 4.9

61.7 33.6 6.8 28.3 3.4 27.9 24.2 3.7 28.1 21.9 6.2

66.2 39.0 5.4 22.1 –3.0 50.5 46.3 4.2 41.2 31.8 9.4

73.4 46.4 6.9 19.1 –5.9 33.8 30.6 3.2 27.5 20.7 6.7

74.5 45.1 6.2 19.5 –9.6 36.3 33.2 3.0 26.8 19.9 6.9

69.3 46.7 7.3 24.0 –10.8 37.2 29.6 2.7 27.0 17.9 6.5

a

S1 = first half, S2 = second half; growth rates refer to the growth over the corresponding half of the previous year. b

Real GDP is originally estimated at 1993 prices; per capita GDP is then rebased to 1996; population is estimated to grow by 1.49% in 1999 and 1.47% in 2000 (growth rates were 1.51% in 1998 and 1.53% in 1997), and population growth is assumed to be evenly distributed throughout 1999 and 2000.

c

Figures for 2000 S1 in these categories refer to the first quarter of 2000 only, and have not been revised as is the case for other GDP components. Sources: BPS (2000a, 2000c); World Bank (2000b).


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As a result of the contraction in 1998 and the first half of 1999, per capita real GDP was 13% lower in the first half of 1999 than in 1996 (table 1). It has since started to recover, and was back to 11% below precrisis levels in the first half of 2000. Private consumption per capita (as calculated from the national accounts) never fell below 1996 levels throughout the crisis. By contrast, if estimates of consumption expenditure from the National Socio-Economic Survey (Susenas) are deflated using the consumer price index (CPI), real consumption expenditure appears to have declined 3% between 1996 and 1999 (figure 1). If the private consumption deflator from the national accounts is used instead of the CPI to deflate these estimates, the decline becomes much larger (16%), because the private consumption deflator rose much more rapidly than the CPI in this period (table 2). For a discussion of anomalies among various price deflators in Indonesia, see box 2.

FIGURE 1 Shares of Consumption Expenditure by Expenditure Group (%) and Index of Real Per Capita Expenditurea (1996 = 100)

100%

100

80%

80

60%

43%

45%

40%

37%

35%

41%

38%

20%

60

40

20 20%

20%

22%

1993

1996

1999

0%

0 Lowest 40%

Middle 40%

Top 20%

Real per capita expenditure

a

Per capita expenditure is deflated by the consumer price index.

Sources: BPS (2000b); World Bank (2000a).

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Eric D. Ramstetter TABLE 2 Various Price Indicators, 1997–2000 (1996 = 100)

Item

1997

1998

1999 S1a

1999 S2a

2000 S1a

GDP deflatorb 113 207 National accounts deflators by expenditure categoryb Private consumption 108 192 Foodc 110 211 Government consumption 107 159 Fixed investment 104 201 Exports 118 307 Imports 109 270 National accounts deflators by industryb Agriculture, fisheries, etc. 113 195 Mining & quarrying 118 291 Manufacturing 117 187 Electricity, gas, & water 101 141 Construction 103 215 Trade, hotels & restaurants 108 221 Transport & communications 103 164 Finance, ownership, business services 117 205 Community, social, personal services 117 178 Consumer price indexd 106 168 194 Foodstuffs, prepared foods & beveragesb 107 Wholesale price indexe 109 218 Agriculture 112 189 Mining 107 131 Manufacturing 104 169 Imports 107 239 Exports 117 297 Oil & gas 118 275 Non-oil & gas 115 326 Non-oil export prices from Rosnerf 119 342 Rp/$, period average 124 428 Rp/$, end of period 195 337

233

224

243

236 279 215 246 349 336

230 261 207 244 344 328

238 292 241 278 346 346

251 235 215 155 252 244 229 225 211 205 251 234 259 158 207 238 275 239 262 270 356 323

227 265 221 156 268 244 192 225 201 200 233 234 258 166 209 236 245 328 263 239 314 325

235 316 230 158 288 251 208 230 222 206 239 252 282 174 212 248 262 436 303 na 334 342

a

S1 = first half, S2 = second half.

b

Deflators calculated from annual or quarterly data defined as 1993 = 100 in the source.

c

See table 1, note c.

d

Annual averages of monthly price indices defined as 1996 = 100 in the source.

e

Annual averages of monthly price indices defined as 1993 = 100 in the source.

f Annual averages of quarterly price indices defined as 1994 Q2 = 100 in $ in the source, translated to rupiah at period average exchange rates.

Sources: Bank Indonesia (BI), Indonesian Financial Statistics (IFS) (various issues); BPS (2000a, 2000c); IMF (2000); Rosner (2000); World Bank (2000a).


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Box 2 NATIONAL ACCOUNTS DEFLATORS AND PRICE INDICES IN INDONESIA In Indonesia, there are substantial differences between trends in national accounts deflators and other price indices that appear to measure similar prices (table 2). As indicated in the discussion of consumption trends, there is a large difference between trends in the private consumption deflator, which show that the cost of private consumption rose 138% between 1996 and the first half of 2000, and trends in the CPI, which suggest a 106% rise in the same period. Even if the comparison is limited to food, the consumption deflator is much higher by the first quarter of 2000 than the corresponding CPI component: 292 versus 239. National accounts deflators also indicate much larger increases in export and import prices than do the corresponding components of the wholesale price index (WPI). Furthermore, in the first half of 2000, national accounts deflators are higher than the corresponding WPI components for mining and manufacturing, but the WPI is higher for agriculture. Some differences between national accounts deflators on the one hand and CPI and WPI components on the other are to be expected, because these indicators measure prices of different baskets of goods and services, and are calculated using different formulae. However, the differences observed in table 2 are often so large as to make one wonder if substantial measurement errors are involved. This point is further underscored by Rosner (2000), who compares a relatively comprehensive set of export price estimates with the WPI export components, which have more limited commodity coverage.

The distribution of consumption expenditures appears to have become somewhat more equal in 1996–99 (figure 1). The 40% of households with the lowest expenditures increased their share of total expenditures from 20% to 22%, while the share of the middle 40% rose from 35% to 38%, and that of the top 20% fell to 45% from 41%. However, the share of poorer households would probably rise much less if one were to calculate the shares in constant prices, and to account for the fact that food occupies a much larger share of expenditures in poor households, because food prices rose more rapidly than prices of other consumer goods (table 2).8

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There were conspicuous increases in fixed investment and exports in the first half of 2000 (table 1). Consequently, shares of these items in real GDP rose to from 19% to 22% and from 24% to 28%, respectively, compared to the first half of 1999. The share of fixed investment was still far below pre-crisis levels (e.g. 31% in 1996), but the long awaited turnaround in fixed investment finally appears to have begun in the first half of 2000.9 Likewise, the share of imports remained steady after falling dramatically in 1999, although it too is still far below pre-crisis levels. If the turnaround in fixed investment is sustained, the share of imports is likely to rise in the medium term, because capital goods account for a large proportion of imports. On the other hand, the share of private consumption fell in the first half of 2000 after rising steadily in 1997–99. Of particular significance is the levelling off and apparent decline in the share of food expenditures in the first quarter of 2000.10 To the extent that the estimate is reliable, the large negative share of inventory investment indicates that existing inventories were rapidly drawn down in the first half of 2000.11 There are some markedly different patterns observed if shares are calculated in current prices, reflecting the fact that price movements have varied greatly across GDP components (tables 1 and 2). For example, the rise in the share of private consumption from 1997 to the second half of 1999, and its subsequent fall, are much larger when shares are calculated in current prices. This reflects the fact that the consumption deflator rose more rapidly than the GDP deflator through 1999, a pattern reversed in the first half of 2000. Food shares increased particularly sharply in current prices, the rise in this deflator being even greater than that in the consumption deflator. In 1999 and the first half of 2000, the fixed investment deflator also rose quite rapidly, resulting in smaller declines or larger increases in GDP shares when measured in current prices. However, by far the largest differences between nominal and real shares were in trade shares of GDP, which were also much larger in current prices, because export and import prices rose much faster than the GDP deflator through 1999. Monetary Developments One of the more important consequences of the crisis, discussed at length by Fane (2000b), was the rapid rise in prices from early 1998 through early 1999. For example, the annualised rate at which the CPI increased (compared to the same month a year earlier) accelerated from under 10% in the last half of 1997 to 40% or more in April 1998 to March 1999, before falling back below 10% from August 1999 (figure 2). Earlier changes in base money and the exchange rate appear to be highly correlated with


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FIGURE 2 Exchange Rate Movements, Inflation and Base Money Growtha (% p.a.) CPI, Base money

Rp/$, period average

120%

480%

100%

400%

80%

320%

60%

240%

40%

160%

20%

80%

0%

0%

-20% Jul-97

-80% Jan-98

Jul-98

Rp/$, average

Jan-99

Jul-99 CPI

Jan-00

Jul-00

Base money

a

All growth rates are annualised rates comparing the month in question with the same month one year earlier. Monthly money supply figures are measured at the end of the month; exchange rates are monthly average rates; various components of the CPI are collected at different intervals throughout the month. Sources: BI, IFS (various issues); World Bank (2000a).

changes in the CPI in this period. More recently, CPI inflation declined to very low levels between September 1999 and June 2000 (of –1% to 2%), before increasing to 5% in July 2000, 6% in August 2000, and 7% in September 2000. Growth rates of base money have been more volatile, but were generally below 20% from May 1999 to May 2000; they then climbed to 22% in June and July and 20% in August, before falling back to 16% in September. As a result, by the end of August base money was 5.7% higher than the performance criteria, and by the end of September it was 5.2% higher than the indicative target identified in the Letter of

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Intent submitted to the IMF in July (Bank Indonesia [BI], Indonesian Financial Statistics [IFS], various issues; tables downloaded from ). Some observers have worried that failure to control the money supply would lead to increased inflation in the second half of 2000 (Feridhanusetyawan 2000: 2–3; McLeod 2000: 16–20). Moreover, the government began reducing its subsidy of oil products on 1 October, raising fuel prices an average of 12%, a move that is generally thought to add to inflationary pressures. Nonetheless, Bank Indonesia still expects that annual CPI inflation will be only about 1% higher than the 5–7% predicted earlier (Dow Jones Newswires, 11/10/00), and the data in figure 2 suggest that this is a reasonable estimate. One reason that Bank Indonesia is hesitant to slow the growth of money is that this would require it to issue certificates of deposit (Sertifikat Bank Indonesia, SBI). The government has issued a large amount of floating rate bonds in conjunction with the bank recapitalisation program, which pay the same rate as the three-month SBIs. Tighter monetary policy and higher interest rates would therefore increase the domestic interest burden in the budget. Three-month SBI rates have already moved markedly higher in recent months, from 11.1% in June to 13.0% in July, and 13.3% in August (BI, IFS, various issues). Table 3 shows that 28-day SBI rates were not much higher than interest rates on simple time deposits, underscoring the weak incentive to hold these securities. Deposit interest rates have been much lower in foreign and joint banks in recent months, suggesting that the public may have more confidence in these banks than before. It is also interesting that private national banks now pay lower interest than state banks, reversing the large differential that existed in 1996–97, when their liabilities were not explicitly guaranteed. Indonesia’s bank recapitalisation program is nearing completion, as illustrated by the turnaround in the level of equity from negative to positive by June 2000 in the private banks and by August in the state banks (table 3). The recapitalisation has been accomplished only because the government has taken control of a large portion of banking assets and assumed commensurate responsibility for associated debts. The scale of this bailout of bank depositors and creditors can be seen from the sharp decline in loans extended by commercial banks, from Rp 487 trillion at the end of 1998 to only Rp 251 trillion in the first half of 1999. Bank lending may finally be recovering, as total loans at the end of June 2000 were Rp 15 trillion, or 7%, higher than the corresponding figure at the end of 1999, with most of the increased lending going to manufacturing, other industries, and trade. However, there was very little increase in lending between June and August 2000.


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TABLE 3 Selected Interest Rates and Indicators for Commercial Banks, 1997–2000 (end of period except as noted)

Item

Dec-97

Dec-98

One-month time deposit and SBI rates (%) State banks 19.7 41.2 Private national banks 27.7 41.9 Foreign & joint banks 17.7 33.1 SBI interest rate (%) 20.0 38.4

Jun-99

Dec-99

Jun-00

24.1 23.9 19.2 22.1

12.5 12.1 9.5 12.5

10.7 10.2 8.6 11.7

Equity (including reserves and retained earnings) of commercial banks (Rp trillion) Total 47 –99 –216 –22 8 State banks 14 –25 –211 –18 –15 Private national banks 26 –48 –11 –10 15 Commercial banks’ outstanding loans (rupiah & foreign exchange) (Rp trillion) Total 378 487 251 225 240 Agriculture 26 39 23 24 23 Mining 5 6 4 4 6 Manufacturing 112 172 91 84 90 Trade 82 96 54 43 47 Services 114 139 53 43 44 Other 39 35 27 27 31

Aug-00

11.5 11.3 9.1 13.5

34 10 16

242 23 5 90 47 43 34

Source: BI, IFS (various issues).

These figures reflect both the successes and the problems that IBRA has had in restructuring Indonesia’s banking sector. Progress has been somewhat slower when dealing with state-owned than with private banks, as political infighting complicates the process. To finance the recapitalisation, IBRA had issued bonds worth Rp 412 trillion by July 2000, including Rp 270 trillion for four state banks (Bank Mandiri, Bank BNI, Bank BRI and Bank BTN) and Rp 109 trillion for four private banks taken over in 1998 (Bank Tiara Asia, Bank Central Asia, Bank PDFCI and Bank Danamon). In addition, in 1998 and 1999 the government issued repayment bonds to Bank Indonesia totalling Rp 228 trillion, including

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Eric D. Ramstetter

Rp 165 trillion to refund liquidity support and Rp 54 trillion to refund outlays related to bank guarantees. Combined, these bonds comprise IBRA’s liabilities of Rp 640 trillion in government bonds, Rp 151 trillion of which are fixed rate bonds, Rp 271 trillion variable rate bonds, and Rp 218 trillion inflation indexed bonds (Feridhanusetyawan 2000: 11). In the process of bank restructuring, IBRA had acquired assets with an estimated book value of Rp 470 trillion at the end of July 2000. However, their market value has recently been estimated at 35–40% of the book value (Feridhanusetyawan 2000: 12). This process has left IBRA and the government with three large problems. First, in the short run, the government has to find a way to pay the interest on the recapitalisation bonds. This will represent a serious fiscal burden over the next few years, as can be seen in the budget presented below. Second, the government will soon have to start paying down the principal on these bonds, some of which begin to mature in 2003, creating a further fiscal burden. Third, IBRA has to dispose of the assets it has acquired. The estimated recovery rate of 35–40% implies that IBRA should be able to raise only about Rp 175 trillion to help alleviate these fiscal burdens. The process of disposing of the IBRA assets is riddled with political difficulties. First, there are fears that previous owners will just buy back their old assets, which IBRA seized at a considerable discount to book value, with the taxpayer left bear the burden of the losses incurred by these bankers. This could create a strong political reaction against IBRA and the government, even if could be justified on the grounds that previous owners made the best offers for the assets. Second, IBRA and the government are hesitant to sell to foreign buyers, partly because they risk being seen as offering Indonesian assets to foreigners at ‘fire-sale’ prices. This nationalist sentiment is so strong that IBRA cannot ignore it, even if nationalism is costly to the economy. As a result, IBRA has been relatively slow to dispose of the assets it holds. Experience from other countries suggests, however, that the longer IBRA holds them, the lower the recovery rate is likely to be. Another important aspect of IBRA’s operations concerns the restructuring of corporate debts.12 There are several agencies in addition to IBRA that are involved in this process, the major ones being the Indonesian Debt Restructuring Agency (INDRA), the Jakarta Initiative (JI), and the Financial Sector Policy Committee (FSPC). INDRA was established in 1998 to help smooth out payments of dollar-denominated debts over time, but there was very little participation, and the government has decided to close INDRA as a result. The JI is a private agency which works to facilitate resolution of debts among creditors and


19

debtors outside the court system. It has been more successful in eliciting participation, but the amount of debt worked out through the JI has been limited. In response to slow progress in resolving corporate debt, the FSPC began operation in February 2000. This is an interministerial committee now headed by Coordinating Economics Minister Rizal Ramli; it is charged with developing guidelines for both bank and corporate restructuring, and with overseeing the operations of IBRA and the JI. However, in a statement on 25 September after concluding a consultation with Indonesia, the IMF expressed concern over the slow progress not only of IBRA, but also of the JI and the FSPC (JP, 27/9/00: 5). Fiscal Developments and Public Sector Debt The budget will be extremely tight for the next several years because of the cost of servicing the large public debt incurred in the process of bank restructuring. Table 4 shows that the domestic interest burden will rise from an actual expenditure of only 0.02% of GDP in fiscal 1998/99 and 1999/2000 (April–March) to a projected 4.2% of GDP in fiscal 2000 (March–December), this increase being almost equal to the total increase in budgeted expenditure in this period. The newly announced budget projects that this burden will be similar in 2001 (January–December).13 The burden the domestic debt places on the budget will increase further in 2003, when the government has to start retiring some of the bonds issued. Two important sources of revenue for the government to make up the shortfalls caused by debt servicing are the sale of banking assets held in IBRA and the sale of state-owned corporations, including banks and other firms such as PT Telkom. However, progress on privatisation has been slow, with realised receipts being far below those projected for 1998/99, and probably below the target for 1999/2000 as well. As with problems in the state-owned banks, an important obstacle to the privatisation process is the lack of a political consensus on how, or whether, to proceed. While public sector debt will place a large burden on government finances in the next few years, it should be emphasised that Indonesian fiscal policy has historically been conservative and deficits have been small. The debt burden is thus likely be a temporary problem, though it will take some years to bring it down to more moderate levels. Deficits are projected to increase in the next few years, but the situation is very different from that in numerous other countries that have experienced fiscal difficulties in the past (e.g. the Philippines in the 1980s and early 1990s), where large public sector debt was the result of running substantial deficits over a long period. Indeed, in view of the significant decline in economic activity in 1998 and the very slow growth in 1999, one could

20

Eric D. Ramstetter TABLE 4 Government Revenue and Expenditure Items (% of GDP) 1998/1999a

Itemc

1999/2000a

Budget Actual Budget Actual

Total revenues 12.61 Domestic revenues 12.61 Income tax 2.43 VAT 2.72 Other domestic taxes 1.10 Import duties 0.52 Export tax 0.09 Non-tax, oil & gas 4.67 Non-tax, other 1.09 Total expenditures 21.66 Current expenditures 12.95 Personnel 2.33 Materials 1.07 Transfers to regions 1.25 Domestic interest 0.18 Foreign interest 2.91 Other current expenditures 5.21 Of which: petroleum subsidy 2.59 Of which: other subsidies 2.37 Development expenditures, net lending 8.70 Rupiah 4.90 Ministries, agencies 1.27 Regional development 1.01 Other 2.62 Of which: bank restructuring 1.41 Project aid 3.81 Equalisation fund (= balanced fund) na Financing (= – surplus/deficit) 9.04 Domestic 1.41 Privatisation 1.41 Asset recovery na Foreign 10.76 Program aid 6.95 Project aid 3.81 Amortisation of foreign debt –3.12 Other financing 0.00

Budgetsb 2000a

2001a

14.05 14.05 4.67 2.67 1.09 0.21 0.43 3.87 1.11 17.29 10.91 2.30 1.04 1.33 0.02 2.26 3.96 2.55 1.22

11.47 11.47 3.61 3.07 1.24 0.26 0.23 1.86 1.20 17.28 10.05 2.98 0.98 1.73 0.03 1.82 2.51 0.89 1.27

na na 4.88 2.93 1.30 0.33 0.07 5.00 na na na 2.98 0.96 1.70 0.02 na na na na

16.80 16.80 6.00 3.00 1.50 0.50 0.10 3.60 2.10 21.60 15.10 3.40 1.00 na 4.20 1.80 4.70 2.50 0.90

17.30 17.30 6.60 3.30 1.70 0.70 0.00 3.50 1.50 21.00 13.30 2.80 0.90 na 4.00 1.50 4.10 2.60 0.80

6.37 3.94 1.17 0.92 1.85 0.94 2.43 na 3.24 0.30 0.30 na 5.85 3.42 2.43 –2.96 0.04

7.23 4.57 1.13 1.20 2.23 1.51 2.66 na 5.90 1.15 1.15 na 6.87 4.21 2.66 –2.12 –0.22

na na 1.08 1.14 na na 1.62 na na na na na 3.87 2.25 1.62 na na

2.90 1.10 na na na na 1.80 3.70 4.80 2.70 0.70 2.00 3.00 1.20 1.80 –0.90 na

2.40 0.80 na na na na 1.60 5.30 3.70 2.30 0.40 1.90 2.50 0.90 1.60 –1.10 na

a

1998/1999 and 1999/2000 refer to fiscal years from April to March; 2000 refers to March– December; from 2001 fiscal and calendar years will coincide. b The 2000 budget is the revised budget as of April 2000; the 2001 budget is the preliminary budget as of 2 October 2000. c The items used here correspond to those in Ministry of Finance (2000). Sources: BPS (2000a, 2000c); BI, IFS (various issues); Ministry of Finance (2000); World Bank (2000a).


21

easily argue that the government has been far too conservative, and that the tendency to underspend the budget in 1998/99, for example, was very costly to the economy. The costs include growth lost through failure to stimulate aggregate demand and to maintain aggressive development spending (in a country that still lacks basic physical and educational infrastructure). Of course, the argument that Indonesia should have run larger deficits is based on the assumption that adequate financing could have been found, and that the funds could have been efficiently allocated to the necessary projects—which may have been politically impossible during this period, especially given the problems on the monetary side. There will also be important long-term changes in the budget in coming years. The first will result from implementation of a decentralisation plan under which the central government intends to return about one-quarter of its domestic revenues to local governments, a process due to begin in January 2001 (McLeod 2000: 30–8). It is unclear how this will proceed, though the 2001 budget does explicitly account for the change with the newly established equalisation fund, which is projected to grow to 5.3% of GDP in 2001. (For a comment on the impact of efforts by local governments to increase their revenues in the context of fiscal decentralisation, see box 3). A second change stems from the decision to roll back some of the subsidies that the government provides. Political difficulties with implementation caused the first increase in fuel prices to be delayed from 1 April 2000 to 1 October. However, this rise has apparently been carried out with relatively little public outcry, and another increase of 20% is scheduled to take place in April 2001. The removal of subsidies is desirable both to lessen the burden on the budget and, more importantly, to promote efficient use of resources. The Balance of Payments and External Debt In contrast to the increased domestic debt burden, the foreign debt burden is declining, although it remains substantial. Government spending on foreign interest was over 2.3% of GDP in 1998/99, but is projected to decline to 1.8% in 1999/2000 and in the 9-month budget for 2000 (table 4). Financing in the form of debt amortisation is also projected to fall from –3.0% of GDP to –2.1% and –0.9% respectively. Public sector debt in dollars, including that of the government and Bank Indonesia, continued to rise in 1998 and 1999, however, reaching a peak of $76 billion at the end of 1999 (table 5). On the other hand, the external debt of private companies and total debt both began to fall in 1999. More importantly, the relative size of total debt has fallen markedly, from 151% of GDP in 1998 to 89% in the first quarter of 2000, largely owing to the rebound of the rupiah.

22

Eric D. Ramstetter

Box 3 DECENTRALISATION AND THE RETURN OF THE ‘HIGH COST ECONOMY’ There is increasing evidence to suggest that decentralisation, on its present course, will generate new interregional trade barriers that work to undermine the integrity of the Indonesian economy and nation. This is unfortunate, as to enjoy the efficiency benefits of decentralisation Indonesia must continue to promote and maintain free and open domestic markets. Perhaps the most significant barrier to internal trade that may arise out of, or be exacerbated by, the decentralisation process is the imposition of taxes, fees, levies, licences and other charges on the movement of agricultural produce. Many of these distortions were eliminated by Law 18/1997—much to the relief of farmers and other small-scale rural producers. Unfortunately this law is now under threat of revision, with amendments currently being considered by the DPR that will give greater flexibility to local governments to generate more revenues from domestic trade and business activities. Some local governments, such as the Lampung provincial government and some district level administrations in North Sumatra, are not waiting for any such amendments and have taken the autonomy initiative by issuing new regulations placing taxes on all commodities transported across provincial and/or district boundaries. Other regional governments are using more creative ways to tax internal trade, such as imposing a requirement upon producers and traders to make a ‘voluntary contribution’ (sumbangan pihak ketiga, third party contribution) based on the amount of the commodity produced or traded. Moreover, as more and more authority to regulate business is devolved to the regions there are signs that many local governments intend to use their business licensing powers to increase local taxation revenue. With no clause in the constitution banning duties on internal trade and with continuing confusion as to whether domestic trade policy will remain a matter of ‘national concern’, there are growing fears that decentralisation will bring with it a new and more dangerous form of the ‘high cost economy’ that had been a feature of Soeharto’s Indonesia: an economy characterised by multiple and discriminatory taxation regimes in the regions and a plethora of new informal taxes and charges imposed upon traders and producers. David Ray Domestic Trade Advisor, PEG–USAID Ministry of Industry and Trade, Jakarta


23

TABLE 5 The Balance of Payments, Exchange Rates, International Reserves, and External Debt Indicators, 1996–2000 ($ billion, unless noted) 1996

1997

1998

Balance of payments, IMF presentationb Current account –7.7 –4.9 4.1 Ratio to GDP (%) –3.37 –2.27 4.09 Exports, non-oil & gas, f.o.b. 38.0 44.6 43.0 Exports, oil, LNG, LPG, f.o.b. 12.2 11.7 7.4 Imports, non-oil & gas, f.o.b. –39.9 –41.4 –29.1 Import, oil & LNG, f.o.b. –4.4 –4.8 –2.9 Services credit 6.6 6.9 4.5 Services debit –15.1 –16.6 –12.0 Income credit 1.2 1.9 1.9 Income debit –7.2 –8.2 –10.1 Net current transfers 0.9 1.0 1.3 Financial account 10.8 –0.6 –9.6 Outward direct investment –0.6 –0.2 0.0 Inward direct investment 6.2 4.7 –0.4 Inward portfolio investment 5.0 –2.6 –1.9 Inward other investment, gov’t –0.7 –0.3 4.2 Inward other investment, banks –0.8 –0.3 –2.3 Inward other investment, other 1.7 –1.9 –9.3 Errors and omissions, net 1.3 –2.6 1.8 Change in reserves –4.5 5.1 –2.1 Use of IMF credit & loans na 3.0 5.8 Addendum: Official inflows, Bank Indonesia presentationc Official inflows, CGI 5.1 4.5 2.8 Official inflows, other 0.6 3.1 10.9 Official debt repayments –6.2 –4.7 –3.8 International reserves 18.3 16.6 22.7 External debt, World Bank estimates 128.9 136.1 150.9 Ratio to GDP (%) 57 63 151 Government & Bank Indonesia na 54.1 67.3 State banks na 7.3 4.8 State enterprises (Pertamina, Garuda) na 6.4 5.6 Private banks na 9.4 6.0 Private companies na 58.9 67.1 a

1999

1999 Q1a

2000 Q1a

5.8 4.10 41.0 10.3 –26.6 –4.0 4.6 –11.6 1.9 –11.7 1.9 –5.9 –0.1 –2.7 –1.8 4.0 0.1 –5.4 2.1 –3.3 1.4

1.5 4.73 8.9 1.9 –6.1 –0.7 1.2 –2.1 0.4 –2.6 0.5 0.1 0.0 –0.2 –2.0 3.0 0.1 –0.7 0.1 –2.2 0.5

1.9 4.68 11.3 3.8 –7.6 –1.3 1.1 –3.5 0.6 –3.0 0.4 –1.0 0.0 –1.5 0.0 0.9 –0.1 –0.3 1.6 –2.8 0.3

2.4 7.0 –4.1 26.4 148.1 105 75.9 4.7 5.8 6.1 55.6

0.6 4.0 –1.1 25.2 149.9 117 68.4 4.9 5.2 6.9 64.5

0.7 1.7 –1.1 28.5 144.3 89 75.3 4.7 5.8 5.7 52.8

Q1 = first quarter.

b

In the balance of payments, positives indicate net receipts or inward capital flows, and negatives indicate net payments or outward capital flows. c

The Bank Indonesia presentation differs from the IMF presentation in the way that services, income and financial flows are recorded; most of the official inflows reported by Bank Indonesia would be part of ‘inward other investment (government)’, but this item also includes IMF credit from 1998 and some items probably recorded as current transfer payments in the IMF presentation. Sources: BI, IFS (various issues); IMF (2000); World Bank (1999, 2000a).

24

Eric D. Ramstetter

The turnaround in the external debt position was facilitated in part by the emergence of a large current account surplus, equal to 4.1% of GDP in 1998 and 5.8% in 1999. The most conspicuous element was the collapse in imports from a peak of $46 billion in 1997 to $31–32 billion in 1998–99. Data for the first quarter of 2000 indicate some recovery in imports to $9 billion, compared to $7 billion in the same period in 1999, but the current account surplus was unchanged at 4.7% of GDP, primarily because exports also grew rapidly, from $11 to $15 billion. Thus, the large depreciation of the rupiah (figure 2) and the recession following the crisis have had the predictable effect of turning around the current account. This is despite very large debits on the services and income accounts, both of which remain strongly negative on net. The substantial increase in investment income debits in 1996–99 reflects increased foreign interest payments. As would generally be expected, the financial account mirrored trends in the current account, moving from a net inflow of over $11 billion in 1996 to a net outflow of $10 billion in 1998 and $6 billion in 1999 (table 5). Outward foreign direct investment (FDI) is negligible, but inward FDI went from a peak of over $6 billion in 1996 to –$3 billion in 1999, as foreign multinational corporations withdrew or reduced investments in Indonesia. In the first quarter of 2000 the negative flow of FDI accelerated, rising to –$1.5 billion, compared to –$0.2 billion a year earlier. Inward portfolio investment followed a similar trend but the decline was more rapid, from $5 billion in 1996 to –$3 billion in 1997 and –$2 billion per year in 1998–99. It recovered slightly to $0.2 billion in the last half of 1999, and was about zero for the first half of 2000, indicating that a few foreign portfolio investors have returned to the Indonesian market. By far the largest element of this account is ‘other investment’ (mainly loans of some sort), and the decline in non-governmental (banks and ‘other’ combined) ‘other’ investment was most pronounced, from $1 billion in 1996 to –$2 billion in 1997, –$12 billion in 1998, and –$5 billion in 1999. In the first quarter of 2000 this flow was still negative, but slightly smaller than in the first quarter of 1999 (–$0.4 billion vs –$0.6 billion). Other investment flows to the government displayed the opposite trend, rising from negative values in 1996–97 to $4 billion per year in 1998–99, though the first quarter flow was much smaller in 2000 than in 1999. Use of IMF credit and loans also rose from virtually zero to $3 billion in 1997 and $6 billion in 1998, but tapered off in 1999. Thus Indonesia relied heavily on official foreign capital in 1997 and 1998, but less so in 1999 and the first quarter of 2000.


25

THE INDUSTRIAL STRUCTURE OF PRODUCTION, TRADE AND EMPLOYMENT It is now three years since the crisis broke and, as the above review of macroeconomic trends suggests, the economy has had to make large adjustments. With the passage of time and the increasing availability of data, it is now possible to examine more closely which industries have benefited from these adjustments, and which have been most adversely affected. Production Shares of some industries in real GDP have changed markedly in the last year and more generally through the crisis (table 6). The hardest hit major industries were construction, whose share fell from 8.0% in 1996 to 5.8% in 1999, and finance, ownership and business services (whose share declined from 8.8% to 6.9%). Construction’s share rebounded somewhat in the first half of 2000, but that of finance, ownership and business services remained stagnant. In the latter sector, the fall in banking accounts for most of the decline, which is of similar magnitude whether measured in current or constant prices. In construction, the decline is much smaller in current than in constant prices, reflecting relatively rapid price rises in this sector (table 2). In trade, hotels and restaurants, where the bulk of business is wholesale and retail trade, the share of constant price GDP fell in 1996–99, while the share of current price GDP remained unchanged. In the first half of 2000, this pattern was reversed. In contrast, shares of real GDP rose in 1996–99 in agriculture (15.4% to 17.3%), manufacturing (24.7% to 25.9%), and community, social and personal services (8.8% to 9.8%) (table 6). Shares of real GDP remained at the 1999 level in the first half of 2000 for manufacturing and community, social and personal services, but fell somewhat in agriculture (to 17.0%).14 In agriculture these changes are even larger when measured in current prices, reflecting the large rise and subsequent decline of prices in that sector (table 2). On the other hand, sectoral deflators were relatively stable in manufacturing and community, social and personal services (compared to the GDP deflator) and shares changed less when measured in current prices. Within agriculture, the increase in the share of real GDP in 1996–99 was largest in crops and fisheries, but the decline in the first half of 2000 was largest in livestock and fisheries. A closely related industry—food, beverages and tobacco—is the largest component of manufacturing, and

26

Eric D. Ramstetter TABLE 6 Industrial Structure of GDP, 1996–2000 (% of GDP)

Current Prices

Industry

1996

Agriculture, livestock, forestry, fisheries 16.7 Crops (food, non-food) 11.7 Livestock, forestry 3.3 Fisheries 1.7 Mining & quarrying 8.7 Crude petroleum & natural gas 5.3 Manufacturing 25.6 Food, beverages, tobacco 10.7 Textiles, apparel, leather, footwear 2.2 Wood, furniture, paper, printing 2.4 Chemicals, rubber, plastics 2.9 Oil & gas 2.7 Non-metallic mineral products 0.8 Basic metals 0.9 Metal products, machinery 3.0 Other manufacturing 0.1 Electricity, gas, water 1.3 Construction 7.9 Trade, hotels, restaurants 16.4 Wholesale & retail trade 13.0 Transport, storage, communications 6.6 Transport 5.5 Finance, ownership, business services 8.3 Banks 3.3 Other finance 0.8 Building rental, business services 4.2 Community, social, personal services 8.7 General government 5.6 Personal & household 2.3

a

S1 = first half.

Sources: BPS (2000d); World Bank (2000a).

Constant (1993) Prices

1999

2000 S1a

1996

1999

2000 S1a

19.5 13.9 3.3 2.3 10.1 6.3 25.4 13.9 1.6 1.7 2.5 3.0 0.5 0.6 1.6 0.1 1.2 6.6 16.4 12.6 5.9 4.6

17.8 12.4 3.2 2.2 11.7 8.1 25.3 12.4 1.6 1.7 2.8 3.4 0.6 0.6 2.2 0.1 1.2 7.3 16.0 12.2 5.8 4.3

15.4 10.6 3.3 1.5 9.1 5.8 24.7 10.5 2.1 2.3 2.8 2.6 0.8 0.8 2.7 0.1 1.2 8.0 16.8 13.4 7.2 5.9

17.3 12.0 3.4 1.9 9.7 5.9 25.9 13.5 1.9 2.0 2.9 3.1 0.6 0.6 1.2 0.1 1.6 5.8 15.9 12.6 7.1 5.2

17.0 12.1 3.1 1.8 9.5 5.6 25.8 12.8 2.0 2.1 3.0 3.0 0.7 0.6 1.7 0.1 1.6 6.2 15.9 12.5 7.4 5.4

6.3 2.2 0.6 3.6

6.2 2.1 0.6 3.5

8.8 3.7 0.8 4.2

6.9 2.2 0.8 3.8

6.9 2.3 0.8 3.8

8.6 5.1 2.8

8.8 5.6 2.5

8.8 5.6 2.4

9.8 5.9 3.1

9.8 5.8 3.1


27

its share of real GDP rose sharply in 1996–99 (10.5% to 13.5%), but then fell significantly in the first half of 2000 (to 12.8%). Another manufacturing industry that experienced relatively large changes was metal products and machinery, whose share of real GDP fell from 2.7% in 1996 to 1.2% in 1999, but then rebounded sharply to 1.7% in the first half of 2000. However, the export and industrial survey data presented below indicate that the composition of this industry has changed markedly. Moreover, the rebound in its share of GDP in the first half of 2000, and the increasing real GDP shares of some of Indonesia’s traditional export industries (e.g. crops, food, beverages and tobacco, and oil and gas manufacturing) in 1996–99, appear to be related to the growth of export industries after the large depreciation in 1997–98. Merchandise Trade The dollar value of merchandise exports as estimated in the trade data was $29 billion in the first half of 2000, 35% higher than in the same period in 1999 (table 7). There is some indication that this rapid pace of growth may be slowing, with exports only 24% higher in July–August 2000 than in the same months in 1999 (BI, IFS, various issues). Perhaps more impressive than the growth of export values has been the dramatic shift in export structure. Food, beverages and tobacco is a traditional Indonesian export industry, and its share of exports in dollars remained constant at about 11–12% in the second half of 1996 and the second half of 1999 (table 8).15 However, it fell to 9% in the first half of 2000, probably reflecting in part changes in international prices for these commodities. Price movements were probably responsible for much of the large fall in the share of raw materials as well. Despite the rise in the price of oil and the value of oil exports in the first half of 2000, the share of mineral fuels declined slightly (25 to 24%) between the first half of 1996 and the first half of 2000. From 1996 to the second half of 1999, shares of oil and gas moved in the same direction, reflecting the generally close link between prices of these two commodities. The large category of ‘other manufactures’ contains some of Indonesia’s major export items, which boomed in the decade preceding the crisis; its share was roughly constant from the second half of 1996 to the second half of 1999 (at around 40%), but then fell slightly to 38% in the first half of 2000. Within this category, shares of textile yarn, apparel, furniture, and paper increased in this period, while shares of footwear and wood products declined. In contrast to the general downward trends in food, minerals, fuels, and ‘other manufactures’, shares of chemicals rose markedly between the first half of 1996 and the first half of 2000. Exports of chemicals remained rather small (5% in the first half of 2000),

28

Eric D. Ramstetter TABLE 7 Various Estimates of Exports and Imports, 1996–2000 ($ billion)

Trade Flow, Data Type & Source Exports Goods & services, national accounts Services Goods Goods, balance of payments data Goods, merchandise trade data Imports Goods & services, national accounts Services Goods Goods, balance of payments data +10%b Goods, merchandise trade data Reported by commodity Imports into EPZc

1996

1997

1998

1999 S1a

1999 S2a

2000 S1a

58.69 9.37 49.32 50.19 49.81

59.83 7.93 51.90 56.30 53.44

50.26 4.16 46.10 50.37 48.85

22.70 2.15 20.54 23.21 21.69

27.04 2.26 24.78 28.03 26.98

28.95 na na na 29.27

60.10 11.22 48.88

61.36 13.71 47.65

41.33 9.29 32.03

18.44 4.54 13.89

20.00 5.14 14.86

20.96 na na

44.24 49.53 42.93 6.61

46.22 49.16 41.68 7.49

31.94 34.28 27.34 6.95

16.19 16.15 11.53 4.62

17.47 16.74 12.47 4.27

na 19.73 13.68 6.05

a

See table 2, note a.

b

In the balance of payments, imports are measured on an f.o.b. basis, whereas they are measured on a c.i.f. basis in the trade data. The c.i.f./f.o.b. ratio is estimated at 1.1. c This portion of imports is not available by commodity: e.g. data by SITC (Standard Industrial Trade Classification) section in table 8 exclude these imports. Sources: BPS (2000a, 2000c, 2000e); BPS, Buletin Ringkas (various issues); IMF (2000); World Bank (2000a).

but the share of machinery rose to high levels, from 9% in the first half of 1996 and 11% in the second half of 1996 and 1999, to 17% in the first half of 2000. Within the machinery category, exports are concentrated in office equipment, visual, audio and telecommunications equipment, and various electronic parts, and shares of all of these items grew rapidly. The machinery story is interesting because exports in this industry are generally dominated by foreign MNCs, not only in Indonesia but also in other Southeast Asian economies such as Singapore and Thailand.16


29

TABLE 8 Shares of Exports and Imports by SITC Section, 1996–2000a (%) Trade Flow, SITC Section Shares of exports 0+1+4 Food, beverages, tobacco 2 Inedible raw materials 3 Fuels, lubricants, etc. 33 Oil 34 Gas 5 Chemical manufactures 7 Machinery manufactures 71–74 Non-electrical machinery 75 Office equipment 76 Visual, audio, telecoms 77 Electronic parts, etc. 6 + 8 Other manufactures 65 Textile yarn 84 Apparel 85 Footwear 63 Cork, wood 82 Furniture 64 Paper 67–69 Metals & products 9 Other items 92 PEBT

1996 S1 1996 S2

1999S1

1999 S2 2000 S1

10.90 11.62 25.31 14.34 8.77 3.24 9.19 1.04 1.33 3.45 1.94 39.58 5.74 6.98 4.48 9.58 2.04 1.76 2.96 0.17 0.00

11.45 8.94 26.27 14.72 9.24 3.67 10.79 0.91 1.85 4.78 2.35 38.70 5.64 7.41 4.34 9.84 1.80 2.01 2.80 0.19 0.00

11.95 7.36 20.61 10.44 7.23 4.78 11.18 1.61 2.66 2.78 2.73 38.45 6.18 7.43 3.40 7.19 2.37 3.75 3.17 5.67 5.00

11.52 6.67 24.92 12.10 10.35 4.98 10.63 1.37 2.29 3.21 2.84 40.45 6.22 8.32 3.21 6.59 2.69 4.17 3.72 0.82 0.06

8.74 6.31 24.39 12.61 9.65 5.30 17.06 1.88 4.49 5.71 4.01 37.56 5.89 7.14 3.08 5.79 2.70 3.98 3.43 0.63 0.01

Shares of imports 0+1+4 Food, beverages, tobacco 12.09 04 Cereals & preparations 6.19 2 Inedible raw materials 8.49 25 Pulp & waste paper 1.73 26 Textile fibres & waste 3.11 3 Fuels, lubricants, etc. 8.35 33 Oil 8.27 5 Chemical manufactures 14.27 7 Machinery manufactures 38.47 71–74 Non-electrical machinery 23.78 75–77 Office & electrical machinery 7.85 78–79 Transportation machinery 6.84 6+8 Other manufactures 18.32 65 Textile yarn 2.94 67–69 Metals & metal products 9.48

7.77 3.13 7.72 1.55 2.87 8.75 8.69 13.83 43.00 24.35 10.56 8.09 18.93 2.95 9.49

13.78 6.81 10.88 2.82 3.85 11.77 11.71 19.53 24.66 16.73 4.26 3.67 19.38 3.99 8.70

14.71 8.93 9.98 2.58 3.14 18.99 18.90 18.01 22.98 12.63 4.40 5.95 15.32 3.25 6.80

9.43 3.65 10.22 2.90 2.78 19.46 19.40 17.33 26.41 12.85 4.76 8.81 17.15 3.34 8.25

a

See table 2, note a.

Sources: BPS (2000e); BPS, Buletin Ringkas (various issues); World Bank (2000a).

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Eric D. Ramstetter

Moreover, as James and Ramstetter (1997) and Pangestu (1997) highlight, before the crisis Indonesia’s electrical and electronic machinery industry had yet to become very large, though there were signs that foreign, particularly Japanese, MNCs were beginning to expand their facilities in the country. The export figures in table 7 suggest very strongly that Indonesia is now being integrated into the regional network on a much larger scale than before. This impression is further underlined by the fact that the major three-digit SITC items involved appear to come from labour-intensive assembly operations, including a large number of parts that are likely to be used elsewhere in the region.17 As indicated in box 4, it is difficult to interpret changes in the structure of imports, primarily because it is impossible to know the structure of the increasingly large share of imports through export processing zones (EPZs). Nonetheless, along with the collapse of imports in 1998 and 1999 (valued in dollars), the decline in the share of the largest import category, machinery, is conspicuous. Machinery shares of imports reported by commodity fell from over 40% in the second half of 1996 and the first half of 1997 to as low as 23% in the second half of 1999, the largest component of this category being non-electrical machinery (table 8). To the extent that the rise in EPZ imports is comprised of machinery, the decline is overstated by these data, but it is nevertheless clear that firms greatly reduced their imports of machinery after the crisis. In contrast, the share of machinery began to increase again in the first half of 2000 compared to 1999, reflecting the recovery in fixed investment described above. Shares of chemicals and other manufactures were more stable during this period, while the share of mineral fuels rose markedly in 1999 and the first half of 2000, largely reflecting higher oil prices. The share of raw materials also increased somewhat between 1996 and 1999– 2000 S1, while the share of food fluctuated. Employment Before the crisis, Indonesia’s robust economic growth resulted in the addition of an average of 1.7 million jobs every year between 1986 and 1996 (World Bank 2000a). When the crisis hit in 1997, employment declined somewhat, but recovered quickly in 1998, and continued to increase in 1999 (table 9), albeit at a slower pace than in 1986–96. The open unemployment rate actually declined in 1997 from 4.9% to 4.7%, but it rose thereafter to 6.4% in 1999. Thus, although Indonesia has a rather flexible labour market that was able to generate a substantial number of jobs as wages fell through the crisis, job generation has not kept up with increases in the size of the labour force.


31

Box 4 PROBLEMS IN THE TRADE DATA There are four important problems with Indonesia’s estimates of external trade. First, there appears to be an increasingly large discrepancy between measures of exports in the merchandise trade statistics and corresponding measures in the national accounts or balance of payments (table 7). For example, when trade data are compared with national accounts data, this discrepancy was only 1% for both exports and imports in 1996, but grew to 9% for exports and 13% for imports in the second half of 1999 (merchandise trade data yielding the larger estimate in all cases). Estimates from the balance of payments differ from both of these estimates, varying from 1% (1996) to 7% (first half of 1999) lower than trade data estimates for exports and from 12% higher (1996) to 4% lower (second half of 1999) for imports, even after a rough measure of the c.i.f./f.o.b. differential is included in the latter calculation. Second, an increasingly large portion of imports (13% in 1996 and 31% in the first half of 2000) through export processing zones and bonded factories cannot be disaggregated by commodity. Hence it is difficult to identify the composition of imports into Indonesia. Third, from April 1997 to March 1999, the category of exports that did not have to be reported by commodity (see note 15) was expanded, and its share of exports went from 0% in the first half of 1997 to 25% in the second half, and 15% in calendar 1998 (BPS 2000e; BPS, Buletin Ringkas, various issues; World Bank 2000a). Fourth, recent trade data are only published in dollars and aggregate weight volumes, but as Rosner (2000) highlights, there can be very large differences between the trends and composition of trade values and those of more carefully measured trade volumes.

Employment structure has changed less than the structures of production and trade, if 1996 is compared with 1999 (tables 6, 9). For example, manufacturing’s share of GDP increased by 1.2 percentage points or 5% over this period, while the corresponding change in share of employment was 0.4 percentage points or 3%. The construction share of GDP changed by –2.2 percentage points or –28%, while the

32

Eric D. Ramstetter TABLE 9 Employment and Unemployment Indicators and Shares of Employment by Industry, 1996–99

1996

1997

1998

1999

Employment and open unemployment Total employment (‘000) 85,702 Open unemployment (‘000) 4,408 Open unemployment rate (%) 4.89

85,406 4,197 4.68

87,672 5,062 5.46

88,817 6,030 6.36

40.7 1.0 12.9 0.3 4.9 19.9 4.8 0.8 14.7

45.0 0.8 11.3 0.2 4.0 19.2 4.7 0.7 14.1

43.2 0.8 13.0 0.2 3.8 19.7 4.7 0.7 13.8

Shares of total employment by main industry (%) Agriculture, livestock, forestry, fisheries 44.0 Mining & quarrying 0.9 Manufacturing 12.6 Electricity, gas, water 0.2 Construction 4.4 Trade, hotels, restaurants 18.8 Transport, storage, communications 4.6 Finance, ownership, business services 0.8 Community, social, personal services 13.7

Mean weekly real wages of production workers (manufacturing in 1996 = 100)a Mining 331 224 231 291 Manufacturing 100 106 73 88 Food, beverages, tobacco 81 83 59 65 Textiles, apparel, leather, footwear 94 101 67 92 Wood, furniture 106 119 81 96 Paper, printing 138 129 90 108 Chemicals 111 110 75 100 Non-metallic mineral products 96 105 67 72 Basic metals 178 161 122 137 Metal products & machinery 116 130 102 105 Other manufacturing 77 80 54 57 Hotels 113 110 81 88 a

Data refer to mean weekly wages of production workers below the supervisor level in December of the year listed, deflated by the consumer price index. Sources: BPS (2000d); World Bank (2000a).


33

corresponding employment figures were only –0.6 percentage points and –14%. In finance, ownership and business services, the change in terms of GDP was –1.9 percentage points or –22%, and in terms of employment –0.1 percentage points or –13%. The same pattern was observed in community, social and personal services, where the GDP share changed by 1.0 percentage point or 11% but the employment share changed by only 0.1 percentage points or 1%. Nonetheless there were important changes in the structure of employment (and production) between 1996 and 1999 (table 9). As emphasised by Manning (2000), this is particularly the case in agriculture, where the share of total employment first fell from 44% in 1996 to 41% in 1997, then rebounded to 45% in 1998, and fell back to 43% in 1999. Another important change was the fall in manufacturing’s share of employment to 11% in 1998 from 13% in 1996–97, and its subsequent rebound to 13% in 1999. There was also a relatively large fall in construction, from 5% in 1997 to 4% in 1998–99. Changes in real mean weekly wages were negative between 1996 and 1998 in all industries for which data are available (table 9). In 1996–98, the largest declines were concentrated in manufacturing, specifically in paper and printing (34%), chemicals (33%), and basic metals and other manufacturing (31% each). The smallest declines were in metal products and machinery (12%) and wood products and furniture (24%). In 1998– 99, the strongest rebound was in the textiles category (37%), chemicals (34%), and mining (26%), while increases were smallest (10% or less) in metal products and machinery, followed by other manufacturing, hotels, and food, beverages and tobacco. Even though the increases in 1998–99 were sometimes larger than the declines in 1996–98, as of December 1999 the recovery had yet to pull wages back to their pre-crisis levels in any industry listed.

THE INVESTMENT ENVIRONMENT AND THE REACTION OF FOREIGN INVESTORS Critical to sustaining Indonesia’s fragile economic recovery is the ability to maintain increases in investment. This section analyses how foreign investors are reacting to the crisis and its aftermath.

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Eric D. Ramstetter

Is the Recovery of Fixed Investment Sustainable? The increase in the share of fixed investment in real GDP, from 19% in the first half of 1999 to 22% in the first half of 2000 (table 1), reflects the first rise in real fixed investment since the third quarter of 1997 (figure 3). In the second, third and fourth quarters of 1998, fixed investment declined by 37–42% in each quarter, compared with the same quarter of 1997. In the first quarter of 1998 and the first three quarters of 1999, these growth rates were –21% to –29%. The large negative growth began to abate in the fourth quarter of 1999, and in the first two quarters of 2000 fixed investment expanded rapidly, by 17% and 25%, respectively, compared to the same quarters of 1999. While the level of fixed investment is still far below that reached in the mid 1990s in real terms or as a percentage of GDP, the downturn does appear to have been arrested, with a robust recovery in the first half of 2000. There is still a general perception, however, that investors are not keen to invest in Indonesia just yet, and that the recovery of 2000 may not last long. Trends in share prices reflect this pessimism: after rising for four consecutive quarters, their rate of increase turned negative in the second and third quarters of 2000, declining by 22% and 26%, respectively, compared to the same quarters of 1999. Although the continued low level of foreign portfolio investment has an important influence on share prices, and FDI by foreign MNCs often attracts the attention of the government and the press, most fixed investment is undertaken by domestic firms. Even at their peak in 1996, inward FDI flows amounted to only 9% of total fixed investment flows in Indonesia (IMF 2000; World Bank 2000a). More importantly, if cumulated from 1983, FDI amounted to only 4% of fixed investment through 1999, and only 5% through 1996, 1997 or 1998, when this ratio reached its peak. Foreign portfolio investment was even smaller than FDI. Moreover, these ratios overstate the importance of FDI and foreign portfolio investment as a source of finance for fixed investment in Indonesia, because only a portion of the flows is used to finance fixed investment, the rest being used to offset other asset or liability changes on corporate balance sheets. In any case, the low level of this ratio shows that domestic investors are the key to the recovery of fixed investment. Another indicator of domestic investor confidence is the amount of domestic investment realised under the supervision of the Board of Investment and State-Owned Enterprise Development (Badan Penanaman Modal dan Pembinaan BUMN, previously the Investment Coordinating Board). Only a small proportion of domestic investment is supervised by the Board, because most domestic investors have little to gain by applying for Board of Investment incentives. Thus, figures on


35

FIGURE 3 Growth Rates of Real Fixed Investment and Share Pricesa (%) 100 75 50 25 0 -25 -50 1995 Q1

1996 Q3 Fixed investment

1998 Q1

1999 Q3

2000 Q3

Share prices

a

Growth rates refer to growth over the corresponding quarter of the previous year.

Sources: BI, IFS (various issues); BPS (2000a, 2000c); World Bank (2000a).

realised domestic investment, like the figures on share prices, are only indicative of investor sentiment, and not a comprehensive measure of domestic investment.18 Moreover, when using Board of Investment data one must be careful to distinguish between approved and realised investment, because the bulk of approved investment is never realised. Data on realised investment are only published on a stock basis (cumulative investment from 1968 forward) and figures are compiled on a gross (not net) basis at historical prices (i.e. book values or prices at the time the investment was realised). Despite these data limitations, it is interesting that trends in realised domestic investment tell very much the same story as do trends in share prices. For example, before the crisis the stock of realised domestic investment increased markedly from Rp 133 trillion in June 1996 to Rp 201 trillion in June 1997 (Investment Coordinating Board, Monthly Investment Report, various issues; Board of Investment and State-Owned Enterprise Development 2000). During the

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Eric D. Ramstetter

crisis, however, investment stagnated from December 1997 through June 1999, when the stock was Rp 210–215 trillion. It increased rapidly in the latter half of 1999, to Rp 306 trillion in December, with most of the Rp 90 trillion in new investment being in fisheries (Rp 48 trillion) and chemicals (Rp 18 trillion). The stock then stagnated again in the first half of 2000, increasing by only Rp 1 trillion to Rp 307 trillion in June. Trends in approved domestic investment were very different from those in realised domestic investment, as illustrated by large fluctuations in the ratio of realised-to-approved domestic investment.19 There is thus conflicting evidence about the sentiment of domestic investors, whose increased willingness to invest is crucial to sustaining the recovery in fixed investment observed in the first half of 2000. Nonetheless, if, as many observers expect, the economy continues to grow at 4–5% for the rest of 2000 and 2001, it is difficult to see how domestic firms will be able to continue to hold back on investment plans as capacity limits become increasingly binding and inventories are drawn down. Foreign Direct Investment Although FDI accounts for a relatively small proportion of fixed investment, MNCs do play an important role in some industries such as oil and gas, finance, and a number of manufacturing industries. In this context, the fact that inward FDI has continued to register large net outflows through the first quarter of 2000 (indicating that foreign MNCs have been repatriating more equity and intercompany debt than they have been bringing in) is an important reflection of negative sentiment among the firms that undertake this investment.20 With one exception, the second quarter of 1998, net FDI flows have been negative since the fourth quarter of 1997, suggesting that the immediate reaction of foreign MNCs was to divest from Indonesia on net, and that this reaction has yet to be reversed. This is in marked contrast to what happened in Korea and Thailand, for example, where foreign MNCs poured in record levels of FDI during and immediately after the crisis in 1997–99 (Ramstetter 2000: table 1). Board of Investment data on gross realised FDI show different trends, however. These data are similar to those on realised domestic investment in that they refer to the gross stock (cumulative value since 1967) of realised FDI through the Board of Investment, excluding investments in finance and the oil and gas industries. In a trend similar to that of realised domestic investment, realised FDI stocks increased from $41 billion in June 1996 (Investment Coordinating Board, Monthly Investment Report, various issues) to $56 billion in December 1997, but then stagnated through June 1999, when the stock was $59 billion (table 10). They then


37

TABLE 10 Stock of Realised Foreign Direct Investment Registered with the Board of Investment, by Industry and Major Source, 1997–2000a ($ billion)

1997 S1b

1997 S2b

1998 S1b

1999 S1b

1999 S2b

2000 S1b

By industry All industries 51.73 (ratio to approved, %) 28 Primary 4.11 Agriculture, forestry 1.35 Fishery 0.17 Mining 2.59 Manufacturing 35.73 Food 1.82 Textiles 2.85 Paper 7.09 Chemicals 12.58 Non-metallic mineral products 1.99 Basic metals 3.64 Metals products & machinery 5.08 Tertiary 11.88 Electricity, gas, & water 2.61 Trade, hotels, restaurants 4.57 Office buildings, real estate 2.49

56.22 28 5.39 1.44 0.17 3.77 37.30 1.91 2.92 7.11 13.16 2.19 3.70 5.59 13.53 2.66 4.64 2.96

58.25 27 5.48 1.48 0.21 3.78 39.13 2.01 2.94 7.13 14.35 2.31 3.78 5.90 13.64 2.66 4.68 2.96

59.43 27 5.59 1.53 0.28 3.78 40.18 2.03 2.99 7.13 14.76 2.36 4.10 6.03 13.65 2.66 4.68 2.96

66.75 29 8.71 2.53 1.66 4.52 43.44 2.07 3.01 7.77 15.93 2.70 4.37 6.63 14.60 2.69 4.91 3.05

70.48 31 10.64 3.03 3.03 4.59 45.22 2.07 3.01 7.77 15.98 2.70 4.37 8.35 14.61 2.69 4.91 3.05

By major source economy Japan Hong Kong United Kingdom Taiwan Korea Singapore United States Malaysia Other & joint countries

9.69 6.56 5.20 3.41 3.14 3.59 3.42 0.37 20.84

10.25 6.59 5.93 3.42 3.18 3.63 3.53 0.38 21.34

10.92 6.60 6.09 3.44 3.21 3.71 3.57 0.40 21.50

12.12 6.66 6.13 4.77 3.88 4.52 3.70 2.71 22.25

12.37 7.16 6.43 4.97 4.75 4.52 3.83 2.73 23.72

8.98 6.53 4.82 3.40 3.03 3.00 2.54 0.34 19.09

a

Data refer to the sum of equity and loans, excluding investments in oil and finance from 1967 forward. b

S1 = end of first half (15 June), S2 = end of second half (15 December).

Sources: Board of Investment and State Owned Enterprise Development (2000); Investment Coordinating Board, Monthly Investment Report (various issues).

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Eric D. Ramstetter

rose to $67 billion by December 1999 and to $70 billion in June 2000. In 1999 and the first half of 2000, increases in approved FDI tended to be smaller than those in realised FDI, and the ratio of the realised total to the approved total rose from 27% in June 1999 to 31% in June 2000. In this period, the largest increases were in fisheries ($2.8 billion), metal products and machinery ($2.3 billion), agriculture and forestry ($1.5 billion) and chemicals ($1.2 billion). In June 2000, the largest industries for FDI were chemicals ($16 billion), metal products and machinery and paper ($8 billion each), and mining and trade, hotels and restaurants ($5 billion each). The large investments observed in fisheries and in agriculture and forestry in the year ending June 2000 are somewhat atypical for MNCs. On the other hand, chemicals and machinery are typically industries where MNCs account for a substantial share of economic activity in Indonesia and elsewhere (Lipsey, Blomström and Ramstetter 1998). By country, the largest increases in the year ending June 2000 came from Malaysia ($2.3 billion), and then Korea, Taiwan and Japan ($1.5 billion each). There was also a significant rise in the category ‘other and joint countries’ ($2.2 billion). The latter was the largest category in stock terms in June 2000 ($24 billion), partly because FDI is recorded by country of origin, not by country of owner, and investments by foreign MNCs often come not only from the parent company in the home country (e.g. the Japanese parent), but also from affiliates in other countries (e.g. an affiliate of the Japanese parent in Singapore).21 Of the individual countries listed, Japan is the largest ($12 billion), followed by Hong Kong ($7 billion), the United Kingdom ($6 billion), and then Taiwan, Korea and Singapore ($5 billion each). Investments from Hong Kong and Singapore would be much smaller if FDI were classified by country of owner (Low, Ramstetter and Yeung 1998). In short, the data on realised FDI indicate a substantial increase in gross FDI in the last year and, if these data are accurate, it would be reasonable to expect that rises in net FDI recorded in the balance of payments may not be far behind. During the economic boom of the late 1980s and early to mid 1990s in Indonesia and other Asian economies, increases in FDI often followed or coincided with rises in local fixed investment. Thus, if recent trends in fixed investment can be maintained, it is also likely that there will be increases in FDI flows.


39

Foreign MNCs in Manufacturing through 1998 Trends in FDI can tell us something about sentiment among foreign investors—namely, whether they believe investments of equity and loan capital will become profitable in the future—but are often poorly correlated with trends in indicators of real economic activity (e.g. employment, production and trade) in the MNCs themselves (Ramstetter 2000: tables 16–17). BPS has recently published its industrial statistics for 1998, and using this data set it is now possible to get a much more precise idea of how foreign MNCs in manufacturing reacted in this crisis year. In a recent paper, Takii and Ramstetter (2000) examined in detail trends in the shares of MNCs, their relative size, and relative productivity. They found that, contrary to the impression given by negative net inward FDI in the balance of payments (table 5) or by stagnant realised FDI through the Board of Investment (table 10), foreign MNCs were not reducing their presence in Indonesian manufacturing; indeed, those with large foreign ownership shares in particular were greatly increasing it. This can be seen from the data in table 11, which show the shares of manufacturing employment in medium or large plants (20 or more workers) for three foreign ownership groups: minority-foreign plants (those with 10–50% foreign ownership), majority-foreign plants (51–89%), and heavily foreign plants (90% or more). The combined total for these three groups in all manufacturing increased from 18.5% in 1996 to 19.4% in 1997 and 19.1% in 1998 (see also Takii and Ramstetter, 2000: tables 1a, 1b, 1c). If these shares are measured in terms of value added there was a more pronounced increase, from 29.2% in 1996 to 33.9% in 1997, and 35.0% in 1998 (Takii and Ramstetter, 2000: tables 2a, 2b, 2c).22 Thus, the shares of foreign MNCs in manufacturing remained roughly constant through 1998 in the aggregate. Moreover, there were only three individual industries in which the combined foreign MNC share of employment in 1996–98 declined by 10% or more relative to 1996 levels (beverages, printing and publishing, and glass), but there were 10 industries in which this share increased by 10% or more in the same period (leather, industrial chemicals, plastics, cement, clay, other non-metallic mineral products, iron and steel, non-electrical machinery, electrical machinery, and transport machinery). Thus, the large negative flows of FDI noted above were apparently not accompanied by a reduction in foreign MNC presence in manufacturing.

40

Eric D. Ramstetter TABLE 11 Shares of Employment for Manufacturing Establishments, Backcast Estimates, 1996–98a (% of total in each industry) Minorityforeign

Industry

Majorityforeign

Heavily foreign

Total

1996

1998

1996

1998

1996

1998

1996

1998

All manufacturing 5.56 Food 5.48 Beverages 5.82 Tobacco 0.00 Textiles 3.07 Apparel 6.84 Leather 2.15 Footwear 10.33 Wood 4.34 Furniture 1.40 Paper 14.43 Printing, publishing 1.73 Industrial chemicals 6.21 Other chemicals 7.46 Oil refineries & gas 0.00 Other oil & coal 3.61 Rubber 3.90 Plastics 3.50 Porcelain 9.91 Glass 22.63 Cement 8.84 Clay 2.02 Other non-metallic mineral products 0.00 Iron, steel 4.03 Non-ferrous metals 5.17 Metal products 7.83 Non-electrical machinery 6.53 Electrical machinery 7.95 Transport machinery 9.60 Precision machinery 2.37 Miscellaneous 7.64

4.56 3.90 3.93 0.00 2.03 5.83 4.72 8.79 2.51 2.24 15.01 1.37 5.69 5.03 0.00 0.96 6.72 2.56 8.78 8.08 7.05 4.82

7.06 2.90 1.78 0.30 7.15 4.32 6.53 22.84 3.12 1.57 2.77 2.86 10.65 10.62 0.00 0.79 5.94 3.53 7.12 1.50 2.43 0.51

6.03 3.68 2.93 0.31 4.93 3.76 15.35 17.05 4.51 0.83 6.03 0.00 9.47 9.49 0.00 15.11 4.63 2.69 8.95 7.55 2.80 3.25

5.87 1.78 7.95 0.98 3.67 11.81 5.65 13.16 1.58 3.00 4.65 0.00 3.95 3.35 0.00 20.79 5.61 3.00 0.00 0.29 0.06 0.00

8.54 2.37 7.14 1.03 5.98 12.82 16.25 18.55 2.16 3.13 2.01 0.32 7.99 7.94 50.86 8.78 4.22 6.12 0.88 0.00 2.71 0.00

18.49 10.15 15.56 1.28 13.88 22.97 14.33 46.33 9.04 5.97 21.86 4.59 20.82 21.43 0.00 25.20 15.44 10.03 17.03 24.41 11.33 2.53

19.12 9.96 14.01 1.34 12.93 22.41 36.32 44.39 9.18 6.20 23.05 1.70 23.16 22.47 50.86 24.85 15.57 11.37 18.61 15.63 12.56 8.06

0.56 7.35 1.48 3.70 7.68 6.45 10.88 3.08 4.46

2.56 8.83 23.85 11.88 10.52 16.61 12.07 19.92 12.26

3.23 6.05 28.52 9.41 12.27 13.96 7.70 9.31 10.67

1.00 2.18 8.93 4.22 5.65 30.64 3.68 22.32 19.97

0.97 3.33 11.29 9.77 16.15 44.63 10.06 32.39 27.04

3.56 15.04 37.95 23.94 22.70 55.21 25.36 44.61 39.88

4.76 16.73 41.29 22.88 36.11 65.04 28.63 44.78 42.17

a

Estimates from the backcast data set are used because it includes estimates for nonreporting plants, and corrections not included in the original raw data sets from which published data are drawn. See the source for details on the differences between these data sets. Minority-foreign plants are plants with foreign ownership shares of 10–50%, majority-foreign plants have shares of 51–89%, and heavily foreign plants have shares of 90% or more. Source: Takii and Ramstetter (2000: tables 2a, 2b, 2c).


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Table 11 also shows that shares of minority-foreign and majorityforeign plants tended to decline in all manufacturing industries, from 5.6% to 4.6% and 7.1% to 6.0%, respectively, from 1996 to 1998. On the other hand, the share of heavily foreign plants grew rapidly, from 5.9% to 8.5%, during this period. In other words, there is a strong indication that foreign MNCs increased their ownership shares in a number of joint ventures, and that there were some takeovers of local plants or joint ventures by heavily foreign plants. This pattern would be expected, given the continual relaxation of limits on foreign ownership, and a high degree of financial stress in local joint venture partners. There is a great deal of variation in foreign shares across industries. By 1998, heavily foreign shares were particularly large (15% or more) in a wide variety of industries—leather, footwear, oil refineries and gas, non-electrical machinery, electrical machinery, precision machinery, and miscellaneous manufacturing. For majority-foreign plants and minorityforeign plants, this list was somewhat shorter, consisting of non-ferrous metals, footwear, leather, and other oil and coal for majority-foreign plants, and paper for minority-foreign plants. These data thus indicate that, even in the depths of the crisis in 1998, foreign MNCs, particularly those with large foreign ownership shares, were not reducing their presence in manufacturing, even though those same MNCs may have been taking FDI equity and loans out of the country on net. Moreover, given the large share of foreign MNCs in machinery industries, it is highly likely that these plants played an important role in the boost in machinery exports that Indonesia experienced in the first half of 2000. NOTES 1

These include Luhut Binsar Pandjaitan (Trade and Industry); Achmad Sujudi (Health and Welfare); Agum Gumelar (Transportation and Telecommunications); and Al Hilal Hamdi (Manpower and Transmigration).

2

Priyadi’s nomination was rejected when he failed the ‘fit and proper’ test of the central bank in January. However, there is some doubt as to the thoroughness of the central bank’s investigation in this case (see The Business Times Singapore, 18/9/00: 1, for more on the case).

3

See Capital, 2–8 October 2000: 6–9, for more details on the Cohen statement and reactions to it. The fact that Indonesia was promised $4.8 billion in loans and $534 million in grants at the October CGI meeting in Tokyo reflects the high priority foreign governments place on supporting Indonesia’s democratic experiment (Sadli 2000).

4

In a recent interview, Mahfud said, ‘The East Timor people want to come back to Indonesia, but foreign countries that were behind the independence

42

Eric D. Ramstetter movement are creating violent situations to stop that from happening’ (New York Times, 24/9/00).

5

Tempo (25/9/00: 18) lists six terrorist events from 13 March 2000 to the 13 September bombing that occurred around times of significant events in the attempt to try former President Soeharto.

6

It may also be possible to bring civil charges even if Soeharto is deemed incompetent.

7

According to BPS (Badan Pusat Statistik [Statistics Indonesia]) as cited in World Bank (2000a), growth rates in the second semester were less than 0.3 percentage points higher than in the first in 1990 and 1991, and 1.2 percentage points or more higher in 1992, 1993 and 1995. See table 1 for 1996 forward.

8

It is impossible to determine how the distribution of income changed, however, and this is usually more unequal than the distribution of consumption expenditures, because richer households tend to save more than poorer ones.

9

Note that revised estimates of fixed investment growth (see figure 3 and related discussion below) are much higher than the original estimates of –3.3% compared to the first quarter of 1999 (BPS 2000c) that were discussed by McLeod (2000: 15–16).

10 The food share for the first quarter of 2000 is based on preliminary GDP estimates and may not turn out to be so large after revision. Note, however, that the share of total private consumption was not very different in the old series (70.6%) and in the revised series (70.4%). See BPS (2000a, 2000c) for details. 11 Estimates of inventory investment can be highly unreliable because it is often estimated as a residual. 12 This paragraph draws heavily on Bird (2000a, 2000b). See also Evans (1998: 11–13) and Cameron (1999: 24–5). 13 As pointed out by Fane (2000a: 26–7), the budget would look very different if it recorded as an expenditure item the bonds issued to finance the bank bailout in 1998/99 and 1999/2000. 14 This is true even if the first half of 2000 is compared with the first half of 1999—agriculture’s share of constant GDP falling from 18.8% to 17.0%, while the corresponding share of current GDP fell from 21.9% to 17.8% (BPS 2000a, 2000c, 2000d; World Bank 2000a). 15 Analysis of export shares focuses on 1996 and 2000, because for 1997 through the first half of 1999 a large portion of exports did not have to be reported by commodity. These exports are classified as SITC category 92 (PEBT, Pemberitahuan Ekspor Barang Tertentu). See James (1998) and Rosner (2000: 93–5) for details. 16 For example, foreign MNCs accounted for 83% of Indonesia’s electrical machinery exports in 1994 and 76% in 1992 (Ramstetter 1999: table 2). Dobson (1997) Chia (1997), Sieh (1997) and Ramstetter (1997) also describe a complex network of electrical and electronic machinery MNCs in Singapore, Malaysia, and Thailand.


43

17 In the first half of 2000, the largest three-digit items were: 752, data processing machines (2.97%); 759, parts of office machines (1.47%); 763, sound recorders (1.37%); 764, telecommunications equipment and parts (2.89%); 776, thermionic, cold cathode and photo cathode valves and tubes (1.26%); 778, miscellaneous electrical machinery and apparatus (1.11%). 18 For example the amount of realised domestic investment 1968–99 was Rp 306 trillion, but this figure was only 0.02% of the total fixed investment in Indonesia in 1983–99 alone. 19 This ratio was 30% in June 1996; 37% in June 1997; 32% in June 1999; 43% in December 1999; and 38% in June 2000. 20 In principle, inward FDI consists of equity and loans remitted from foreign MNCs to their Indonesian affiliates, as well as reinvested earnings by affiliates in Indonesia. However, in Indonesia, data on reinvested earnings are neither collected nor estimated. 21 See Low, Ramstetter and Yeung (1998) for details on investments channelled through Hong Kong and Singapore affiliates to other Asian economies. 22 The fact that foreign shares are generally much larger if measured in terms of value added (and larger still if measured in terms of exports) implies that, on average, foreign plants tend to be characterised by relatively high value added per worker (and relatively high export–sales ratios). See Ramstetter (1999); Blomström and Sjöholm (1999); and Takii and Ramstetter (2000), among other studies, for detailed analysis of these and related points.

REFERENCES BPS (Badan Pusat Statistik, Statistics Indonesia) (2000a), Berita Resmi Statistik, No. 18, Th. III, August, Jakarta. —— (2000b), Expenditure for Consumption of Indonesia 1999, Jakarta. —— (2000c), Produk Domestik Bruto (PDB) Menurut Penggunaan, Triwulan I/1996– I/2000 [Gross Domestic Product (GDP) by Use, Quarters I/1996–I/2000], Jakarta. —— (2000d), Data downloaded from the BPS website in February and September. —— (2000e), Trade data by 2-digit SITC section provided by BPS’s Data Dissemination division, September and October. —— (2000f), Berita Resmi Statistik, No. 19, Th. III, 1 September 2000. —— (2000g), Berita Resmi Statistik, No. 21, Th. III, 2 October 2000. Bird, Kelly (2000a), ‘The Indonesian Economy in 2000: Still Flat on Its Back?’, Paper presented at the Indonesia Update Conference, ANU, Canberra, 6–7 October. —— (2000b), ‘The Waiting Game: Corporate Debt Restructuring in Indonesia’, Paper presented at the Seventh International Convention of the East Asian Economic Association, Singapore, 17–18 November. Blomström, Magnus, and Fredrik Sjöholm (1999), ‘Technology Transfer and Spillovers: Does Local Participation with Multinationals Matter?’ European Economic Review 43 (4–6): 915–23.

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Board of Investment and State Owned Enterprise Development [Badan Penanaman Modal dan Pembinaan BUMN] (2000), Monthly Investment Report [Laporan Bulanan Investasi], June issue. Cameron, Lisa (1999), ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 35 (1): 3–40. Chia, Siow Yue (1997), ‘Singapore: Advanced Production Base and Smart Hub of the Electronics Industry’, in Wendy Dobson and Chia Siow Yue (eds), Multinationals and East Asian Integration, International Development Research Centre, Toronto, and Institute of Southeast Asian Studies, Singapore: 31–61. Dobson, Wendy (1997), ‘Crossing Borders: Multinationals in East Asia’, in Wendy Dobson and Chia Siow Yue (eds), Multinationals and East Asian Integration, International Development Research Centre, Toronto, and Institute of Southeast Asian Studies, Singapore: 223–47. Evans, Kevin (1998), 'Survey of Recent Developments', Bulletin of Indonesian Economic Studies 34 (3): 5–36. Fane, George (2000a), ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 36 (1): 13–44. —— (2000b), ‘Indonesian Monetary Policy during the 1997–98 Crisis: A Monetarist Perspective’, Bulletin of Indonesian Economic Studies 36 (3): 47–62. Feridhanusetyawan, Tubagus (2000), ‘Indonesia: The Agenda of Economic Restructuring’, Paper presented at the First Europe and Southeast Asia Forum: The Stability of Indonesia and the Security of Southeast Asia, Berlin, 4–5 October. ICSEAD (International Centre for the Study of East Asian Development) (2000), ‘Recent Trends and Prospects for Major Asian Economies’, East Asian Economic Perspectives 11, Special issue (February). IMF (International Monetary Fund) (2000), International Financial Statistics, September CD-ROM, Washington DC. Investment Coordinating Board [Badan Koordinasi Penanaman Modal, BKPM], (various years), Monthly Investment Report [Laporan Bulanan Investasi], January, June, December issues, 1996–99. James, William E. (1998), ‘A Problem with Indonesia’s Export Statistics’, Bulletin of Indonesian Economic Studies 34 (3): 115–18. James, William E., and Eric D. Ramstetter (1997), ‘Globalization’s Implications for Indonesia: Trade Policy, Multinationals, and Competition’, in Satya Dev Gupta (ed.), Dynamics of Globalization and Development, Kluwer Academic Publishers, Boston/Dordrecht/London: 153–85. Lipsey, Robert E., Magnus Blomström and Eric D. Ramstetter (1998), ‘Internationalized Production in World Output’, in Robert E. Baldwin, Robert E. Lipsey and J. David Richardson (eds), Geography and Ownership as Bases for Economic Accounting, University of Chicago Press, Chicago: 83–135. Low, Linda, Eric D. Ramstetter and Henry Wai-Chung Yeung (1998), ‘Accounting for Outward Direct Investment from Hong Kong and Singapore: Who Owns What?’, in Robert E. Baldwin, Robert E. Lipsey and J. David Richardson (eds), Geography and Ownership as Bases for Economic Accounting, University of Chicago Press, Chicago: 139–68. MacIntyre, Andrew (2000), ‘Megawati Will Not Be Able to Do Much More’, Indonesian Business, September: 12.


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McLeod, Ross H. (2000), ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 36 (2): 5–40. Manning, Chris (2000), Indonesian Labour Markets: Adjusting to Crisis and a Slow Recovery, Australian National University, Canberra (mimeo). Ministry of Finance (2000), Summary of Fiscal Policy and Budget Proposal for 2001, Press Release, 2 October. Pangestu, Mari (1997), ‘Indonesia: Trade and Foreign Investment Linkages’, in Wendy Dobson and Chia Siow Yue (eds), Multinationals and East Asian Integration, International Development Research Centre, Toronto, and Institute of Southeast Asian Studies, Singapore: 193–220. Ramstetter, Eric D. (1997), ‘International Trade, Multinational Firms, and Regional Integration in Thailand’, in Wendy Dobson and Chia Siow Yue (eds), Multinationals and East Asian Integration, International Development Research Centre, Toronto, and Institute of Southeast Asian Studies, Singapore: 107–30. —— (1999), ‘Trade Propensities and Foreign Ownership Shares in Indonesian Manufacturing in the Early 1990s‘, Bulletin of Indonesian Economic Studies 35 (2): 43–66. —— (2000), ‘Recent Trends in Foreign Direct Investment in Asia: The Aftermath of the Crisis to Late 1999’, Working Paper 2000–02, International Centre for the Study of East Asian Development, Kitakyushu. Rosner, L. Peter (2000), ‘Indonesia’s Non-oil Export Performance during the Economic Crisis: Distinguishing Price Trends from Quantity Trends’, Bulletin of Indonesian Economic Studies 36 (2): 61–95. Sadli, Mohammad (2000), ‘The Economy Propped Up by International Aid but political Uncertainty Still Increasing’, Buletin Kadin, October. Sieh, Mei Ling (1997), ‘Malaysia: Electronics, Autos, and the Trade–Investment Nexus’, in Wendy Dobson and Chia Siow Yue (eds), Multinationals and East Asian Integration, International Development Research Centre, Toronto, and Institute of Southeast Asian Studies, Singapore: 131–52. Takii, Sadayuki, and Eric D. Ramstetter (2000), ‘Foreign Multinationals in Indonesian Manufacturing, 1985–1998: Shares, Relative Size, and Relative Labor Productivity’, Working Paper Series 2000–18, International Centre for the Study of East Asian Development, Kitakyushu (September). World Bank (1999), Global Development Finance, 1999 CD-ROM, Washington DC. —— (2000a), Data from the World Bank’s Indonesia web page, downloaded September 27–28, . —— (2000b), World Development Indicators, 2000 CD-ROM, Washington DC.

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GLOSSARY

TERMS AND ABBREVIATIONS ANU Bank BNI Bank BRI Bank BTN BI BKPM BPS

Buletin Ringkas BUMN c.i.f. CPI EPZ f.o.b. FDI FSPC GDP Gus Dur IBRA ICSEAD IFS IMF INDRA JI

Australian National University Bank Negara Indonesia (State Bank of Indonesia) Bank Rakyat Indonesia (Indonesian People’s Bank, a state-owned commercial bank) Bank Tabungan Negara (State Savings Bank, a stateowned commercial bank) Bank Indonesia (the central bank) Badan Koordinasi Penanaman Modal (Investment Coordinating Board) Badan Pusat Statistik (Statistics Indonesia, the Central Statistics Agency, formerly the Central Bureau of Statistics) Brief Bulletin (monthly BPS publication) Badan Usaha Milik Negara (state-owned enterprise) cost, insurance and freight, or charged in full (to the seller) consumer price index export processing zone free on board foreign direct investment Financial Sector Policy Committee gross domestic product the name by which President Abdurrahman Wahid is popularly known Indonesian Bank Restructuring Agency (also known as BPPN, National Banking Rehabilitation Agency) International Centre for the Study of East Asian Development (Kitakyushu, Japan) Indonesian Financial Statistics (BI publication) International Monetary Fund Indonesian Debt Restructuring Agency Jakarta Initiative (a voluntary framework for debt resolution)

Survey of Recent Developments JP LNG LPG MNC MPR New Order PEBT PEG Pertamina PT Q1, Q2 … S1, S2 SITC Susenas TNI UN USAID VAT WPI

Jakarta Post liquid natural gas liquid petroleum gas multinational corporation Majelis Perwakilan Rakyat (People’s Consultative Assembly) the Soeharto era, 1965–98 Pemberitahuan Ekspor Barang Tertentu (document for reporting exports) Program for Economic Growth Perusahaan Pertambangan Minyak dan Gas Bumi Negara (Indonesia’s state-owned oil company) Perseroan Terbatas (limited liability company) 1st, 2nd … quarter first, second semester/half-year Standard International Trade Classification Survei Sosio-Ekonomi Nasional (National SocioEconomic Survey) Tentara Nasional Indonesia (Indonesian National Armed Forces) United Nations US Agency for International Development value-added tax wholesale price index

CURRENCY $ Rp

US dollar rupiah

47

Ramstetter: Survey of Recent Developments (BIES)

Ramstetter: Survey of Recent Developments (BIES)

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