Indonesia
 |
| Beautiful Mosjid of Indonesia |
Formal Name: Republic of Indonesia (Republik Indonesia; Indonesia coined from Greek indos--India--and nesos--island).
Short Form: Indonesia.
Term for Citizens: Indonesian(s).
Capital: Jakarta (Special Capital City Region of Jakarta).
Date of Independence: Proclaimed August 17, 1945, from the Netherlands. The Hague recognized Indonesian sovereignty on December 27, 1949.
National Holiday: Independence Day, August 17.
GEOGRAPHY
 |
| Indonesia in Map |
Size: Total land area 1,919,317 square kilometers, which includes some 93,000 square kilometers of inland seas. Total area claimed, including an exclusive economic zone, 7.9 million square kilometers.
Topography: Archipelagic nation with 13,667 islands, five main islands (Sumatra, Java, Kalimantan, Sulawesi, and Irian Jaya), two major archipelagos (Nusa Tenggara and Maluku Islands), and sixty smaller archipelagos. Islands mountainous, with some peaks reaching 3,800 meters above sea level in western islands and as high as 5,000 meters in Irian Jaya. Highest point Puncak Jaya (5,039 meters), in Irian Jaya. Region tectonically unstable with some 400 volcanoes, of which 100 are active.
Climate: Tropical, hot, humid; more moderate climate in highlands. Little variation in temperature because of almost uniformly warm waters that are part of the archipelago. In much of western Indonesia dry season June to September, rainy season December to March.
ECONOMY
 |
| Chart of Indonesian economy |
Salient Features: Economy transformed from virtually no industry in 1965 to production of steel, aluminum, and cement by late 1970s. Indonesia exporter of oil; responsible for about 6 percent of total Organization of the Petroleum Exporting Countries production in 1991. Emphasis in early 1990s on less government interference in private business and greater technology inputs. Agriculture predominates and benefits from infusion of modern technology by government. Indonesia major aid recipient. Major trade partners Japan and United States; trade with ASEAN fellow members increasing.
Gross Domestic Product (GDP): Rp166.3 trillion in 1989. GDP annual average growth rate 6 percent in 1985-91.
Agriculture: Declining share (20.6 percent) of GDP but employed majority of workers (55 percent of total labor force) in 1989. Only 10 percent of total land cultivated, another 20 percent potentially cultivable. Farming by smallholders and on large plantations (estates); cropland watered by flooding, and slash-and- burn farming used. Rice dominates production but cassava, corn, sweet potatoes, vegetables, and fruits important; estate crops-- sugar, coffee, peanuts, soybeans, rubber, oil palm, and coconuts-- also important. Green Revolution technological advances and increased irrigation improved production in 1970s and 1980s. Poverty in rural areas of Java, Bali, and Madura partially ameliorated with government-sponsored Transmigration Program that moved people to more plentiful farmland in Outer Islands. Animal husbandry, fishing, and forestry smaller but valuable parts of agricultural sector.
Industry: Increasing share (37 percent in 1989) of GDP, but employed only about 9 percent of the work force in 1989. Basic industries: oil and natural gas processing, cigarette production, forestry products, food processing, metal manufactures, textiles, automotive and transportation manufactures, and various light industries. Nearly 50 percent of production in Java, 32 percent in Sumatra.
 |
| Relation with foreign countries |
Minerals: Crude petroleum and natural gas predominant. About 70 percent (about 500 million barrels valued at US$6 billion in 1989) of petroleum exported. World's largest exporter of liquefied natural gas (20.6 million tons valued at US$3.7 billion in 1990). Also significant reserves of coal, tin, nickel, copper, gold, and bauxite.
Services: Some 29 percent of GDP projected for 1991, employing about 35 percent of work force in 1989. Government service one of fastest growing sources of employment and with most educated personnel. Mix of modern government-operated utilities, stable private services, and numerous self-employed operators in informal, personal services sector. Interisland maritime transportation crucial; supported by large fleet of traditional and modern boats and ships.
Foreign Trade: Principal export trade with Japan, the United States, Republic of Korea (South Korea), and Taiwan. Most important commodities crude petroleum and petroleum products; natural gas (mostly to Japan), natural rubber, clothing, and plywood also important. About 25 percent of GDP exported in 1980s. Major imports (37 percent of total) from Japan and the United States, primarily manufactured products. Growth in trade with other ASEAN members in 1980s and early 1990s.
Balance of Payments: Positive trade balance throughout 1980s despite oil market collapse. 1990 exports US$26.8 billion versus US$20.7 billion imports. Foreign debt increasing quickly (US$1.1 billion in 1989; US$2.4 billion one year later) in late 1980s and early 1990s.
Foreign Aid: Traditionally important part of central government budget. From 1967 to 1991, most coordinated through Inter-Governmental Group on Indonesia founded and chaired by the Netherlands; since 1992 without Netherlands through Consultative Group on Indonesia. Major CGI aid donors (80 percent) Japan, World Bank, and Asian Development Bank.
Exchange Rate: Rupiah (Rp). US$1 = Rp2,060 (January 1993), Rp1,998 (January 1992), Rp1,907 (January 1991).
Fiscal Year: April 1-March 31.
Financial Reform
The president's technocratic advisers on financial policy, who had unsuccessfully resisted growing government regulations during the 1970s, spearheaded the return to market-led development in the 1980s. The financial sector is often the most heavily regulated sector in developing countries; by controlling the activities of relatively few financial institutions, governments can determine the direction and cost of investment in all sectors of the economy. From the 1950s to the early 1980s, the Indonesian government frequently resorted to controls on bank lending and special credit programs at subsidized interest rates to promote favored groups. Toward the end of this period, the large state banks that administered government programs were often criticized as corrupt and inefficient. Sweeping reforms began in 1983 to transform Indonesia's government-controlled financial sector into a competitive source of credit at market-determined interest rates, with a much greater role for private banks and a growing stock exchange. By the early 1990s, critics were more likely to complain that deregulation had gone too far, introducing excessive risk taking among highly competitive private banks. |
| Balance of economy |
Like many developing countries, the Indonesian financial sector historically was dominated by commercial banks rather than by bond and equity markets, which require a mature system of accounting and financial information. Several established Dutch banks were nationalized during the 1950s, including de Javasche Bank, or Bank of Java, which became the central bank, Bank Indonesia, in 1953. Under Sukarno's Guided Economy, the five state banks were merged into a single conglomerate, and private banking virtually ceased. One of the first acts of the New Order was to revive the legal foundation for commercial banking, restoring separate state banks and permitting the reestablishment of private commercial banks and a limited number of foreign banks.
During the 1970s, state banks benefited from supportive government policies, such as the requirement that the growing state enterprise sector bank solely with state banks. State banks were viewed as agents of development rather than profitable enterprises, and most state bank lending was in fulfillment of governmentmandated and subsidized programs designed to promote various economic activities, including state enterprises and small-scale pribumi businesses. State bank lending was subsidized through Bank Indonesia, which extended "liquidity credits" at very low interest rates to finance various programs. By 1983 such liquidity credits represented over 50 percent of total state bank credit. Total state bank lending in turn represented about 75 percent of all commercial bank lending. The nonstate banks--which by 1983 numbered seventy domestic banks and eleven foreign or joint-venture banks--had been curtailed during the 1970s by licensing restrictions, even though they offered competitive interest rates on deposits and service superior to that offered by the large bureaucratic state banks. Bank Indonesia also imposed credit quotas on all banks to reduce inflationary pressures generated by the oil boom.
The first major economic reform of the 1980s permitted a greater degree of competition between state and private banks. In June 1983, credit quotas were lifted and state banks were permitted to offer market-determined interest rates on deposits. Many of the subsidized lending programs were phased out, although certain priority lending continued to receive subsidized refinancing from Bank Indonesia. Also, important restrictions remained, including the requirement that state enterprises bank at state banks and limitations on the number of private banks. By 1988 state banks still accounted for almost 70 percent of total bank credit, and liquidity credit still accounted for about 33 percent of total state bank credit.
In October 1988, further financial deregulation essentially eliminated the remaining restrictions on bank competition. Limitations on licenses for private and foreign joint-venture banks were lifted. By 1990 there were ninety-one private banks--an increase of twenty-eight in a single year--and twelve new foreign joint-venture banks, bringing the total foreign and joint-venture banks to twenty-three. State enterprises were permitted to hold up to 50 percent of their total deposits in private banks. Later, in January 1990, many of the remaining subsidized credit programs were eliminated.
The extensive bank deregulations promoted a rapid growth in rupiah-denominated bank deposits, reaching 35 percent per year when controlled for inflation in the two years following the October 1988 reforms. This rapid growth led to concerns that competition had become excessive; concern was heightened by the near failure of the nation's second largest private bank, Bank Duta. The bank announced in October 1990 that it had lost more than US$400 million, twice the amount of its shareholders' capital, in foreign exchange dealings. The bank was saved by an infusion of capital from its shareholders, which included several charitable foundations chaired by Suharto himself. The spectacular crash of Bank Summa in November 1992 was not protected by Bank Indonesia. Its owner, a highly respected wealthy businessman, was forced to liquidate other assets to cover depositors' losses.
 |
| Currency of Indonesia |
Unrestricted transactions in foreign exchange by Indonesian residents had been a unique feature of the financial sector since the early 1970s. While many developing countries attempt to outlaw such so-called capital flight, the New Order continued to permit Indonesian residents to invest in foreign financial assets and to acquire the foreign exchange necessary for investments through Bank Indonesia without limit. Commercial banks in Indonesia, including state banks, were also permitted since the late 1960s to offer foreign currency--usually United States dollar--deposits, giving rise to the so-called Jakarta dollar market. By 1990 20 percent of total bank deposits were denominated in foreign currency. This freedom to invest in foreign exchange served the financial institutions well. During the 1970s, when banks' domestic credit activities were heavily restricted, most banks found it profitable to hold assets abroad, often well in excess of their foreign exchange deposits. When demand for domestic credit was high, banks resorted to international borrowing to finance expanding domestic loans. To control the domestic supply of credit by plugging the offshore leak, in March 1990, Bank Indonesia issued a new regulation that limited the net foreign position of a bank (the difference between foreign assets and liabilities) to 25 percent of the bank's capital.
Prior to bank reforms in October 1988, some private banks were essentially the financial arm of large business conglomerates and consequently did not make loans to businesses outside those connected with the bank's owners. The 1988 bank reforms limited loans to businesses owned by bank shareholders. When many of the government-subsidized credit programs targeted to small businesses were eliminated in January 1990, the government required banks to lend a 20 percent share of their loan portfolio to small businesses, defined as those businesses with assets, excluding land, worth less than Rp600 million (about US$300,000). This aspect of financial reform ran counter to the overall effort to improve bank efficiency, since the rule applied to all banks regardless of their expertise in small-scale lending. However, the policy reflected the government's persistent concern that the public might perceive the benefits of economic growth as limited to the wealthy few.
One of the most striking outcomes of financial reform was the revival of the Jakarta stock market in the late 1980s. Established in 1977, the stock market had become lifeless during the early 1980s because of extensive regulation of stock issues and price movements. In conjunction with substantial bank reforms, many restrictions on the Jakarta Stock Exchange were lifted in the mid1980s , broadening the range of firms that could issue equity and permitting stock prices to reflect market supply and demand. To tap the growing international interest in Asian investments, foreign ownership was permitted for up to 49 percent of an Indonesian firm's issued capital. The market's response to these reforms was dramatic. The number of firms listed on the exchange rose from 24 in 1988 to 125 in January 1991, and the market capitalization--the total market value of issued stocks--reached more than Rp12 billion. Although this amount of market capitalization was less than 15 percent of the volume of bank credit to private firms, the stock market promised to become an increasingly important source of finance.
FOREIGN AID, TRADE, AND PAYMENTS
Aid and Trade Policies
Indonesia's exports were vital to its economic development, as exports earned the foreign exchange that permitted Indonesia to purchase raw materials and machinery necessary for industrial production and growth. During the 1980s, about 25 percent of domestic production, or GDP, was exported. Although petroleum was the most important export, other exports included agricultural products such as rubber and coffee and a growing share of manufactured exports. In the late 1980s, the government classified about 70 percent of imports as raw materials or auxiliary goods for industry, about 25 percent of imports as capital goods, primarily transportation equipment, and only around 5 percent of imports as consumer goods.Export earnings also contributed to Indonesia's ability to borrow from world financial markets and international development agencies. On average, about US$3 billion per year was borrowed during the 1980s. These borrowings primarily financed governmentsponsored development projects. However, increasing interest payment obligations in the late 1980s helped bring more restraint to government borrowing.
Indonesian exports were traditionally based on the country's rich natural resources and agricultural productivity, making the economy vulnerable to the vicissitudes of changing world prices for these types of products. For example, the Dutch colonial economy suffered when world sugar prices collapsed during the Great Depression, and fifty years later, the New Order endured the dramatic oil market collapse in the mid-1980s. Manufactured exports offered the prospect of more stable export markets during the 1980s, but even these products were threatened by increased trade protection among industrial countries. To avoid heavy reliance on a few trade partners, the government pursued several measures to diversify export markets, especially to other developing nations such as China and Indonesia's fellow members of the Association of Southeast Asian Nations.
 |
| Tourism statistic of Indonesia |
Substantial trade reforms during the 1980s contributed to the surge in manufactured exports from Indonesia. The most important manufactured export was plywood, whose domestic production was facilitated by the ban on log exports in the early 1980s. In 1990 plywood accounted for over 10 percent of total merchandise exports. Although not yet significant individually, a wide range of manufactured products, including electrical machinery, paper products, cement, tires, and chemical products, helped bring overall manufactured exports to 35 percent of merchandise exports, or a total of US$9 billion in 1990, up from less than US$2 billion in 1984.
The growth in non-oil exports helped Indonesia maintain a positive trade balance throughout the 1980s in spite of the oil market collapse. However, increases in imports, service costs such as foreign shipping, and interest payments on outstanding foreign debt all contributed to a worsening current account deficit in the late 1980s. The deficit more than doubled from US$1.1 billion in 1989 to US$2.4 billion in 1990. The 1991 current account deficit was predicted to reach as high as US$6 billion.
The government had successfully avoided a debt crisis in the early 1980s when many developing countries, including the neighboring Philippines, were forced to temporarily halt debt repayments. In a comparative study of Indonesia and other debtor nations, economists Wing Thye Woo and Anwar Nasution argued that Indonesia's success was due to two main factors: heavy reliance on long-term concessional loans and sustained high exports because of a willingness to devalue the exchange rate even when oil export revenues were buoyant. When dollar interest rates soared in the early 1980s, Indonesia's average interest rate on long-term debt was 16 percent compared with over 20 percent paid by Brazil and Mexico.
By 1990 Indonesia's total outstanding foreign debt had reached US$54 billion, more than double the amount in 1983. Over 80 percent of this debt was either lent directly to the government or guaranteed by the government. Measures to reduce foreign borrowing together with the rise in export earnings brought the debt service ratio from 35 percent in 1989 to 30 percent in 1990. Indonesia continued to rely heavily on borrowing from official creditors rather than private sources such as commercial banks or bond issues. In 1990 US$33 billion, or 75 percent, of government debt was from official creditors; of this amount, US$18.5 was at concessional terms. In 1990 US$5 billion in new loan commitments from official creditors were secured at an average interest rate of 5.7 percent, with an average maturity of twenty-three years, whereas US$1 billion in new commitments from private creditors entailed a 7.4 percent interest rate and an average of fifteen years maturity.
The mounting government concern over foreign debt led to the establishment of a Foreign Debt Coordinating Committee in 1991, which included ten cabinet ministers chaired by the coordinating minister for economics, finance, industry, and development supervision. The committee was given broad powers to document and coordinate all foreign borrowing that was related to either the central government budget or the state enterprise sector. Although in theory this debt excluded private-sector foreign borrowing, such borrowing could be included if the investment project received any state financing or supply contracts from state enterprises. The power of this committee was made apparent in its first initiative in 1991, which postponed until 1995 four major energy and petrochemical projects representing a total investment of US$10 billion.
Multilateral aid to Indonesia was long an area of international interest, particularly with the Netherlands, the former colonial manager of Indonesia's economy. Starting in 1967, the bulk of Indonesia's multilateral aid was coordinated by an international group of foreign governments and international financial organizations, the Inter-Governmental Group on Indonesia. The IGGI was established by the government of the Netherlands and continued to meet annually under Dutch leadership, although Dutch aid accounted for less than 2 percent of the US$4.75 billion total lending arranged through the IGGI for FY 1991.
The Netherlands, together with Denmark and Canada, suspended aid to Indonesia following the Indonesian army shootings of at least fifty demonstrators in Dili, Timor Timur Province, in November 1991. The shootings led to international protests against government policy in the former colony of Portuguese Timor, which had been forcefully incorporated into the Indonesian nation in 1976 without international recognition. Indonesian minister of foreign affairs Ali Alatas announced in March 1992 that the Indonesian government would decline all future aid from the Netherlands as part of a blanket refusal to link foreign assistance to human rights issues, and requested that the IGGI be disbanded and replaced by the Consultative Group on Indonesia formed by the World Bank.
Indonesia's major aid donors--Japan, the World Bank, and the Asian Development Bank contributed about 80 percent of IGGI-coordinated assistance, and were willing to continue assistance outside the IGGI framework. Other donors, however, such as the European Community, had charter clauses refusing financial assistance to governments that violated human rights. Although European Community did not sever its aid ties to Indonesia following the 1991 events in East Timor, human rights concerns were expected to affect subsequent negotiations.
No comments:
Post a Comment