Survey of Recent Developments

Bulletin of Indonesian Economic Studies, Vol. 39, No. 2, 2003: 133–56

SURVEY OF RECENT DEVELOPMENTS

Andrew MacIntyre and Budy P. Resosudarmo

The Australian National University

SUMMARY Indonesia continues to move forward, The overall macroeconomic picture albeit slowly. We see this as the defin- continues to improve. Year-on-year ing characteristic of the period under GDP growth of 3.4% recorded in the first review. There is continued macro- quarter of 2003 exceeded many expec- economic improvement, and a more vi- tations. Public debt is still declining as a able system of national government is percentage of GDP, interest rates and emerging. These developments help to inflation have also fallen and the curren- explain why the economy and the gov- cy has appreciated. And an important ernment were able in the first half of 2003 new state finance law lays an encourag- to weather without major disruption two ing foundation for gradual overhaul of potential international shocks (the Iraq the management of public finance. war and the SARS epidemic) and a slow- At the micro level the picture remains ing of the world economy. But serious troubling. Investment trends continue to problems persist and there seem to be be weak, progress in banking recovery systemic limits to the ability of policy is slow, the revised labour law contains makers to create an attractive investment only modest improvements from an in- environment. We see this mixed judg- vestor viewpoint and there are signs of ment—continued progress, but slowly— creeping protectionism. as a probable pointer to what lies ahead In the wider institutional environ- over the next several years. ment for business, even though the le- The electoral cycle is already heating gal system remains a void and much up in preparation for next year’s multi- uncertainty still surrounds the devolu- ple contests. Although not conducive to tion of power to regional governments, sound economic policy making, elector- important progress has been made in al politicking thus far shows little sign straightening out the basic structure and of seriously disturbing the economy. dynamics of government at the nation- Also creating remarkably few ripples is al level. With these changes now large- the growing recognition that Indonesia ly in place, we can begin to think is unlikely to renew its relationship with through the implications of the new the IMF at the end of 2003. Fortunately framework for economic policy and fu- too, thus far at least, Indonesia’s new war ture performance. in Aceh has not had significant econom- We see continued slow progress for ic repercussions. The response to the Bali Indonesia. In the short term this is satis- bombing is a modest boost to national factory. But over the longer term, a confidence. On the other hand, the out- 3–4% growth trajectory has worrying break of SARS in other parts of East Asia implications for unemployment, pover- has harmed inbound tourist travel. ty and social stability.

POLITICS be presented with a choice of three tick- Indonesia’s next electoral cycle is al- ets in the first presidential run-off. ready heating up, even though legisla- The excitement at this early stage cen- tive and presidential elections do not tres on party leaders. Barring some take place until mid next year. Along- extraordinary circumstance, Megawati side continued bargaining over the re- has the leadership of PDI-P (the Indo- maining constitutional and electoral law nesian Democratic Party of Struggle) issues, the main game at this stage is locked up. The focus is thus on Golkar strategic pre-positioning by presidential (the government party under former aspirants. In an odd contrast with the president Soeharto), which, as the sec- attention to these early electoral ma- ond largest party, is the key swing play- noeuvres, the onset of formal military er: will it forge a coalition with PDI-P or action by government troops in Aceh not? This depends in part upon whom has had no major impact on the dynam- it chooses as party leader. In a little no- ics of national politics. On Aceh, politi- ticed irony of Indonesian politics, Golkar cal leaders seem largely to have adopted is emerging as one of the most internal- a nationalist insistence on the need to ly democratic parties. Under a schedule stamp out this challenge to the repub- adopted by the party, voting will take lic’s geographic integrity, even as it place this July in branches at district lev- seems also to be tacitly recognised that el across the country to identify a list of this will be an unhappy and protracted preferred candidates for party leader. business. Also interesting is the wide- This list will be narrowed to five candi- spread (and entirely justified) pride at dates in October with another round of the extraordinary progress the police voting at the provincial level. A nation- have made in pursuing the perpetrators al party convention in February 2004 of the Bali bombings. Although politi- will choose one candidate from the list cal leaders do not appear to have seen of five. electoral advantage in playing this up, Given this long lead-time, and given it is a development that helps to build that the PDI-P leadership is not open for international confidence in the strength contestation, all serious aspirants for the of the Indonesian polity. presidency (other than Megawati) need The electoral process is beginning ear- to be throwing their hats into the ring lier than in the past because of the new now. The names in circulation thus far rules for presidential elections. The re- for the Golkar leadership include incum- ality of a multiparty system, plus the bent party chair Akbar Tandjung, Co- requirement that parties nominate a can- ordinating Minister for People’s Welfare didate for both president and vice pres- Jusuf Kalla, Minister of Transport (and ident, is forcing coalitional deals to be former general) Agum Gumelar, Coor- made up front. Also shaping the game dinating Minister for Political and Se- is the likely new requirement (still to be curity Affairs (and former general) finalised in implementing laws) that Susilo Bambang Yudhoyono, the Sultan only political parties which clear a sig- of Yogyakarta, businessman Abu Rizal nificant threshold in the legislative elec- Bakrie, media tycoon Surya Palo, and re- tions in April (probably 15–20% of the spected Muslim scholar Nurcholis vote) will be entitled to put forward a Madjid. presidential–vice presidential ticket. The Nurcholis declared his interest in the most likely scenario is that voters will presidency in May, and although he did Survey of Recent Developments 135 not specify his preferred party affilia- criticism by virtue of having held tion, most commentators see Golkar as ground the longest and, indeed, for hav- the only plausible option. A political ing strongly defended the price rises just ‘clean-skin’, his candidacy generated a before reversing course. Almost all po- flurry of excitement in the Jakarta me- litical parties have seen their support dia. Whether he can successfully navi- decline in public opinion polls (reflect- gate the real world of party preselection ing general unhappiness with the appar- processes is another matter. Tempered ently self-serving nature of national by discussions with players of various political life). But prominent political sorts, our best guess at this stage is that analyst Rizal Mallarangeng, comparing the person ultimately chosen as Golkar polling data from November 2002 and leader will be either Akbar Tandjung or February 2003, argues that public disil- Jusuf Kalla, with the latter slightly more lusionment is hitting Megawati and probable. The key to the contest between PDI-P most (Mallarangeng 2003). the two is likely to be Akbar’s legal fate In addition to this lengthy prepara- (following his corruption conviction in tory period for the elections in which September 2002 and ongoing appeal). In leading figures seek to position them- this regard, over the coming months selves for party leadership posts, the BIES readers may wish to be on the look- country also faces a long formal elector- out for reports on the decline or growth al season next year. Legislative elec- of a strategic alliance between Akbar tions—for the House of Representatives and PDI-P political czar (and presiden- (DPR), the new House of Regional Rep- tial spouse) Taufiq Kiemas. resentatives (DPD) and the provincial As electoral positioning intensifies and district legislatures (DPR-D)—will through this year, it is to be expected that take place on 5 April. Campaigning will economic policy debates will assume a then continue for the two-stage presi- more populist disposition. The most dential electoral process, with the first prominent manifestation of this during round ballot on 3 July and a second the first quarter of the year has been the round in September if (as is almost cer- emergence of the group known as Indo- tain) the first does not produce a major- nesia Bangkit (Indonesia Arises). This ity winner. The inauguration of the new loose coalition of some 35 economists president is expected to take place and other intellectuals under the lead- around 20 October. Between now and ership of the former economics coordi- then the political climate will be increas- nating minister, Rizal Ramli, has taken ingly inimical to market-friendly legis- a strong position on Indonesia’s relation- lative reform: leading lights in the ship with the IMF (we discuss this business community will be seeking reg- further below). Of more immediate con- ulatory favours in return for contribu- sequence was the dramatic swing in Jan- tions and (in almost poignant irony) all uary by the major political parties away politicians will be wary of charges of from supporting an end to fuel price ‘selling out’ to foreign interests. And, of subsidies (Waslin 2003: 6). Key parties course, blandishments of all sorts will and their leaders had previously en- be on offer from candidates competing dorsed this fiscally responsible move, for voter support—though the extent of but in the face of focused public opposi- pork-barrelling and outright vote buy- tion their stances changed—with Mega- ing is likely to be less than in some oth- wati and PDI-P absorbing most of the er countries in the East Asian region. 136 Andrew MacIntyre and Budy P. Resosudarmo

FIGURE 1 Inflation and the Exchange Rate % p.a. Rp/$ 16 12,000

12 9,000

8 6,000

Inflation Exchange rate 4 3,000

0 0 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03

Source: CEIC Asia Database.

MACROECONOMIC gapore and Canada. This was another DEVELOPMENTS AND TRADE blow to the Balinese economy following Recent Economic Shocks the bombings on 12 October 2002, and As the political climate warmed up in adversely affected tourism nationwide. preparation for next year’s election, the The average hotel occupancy rate in Bali economy early this year experienced had recovered to approximately 47% by two significant external shocks. In early February 2003, after a fall of 80% in tour- March 2003, public and political debate ist arrivals between September and No- quickly became focused on the US deci- vember 2002 (Waslin 2003: 14) and sion to attack Iraq. The growing anti-US plummeting occupancy rates. In March, sentiment did not, however, translate however, Bali’s average occupancy rate into political turmoil, for two reasons. for three-star hotels and better fell again, First, most politicians and religious lead- to about 20%, while that for two-star ers saw a stable relationship with the US hotels and below was down to only 10% as important, and persuaded Indone- (Gatra, 3/5/03). For the whole country, sians that the war in Iraq was a conflict the number of international tourist ar- between the US and Saddam Hussein, rivals declined by approximately 13% in rather than an attack by the US on a the same month (Berita Kantor Menko Muslim society. Second, the war itself Ekuin, 25/04/03). was of short duration. In May there was another shock, As the conflict began, news emerged when the government decided to con- of the outbreak of a deadly viral illness, duct a military operation against the severe acute respiratory syndrome Free Aceh Movement (GAM, Gerakan (SARS), in China, Hong Kong, Sin- Aceh Merdeka). If the war is brief, its Survey of Recent Developments 137

FIGURE 2 Base Money Growth and Interest Rates (% p.a.)

25 3-month SBI (Bank Indonesia Certificate) rate 3-month SBI real rate 20 Base money growth

0 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03

Source: CEIC Asia Database. impact on national politics and the econ- sales by IBRA (the Indonesian Bank Re- omy will be manageable. Even for a structuring Agency) have reduced net short war, it is estimated that the gov- capital outflow and boosted reserves. ernment will have to allocate approxi- GDP growth in the first quarter of 2003 mately (probably at least) Rp 1.3 trillion was almost the same as a year earlier. to this military operation and the sub- The economy certainly appears less vul- sequent recovery program (Gatra, nerable than it was 12 months ago, or 13/5/03). However, if the war does not after the Bali bombings in October 2002. end quickly, as the number of human Detailed observations on recent eco- dead and injured increases and region- nomic indicators follow. alist Acehnese sentiment intensifies, the pressures on the political environment Inflation, the Exchange Rate could escalate and may cause political and Interest Rates turmoil. The annual inflation rate declined from Hitherto, the impact on the national approximately 14% per annum in Feb- economy of all these factors—the lead- ruary 2002 to 7% in April 2003 (figure 1). up to the election, the Iraq war, SARS, The much smaller than planned increas- and the beginning of the military oper- es in fuel oil and electricity prices at the ation in Aceh—has been surprisingly beginning of 2003 did not affect the in- mild. Continuing the trends of last year, flation rate significantly. The decline in inflation and interest rates have fallen, the rate of inflation was at least partly while the rupiah has strengthened due to the successful efforts of the cen- against the dollar. The ratio of debt to tral bank to control the growth of base GDP has continued to decline. Asset money (figure 2). Annual base money 138 Andrew MacIntyre and Budy P. Resosudarmo growth was reduced from over 15% at mately 3.5%. While by no means disas- the beginning of 2002 to approximately trous, this projected rate is the lowest 6% in February 2003. During that peri- among the larger East Asian economies od there was one peak, in November other than Japan (World Bank 2003a: 1; 2002. The most likely contributors to this ADB 2003: 20).1 were attempts to soften the impact of the Bali bombing, and the Muslim Idul Fitri Growth holiday in early December. The year-on-year GDP growth rates re- Nominal interest rates also fell dur- corded in Q4 2002 and Q1 2003 were rel- ing 2002 and early 2003. This was due atively modest (table 1), but higher than in part to the declining inflation rate, many expected. At around 3.5%, they since real interest rates—three-month were well above the rates in the same SBI (Bank Indonesia Certificate) rates quarters a year earlier. The two main minus inflation—seem to have re- pillars of growth during these periods mained in the range 3–5% p.a. Lower were government consumption and nominal interest rates have contributed investment. The former is rather puz- to an increase in lending by the banking zling, since the central government had sector. Bank credit outstanding rose kept a tight rein on spending in this pe- from around Rp 302 trillion in January riod. Interestingly, relatively high 2002 to Rp 420 trillion in March 2003. In growth in government consumption has general, the health of the sector im- been evident since early 2001—the first proved over this period: the percentage year of the country’s decentralisation of non-performing loans fell from 12% era—apart from the first half of 2002. in January 2002 to 8% in March 2003, The rise in government spending may and the average capital adequacy ratio have been due to higher expenditure by (CAR) increased to approximately 8% regional governments on salaries, (ADB 2003: 12). possibly offset by lower government The exchange rate, which had investment (World Bank 2003b: 2). strengthened from over Rp 10,000/$ at Meanwhile, the high percentage in- the end of 2001 to around Rp 9,000 just crease in investment is partly explained before the Bali bombings, weakened for by the low level of investment recorded a brief period towards the end of 2002 last year. Significant increases in invest- and then improved again to fall below ment occurred in the construction sec- Rp 8,500/$ in May 2003. In recent times tor, which contributed approximately the improvement has been due partly to 70% of total investment in 2002 (World the weakening of the dollar against all Bank 2003b: 2). major world currencies. Growth rates for exports and imports Despite these improved economic in- have increased markedly since the last dicators, during the last quarter of 2002 quarter of 2001. Growth in imports and early 2003 the net flow of foreign became positive from mid 2002, peak- direct investment (FDI) was still nega- ing at an unusually high 20% at the end tive. Meanwhile, consumer spending, of that year. High growth rates are in which had been the engine of growth in part explained by the low level of im- the last few years, faltered, increasingly ports in the last quarter of 2001 and first constrained by consumer debt (World half of 2002. But other contributing fac- Bank 2003b: 1). Hence it is predicted that tors have been a rise in consumer spend- the annual GDP growth rate in 2003 will ing on imports, and the fact that many be similar to that for 2002, at approxi- production sectors replaced or upgrad- Survey of Recent Developments 139

TABLE 1 GDP Growth, Year-on-Year (1993 prices, %)

Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03

GDP 1.7 2.7 3.9 4.3 3.8 3.4 Expenditure Private consumption 7.0 5.6 4.9 3.9 4.5 3.9 Government consumption 14.0 6.6 9.0 16.9 17.9 10.7 Investment –3.9 –8.9 –4.6 4.6 8.9 6.4 Exports –12.9 –4.5 –6.5 2.6 4.4 0.7 Imports –29.9 –25.7 –20.8 2.9 19.8 9.4

Sector Agriculture, livestock, forestry & fisheries –0.4 –3.1 3.9 3.8 2.4 3.2 Mining & quarrying –6.8 –1.5 2.2 2.7 5.7 1.4 Manufacturing 3.1 5.6 3.9 4.1 2.4 2.7 Electricity, gas & water supply 1.2 8.0 3.1 4.5 9.1 6.1 Construction 1.0 1.9 3.2 5.4 5.9 5.8 Trade, hotels & restaurants 2.6 2.7 3.3 4.7 3.7 3.5 Transport & communications 8.8 8.9 8.8 7.5 6.2 6.2 Finance, rental & business services 2.9 4.4 5.2 5.8 6.8 5.7 Services 2.8 2.7 1.8 1.6 1.8 2.0

Source: CEIC Asia Database. ed their equipment by purchasing im- stimulus package in the wake of the Bali ported goods. The increased demand for bombings are probably the main reasons imports is probably due in part to a de- for the improved growth rate. cline in import prices of selected goods The transport and communications such as electronics and processed foods. sector is particularly interesting. In the On the production side, we see four last two quarters it grew more rapidly largely non-tradable sectors—electrici- than most other sectors, but more slow- ty, gas and water supply; construction; ly than it had in the previous four quar- transport and communications; and fi- ters. The Bali bombing and the war in nance, rental, and business services— Iraq were probably important contribu- showing strong growth, in several cases tors to this slowing of growth, reducing stronger in these last two quarters than the demand for international flights. in the previous four. All have been sup- However, the fall in international de- ported by government and private con- mand caused airline companies to sumption. In the electricity, gas and concentrate on increasing the sale of water supply sector, this period saw a domestic flights by lowering prices. large number of new connections by Competition among airlines pushed do- households, but a less significant num- mestic air fares even lower, attracting ber by industrial entities. In construc- domestic customers who normally trav- tion, maintenance activities and the el by rail, road and water. 140 Andrew MacIntyre and Budy P. Resosudarmo

FIGURE 3 Exports and Imports ($ billion) 6

0 Jan-02 Mar-02 May-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03

Total exports Non-oil exports Total imports Non-oil imports Average monthly total exports in 1997 (at 2002 prices)

Source: CEIC Asia Database.

Among the sectors that did not per- in 1997. Oil exports were more or less form well in the last two quarters were steady. The value of exports of spices, mining and manufacturing. In the min- cotton seed, cocoa and palm oil doubled; ing sector, the bottleneck impeding of these four, palm oil contributed most higher growth has been the decline in to the increase in total exports. Mean- oil and gas output since 2001. This was while the value of textile exports de- probably due partly to falling demand clined, while exports of electronics and for oil by the petroleum refineries. Out- wood processing grew quite slowly over put of the latter had also declined in the this period, at average rates of 3% and same period, and hence affected the 1% respectively. growth of total manufacturing output. Imports also increased steadily in 2002 and early 2003. The value of Trade and the Balance of Payments foodcrops, processed food, fruit and The value of international trade in- vegetables, and machinery for metal creased during 2002 and early 2003 processing rose most. This is consistent (figure 3). Nevertheless, total exports for with the observation made above that most months during this period were household consumption of imported lower than their average monthly level goods had increased, and that import- Survey of Recent Developments 141

TABLE 2 The Balance of Payments ($ billion)

2001 2002

Q1 Q2 Q3 Q4 Total

Exports 57.4 12.7 15.1 16.2 14.9 58.8 Non-oil & gas 44.8 10.0 12.0 13.0 11.3 46.3 Oil & gas 12.6 2.6 3.1 3.3 3.6 12.5 Imports –34.7 –7.5 –8.8 –10.2 –9.1 –35.6 Merchandise trade balance 22.7 5.2 6.3 6.1 5.7 23.2 Services –15.8 –3.5 –4.4 –3.6 –4.1 –15.7 Current account 6.9 1.6 1.9 2.4 1.6 7.6 Official capital –0.7 –0.4 0.0 –0.1 –0.1 –0.5 Inflows 5.7 1.4 2.2 1.6 2.1 7.3 CGI (Consultative Group on Indonesia) 2.0 0.4 0.4 0.4 0.4 1.5 Non-CGI 3.8 1.0 1.8 1.3 1.7 5.8 Debt repayment –6.5 –1.8 –2.1 –1.7 –2.1 –7.8 Private capital –8.3 –1.0 –0.6 –0.1 –0.1 –1.8 Direct investment –5.9 –1.2 –2.2 –1.6 –2.1 –7.1 Other –2.4 0.2 1.5 1.5 2.0 5.2 Capital account –9.0 –1.4 –0.6 –0.2 –0.2 –2.3

Overall balance –1.4 0.0 1.3 0.8 2.0 4.0 Capital & current account, net –2.1 0.3 1.3 2.2 1.4 5.3 Errors & omissions 0.7 –0.3 0.0 –1.5 0.6 –1.2

Source: CEIC Asia Database. ed equipment had replaced domestic as a high-risk country, and this attitude production in several sectors. is unlikely to change before the elections. When this survey was prepared, the Although falling steadily as a share of latest information available on the bal- GDP, official debt repayment also con- ance of payments was for the last quar- tinues to be high, and is likely to remain ter of 2002. Significantly, the net capital so for several years. Hence, the net cap- account remained negative, despite rel- ital account will probably be negative for atively stable political conditions and several more quarters. improving macroeconomic perfor- The good news from the balance of mance, even though the negative num- payments table is that other private cap- bers grew smaller throughout 2002, and ital flows became positive in the first the total for 2002 was much lower than quarter of 2002 and increased through- that for 2001 (table 2). The main reason out that year. This has been due prima- for the continuing negative capital ac- rily to IBRA asset sales, and to renewed count is that net FDI is still negative. For- interest in investing on the Jakarta Stock eign investors continue to see Indonesia Exchange. 142 Andrew MacIntyre and Budy P. Resosudarmo

BOX 1 APPOINTMENT OF NEW CENTRAL BANK GOVERNOR AND SENIOR DEPUTY GOVERNOR The appointment of the new team of Burhanuddin Abdullah and Hartadi Sarwono as governor and senior deputy governor of the central bank appears to have been welcomed by the financial markets as the best choice for leadership of Indonesia’s premier financial institution. BI has suffered from leadership and credibility problems since the collapse of the rupiah in 1997–98 and the disastrous last resort lending (BLBI) to a number of banks, culminat- ing in the Bank Bali affair of 1999 (Booth 1999; Fane 2000). A cloud had remained over the head of outgoing governor Syahril Sabirin ever since his conviction for alleged involvement in kickbacks related to the clearing of Bank Bali’s claims on Bank Dagang Negara Indonesia, although he was even- tually exonerated by the Supreme Court. The procedure for appointing the governor had changed in 1999 (Law 23/1999 on Bank Indonesia) from direct appointment by the president to a process whereby the DPR selects one of up to five presidential nominees. The president had nominated Burhanuddin Abdullah, high profile former deputy governor Miranda Goeltom and former IMF technical assistance advisor Cyrillus Harinowo. While the PDI-P backed members of Commission IX (the committee on economics and finance) in the DPR supported Miranda Goel- tom for the top position, an alliance of Islamic parties and Golkar combined to produce a final decision in favour of Burhanuddin. His selection is widely expected to help restore the standing of the Bank. Formerly an assistant executive director of the IMF, and Coordinating Minis- ter of Economics and Finance in the last months of the Abdurrahman Wahid government, Burhanuddin is regarded as relatively clean and untainted by the BLBI loans, which contributed greatly to the banking sector crisis in 1997–98 (Tempo, 11/5/03, 25/5/03; Fane and McLeod 1999: 401). Hartadi, most recently the BI representative in Japan, is similarly respected, and high- ly regarded as a monetary policy analyst.

Welcome Reforms: The New State run. Amid other less helpful bumps and Finance Law and the Central Bank shocks of various kinds, this represents Leadership an important foundation for the task of Two welcome developments from the overhauling the management of public viewpoint of economic policy were the finances in Indonesia. Submitted to the passing of the State Finance Law and the parliament last September, it was passed appointment of Burhanuddin Abdullah on 6 March. It is the first in a suite of and Hartadi Sarwono as Governor and three major laws, with two others (a Deputy Governor, respectively, of Bank State Treasury Law and a State Finan- Indonesia (BI) (see box 1 on the BI ap- cial Audit Law) to follow.2 pointments). The little heralded State Perhaps the most important element Finance Law (Undang-Undang No. of the framework is the establishment 17/2003) has potentially positive macro- of the principle of a single consolidated economic implications over the longer budgetary fund, thereby prohibiting the Survey of Recent Developments 143 deeply corrosive practice of off-budget Rp 456.3 trillion (about $60 billion) in ir- fiscal activity. The law stipulates very regularities in the use of state funds dur- clearly the legal responsibility of all rel- ing 2001–02, although nothing has yet evant officials handling public monies, been done to hold any of the individu- and their accountability obligations als or agencies involved accountable. through the Supreme Audit Agency As with many things in Indonesia (BPK). Importantly, the law also clearly during these years of transition, one can stipulates the relationships among var- view this as a glass that is half full or as ious state institutions. one that is half empty. The new legal Most fundamentally, it makes very framework makes these issues much explicit the constitutional principle of more explicit, defining irregularities and the parliament’s role in drafting and specifying illegality and culpability. In approving the budget and holding the short, it provides a clear and strong leg- executive branch accountable for it. Sim- islative foundation for public finance. ilarly, the parliament’s co-approval is This is important progress. But prose- required for all foreign loans and grants cution—particularly in certain do- (and any transfer of such funds to remains—will be difficult. The most gional governments), the privatisation obvious case of this off-budget expen- of state enterprises and the injection of diture is activity by the armed forces state capital into any private enterprise. (TNI). With some two-thirds of military Some economists have complained that expenditure being off-budget, it is sim- this will ‘reduce the government’s fis- ply inconceivable that all activity will cal flexibility’ (JP, 10/3/03). Indeed, the suddenly be channelled through the new law leaves no doubt as to the piv- Ministry of Finance. Indeed, this is such otal role of the DPR in economic deci- a basic problem that, in the interests of sion making in the new Indonesia. both the integrity of the new law and, Finally, the law also establishes similar even more fundamentally, the viability principles between the executive and of Indonesia’s new democracy, a reason- legislative branches of government at able case can be made for adopting spe- the regional level, and the fiscal hier- cial legislation stipulating that, in the archy at various levels of government. case of the TNI, the process of bringing These are historic changes in the fis- all activities on-budget will be phased cal governance of Indonesia. But will the in over a specified period. (Significant- reforms actually work? The answer is ly, the new law comes into effect on the likely to be mixed, reflecting prevailing eve of the TNI’s formal withdrawal from political realities. The enshrinement and the national parliamentary arena.) specifications of the parliament’s pow- One final aspect of this important step er are likely to be fully enacted, because forward in fiscal governance is the con- the political parties are the centre of troversy that erupted over inter-agency power today and the parliament is the responsibilities. The new law does not forum they all share. Less clear is the mention the national planning agency, extent to which and the pace at which Bappenas, and specifically stipulates the off-budget fiscal activity is going to be Ministry of Finance as the agency with eliminated. As BPK Chairman Billy managerial authority. This detail es- Joedono noted, without effective imple- caped public notice for some weeks, mentation, the new legislation will be until development planning minister toothless (JP, 8/3/03). The BPK recent- and Bappenas head Kwik Kian Gie pub- ly revealed that it had identified some licly complained that his agency was 144 Andrew MacIntyre and Budy P. Resosudarmo being wiped out, perhaps as a result of nesians to take greater control of their ‘plotting’ by the World Bank (Tempo, own affairs. In April former finance min- 13/4/03; Tempo Interaktif, 9/4/03). ister Bambang Sudibyo called publicly While Bappenas’s continued existence is for the country to ‘look inwards’ (JP, not currently in question, there can be 9/4/03). More concretely, there has been no doubt that its role and authority in a small but growing number of policy economic policy matters continues to de- moves in this direction; most recently a cline under Megawati. Partly this renew visa requirement and charge for flects the dramatic rise of the DPR’s foreign tourists, a proposed new ban on budgetary powers, as well as the new all rice imports (JP, 17/5/03) and a re- expansion of the finance ministry’s au- striction on sugar imports (see below). thority, and partly it reflects the relative In the debate about the IMF, this na- political fortunes of different ministers. tionalist sentiment has been given intel- lectual embodiment with the emergence INDONESIA AND THE IMF of the Indonesia Bangkit group. In ad- Indonesia signed another Letter of In- dition to its coordinator, former econom- tent (LOI) with the IMF on 18 March ics coordinating minister Rizal Ramli, 2003. The LOI and the accompanying the group’s members include Sri Edi Memorandum of Economic Policies out- Swasono of the University of Indonesia, lined the progress Indonesia had made Umar Juoro of the Centre for Informa- in the previous quarter with promised tion and Development Studies (CIDES), reforms, and specified new targets for Didik Rachbini of the Institute for De- the coming period (JP, 20/3/03). Follow- velopment of Economics and Finance ing IMF acceptance, this resulted in a (INDEF) and Elvyn Masasya of Finan- further $450 million in IMF lending be- cial Intelligence Research. Having ing released to Indonesia. worked behind the scenes lobbying all It was not long ago that Indonesia’s fraksi (parties) in the parliament late last fulfilment of such conditions and the year, Indonesia Bangkit took a high pub- disbursement of funds were subject to lic profile early in 2003, campaigning delay and controversy. This time the cy- strongly for a prompt and complete ter- cle went relatively unremarked. Instead, mination of engagement with the IMF. debate has intensified on the broader In essence, the group’s argument is that question of what form of engagement, the IMF has served Indonesia poorly, if any, Indonesia should have with the that it constrains the country’s future IMF after the existing Extended Fund growth prospects, and that with im- Facility expires in December this year. proved macroeconomic circumstances The debate is being driven not only by Indonesia can readily afford to repay its the approaching end-date, but also by a outstanding loan obligations promptly formal recommendation issued last year (Tempo Interaktif, 26/2/03; JP, 29/4/03). by the MPR (People’s Consultative As- The Indonesia Bangkit position has sembly) that a framework be developed been seen as a direct challenge to the ap- for ending Indonesia’s dependence on proach of the dominant group of eco- the IMF.3 nomic ‘technocrats’—the successors of But the wider backdrop is a quietly the New Order ‘Berkeley mafia’ econo- growing nationalist mood in politics and mists led by Widjojo Nitisastro. A clos- public discourse more generally—a er investigation suggests, however, that sense of concern about Western domi- the challenge may be more political than nance and an inchoate desire for Indo- philosophical, given the centrality Indo- Survey of Recent Developments 145 nesia Bangkit seems to give to orthodox fect, to exit the standby ‘cold-turkey’; macroeconomic management and the that is, upon the expiry of the existing absence, for instance, of any grand pro- program at the end of 2003, Indonesia tectionist industrial strategy.4 would decline even the option of struc- The question of the future form of tured but non-binding policy dialogue, Indonesia’s engagement came more and would pay off all remaining loan sharply into focus in early May, when obligations immediately rather than the Senior Advisor of the IMF’s Asia and spreading repayments over the current Pacific Department, Daniel Citrin, pub- schedule. licly outlined three broad options for The key dimensions along which the Indonesia upon the expiry of the exist- tradeoffs have to be decided are financ- ing program: a Standby Arrangement, ing and conditionality. In financial a Precautionary Standby Arrangement terms, Indonesia can seek low cost IMF and exiting the standby framework com- loans and Paris Club rescheduling (the pletely but engaging in a ‘post program latter is worth $3 billion in 2003), or it dialogue’ (Kompas, 9/5/03). The first can seek to finance itself through a com- option is the most cautious in financial bination of substantially stepped up tax terms, for it would it allow Indonesia collection and special bilateral ap- continued access to special IMF stand- proaches to key creditor countries and by lending (on condition of policy re- development banks for increased sup- forms codified in a binding LOI), and port. In terms of conditionality, Indone- thus keep open the possibility of re- sia can seek the discipline imposed by questing a further rescheduling of debt nominally binding LOI reform commit- to creditor countries through the Paris ments (which, arguably, helps both to Club. move reforms forward faster than The second option, a Precautionary would otherwise be possible and to Standby Arrangement, is a contingent boost market confidence about a coun- facility in case new standby lending is try’s overall policy trajectory). Alterna- needed. It involves LOI conditionality, tively, it can seek to make its own but does not permit concessional financ- sovereign policy choices, knowing that ing through the Paris Club (since this it must do so within the context of the requires participation in a full Standby wider discipline of market judgments. Arrangement). The third of the outlined There has already been much excited options would see Indonesia complete- discussion about the IMF in the parlia- ly exit standby status but engage in a ment and the media more broadly. post-program dialogue with the IMF, Within the executive branch, an inter- forgoing any special IMF borrowing or agency team including the economics Paris Club rescheduling. Indonesia coordinating minister, the finance min- would free itself from conditionality, but ister and the central bank governor is engage in voluntary and structured pol- preparing advice for the president. icy discussion with the IMF for another There are serious questions to be ad- year or so. dressed about the likely size of the fi- Under all of these scenarios, Indone- nancing gap that would be created by sia would pay off its loan obligations on forgoing access to IMF and Paris Club the current schedule, which extends un- assistance, about the actual potential for til 2012. A fourth possibility, not men- substantially increased tax collection tioned by Citrin but explicitly advocated and about the real value of IMF condi- by Indonesia Bangkit members, is, in ef- tionality. Almost certainly, there will be 146 Andrew MacIntyre and Budy P. Resosudarmo a significant cost to Indonesia in exiting. cians have been able to pretend that But the decision will in the end be based unpopular decisions were forced on In- on calculations made by political lead- donesia by the IMF. The country’s long- ers—that is, the president and other par- term economic health and maturation ty leaders in the parliament—about would be aided by politicians (and com- likely macroeconomic conditions next mentators) of all persuasions being year. Of special importance is the extent forced to accept ownership of their pol- to which a strong anti-IMF stance will icy preferences publicly. be rewarded by voters in both parliamentary and presidential elections. INVESTMENT CLIMATE At the time of writing, the prevailing The investment climate remains worry- mood among professional economists ingly uncertain, and is clearly the area and market commentators in Jakarta of greatest immediate concern in any seems to be one of acceptance that the overall assessment of the economy. most likely outcome is the third or per- There is general agreement on the pri- haps the fourth of the scenarios mary domestic problems that continue described above. The driving consider- to discourage investors: ongoing uncer- ation is a belief that it is politically (i.e. tainty about the implications of a electorally) necessary for Indonesia to systemically weak legal system, an in- shake off IMF conditionality, and that hospitable labour environment, and current macroeconomic circumstances deep confusion about who holds author- are sufficiently propitious to make this ity over what—particularly outside possible, albeit at some considerable Jakarta—as a result of the unfinished short-term cost. Of the two, our expec- process of devolving power to regional tation is that the third option is the most governments. The net effect of these probable—as the fourth entails added changes is uncertainty, higher costs and cost and risk, with little clear advantage. a welter of cross-cutting demands for BIES readers who have not them- bribes. selves recently been in Indonesia might This translates into not just a very be surprised by the sense of acceptance small flow of inbound investment, but and even calm with which this is also a significant outflow. For example, viewed.5 A few commentators argue for in March the Textile Producers Associ- caution and continuity. But barring a ation reported that a large number of for- major deterioration in economic circum- eign firms had discontinued operations stances this year, most believe it is in West Java (Asia Times, 7/3/03). More almost a foregone conclusion that Indo- recently, Proctor and Gamble joined sev- nesia will exit standby status. eral major multinationals that have All of this suggests that, should In- abandoned Indonesia altogether (JP, donesia relinquish its standby arrange- 16/5/03). This continuing pattern of ment with the IMF, there is unlikely to multinationals choosing to base their op- be a dramatic market reaction. Further, erations elsewhere is of major concern. if indeed this is the decision, one posi- Monthly levels of both foreign and tive consequence is that it would end the domestic approved investment in late charade of leaders using the IMF as a 2002 and early 2003 were still far below political scapegoat for tough economic average pre-crisis levels (figure 4). The decisions. An unfortunate by-product of level of actual investment was undoubt- the very close relationship with the IMF edly much lower still, since even those since the financial crisis is that politi- who are willing to invest are often forced Survey of Recent Developments 147

FIGURE 4 Domestic and International Approved Investment ($ million) 8

6 Domestic

Foreign

Total 4 Average total monthly investment in 1996

0 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03

Source: CEIC Asia Database. to postpone or cancel their plans for the capital that investment projects in Indo- reasons suggested above. The gap be- nesia have a high risk of failure. tween the true and the approved levels It is interesting to observe the influ- will remain high for some time. The ence of the domestic financial sector and Tangguh LNG project in Papua is an the capital market on the level of invest- example of a major approved investment in the country. Improved macro- ment that may not be realised. The main economic performance has reduced difficulty is finding buyers for its prod- economic volatility and raised expecta- uct, given a possibly unreliable delivery tions of increased funds flowing into schedule from the remote Tangguh area, the financial sector, particularly from where security is a major problem (Mc- abroad. The level of deposits in domes- Beth 2003). tic banks rose during the first quarter of Furthermore, much realised invest- 2003, but most deposits are still short ment was probably directed to replace- term. Credit extension has therefore ment of old equipment rather than to been concentrated mainly in consumer expanding operations, and thus did not loans, where the probability of default generate increased output in the real is low and consumers are required to economy. Lack of investment has begun provide almost full collateral. Consum- to result in some sectors, particularly oil er credit rose about 37% in the year to and gas, experiencing a decline in out- December 2002, while working capital put (Business News, 25/4/03). loans, mainly to small and medium en- Overall, FDI flows in the balance of terprises, increased by 12%. Investment payments remain negative, reflecting capital loans rose by 21% on a year-on- the continuing perception of foreign year basis in the same period. But most 148 Andrew MacIntyre and Budy P. Resosudarmo of these were used to buy back assets tinuing administrative and political under IBRA, and hence they did not con- struggle to improve conditions for com- tribute directly to business expansion petitive investment in Indonesia. (World Bank 2003b). In the capital market, the stock index The New Labour Law increased in early 2003, but the number A new labour protection law (Undang- and value of stock transactions did not Undang No. 13/2003) was finally rise, and the number of new initial pub- passed on 25 February. Although less lic offerings (IPOs) was particularly lim- unfriendly to business than the previ- ited. This suggests that the stock market ous regulatory framework, on key is not yet contributing to expansion of dimensions the new law still looks un- the real economy. competitive compared to practices else- In the bond market, on the other where in the region. It is an improved hand, the value and number of bonds, compromise on a vexatious issue, but although low, increased throughout will provide only a marginal fillip to 2002 and 2003. Low bank interest rates investor confidence. The Manpower have made bonds, with interest rates of Law replaces some 13 older pieces of around 15%, more attractive. However, legislation, most notably Manpower one financial sector commentator sug- Law No. 25/1997 (enacted under Soe- gested that companies issuing bonds harto) and Ministerial Decree No. have typically used this income to re- 150/2000 (issued by Minister of Man- finance their debts rather than to under- power Bomer Pasaribu during the Ab- take business expansion. durrahman Wahid administration) In sum, the financial and capital mar- (CSIS 2002, 2003). The 1997 statute had ket sectors were recovering in late 2002 been the subject of bitter hostility from and early 2003, but were not yet able to labour unions, while that of 2000 was a attract sufficient investment to stimulate source of intense opposition from em- expansion in the real economy. How ployer groups. soon the investment climate will recover The new law was intended to strike a remains the big question for Indonesian balance between the need the redress the economic development in the years to long years of political repression for la- come. The launch by the president in late bour, and the mounting concerns among February of ‘Indonesian Investment investors that Indonesia was no longer Year 2003’ suggests that there is aware- competitive for labour-intensive manu- ness of the problem at the highest levels facturing. It has been accepted as a of government. However, cosmetic compromise by both the Indonesian changes such as a revised investment Employers Association (Apindo) and law urged by the president are hardly major labour unions such as the All likely to make a significant difference. Indonesia Workers Union (Serikat Pe- While fundamental changes to the po- kerja Seluruh Indonesia, SPSI), Reform litical structure have helped (see below), SPSI and the Indonesia Prosperity Trade other developments continue to under- Union (Serikat Buruh Sejahtera Indo- mine investor confidence. We look at the nesia, SBSI). Significant concerns do, new labour law, at the tragic case of the however, remain on both sides. Tanah Abang market fire, at the Lippo The new law includes the following Bank asset management scandal and at key elements. the special case of protection in the • It accepts the generous rates of sever- sugar industry, as examples of the con- ance and long service pay set out in Survey of Recent Developments 149

Ministerial Decree 150/2000 (Dick dition to feeling pressured by labour 2001: 29), with minor concessions to unions, such firms have also been employers, such as maximum sever- squeezed by the Ministry of Manpower ance pay of 9 rather than 12 times a aggressively extracting rents from firms worker’s monthly salary.6 However, by way of numerous regulatory require- employers are not (any longer) re- ments. (The scope for this is consider- quired to provide severance pay to able, with the new law running to 18 workers who resign voluntarily chapters, 193 articles and close to 500 (including to take higher-paid em- clauses, and extending over some 70 ployment elsewhere) or who are dis- pages.) missed for committing crimes. On the labour side, while the larger • The law retains a 40-hour working unions declared themselves satisfied week at normal rates of pay (China with the new law, dozens of smaller and Vietnam both have 48-hour ones aligned to the NGOs and political weeks.) reform agendas bitterly denounced it. • The right to be paid while striking These groups objected to the concessions remains, provided the strike occurs at it made, and also to the fact that they the place of employment and both the themselves were not viewed as serious employer and the authorities are giv- enough players to be party to the tripar- en advance notification.7 If striking tite consultations, as their larger and es- workers violate specified procedures, tablishment brethren had been. the strike is illegal and without pay, The substantive importance of the and workers are liable to temporary revised labour law aside, the process of lockout. legislative change on this issue is reveal- • The law places stricter limits on the ing. This has been an intensely contro- use of temporary labour or outsourc- versial subject, with employer, labour ing of core activities to contract la- and bureaucratic interests keenly con- bour. tested over many months. But it was the • Minimum wages are set by provin- parliament that ultimately had to decide cial governors (not district heads), the matter. A well placed source was based on a ‘fitting’ standard of living.8 able to confirm what one might expect In broad terms, the new law can be given the new importance of the DPR: seen as winding back some of the gains in order both to accelerate what had that unions won under the statute of been a stalled process and to get an out- 2000. But from the viewpoint of employ- come closer to their own liking, business ers, the previous framework was so se- interests including Kadin (the peak busi- verely pro-labour that employment ness body, to which Apindo belongs) conditions were costly and rigid com- had to direct significant financial sup- pared even to those in countries such as port to relevant legislators. Thailand—to say nothing of China or Vietnam. The revised framework is still Fire in Tanah Abang viewed as one of the most anti-business The investment climate depends partly in the region. The firms most sensitive on maintaining, as well as investing in, to these problems have been the large scarce physical and social infrastructure. labour-intensive manufacturers in the It is difficult to restore confidence when export sector, notably the footwear, gar- natural (or man-made) disasters destroy ment and furniture manufacturers of public facilities on a regular basis. The Jakarta, Bandung and Surabaya. In ad- most recent example was a fire which 150 Andrew MacIntyre and Budy P. Resosudarmo destroyed the Tanah Abang market in The Lippo Scandal Jakarta, an event that brought in its train In late 2002 and early 2003, a scandal an unpleasant transgression of press erupted over the actions of Lippo Bank, freedoms. one of the first private banks to be re- On 19 February 2003, the country’s capitalised by IBRA in 1999 (Cameron largest wholesale textile market in 1999: 22), and now awaiting sale by Tanah Abang caught fire. Trading was IBRA (Waslin 2003: 20). The scandal in- reduced significantly for some time, volved a series of steps by which the with predicted losses of billions of rupi- bank’s management allegedly sought to ah, the market’s annual transaction val- mislead the public in such a way as to ue being approximately Rp 15 trillion allow the former owner, the Lippo (Bisnis Indonesia, 20/2/03). Group, to buy back a majority stake in Reported estimates of the fire’s im- the bank at a bargain price. pact on the economy included major job In late 2002, Lippo issued two differ- losses (Kompas, 22/2/03); significant dis- ent third quarter financial reports. The tribution breakdowns in the textile in- first gave the bank’s total assets as ap- dustry, with many factories in Java proximately Rp 24 trillion and its net unable to find other market destinations profit as around Rp 98 billion; the sec- (Bisnis Indonesia, 22/2/03); a rise in non- ond stated that total assets had fallen to performing loans; a decline of Rp 3 tril- only Rp 22.8 trillion and that the bank lion in government tax revenue (Business had posted a net loss of approximately News, 28/2/03); and a decline of Rp 33 Rp 1.3 trillion. The Lippo Bank manage- billion in local government revenues ment was accused by several observers from the city-owned market operator, of accounting manipulation.10 PD Pasar Jaya (JP, 21/2/03). The likely Despite this public allegation, the economic consequences of the fire were management and board of commission- thus substantial, even if they were not ers of Lippo Bank used the second finan- immediately discernible in national eco- cial report to conclude that the bank’s nomic performance. CAR was only 4.2%, and that a number Probably as important was the sub- of steps were needed to improve this sequent conflict between Tomy Winata, ratio: (1) to conduct a reverse stock mea- owner of the Artha Graha conglomerate, sure of 1 for 10, i.e. to reduce the num- and Tempo magazine over the Tanah ber of shares by 1/10, so that 10 old Abang incident. A few days after the shares (worth Rp 70 each) would be- fire, Tempo published an article suggest- come one new share with 10 times that ing that Tomy’s people may have lit it value; (2) to inject more capital into the deliberately, Tomy having previously company by selling its takeover assets submitted to the Jakarta regional gov- (the collateral taken over by the bank in ernment a proposal for total renovation bad loan cases); and (3) to conduct a of the Tanah Abang market (Tempo, rights issue (issuing additional shares 3/3/03). Tomy filed a defamation and giving priority to existing share- suit against the magazine, and his holders at preferential prices). bodyguards attacked the Tempo office, The second aspect of the Lippo case dragged the editor before the local was that the sale of the bank’s takeover police chief, and tried to force him to assets was not transparent. There were declare his sources and retract the alle- strong suggestions among financial ana- gation.9 lysts that Lippo Bank sold the assets only Survey of Recent Developments 151 to companies within the Lippo Group. Trade Barriers: The Case of Sugar The third aspect was that the reverse As mentioned in previous surveys stock measure and the existence of mul- (Athukorala 2002; Alisjahbana and Man- tiple buying and selling transactions at ning 2002), the pressure for increasing very low prices reduced market confi- trade barriers in agriculture has intensi- dence in the stock and knocked down fied in the past few years, as producer the price of Lippo Bank shares from interests have regrouped in the post- around Rp 700 to Rp 300 per share.11 crisis period. When former finance min- These events occurred in late 2002 and ister Bambang Sudibyo called recently early 2003. for Indonesia to become more inward The last, and crucial, part of the ac- looking, he proposed two strategies, one tion would see Lippo Bank’s former of which was increased protection in the owners, the Lippo Group, in a position agricultural sector (Kompas, 9/4/03).12 to buy all the new shares from the rights There were also reports that the Minis- issue process at only Rp 300 per share, ter of Industry and Trade, Rini Suwandi, and become the majority holder of Lip- planned to issue a decree requiring all po Bank stock. But before the bank had contractors on government projects to carried out the rights issue, a number of use locally made products (JP, 5/4/03). financial and capital market analysts The most recent problem to emerge and journalists wrote articles alleging in relation to protection concerns the systematic actions by the management sugar industry. At the beginning of of Lippo Bank to ensure that the Lippo April 2003, despite a recent fall in the Group would be able to become the world price of sugar, the domestic price bank’s majority shareholder for a rela- suddenly rose from approximately tively low price (see, for example, Wei Rp 3,800 to more than Rp 5,000 per kilo- 2003a, 2003b; Aipassa 2003; Trianto gram. In several regions, the price 2003). As a result the government, reached Rp 10,000 per kilo, and it be- through IBRA, declined to approve the came very difficult to buy sugar in many rights issue and changed the member- areas. The main reason for the high price ship of Lippo Bank’s management and was clearly a supply shortage. The board of commissioners. Bapepam logistics agency Bulog (Badan Urusan (Badan Pelaksana Pasar Modal, the Cap- Logistik) reacted by distributing 60,000 ital Market Supervisory Agency), along tonnes of sugar into the market, with Bank Indonesia, imposed on Lip- but the price of sugar remained po Bank’s management a fine for mis- close to Rp 5,000 per kilogram (Tempo, leading reporting of Rp 2.5 billion 27/4/03, 11/5/03). (around $300,000), a penalty widely re- The value of the tariff on sugar im- garded as very mild. ports is approximately 30% for raw sug- The Lippo Bank scandal suggests that ar and 35% for refined sugar, but the Indonesia is still far from achieving problem is not merely the tariff, which transparency and accountability in busi- was introduced in 1999 and then modi- ness, and from developing an institu- fied in 2002.13 The Department of Indus- tional framework strong enough to try had granted only five permits to prosecute powerful conglomerates that import sugar—to Bulog and to four state flout the law. All of these problems rep- enterprises. The latter argued in early resent barriers to improvement in the in- April that they had encountered admin- vestment climate. istrative problems with the Directorate 152 Andrew MacIntyre and Budy P. Resosudarmo

General for Customs and Excise which tributing to the low level of investor had prevented them from distributing confidence in Indonesia. Less well un- imported sugar in the market. Customs derstood is the significant progress that and Excise claimed that the four import- has been made in sorting out a viable ers had not fulfilled the administrative set of rules for structuring government requirements. With so few importers in at the national level. Although by no the sugar market there is a strong incen- means a panacea for all of Indonesia’s tive for them to behave as an oligopoly problems, this is another substantial step and seek high profits at the expense of in a positive direction. Furthermore, consumers. Hence, the suspicion arose with the big building blocks of this re- that the importers and the Directorate structuring of national level political life General for Customs and Excise had dis- largely in place, we are now in a posi- agreed over the division of this oligo- tion to reflect on the significance of the polistic profit, leaving a significant new political system for economic quantity of imported sugar held up in policy. the ports. The most fundamental changes came A proposal to reduce sugar import in the initial wave of reforms in the two barriers by giving import permits to years following Soeharto’s departure, more companies did not receive wide which saw the freeing up of the politi- support, and was strongly rejected by cal parties—and thus the legislature— the association of sugar producers. Since and the decision to devolve significant the Minister for Agriculture, Bungaran powers to local government. This led to Saragih, and the Minister for Industry, a dramatic decentralisation of power Rini Suwandi, do not appear keen to after the tight centralism of the Soeharto abolish entry barriers to sugar and con- years. Power shifted sharply from the trols over the distribution of imports, it presidency to the legislature, with the is unlikely that protection of Indonesia’s president being beholden to the parties sugar market will be reduced in the near not just for cooperation in law making, future. Given that consumers are still but for his very survival. having to bear the burden of the high Fortunately the reform process did cost of sugar, it would seem important not stop there, since this was a recipe that NGOs such as the Indonesian Con- for political chaos (of which we got some sumers Organisation (Yayasan Lemba- hint during Abdurrahman Wahid’s ten- ga Konsumen Indonesia, YLKI) become ure). Subsequently the power balance more active in this area. Meanwhile, swung back a little, initially on the basis Indonesia will have difficulty creating of a type of honeymoon effect for Mega- a favourable investment climate while wati under which the other parties could it continues to exhibit the protectionist not contemplate removing her. Her po- tendencies illustrated by this recent sition was then formally consolidated problem in the sugar industry. through constitutional reform which ef- fectively gave her security of tenure and THE NEW POLITICS OF made her answerable only to the elec- ECONOMIC POLICY torate. With the parties no longer able It is widely understood that the confu- to remove the president, the office again sion and uncertainty generated by the becomes a force to be reckoned with. The political changes of the past half decade, occupants of the presidency are now in together with the systemic weaknesses a position to exert at least some author- of the legal system, are core factors con- ity over cabinet, and better exercise le- Survey of Recent Developments 153 verage in bargaining with the DPR over marking the fifth anniversary of Soehar- legislation. to’s fall, many of them focusing on con- With the second wave of political re- tinuing corruption, and on public forms being bedded down under Mega- disillusionment that reformasi has not de- wati, her term provides something of a livered more. This is little wonder, giv- window onto the future. At the nation- en the steady stream of reports of al level, while the personalities and rel- politicians receiving money not just ative support for individual parties may from commercial interests pushing a move around, the fundamental contours preferred position, but even from min- of the political landscape are unlikely to isters seeking to have their departmen- change dramatically over the next five tal budgets approved expeditiously years. This is because there is general (uang lelah). acceptance (including by the military) But it is important to keep these that Indonesia is to be governed consti- problems in some perspective. In the tutionally for the foreseeable future; it spectrum of developing country demo- is also because there is no sign of any cracies, the emerging political architec- shift in underlying social cleavages such ture in Indonesia is markedly less bad as might cause a realignment of the par- than it might have been. As a result of ty system. the second and third wave of political In practical terms, this means we are reforms, the party system will probably looking at a world in which authority is be further consolidated. It is thus much no longer as fragmented and confused less likely to undergo the sort of acute as it was in the latter part of the Habibie political fragmentation and legislative period and under Abdurrahman Wahid. stalemates it experienced in the 1950s, Where it had once been extremely diffi- or that Thailand, for example, suffered cult to see scope for significant econom- during the mid 1990s. And while there ic policy reform, the potential is now can be no denying the apparent appe- greater. tite for cash among Indonesia’s politi- The political obstacles have been cians, the recent electoral and party somewhat reduced, but the process is reforms mean that Indonesia is unlike- still not easy. The days of quick and ly to develop the acutely atomistic par- decisive action on major policy re- ty practices evident in a country such as forms—which the Soeharto regime was the Philippines. sometimes capable of—are now a dis- While there are concerns about weak tant memory. The reality of policy mak- ties between representatives and voters, ing today is very much slower and the net effect of the new rules is likely to messier. No significant reform can take make Indonesian parties more coherent. place unless both the executive branch This can be helpful in facilitating legis- and a majority of the DPR agree. With lative bargains (since parties mostly vote multiple parties, this process is inevita- as a bloc rather than atomistically). It bly slow, and quite susceptible to derail- also means that there is much more ment by vested interests that succeed in scope for politicians to compete on the inducing key legislators to oppose a pro- basis of their party’s brand-name, rath- posed reform. er than on the basis of their own indi- Many observers view this emergent vidual capacity to pass out special pattern of policy making with despair. favours (including cash) at election time. In late May the pages of the Indonesian Although relative, these gradations are press were filled with commentaries not trivial. 154 Andrew MacIntyre and Budy P. Resosudarmo

At the national level we can expect concentrated benefits than for those with some easing of the uncertainty that has diffuse benefits. bedevilled the investment climate. This The obstacles to achieving a strongly will not be a dramatic swing from con- pro-growth policy mix are reinforced by fusion to clarity. But at least some of the the fact that this is not something Indo- uncertainty will be removed as the new nesian voters are yet focusing on. The political system settles in, and as inves- primary divisions around which the tors come to understand better where political parties are mobilised are socio- the veto points are and how the system religious (Islamic versus secular, with functions in steady state. This is good geographic subdivisions). It is only a few news. And yet, overall, it is very diffi- very small parties that have economic cult to be sanguine about the net eco- issues at the core of their platforms (e.g. nomic effects of the emerging political Sjahrir’s New Indonesia Party and the equilibrium. Yes, it is definitely better People’s Democratic Party). than the situation a couple of years ago: The economic implications of the new progress with economic reform is at least political framework point towards a now possible. But reform is likely to be pattern of continued modest growth: of slow. This means that we are unlikely Indonesia continuing to make progress, to see a return to high growth. but only slowly. Here again perspective There is a rough consensus on many is important, for this is probably best of the policy ingredients that would be understood as a necessary stage along needed to re-ignite rapid economic the way. There is no guarantee that Indo- growth: continued macroeconomic sta- nesia will continue in this direction and bility, accelerated reform of the finan- gradually sort out the institutional chal- cial sector and specific measures to lenges associated with devolving power improve the investment climate, espe- to the regions or, even further down the cially in the labour-intensive export sec- road, with bringing about systemic le- tor. The problem, of course, is forging gal reform. But this is a necessary first agreement within and between the ex- step; without viable national govern- ecutive and legislative branches of gov- ment, nothing much at all is possible. So, ernment on enacting such reforms. while we recognise the limitations of the While there are certainly grounds for status quo, the significance of the optimism that some of this agenda is progress thus far is that it is an essential now more readily achievable, any such foundation for stronger confidence progress is likely to be slow and hap- in Indonesia, both domestically and hazard. abroad. It is also likely to be accompanied by In a sense, we seem to be looking at significant reversals on other fronts, something of a reversal of the develop- such as the emergence of a counter- mental trajectory of the Soeharto years: vailing trend towards quietly creeping instead of strong economic progress and protectionism. In principle, one might political stagnation, the mix for the me- expect there to be equal difficulty in- dium term is more one of progress in volved in introducing both market- making democratic politics more work- opening and market-restricting policy able, but limited economic lift. Over the changes. But, in practice, the latter is short term this is not a problem. But in- likely to prove politically easier than the creasingly the social costs of attaining former, since support is almost always only moderate economic growth are more forthcoming for measures with going to mount. Over the longer term, Survey of Recent Developments 155 the hope must be that further progress 12 The other strategy he suggested was to with institutional reform will lay the increase the salaries of civil servants and basis for increased investor confidence labour. and stronger economic growth. 13 After removal of all tariffs on sugar during hyperinflation in 1998, a 20% tariff on raw sugar and a 25% tariff on pro- 10 June 2003 cessed sugar were introduced in 1999. These were then modified to a flat rate NOTES duty in 2002, in an attempt to address the 1 Japan is expected to grow at a rate of 0.6% problem of under-invoicing of import (World Bank 2003a: 1). prices. 2 For discussion of the new law see Gint- ing (2003); ‘Bill Passed to Help Curb Graft’, JP, 7/3/03; and ‘Milestone in Ac- REFERENCES countability ’, JP, 10/3/03. ADB (Asian Development Bank) (2003), Asia 3 Ketetapan No. IV, MPR 2002. Economic Monitor: February 2003 Update, 4 Authors’ interview with Dr Rizal Ramli; February edition, Asian Development see also formal statements such as Ramli Bank, Manila. (2002). Aipassa, J. (2003), ‘Menyimak Kasus Bank 5 Some mainstream economic commenta- Lippo: Persoalan Baru Pasar Modal Indo- tors in fact welcome this possibility (see, nesia’, Suara Pembaruan, 11 February. for example, Morgan Stanley Economists Alisjahbana, Armida S., and Chris Manning 2003). (2002), ‘Survey of Recent Developments’, 6 However, total severance and long ser- Bulletin of Indonesian Economic Studies 38 vice payments remain much higher than (3): 277–305. those in most other Asian countries (e.g. Athukorala, Prema-chandra (2002), ‘Survey twice those in Thailand for a worker of Recent Developments’, Bulletin of Indo- employed 10 years or more and dis- nesian Economic Studies 38 (2): 141–62. missed for economic cause). Booth, Anne (1999), ‘Survey of Recent De- 7 According to previous drafts of the law, velopments’, Bulletin of Indonesian Econom- workers had to be paid while on strike, ic Studies 35 (3): 3–38. regardless of the time or location. Cameron, Lisa (1999), ‘Survey of Recent De- 8 See, for example, ‘Labor Law to Woo velopments’, Bulletin of Indonesian Econom- Investment’, JP, 26/2/03; ‘New Labor ic Studies 35 (1): 3–40. Law’, JP, 26/2/03; ‘Employers Hail New CSIS (Centre for Strategic and International Labor Bill, Unions Divided’, JP, 25/2/03. Studies) (2002), ‘New Labor Bills Failed 9 Interestingly, the police chief did noth- to be Ratified’, CSIS Quarterly Report, No- ing to stop this harassment, nor did he vember. interrogate Tomy about the case, let alone CSIS (2003), ‘The New Law On Labor’, CSIS arrest him. The fact that Tomy was not Quarterly Report, March. called to account for this attack on Dick, Howard (2001), ‘Survey of Recent De- Tempo sends a signal to the international velopments’, Bulletin of Indonesian Econom- community that law and order remains ic Studies 37 (1): 7–41. a problem in Indonesia. Fane, George (2000), ‘Survey of Recent De- 10 The main critic was financial journalist velopments’, Bulletin of Indonesian Econom- Lin Che Wei (Wei 2003a, 2003b), who ic Studies 36 (1): 13–45. himself was threatened with a libel case Fane, George, and Ross H. McLeod (1999), by Rudi T. Bachrie, a member of Lippo ‘Lessons for Monetary and Banking Poli- Bank’s board of commissioners. cies from the 1997–98 Economic Crises in 11 Prices shown are those prevailing after Indonesia and Thailand’, Journal of Asian the reverse stock measure. Economics 10 (3): 359–499. 156 Andrew MacIntyre and Budy P. Resosudarmo

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