Bulletin of Indonesian Economic Studies

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Survey of Recent Developments

Armida S. Alisjahbana & Chris Manning

To cite this article: Armida S. Alisjahbana & Chris Manning (2002) Survey of
Recent Developments, Bulletin of Indonesian Economic Studies, 38:3, 277-305, DOI:
10.1080/00074910215539

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 Bulletin of Indonesian Economic Studies, Vol. 38, No. 3, 2002: 277–305

SURVEY OF RECENT DEVELOPMENTS

Armida S. Alisjahbana
Padjadjaran University, Bandung

Chris Manning*
Australian National University

SUMMARY
The Indonesian economy continued to
stabilise in 2002, and to recover in the
second and third quarters of the year
from poorer performance in the previ-
ous year. Confidence was helped by a
successful MPR session in August,
which completed the round of consti-
tutional reforms begun several years
earlier, including provision for direct
election of the president and vice presi-
dent and a new bicameral elected
national assembly. Sadly, just when
macroeconomic conditions seemed
more favourable than for some time, the
tragic events in Bali in October threw a
cloud over growth prospects for the fi-
nal quarter and the coming year.
All the indicators of macroeconomic
performance had turned around by
August–September. The exchange rate
had appreciated significantly, year-on-
year inflation was down from 15% in
February to 10% by August, and nomi-
nal interest rates had fallen. These de-
velopm ents supported much more
favourable budget outcomes for 2002.
The assumptions for the proposed 2003
budget appeared generally plausible,
although the 5% growth target seemed
a little too optimistic, the more so in the
wake of the Bali bombings. Divestment
of shares from both Telkom and Indosat
appeared to have secured the govern-
ment’s budget target from IBRA sales
for 2002, and the fire sale of IBRA debts
added another Rp 23 trillion to the pub-
lic coffers. Although investment still
remained flat, there had also been some
important signs of credit expansion for
small and medium enterprises. Some
breakthroughs were achieved in the
private sector, such as a resolution in
the long-standing Kalimantan Prima
Coal dispute on divestment of its ma-
jority shareholding, and a favourable
court rulin g in the M an ulife case
(Athukorala 2002: 145 and 147–8).
At the same time, recovery in both
domestic demand and exports was halt-
ing. International confidence was not
helped by National Planning Agency
head Kwik Kian Gie’s continuing focus
on early ‘graduation’ from the IMF pro-
gram. Asset sales were delayed because
of haggling over the disposal of a 51%
share in Bank Niaga and there were signs
of spreading agricultural protection,
much of it in the form of NTBs. There
were strong indications that labour regu-
lation and associated unrest were begin-
ning to affect the investment climate.
Labour-intensive manufacturing exports
suffered in particular, raising much con-
cern about job creation. The crisis over
repatriation of large numbers of overseas
workers from Malaysia from early 2002
did not help the labour market, especially
in Eastern Indonesia.

ISSN 0007-4918 print/ISSN 1472-7234 online/02/030277-29 © 2002 Indonesia Project ANU

278
POLITICAL DEVELOPMENTS
The August MPR (People’s Consultative
Council) meeting marked the fourth and
final round of constitutional amend-
ments begun under former President
Habibie. 1 The amendments passed allow
the public direct control over the election
of the president, and take away the
MPR’s authority to elect the president
and the president’s direct accountability
to the MPR (with the accountability
speech to the MPR now replaced by an
annual report). The two main amend-
ments on the election of the president and
the composition and role of the MPR
were passed with relatively little oppo-
sition, after extensive negotiation among
the major parties. A constitutional com-
mission was to be set up through an MPR
committee over the next six months, with
a more limited agenda than initially en-
visaged of ‘synchronising’ and improv-
ing the amendments already passed. The
push by several of the Muslim-oriented
parties for introduction of syariat law
through revision of article 29 was de-
feated. However, the MPR meeting also
saw the creation of two independent ju-
dicial bodies, a Constitutional Court and
an independent Judicial Commission
with responsibility for supreme court
appointments and judicial ethics issues.
The passing of the two amendments
is critical for planning of the 2004 elec-
tion. They include provisions for direct
election of the president and vice presi-
dent, and for the restructuring of the
MPR, for the first time since it was in-
augurated in 1960, into a fully elected
bicameral assembly comprising parlia-
ment and a regional representative
council. A two-stage process of presi-
dential election was approved which
sets out a ‘packet’ system whereby par-
ties nominate ‘tickets’ of presidential
and vice-presidential candidates. If no
ticket gains the necessary majority sup-
port, the two highest ranking tickets go
Armida S. Alisjahbana and Chris Manning
through to a second round. Teams on
one ticket must gain at least 20% of the
votes in half of the country’s provinces,
requiring the candidates to cultivate
support in the majority of outer island
provinces. The reform ensures that the
strongest presidential–vice-presidential
teams will probably consist of coalition
candidates from the major parties.
In practice, the completion of the
round of constitutional amendments
reaffirms the unitary structure of the
state with ‘federal’ arrangements, in-
cluding the creation of two new special
autonomous regions in Aceh and Papua.
The bicameral system to replace the cur-
rent MPR will consist of an elected DPR
(Dewan Perwakilan Rakyat, People’s
Representative Council) chamber and a
second elected chamber to represent re-
gional interests, the DPD (Dewan
Perwakilan Daerah or Council of Re-
gional Representatives). Interest group
representatives will disappear from the
MPR in 2004, bringing about the historic
removal of the 38 armed forces (TNI)
representatives, who would have re-
tained their seats until 2009 under a
previous decree.2
The MPR also took the bold step of
mandating an ‘aspirational’ 20% alloca-
tion for education from central and dis-
trict budgets and a stipulation that the
social welfare system should be ex-
tended to ‘all the people’, although it
was not clear how either objective might
be achieved in practice.
Two other political events in Septem-
ber portrayed the government in a less
favourable light with pro-democracy
forces. The first was the decision of
Akbar Tanjung (with implicit presiden-
tial support) not to step down from any
of his present positions, including as
chairman of the DPR, while he appeals
against the three-year gaol term handed
down early in the month for embezzle-
ment of Bulog funds. Not long after the
Survey of Recent Developments
Akbar ruling, the controversial Jakarta
governor, General (ret.) Soetiyoso, was
voted in for a second term by the pro-
vincial assembly, with Megawati’s
blessing and amidst huge demonstra-
tions. The election was marked by well
documented claims of substantial vote
buying of councillors in the regional as-
sembly (DPRD) (JP, 5/9/02). 3 This
came on top of a detailed account of
spending sprees by DPR members from
huge increases in salaries and other
emoluments in various regions across
the country at a time of fiscal belt-tight-
ening (Tempo, English Edition, 1–7
October 2002).
At the time of writing, it was still too
early to assess the political and economic
fallout from the huge bomb blast that
claimed the lives of over 180 people, the
majority of them foreigners, in Kuta, Bali
on 12 October. Despite earlier official de-
nials, the country has now been tragi-
cally given notice that it is well and truly
on the international terrorist map. The
tragedy is likely to affect the Balinese
economy severely, especially through
dire consequences for tourism in the
immediate future. It is also likely to pose
a further disincentive to foreign invest-
ment throughout Indonesia (and the re-
gion), though early falls in the exchange
rate and the stock exchange, while no-
ticeable, were not as large as some had
feared. This domestic shock occurred at
a time of heightened fears of a down-
turn in the international economy in the
wake of the US stock market decline,
and in light of the pending US, and pos-
sibly UN-supported, attack on Iraq.
MACROECONOMIC
PERFORMANCE
Regained Growth Momentum?
The upward trend in GDP growth that
began in Q1 2002 continued, with GDP
expanding in the second quarter of 2002
by 3.5% year-on-year, well up from the
279
Q4 2001 figure of just 1.6% (table 1). This
growth was mainly supported by con-
sumption spending, with private and
government consumption increasing by
6.4% and 9.4%, respectively, even
though total consumption growth fell
back slightly during the first half. Sec-
ond quarter investment was 3.7% lower
than in 2001, although this rate of de-
cline was less severe than in the two pre-
vious quarters. Exports continued to fall
at a significant rate, while imports
slumped dramatically in each of the last
three quarters.
Given the continued decline in invest-
ment and exports, the contribution of
private consumptiongrowth to economic
recovery is important, since it accounts
for more than 70% of GDP (DRI 2002).
The continued healthy growth in private
consumption may reflect perceptions of
reduced risk relating to economic and
political conditions and, in particular,
increasing confidence engendered by
strengthening of the rupiah. The rise in
net exports during the last year (with
imports declining much more than ex-
ports) reflects the expected reallocation
of productive resources from non-
tradable goods and services to tradables
as a result of the large real depreciation
of the rupiah from mid 1997. The persis-
tent decline in investment is due mainly
to continued lack of business confi-
dence—especially among foreign inves-
tors; the adverse impact of the global
economic slowdown on investment in
export-oriented industries; the existence
of significantexcess capacity in the manu-
facturing sector; and poor profit perfor-
mances in the corporate sector
(Athukorala 2002; ADB 2002: 7).
On the output side, relatively strong
growth in the second quarter was
helped considerably by an impressive
turnaround in the agriculture sector,
which registered 6.3% year-on-year
growth after modest declines in the pre-
280 Armida S. Alisjahbana and Chris Manning

TABLE 1 GDP Growth, Year-on-Year

(1993 prices, %)

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

GDP 4.8 3.8 3.1 1.6 2.2 3.5

Expenditure
Private consumption 4.0 4.7 5.8 9.2 7.1 6.4
Government consumption 6.0 4.2 11.9 11.0 8.8 9.4
Investment 18.9 7.7 –0.8 –7.1 –6.9 –3.7
Exports 18.4 8.0 –2.6 –12.9 –5.2 –7.1
Imports 50.7 37.2 –3.7 –29.8 –25.7 –21.6
Sector
Agriculture, livestock, forestry
& fisheries 3.7 1.7 –0.4 –2.8 –1.4 6.3
Mining & quarrying 6.8 –0.3 –2.4 –5.9 -2.3 1.8
Manufacturing 4.2 4.8 4.7 3.6 3.7 2.5
Electricity, gas & water supply 7.3 9.9 8.9 7.6 7.9 4.7
Construction 6.2 5.7 3.5 0.7 1.7 2.4
Trade, hotels & restaurants 6.8 5.5 5.7 2.6 3.4 3.7
Transport & communications 6.4 7.0 7.6 8.9 8.4 8.2
Finance, rental & business services 3.9 3.4 2.7 2.0 2.7 2.6
Other services 1.3 1.6 2.3 2.7 1.5 0.4

Source: CEIC Asia Database.

ceding three quarters. The manufactur-
ing and construction sectors grew
relatively slowly, by 2.5% and 2.4% re-
spectively, while transport and commu-
nications continued to outperform other
sectors, with growth of 8.2%. The steady
decline in manufacturing growth (from
4.7% year-on-year in Q3 2001) provides
some cause for concern, but all in all it
appears that GDP growth for 2002 is
likely to be in the range 3.5–3.8% in the
absence of any expectation of resurgence
in exports or investment.
In longer-term perspective, GDP re-
bounded relatively slowly from the peak
of the crisis in 1998, only beginning to
grow moderately during the latter part
of 1999. Somewhat surprisingly, Indo-
nesia’s growth compared favourably
with that of the other Asian crisis coun-
tries from late 2000 until the third quar-
ter of 2001, and Indonesia continued to
outperform Malaysia until Q2 2002 (fig-
ure 1). It has been argued that this was
because Indonesia was not affected as
severely by the slump in the electronics
export market, on which it is less depen-
dent than countries such as Malaysia
and Korea (Pangestu and Goeltom
2001). Nevertheless, Indonesia’s growth
rate declined during 2001 and, notwith-
standing recent acceleration, it had
fallen behind all the other countries in
this group by mid 2002.
Financial Indicators
Exchange Rate. The rupiah appreciated
strongly between February and May
2002, but weakened a little from mid year
to around Rp 9,000/$ in September (fig-
ure 2). (The October bombings in Bali
had had surprisingly little impact on the
currency at the time of writing.) Overall
it appreciated by some 15.4% against the
Survey of Recent Developments 281

FIGURE 1 Comparative GDP Growth, Year-on-Year

(1993 prices, %)
16

Indonesia Malaysia
12
Philippines Korea
Thailand

-4
Q1 2000 Q1 2001 Q1 2002

Source: Asia Recovery Information Center Database, www.aric.adb.org.

FIGURE 2 Exchange Rates and Share Pricesa

(December 1999 = 100)
100

80

60

$/Rp
40 Yen/Rp
CSPI

20

0
Sep-01 Dec-01 Mar-02 Jun-02 Sep-02
a
CSPI = Composite Share Price Index.

Source: CEIC Asia Database.

282
dollar and 6.8% against the yen during
the first three quarters of 2002—one of
the stronger performances across the re-
gion. The strengthening of the currency
has also been accompanied by a reduc-
tion in its volatility compared with the
previous year (Bank Indonesia 2002).
Among other things, these positive de-
velopments presumably reflect both in-
ternational and domestic responses to
Indonesia’s perceived commitment to
more prudent macroeconomic manage-
ment (LPEM–FEUI 2002), including bet-
ter control of monetary growth.
Risk. Short-term risk indicators such
as the swap premium and covered inter-
est rate differentials declined during
2002. The one-month swap premium fell
significantly from 16.7% at the end of
2001 to 12.2% by the end of August 2002,
suggesting that market players were be-
coming less concerned about weakening
of the rupiah in the near future. Likewise,
the covered interest rate differential (the
excess of the dollar interest rate over the
rupiah interest rate adjusted for the swap
premium) narrowed from 0.83% to 0.50%
during this period, suggesting a modest
decline in market assessments of other
kinds of risk relating to Indonesia.
Stock Market. The rebound on the
Jakarta Stock Exchange since late 2001
peaked in April 2002 (figure 2). Al-
though this partly reflected the general
upward trend as global and regional
share prices recovered after the terror-
ist attacks on the US on 11 September,
the surge in Indonesian share prices was
especially strong, with a gain of 33% in
local currency terms and 60% in dollar
values (ADB 2002). Presumably this was
partly attributable to renewed investor
interest in Indonesian shares as politi-
cal uncertainties receded. Share prices
began to slide back in May, however,
and by September most of the rupiah
gains since the end of 2001 had been
wiped out; nonetheless, given rupiah
Armida S. Alisjahbana and Chris Manning
strengthening during this period, dol-
lar values were still 23% above their end
2001 levels. Part of the explanation for
the decline in rupiah share prices may
be overall weakness in industrial coun-
try and regional stock markets, but the
decline in money growth relative to the
earlier period is also likely to have con-
tributed.
Base Money. Base money increased by
21% in the year to November 2001, 4 and
stood at Rp 127.8 trillion at year end,
well above the current LOI (letter of in-
tent to the IMF) indicative target of Rp
120.6 trillion. Bank Indonesia (BI) finally
responded at around this time to the
persistent increase in inflation since
about March 2000 by tightening mon-
etary policy (figure 3). Whereas base
money growth of around 20% p.a. had
been the norm since mid 2000, the
growth rate was far slower in 2002, and
was running at 7.5% year-on-year by
September—having fallen to as low as
4.9% in August. In contrast with most
of the post-crisis period (Deuster 2002:
25), the volume of base money was well
below LOI indicative targets after April
2002, amounting to Rp 123.9 trillion at
the end of September, whereas the in-
dicative target was Rp 128.2 trillion.
Inflation. Inflationary pressure re-
ceded significantly after February (fig-
ure 3), with the year-on-year rate falling
from 15.1% to 10.5% in September;
prices were virtually constant during
March and April, and subsequent
monthly increases have been relatively
small. While many commentators seek-
ing to explain changes in inflation look
to seasonal factors, wage and salary in-
creases, exchange rate changes and in-
creases in administered prices for
commodities such as fuel, it is hard to
ignore the fact that base money growth
was far lower in 2002 than in 2001.
Interest Rates. The second quarter of
2002 saw a continuation of the decline
Survey of Recent Developments
FIGURE 3 Base Money Growth, Inflation and Interest Rates
(% p.a.)
25
20
15
10
-5
Jan-00 Jul-00 Jan-01
Base money growth
Interbank 1-month
Source: CEIC Asia Database.
in nominal interest rates that had been
apparent since January (figure 3). The
nominal 3-month SBI (Bank Indonesia
Certificate) rate (not shown) fell by 3.3
percentage points during the period
January–September. 5 Bank lending rates
dropped relatively little during this pe-
riod, but average deposit rates fell some-
what more, resulting in a much needed
increase in the banks’ net lending mar-
gins. The declining interest rate trend
reflects the impact on expectations of
falling inflation and rupiah appreciation
over this period: that is, nominal rates
adjusted downwards as expectations of
inflation and depreciation were revised
to lower levels. It is interesting to note
that the real interest rate—represented
in figure 3 by the 1-month interbank call
rate adjusted for contemporaneous in-
283
Jul-01 Jan-02 Jul-02
Inflation
Interbank real
flation—appears to be largely unrespon-
sive to the conduct of monetary policy,
having remained fairly consistent at
around 4–5% p.a. since late 2000. 6 Ar-
guably it is real rather than nominal
rates that are of most fundamental con-
cern to economic actors.7
Balance of Payments
Although total exports stabilised in Q1
2002, non-oil and gas exports and total
imports both declined slightly, continu-
ing the slide that began in Q3 2000
(table 2). The trade balance increased
marginally over the previous quarter, as
did the current account surplus. The capi-
tal account was still in deficit in Q1 2002,
reflecting a continued and significant net
outflow of private capital; net official
capital inflow also remained negative.
284 Armida S. Alisjahbana and Chris Manning

TABLE 2 Balance of Payments

($ billion)

2000 2001 2002

Total Q1 Q2 Q3 Q4 Total Q1

Exports 65.41 15.40 15.00 14.23 12.73 57.36 12.74

Non-oil & gas 50.34 11.62 11.67 11.31 10.20 44.81 10.12
Oil & gas 15.07 3.78 3.33 2.92 2.53 12.56 2.62
Oil 7.95 2.08 1.95 1.55 1.35 6.92 1.42
LNG & LPG 7.11 1.71 1.38 1.37 1.18 5.64 1.20
Imports –40.37 –9.22 –9.51 –8.59 –7.35 –34.67 –7.20
Merchandise trade
balance 25.04 6.18 5.49 5.64 5.38 22.69 5.54
Services –17.05 –4.12 –4.15 –3.28 –4.24 –15.80 –4.26
Current account 7.99 2.06 1.34 2.36 1.14 6.90 1.28
Official capital 3.22 –0.14 –0.24 –0.20 –0.17 –0.74 –0.35
Inflows 7.49 1.40 1.16 1.40 1.79 5.74 1.36
CGI 2.42 0.53 0.41 0.38 0.65 1.96 0.35
Non-CGI 5.07 0.87 0.75 1.02 1.14 3.78 1.01
Debt repayments –4.27 –1.53 –1.40 –1.59 –1.95 –6.48 –1.71
Private capital –9.99 –3.11 –2.47 –2.50 –0.18 –8.25 –1.08
Direct investment –4.55 –2.24 –1.90 –1.11 –0.62 –5.88 –2.24
Other –5.44 –0.87 –0.57 –1.39 0.45 –2.38 1.16
Capital account –6.77 –3.25 –2.71 –2.70 –0.34 –8.99 –1.42
Overall balance 5.04 –0.72 –0.04 0.32 –0.94 –1.38 –0.01
Capital & current
account, net 1.22 –1.19 –1.37 –0.34 0.80 –2.09 –0.14
Errors & omissions 3.82 0.46 1.33 0.66 –1.74 0.71 0.13

Source: Bank Indonesia, http://www.bi.go.id.

The net outflow of private capital in the
form of direct investment was as high
in Q1 2002 as in any quarter since the
start of the crisis, providing a strong in-
dication that investor confidence in
Indonesia’s prospects, far from improv-
ing, has continued to weaken.
There was, however, a significant in-
crease in other private capital flow (i.e.
portfolio investment), which had been
positive since Q4 2001. The factors un-
derlying this surge in portfolio invest-
ment are difficult to ascertain, but may
include the return of Indonesian citi-
zens’ savings from offshore accounts as
political conditions stabilised, renewed
investor interest in the Jakarta Stock Ex-
change, and IBRA (Indonesian Bank Re-
structuring Agency) asset sales (CSIS
2002). Note, however, that these balance
of payments data are by now quite old;
the recent figures from the stock ex-
change discussed above suggest that the
desire to invest in Indonesian stocks has
declined significantly in recent months.
THE FISCAL SITUATION
The 2002 Budget
At the time of writing, the budget for
2002 appeared to be reasonably well on
track. Tax revenue for January–August
was 58.4% of the budgeted amount for
Survey of Recent Developments
the year, suggesting that the overall tar-
get is within reach—even though re-
vised GDP growth estimates of 3.2–3.8%
for 2002 are a little lower than the bud-
get assumption of 4% (table 3). The 9%
inflation rate assumed in the budget was
well within reach at its September level
of 10.5%. Rupiah appreciation had not
been sufficient at the time of writing to
achieve the average exchange rate of
Rp 9,000/$ assumed in the budget, but
the actual outcome should not be far
away from this.8 The decline in SBI in-
terest rates reduced interest payments
on the government’s domestic debt, but
it was not until September that the
3-month SBI rate fell to 14%—the aver-
age rate assumed in the budget. Thus in
the absence of debt rescheduling, debt
interest outlays can be expected to ex-
ceed budgeted levels. On the other hand,
the assumed average oil price of $22/
barrel will be exceeded, as oil has risen
dramatically in price since March: it was
$28/barrel in August, and with the
threat of war in Iraq there was the pros-
pect of even further increases in the near
future. Oil production is expected to
average 1.2 million barrels/day, some-
what less than the budget assumption
of 1.3 million barrels/day, but the im-
pact of this on oil revenue will be more
than offset by the higher price.
The planned budget deficit of 2.5% of
GDP is believed to be within reach,
thanks to the increase in oil prices and
to the rescheduling of some interest pay-
ments falling due in 2002 as agreed in
the Paris Club negotiations in April. Fi-
nancing of the deficit relies heavily on
privatisation and IBRA asset sales. Pri-
vatisation proceeds and IBRA asset sales
for the first half of 2002 were Rp 2.1 tril-
lion and Rp 23.1 trillion respectively,
already well in excess of the aggregate
Rp 23.5 trillion required from these
sources to finance the deficit. The gov-
ernment actually hopes to obtain greater
285
amounts from privatisation (Rp 6.5 tril-
lion) and asset sales (Rp 35.3 trillion)
than suggested by table 3. Assuming the
deficit comes in on target, this would
permit some net redemption of govern-
ment bonds outstanding.
The Draft 2003 Budget
The 2003 draft budget presented by
President Megawati to parliament in
August 2002—surprisingly far in ad-
vance of the start of the fiscal year in
January 2003, and thus running the risk
of being overtaken within the next few
months by unforeseen events such as the
Bali bomb attacks—was based on three
broad objectives: consolidating the bud-
get, stimulating the economy, and
achieving fiscal sustainability. The bud-
get deficit was targeted at 1.3% of GDP,
significantly lower than for 2002. Its key
economic assumptions (table 3) were
that:
• GDP growth would increase to 5%
(by comparison with the 3.2–3.8% now
expected in 2002);
• inflation would fall to 8% from its
August 2002 level of 10% (a surpris-
ingly unambitious target, given the
ease with which the rate had already
been reduced from over 15% in Feb-
ruary);
• the 3-month SBI interest rate would
fall to 13% from its August level of
14.9%;
• the average exchange rate would be
Rp 8,700/$, roughly the same as its
August level;
• oil production would remain
around its average 2002 level of 1.2
million barrels/day; and
• the oil price would fall to $20.50/bar-
rel from the $28/barrel figure recorded
in August (seemingly highly conser-
vative, but the difficulty of predicting
world oil prices probably justifies such
an approach—even if the level of pre-
cision here is spurious).
286 Armida S. Alisjahbana and Chris Manning

TABLE 3 Budgets for 2002 and 2003

(Rp trillion)

2002 2003 Real

Change
Revised % of % of Approved % of % of (%)a
Total GDP Total GDP

TOTAL REVENUE 301.9 100.0 17.6 327.8 100.0 16.8 0.5

Tax revenue 219.6 72.7 12.8 260.8 79.5 13.3 10.0
Domestic taxes 207.0 68.6 12.1 246.5 75.2 12.6 10.3
Income tax 104.5 34.6 6.1 124.7 38.0 6.4 10.5
(of which non-oil & gas) (88.8) (29.4) (5.2) (112.2) (34.2) (5.7) (16.9)
Value added tax 70.1 23.2 4.1 82.1 25.1 0.5 8.5
Land & building taxes 8.1 2.7 0.5 9.9 3.0 1.5 18.6
Excise & other 24.4 8.1 1.4 29.8 9.1 6.2 13.2
International trade taxes 12.6 4.2 0.7 14.3 4.3 0.7 4.8
Non-tax revenue 82.3 27.3 4.8 67.0 20.5 3.4 –24.6
Natural resources 63.2 20.9 3.7 49.6 15.1 2.5 –27.4
Profit transfers from SOEs 10.4 3.4 0.6 8.5 2.6 0.4 –24.2
Other non-tax revenues 8.7 2.9 0.5 9.0 2.7 0.5 –4.5

TOTAL EXPENDITURE 344.0 100.0 20.1 354.2 100.0 18.1 –4.7

Central government expenditure 246.1 71.5 14.3 241.0 68.0 12.3 –9.3
Routine expenditure 193.8 56.3 11.3 186.5 52.6 9.5 –10.9
Personnel 41.3 12.0 2.4 51.9 14.7 2.7 16.4
Goods & services 12.9 3.8 0.8 15.4 4.3 0.8 10.4
Interest payments 88.5 25.7 5.2 80.9 22.8 4.1 –15.4
Domestic debt 59.5 17.3 3.5 55.1 15.6 2.8 –14.3
Foreign debt 29.0 8.4 1.7 25.8 7.3 1.3 –17.6
Subsidies 41.6 12.1 2.4 25.4 7.2 1.3 –43.5
Fuel 30.4 8.8 1.8 13.6 3.8 0.7 –58.6
Non-fuel 11.2 3.3 0.7 11.8 3.3 0.6 –2.4
Other 9.5 2.8 0.6 12.8 3.6 0.7 25.2
Development expenditure 52.3 15.2 3.0 54.5 15.4 2.8 –3.5
Rupiah financing 26.5 7.7 1.5 36.2 10.2 1.9 26.6
Project financing 25.8 7.5 1.5 18.3 5.2 0.9 –34.4

Funding of regional governments 97.9 28.5 5.7 113.2 32.0 5.8 7.1
Equalisation funds 94.5 27.5 5.5 103.6 29.2 5.3 1.5
Revenue sharing 24.6 7.2 1.4 25.9 7.3 1.3 –2.7
General allocation fund (DAU) 69.1 20.1 4.0 75.4 21.3 3.9 1.1
Specific allocation fund (DAK) 0.8 0.2 0.0 2.3 0.7 0.1 169.0
Special autonomy funds 3.4 1.0 0.2 9.6 2.7 0.5 162.1

OVERALL BALANCE –42.1 –12.2 –2.5 –26.3 –7.4 –1.3 –42.1

Survey of Recent Developments 287

TABLE 3 (continued) Budgets for 2002 and 2003

(Rp trillion)

2002 2003 Real

Change
Revised % of % of Approved % of % of (%)a
Total GDP Total GDP

FINANCING 42.1 100.0 2.5 26.3 100.0 1.3 –42.1

Domestic financing 23.5 55.9 1.4 16.9 64.3 0.9 –33.4
Use of bank deposits 0.0 0.0 0.0 8.5 32.3 0.4
Other 23.5 55.9 1.4 8.4 31.9 0.4 –66.9
Privatisation 4.0 9.5 0.2 8.0 30.4 0.4 85.2
Asset sales 19.5 46.4 1.1 12.0 45.6 0.6 –43.0
Government bonds (net) 0.0 0.0 0.0 –11.6 –44.1 –0.6
Foreign financing (net) 18.6 44.1 1.1 9.4 35.7 0.5 –53.1
Foreign financing (gross) 35.4 84.1 2.1 26.1 99.2 1.3 –31.7
Program loans b 9.5 22.7 0.6 7.8 29.7 0.4 –24.2
Project loans 25.8 61.4 1.5 18.3 69.6 0.9 –34.4
Debt payment –16.8 –39.9 –1.0 –16.7 –63.5 –0.9 –8.0
Maturity –44.0 –104.6 –2.6 –42.8 –162.7 –2.2 –9.9
Rescheduling 27.2 64.7 1.6 26.1 99.2 1.3 –11.2
Principal 20.1 47.8 1.2 19.8 75.3 1.0 –8.8
Interest 7.1 16.9 0.4 6.3 24.0 0.3 –17.8

ASSUMPTIONS
GDP growth (%) 4.0 5.0
Inflation rate (%) 9.0 8.0
Interest rate (3-month SBI, %) 14.0 13.0
Exchange rate (Rp/$) 9,000 8,700
Oil production (mbcd)c 1.3 1.2
Oil price ($/barrel) 22.0 20.5

a
Change in 2003 relative to 2002, % in real terms.
b
In the revised 2002 budget, program loans were merged with Paris Club III rescheduling
of Rp 36.8 trillion, because at the time the budget was formulated the amount of debt
rescheduled was not yet clear.
c
Million barrels of crude oil per day.

Source: Republic of Indonesia, Nota Keuangan dan Rancangan Anggaran Pendapatan dan Belanja
Negara 2003 [Financial Notes and Draft State Budget 2003].
288
The assumption of 5% GDP growth
was perceived to be reasonable, if some-
what optimistic. It relied, for example,
on assumptions of investment and ex-
port growth in excess of 6% and 5% re-
spectively, which would represent a
considerable improvement on 2002. 9 The
blow to investor confidence and to tour-
ism exports resulting from the Bali
bombings makes it highly unlikely that
these growth rates will be achieved. The
targeted deficit of 1.3% of GDP has been
criticised by some as failing to provide
an adequate stimulus to economic re-
covery, but this view assumes that the
continued existence of unused produc-
tion capacity results simply from a lack
of aggregate demand—ignoring such
crucial matters as the enormous prob-
lem of widespread corporate defaults,
the continued ill health of the banking
system, the lack of strong leadership and
consistent policy making on the part of
the government, and the ever more ob-
vious inadequacies of the legal system.
The planned reduction of the deficit at
least signals the government’s intention
to consolidate its position and put the
budget on a more sustainable path.
Revenue is expected to increase by
8.5% from the budgeted amount in 2002,
which would amount to a negligible
change in real terms: hence the projected
slight decline in revenue relative to
GDP. Most of the increase is to be gen-
erated from individual and corporate
income tax, value added tax and the ex-
cise on cigarette sales. Income tax rev-
enue increases are to be achieved by
extending coverage of persons and firms
that have thus far evaded their obliga-
tions as tax payers.
Central government expenditure is
projected to decline significantly by vir-
tue of a large cut in routine expendi-
ture—despite plans to increase salaries
of civil servants, police and military per-
sonnel by 10% and teachers’ allowances
Armida S. Alisjahbana and Chris Manning
by 50%. This reduction is made possible
by a further major cut (39%, or 44% in
real terms) in subsidies—most notably
on fuel prices—and by reduced debt ser-
vicing costs. Fuel subsidies are to be
slashed to Rp 13.6 trillion, down from
Rp 30.4 trillion in 2002, while electricity
tariffs will be raised on average by 6%
each quarter. Some non-fuel subsidies
will be retained, however, including the
fertiliser subsidy, food subsidies for
poverty alleviation, and interest subsi-
dies in certain lending programs; the
total amount involved is Rp 11.8 trillion.
The cost of foreign debt servicing is ex-
pected to decline as a result of both the
Paris Club rescheduling and rupiah ap-
preciation. At the same time, the domes-
tic debt servicing cost is projected to fall
with declines in the SBI interest rate, and
as a result of some redemptions of the
government’s bank recapitalisation
bonds.
Development expenditure is also ex-
pected to decline in real terms and as a
percentage of GDP. There is a projected
shift in development spending toward
greater reliance on rupiah financing and
correspondingly less on project (aid) fi-
nancing. The decline in development
spending must be interpreted carefully,
in light of structural changes to the bud-
get resulting from the decentralisation
of public services to local government
level: total funding of local government
accounts for about 30% of the central
government budget. Nevertheless,
funding of local government through
the equalisation process is to increase
only by about 1.5% in real terms.
Roughly two-thirds (Rp 16.9 trillion)
of the deficit financing requirement is to
be met from domestic sources, the re-
mainder from net new foreign borrow-
ing. The target for privatisation proceeds
is Rp 8 trillion—twice the budgeted
amount in 2002—which seems very op-
timistic considering the slow progress so
Survey of Recent Developments
far on this front. IBRA asset sales are ex-
pected to bring in another Rp 12 trillion.
Whether IBRA can meet this target re-
mains to be seen, since it has limited as-
sets for disposal after recent large sales.
If these figures (and all the other budget
items) were to be realised, the govern-
ment would be able to redeem some
Rp 11.6 trillion of existing bank recapi-
talisation bonds. Provided any shortfall
in privatisation and asset sales does not
exceed this amount in aggregate, the bud-
get deficit for 2003 can still be financed,
but correspondingly smaller amounts of
bonds will be able to be redeemed.
The Burden of Government Debt
As of September 2002, total government
domestic debt outstanding was Rp 656
trillion. The bulk of it (Rp 427 trillion)
comprised bonds issued to recapitalise
banks that became insolvent during the
banking sector crisis of 1997/98, while
additional bonds worth Rp 218 trillion
were issued to Bank Indonesia in settle-
ment of liquidity support provided to
troubled banks during the course of the
crisis. 10 Interest payments on these
bonds are now imposing a heavy bur-
den on the budget: in 2002, for example,
about Rp 59.5 trillion, or 20% of total
revenue, is accounted for by interest
payments on domestic debt. On the ba-
sis of the maturity structure of these
bonds as originally issued, principal re-
payments begin to become significant in
2003, but jump to a much higher level
in 2004 and continue to increase in each
of the next three years (Deuster 2002: 31).
This would imply much greater annual
debt service burdens than in 2002; in
2004, for example, principal and inter-
est payments together would exceed
Rp 100 trillion.
One response to this cash flow prob-
lem is to roll over the bonds as they
mature (i.e. to issue replacement bonds)
as in the budget for 2002, 11 but recently
289
the government has been concentrating
on lengthening the maturity structure
of some of the existing bonds so as to
push principal repayments further into
the future. Agreement has been reached
with the four state-owned banks (Bank
Mandiri, Bank BNI, Bank Rakyat Indo-
nesia and Bank Tabungan Negara) to
‘re-profile’ some Rp 175 trillion of their
holdings of government bonds (table 4).
The maturity dates of fixed rate bonds,
originally between 2004 and 2009, are
now to be extended to between 2010
and 2013 (Kompas, 21/9/02), while
those of variable rate bonds are to be
extended from between 2004 and 2009
to between 2014 and 2020. Despite a
perception to the contrary on the part
of some observers, the debt re-profil-
ing exercise has not involved any
switching of bonds from fixed to vari-
able interest rates. Since the interest
rates on these bonds are below market
levels (McLeod 2000: 27–9) the banks
that hold them are effectively subsidis-
ing the government, and the size of the
subsidy increases with any extension of
the maturity structure. Presumably for
this reason, the agreement provides for
additional interest payments to the four
banks amounting to a total of Rp 824
billion each year until 2010 in return for
delaying the repayment of principal
(Kompas, 21/9/02).
Besides domestic debt, the total
amount of government external debt
outstanding was $73.5 billion (as of July
2002), and the cash outflows associated
with this also constitute a heavy drain
on budgetary resources. In the 2002
budget, total principal and interest
originally due on this debt was
Rp 43.9 trillion, but the government has
reduced the actual amount to Rp 16.7
trillion by negotiating through the Paris
Club the rescheduling of some Rp 20.2
trillion of principal and Rp 7.1 trillion
of interest falling due this year.
290 Armida S. Alisjahbana and Chris Manning

TABLE 4 Domestic Government Debt Reprofiling

(Rp trillion)

Bank Rate Total Reprofiled Unchanged

Mandiri Fixed 47.0 34.8 12.3

Variable 89.9 69.6 20.3
Total 137.0 104.4 32.6
BNI Fixed 33.1 24.7 8.5
Variable 19.3 16.2 3.1
Total 52.4 40.8 11.6
BRI Fixed 22.0 16.8 5.2
Variable 6.5 3.6 2.9
Total 28.5 20.4 8.1
BTN Fixed 1.2 0.0 1.2
Variable 12.6 9.0 3.6
Total 13.7 9.0 4.7
Total fixed 103.3 76.2 27.1
Total variable 128.4 98.4 30.0
Grand total 231.6 174.6 57.0

Source: Ministry of Finance, cited in Kompas, 21/9/02.

Of course rescheduling foreign debt
and lengthening the maturity profile of
bonds issued domestically does nothing
more than ease the government’s cur-
rent cash flow difficulties—in effect,
shifting the burden of dealing with the
amortisation of these borrowings to fu-
ture governments. Thus an even greater
problem will arise with the 2004 bud-
get, for example.
There does not appear to be an easy
solution to the budget debt servicing
problem. In the absence of any other
new source of financing, and given lim-
its on the extent to which spending can
be reduced further, external financing
and rescheduling of existing debt is still
a possibility in the near future.12 In the
medium term, however, the important
question is whether the government will
continue to be able to persuade its ex-
ternal creditors to delay the repayment
of its borrowings.
Various measures are available for re-
ducing the total amount of bonds out-
standing, such as selling assets to finance
the redemption of bonds, and allowing
recapitalised banks to swap bonds for
assets (such as bank loans) now held by
IBRA.13 Little is gained by such measures,
as they all involve the loss of revenues
generated by the assets in question, leav-
ing the budget deficit largely unchanged.
An alternative approach involving the
use of accumulated budget surpluses
(sisa anggaran lebih) held as deposits at
BI to redeem bonds would have the ef-
fect of expanding base money, and it
would be necessary for BI to sterilise the
inflationary impact by issuing new SBIs;
given that BI is part of the public sector,
total public sector debt would therefore
be unchanged. This latter observation is
also relevant to a recent agreement on the
sharing of banking crisis costs by the gov-
ernment and BI (box 1).14
Survey of Recent Developments 291

BOX 1 SMOKE AND MIRRORS: SHARING THE COST OF THE BANKING C RISIS?
Much was made recently of a new agreement (still to be ratified by the DPR
at the time of writing) regarding some Rp 218 trillion in bonds issued by the
government to BI to compensate the latter for last-resort loans it extended to
troubled banks at the height of the financial crisis (Bantuan Likuiditas Bank
Indonesia, BLBI), most of which have not been repaid (Kenward 2002: 22–3).
The purpose of this agreement was to create the impression that the cost of
these defaults was now to be shared between the government and BI, rather
than being carried by the government alone (in implicit recognition of BI’s
failure to exercise sufficient care in providing these loans in the first place).
This was to be effected by transforming some Rp 159 trillion of these bonds
into ‘Capital Maintenance Notes’ (CMNs) that have no maturity date and
pay no interest (i.e. into zero interest consols).a
Clearly these new instruments are worthless, since their present value
(calculated by discounting their nominal amounts over an infinitely long
period of time at any positive interest rate) is zero. That being the case, the
effect is to ‘charge’ BI an amount of Rp 159 trillion for its presumed incom-
petence as lender of last resort; apparently this is sufficient to satisfy those
on the government side who wish to see BI carry some of the cost of what
they see as its past mistakes. By carrying the CMNs at their face value rather
than their true value, however, BI will be spared the embarrassment of rec-
ognising this loss and writing down the value of its equity commensurately
in its financial statements.
The agreement also requires, however, that these CMNs be redeemed by
the government over time by means of forgoing dividends that would oth-
erwise accrue to it from BI’s operating profits. Thus if BI were to make a
profit of Rp 159 trillion this year it could notionally pay this amount to the
government as a dividend, whereupon the government could notionally
use this revenue to redeem all the outstanding CMNs. BI would still be
saved from the need to recognise a loss of Rp 159 trillion on its lending
activities, by being able to portray this transaction as a dividend payment.
At the other extreme, if it failed ever to earn any profit in the future, it would
simply continue to carry Rp 159 trillion of CMNs in its balance sheet indefi-
nitely, again avoiding the need for any embarrassing financial disclosures.
All of this financial ‘smoke-and-mirrors’ is of little or no consequence to
the government’s financial position or to economic recovery. Both BI and
the government are part of the public sector, and changing the terms of the
financial transactions between them has no impact on the financial position
of the public sector overall: any gain to one side is matched by an equal loss
to the other. There is an intangible cost, however, in the form of yet another
setback to the ideal of encouraging transparency in the public sector.
a
This formalises what has been actual practice: to date the government has not paid
any interest on its debt to BI.
292 Armida S. Alisjahbana and Chris Manning

FIGURE 4 Motor Car, Motor Cycle and Cement Sales

(January 2002 = 100)
150

125

100

75

50 Motor cars
Motor cycles
Cement
25

0
Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02

Source: PEG–Bappenas, Real Sector Indicators (unpublished data).

THE REAL SECTOR: Nevertheless, even though the value of

TRADE AND INVESTMENT
Although growth had been expected to
remain strong for the rest of 2002, inter-
national developments and the fallout
from the Bali tragedy now cast doubt on
this prognosis, and even more so for
growth targets and macroeconomic sta-
bility in 2003. Domestic consumption
was not as robust in the first half of 2002
as 12 months ago. Key indicators ce-
ment, motor car and motor cycle sales
increased in this period, but were still
barely above figures recorded in the first
half of last year, following a deep trough
around puasa and lebaran (the fasting
month and the holiday following it) in
late 2001 (figure 4).
Investment signals were mixed. For-
eign investment approvals remained
low in the first half of 2002. Both the
number of projects (506) and the value
of investment approvals (just over $2.5
billion) were significantly down com-
pared with the same period in 2001.
domestic approvals plunged 70% over
the same period, the downward trends
in total gross fixed capital formation
and import of capital goods seem to
have bottomed out in the December
quarter. Growth in the domestic com-
ponent of fixed capital formation also
remained positive in each quarter since
mid 2001. Additionally, reports from BI
of an increase in credit from the bank-
ing sector and of some 51% of all new
credit going to small and medium en-
terprises (SMEs) through to May 2002
(Kompas, 18/7/02) offer further hope
for continued recovery in 2002, al-
though the potential disincentive for
the banks to lend to SMEs following
official approval for a haircut on past
loans is not encouraging. 15
Exports recovered somewhat in 2002
after a bumpy last two quarters in 2001.
Although they were some 7% lower
overall (and 3% in the case of non-oil
and gas exports) in the first half of 2002
Survey of Recent Developments 293

FIGURE 5 Value of Oil and Non-oil Exports

($ billion)
6

3
Total
Non-oil
2 Oil

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

Source: BPS (Central Statistics Agency), Indikator Ekonomi, various issues.

than in the same period in 2001, they
had bounced back following the steep
decline in the second half of 2001, when
orders fell off sharply in response to the
11 September attacks and associated
political unrest in Indonesia. Overall,
non-oil and gas exports rose by 3.6% in
the first half of 2002 compared with the
second half of the previous year, with
machinery and appliances registering
particularly robust growth (figure 5
and table 5). 16
Nevertheless, the trend in several
labour-intensive exports that had
played a key role in job expansion
before the crisis was particularly wor-
rying. Garments had not recovered fol-
lowing the sharp (15% ) decline in
exports in the second half of 2001. Com-
petition from China was already begin-
ning to hurt the textile and garment
industries, with lower unit labour costs
resulting from higher productivity rela-
tive to wage rates in Chinese industry
(James, Ray and Minor 2002). The foot-
wear industry was facing major prob-
lems as Nike and Reebok closed facto-
ries in Indonesia in the first half of 2002
(FEER, 12/9/02: 47–9). Furniture and
timber sales also declined in this pe-
riod, and were some 10% below the
previous quarter.
The appreciation of the exchange rate
in the first two quarters of 2002 prob-
ably played some role in the slowdown
in these exports, although regulated in-
creases in labour costs were now squeez-
ing key labour-intensive industries (see
below). Further, firm surveys found that
non-labour costs of special concern to
exporters included the high luxury tax
on imported goods, especially electron-
ics, the high cost and inefficiency of port
services, the ban imposed on bonded
warehouses for the purchase of locally
made materials, and delays in rebates
to exporters through Bintek (Badan
Informasi dan Teknologi Keuangan, the
Financial Information and Technology
Agency).17
294 Armida S. Alisjahbana and Chris Manning

TABLE 5 Principal Non-oil Exports, 2001 and 2002

($ million)

Product and 2001 2002 2002 S1

SITC Code Compared with:
S1 S2 S1 2001 S1 2001 S2
(% ) (% )

Machine/electricity equipment (85) 3,198 2,716 2,976 –6.9 9.6

Timber, timber products (44) 1,649 1,705 1,531 –7.2 –10.2
Machinery/mechanical machinery (84) 1,422 1,303 1,496 5.2 14.8
Garments (excl. knitted ware) (62) 1,511 1,272 1,297 –14.2 2.0
Appliances/household lighting (94) 775 676 849 9.5 25.6
Synthetic filaments (54) 585 571 533 –8.9 –6.7
Organic chemicals (29) 488 538 528 8.2 –1.9
Man-made staple fibres (55) 468 414 456 –2.6 10.1
Cotton (52) 390 354 340 –12.8 –4.0
Copper (74) 199 221 210 5.5 –5.0
Subtotal 10,685 9,770 10,216 –4.4 4.6
Other 11,670 11,229 11,529 –1.2 2.7
Total 22,355 20,999 21,745 –2.7 3.6

Source: BPS (adapted from CSIS 2002).

Smuggling and Trade Restrictions At the same time, a raft of regulations

Reports of widespread smuggling con-
tinued to dominate public discussion of
trade policy in the first half of 2002. Fol-
lowing the furore over a smuggled con-
signment of luxury cars earlier in the
year, extensive smuggling of electron-
ics products and used clothing contin-
ued to receive media attention (JP,
18/7/02). This revived once again the
debate over whether Indonesia should
reintroduce a Pre-Shipment Inspection
Authority (PSI). 18 Both trade and indus-
try minister Rini Suwandi and IMF rep-
resentatives have spoken in favour of
reintroduction of PSI and they have
received strong support from some pro-
ducer groups. Finance minister Boedi-
ono has been more cautious, arguing
that the reintroduction of PSI will only
delay long overdue reforms to the cus-
toms service.
have been introduced in an attempt to
limit smuggling and overcome prob-
lems of under-invoicing of imports.
Over 3,800 importers in eight key sec-
tors have been registered with the trade
and industry ministry, which threatened
to withdraw licences for non-reporting.
The customs service announced in Oc-
tober that 10 large, reputable importers
would receive favourable treatment
from the service (Kompas, 2/10/01).
Many of the reforms to agricultural
trade outlined in the initial MOU
(memorandum of understanding) with
the IMF in 1998 are being dismantled.
Import of some commodities for domes-
tic processing, notably cloves and raw
sugar, has been restricted to registered
domestic producers. The Ministry of
Trade and Industry appointed three
state plantations as registered sugar
Survey of Recent Developments
importers, setting a minimum price
(Rp 3,100) well above the current fob
price at which they can bring in sugar
(JP, 24/9/02). 19 Some key items such as
rice and wheat flour have been moved
from the ‘green’ to the more intrusive
‘red’ customs lane for special attention
on the part of officials, causing major
delays and some cancellation of import
consignments.
As reported in the previous survey
(Athukorala 2000: 157–8), calls for in-
creased agricultural protection have
been associated with complaints that
local producers can no longer compete
with lower than normal international
prices of some commodities (sugar and
cloves in particular). 20 Low (5%) anti-
dumping duties were proposed by the
Ministry of Industry and Trade on
wheat flour in July, despite earlier as-
surances from the minister that there
was no case against dumping in this in-
dustry. A much stronger push for new
tariffs on key agricultural commodities
(rice, sugar, corn and soy bean) was
made by the agriculture minister,
Bungaran Saragih (Kompas, 11/6/02).
He formed a team to investigate tariffs
on these commodities in late June. In
September, he announced a proposed
increase in the tariff on rice from Rp 430
to Rp 753/kg to accompany an increase
in the farmers’ floor price of around
15%, from Rp 1,519 to Rp 1,745/kg of
unhusked rice (gabah).21
The Ministry of Agriculture has also
recommended a fertiliser subsidy of
Rp 1.2–1.5 trillion, which is projected
to reduce urea and other fertiliser prices
by some 15–20%, and the Ministry of
Trade and Industry has banned a re-
ported small increase in price by the
state-owned producer, PN Pusri
(Kompas, 9/10/02). Other regulations
proposed by the trade and industry
ministry are also potentially damaging
295
to farmer interests, most notably a
5–20% export tax on cocoa, a move
strongly criticised by the Executive Di-
rector of the Indonesian Cocoa Associa-
tion (Askindo) (JP, 12/10/02).
Tariffs on Rice. There has been con-
siderable controversy over the effects of
projected increases in the rice tariff. The
supporters of greater protection argue
that Indonesia is merely adapting to
what is a very uneven playing field in
agricultural trade. On the other hand,
critics of a more interventionist ap-
proach have pointed out that Indonesian
rice prices are now already significantly
above world prices, thus artificially dis-
torting incentives in favour of rice
against potentially more profitable
crops, farm and non-farm activities
(Bappenas et al. 2002; Timmer 2002).
They also argue that higher rice prices
tend to hurt rather than help the poor,
most of whom are net consumers of rice.
The special rice subsidy (OPK), recently
increased in value to a smaller number
of households, tends to cushion the im-
pact of higher prices on the poor, al-
though it has been estimated that only
around half receive relatively meagre
support. However, a further increase in
the tariff will reduce benefits from the
subsidy.
Critics of the push towards more
protection in rice also draw two impor-
tant contrasts with the early period
when Bulog held a monopoly over the
import of rice. In the period of heavy
Bulog intervention in the 1980s and
1990s, domestic prices tracked interna-
tional prices quite closely in a volatile
world rice market. Currently, all indi-
cations are that world prices will re-
main low for some time, with higher
levels of per capita production in many
countries. Major exporters (Vietnam
and Thailand) hold large stocks of rice,
and countries like India also play a role
296
in the international trade from time to
time. Secondly, insofar as rice produc-
ers were protected in earlier periods,
the trade-off was substantial gains in
production through the rice intensifi-
cation and extensification programs,
which are unlikely to be repeated.
While few would deny that in-
creased protection of rice farmers is
likely to slow the longer-term transfer
of farmers into higher value added
crops, the impact of increased protec-
tion on the poor appears to be less
clearcut. A CGE (Computable General
Equilibrium) model to simulate the ef-
fects on the poor of an increase in the
tariff from 25% to 45% found that
higher tariffs do increase the incidence
of poverty (Warr 2002). But the impact
was quite small. The results imply that
the effects on the poor alone are not
enough to drop proposals for greater
protection. The analysis predicts that
the main beneficiaries of the policy are
likely to be farm labouring households,
through more employment and higher
wages from increased production. The
net positive impact on poverty occurs
mainly because these households have
the highest incidence of poverty among
socio-economic groups identified in the
model.
These results are a welcome reminder
that the distributional impact and ad-
justment costs of market-oriented poli-
cies are not always clearcut, despite
potential longer-term economic benefits.
The proponents of reform must do more
than merely assert that poverty allevia-
tion is served by less protection if they
are to convince a sceptical public, and
gullible politicians, that the interests of
well organised producer groups are nec-
essarily against those of the poor in pub-
lic policy.22
The longer-term costs of more protec-
tion would seem much higher in the case
of sugar. The main issue still appears to
Armida S. Alisjahbana and Chris Manning
be the conflict between the entrenched
interests of the sugar mill lobby and
those of both consumers and potential
producers of agro-processed commodi-
ties, who use sugar as an input. As agri-
cultural researchers have long pointed
out, increased protection of sugar and
sugar factories is likely to be at the ex-
pense of many rice sector farmers (and
workers) on Java, who thrive under
similar agronomic conditions.
Nevertheless, on the positive side,
prior to this year the government had
moved cautiously on agricultural pro-
tection, despite quite intense lobbying
from farmer groups and from some re-
gions. The Ministry of Trade and Indus-
try strongly rejected the East Java
attempt to impose an import ban for that
province in early July, and it appears
that after a month of experimenting with
such a ban the East Java governor was
having second thoughts on whether this
was an effective policy to raise farmgate
rice prices (Bisnis Indonesia, 9/7/02 and
8/8/02). The Minister of Finance is said
to have rejected proposals for an anti-
dumping tariff on wheat flour. There
have not been strong signs of a grow-
in g protectionist mood spr ead ing
from agriculture to other areas of the
economy (despite pressures from pro-
ducers and sections of the DPR), al-
though a recent proposal for a tariff on
garments is a worrying development.
Failing Infrastructure?
The Case of Electricity Supply23
One major obstacle to new investment
and increased production has been the
slowdown in construction of new infra-
structure and the maintenance of exist-
ing road, port, telecommunications and
electricity networks. Fortunately, the
country had invested heavily in physi-
cal infrastructure during the Soeharto
era, and hence existing networks were
better placed than in many countries
Survey of Recent Developments
suffering economic crises (e.g. Eastern
Europe or the Philippines in the 1980s
and 1990s).
Five years on the cracks are beginning
to appear, owing to a lack of public and
private investment. This was vividly
brought home to national capital resi-
dents and businesses when Jakarta and
surrounding areas suffered a five-hour
total blackout on Thursday, 12 Septem-
ber (McBeth 2002). The immediate cause
of the blackout was a break in nearby
transmission lines. But the underlying
problem relates to funding cutbacks and
financial difficulties suffered by the State
Electricity Company, PLN, in the wake
of the crisis.
The main challenge appears to be
medium term rather than immediate.
For the present, the power needs of the
country are being met by a combination
of public and private (captive) suppli-
ers, with some two-thirds of total capa-
city (33,000 megawatts) being supplied
by the public sector. Moreover, the gov-
ernment has moved to raise electricity
prices from the highly subsidised levels
of the past, and recently passed a new
law paving the way for privatisation of
PLN by 2007, allowing greater flexibil-
ity in pricing and investment. (A short-
term effect was the release of urgently
needed aid for power.) Current capacity
still seems capable of coping with cur-
rent demand—although there are some
tricky transmission issues to be dealt
with—and there remains a breathing
space to increase generation, transmis-
sion and distribution if investments (and
decisions) are forthcoming in the imme-
diate future.
Nevertheless, the country will need
around 2,000 megawatts of new gener-
ating capacity per annum if investment
picks up and the country begins to meet
economic growth targets of 5% or more.
New investment needs would then be
around $2 billion per annum in all stages
297
of the electricity production process,
much of which would almost certainly
have to come from overseas private
sources. Because of uncertainty, large in-
vestors will probably require a sover-
eign, not a PLN, guarantee (after having
had their fingers burnt from unpaid
debts arising out of the rupiah depre-
ciation of 1998–99); the government is
loath to offer such guarantees, given
the precedent it would set for other
public–private sector deals. Gas may be
an option in the medium term. But even
here, the country will need large invest-
ments, and a capacity to deal with asso-
ciated legal and security issues.
LABOUR POLICY:
REGULATION OUT OF CONTROL
Labour policy issues remained in the
spotlight in the latter half of 2002, in
the context of layoffs in key labour-
intensive industries, discussed above,
and associated fears of mountin g
unemployment. 24 Three interrelated
policy issues dominated public discus-
sion: (i) the employment impact of large
increases in minimum wages in Janu-
ary; (ii) opposition from employers and
unions to the drafts of two new acts
(undang-undang) regulating labour pro-
tection and the settlement of industrial
disputes; and (iii) labour unrest, espe-
cially associated with layoffs in the
modern sector. There remains a funda-
mental disconnect between the advo-
cacy of labour rights campaigners, on
the one hand, and the complaints of
business groups about labour regula-
tion and unrest on the other. The former
fail to address the argument that labour
regulation jeopardises employment,
while the employers’ case is not helped
by often exaggerated claims about the
impact of some regulations, such as
multiple unionism at the plant level,
and the disruption caused by a more
militant union movement.
298
The flight of capital from labour-
intensive industries has been high-
lighted by the exit of foreign investors
(especially Koreans) and domestic firms
from the garments and footwear indus-
tries. During the June visit of his foreign
minister, Badawi, the Malaysian ambas-
sador also announced that Indonesia
was pricing itself out of export-oriented
labour-intensive industries. The Korean
Chamber of Commerce reported that 36
companies in garments, footwear and
toy making had closed down in the pre-
vious 12 months (JP, 23/8/02). Even
though the number of workers affected
is still a small proportion of the 500,000
reported to be employed in Korean
companies, the closure of several high
profile Nike and Reebok contractors re-
sulted in labour protests.
Once the largest exporter of Nike
footwear in the world, with 38% of the
market in 1996, Indonesia has now
slipped behind China, and many inves-
tors have set up in Vietnam, whose share
of exports of Nike products rose from
2% in 1996 to 16% in 2001–02 (Dhume
and Tkacik 2002). Nike and Reebok have
been at pains to stress that they are com-
mitted to Indonesia, yet their actions
FIGURE 6a Real Minimum Wages in Major
Industrial Centres, 1992–2002
(Rp, 1996 prices)
250
200
150
100
Jakarta
50 Bandung
Surabaya
0 0
1992 1994 1996 1998 2000
Sources: Unpublished data, Ministry of Manpower and Transmigration; BPS, Indikator
Kesejahteraan Buruh [Labour Welfare Indicators], various issues.
Armida S. Alisjahbana and Chris Manning
clearly suggest otherwise (JP, 31/8/02).
Although probably overstating the case,
the footwear manufacturer and associa-
tion head, Anton Supit, reports that
some 200,000 workers lost jobs in the in-
dustry over the past two years (AWSJ,
13/8/02). It is a similar story in gar-
ments. Great River, one of the country’s
largest exporters, reportedly shed some
5,000 of its 15,000 workers in the past
two years.
In the five years 1996–2001, at a time
of increasing strains in the labour mar-
ket, small and cottage firms absorbed
almost 80% of employment growth in
manufacturing. In contrast, the number
of jobs in large and medium firms grew
hardly at all, after increasing at slightly
less than 10% per annum and account-
ing for more than half the new jobs
created in the sector in the decade
1986–96. 25
Minimum Wages: Employment
Considerations on the Back Burner
The Korean Chamber of Commerce re-
ported four labour-related problems in
Indonesia (JP, 23/8/02): ‘irrational’
wage policies (minimum wages and ex-
cessive overtime premiums); low labour
FIGURE 6b Minimum Wages in Major
Industrial Centres in Dollar Terms, 1992–2002
($, current prices)
70
60
50
40
30
20 Jakarta
Bandung
10
Surabaya
2002 1992 1995 1998 2001
Survey of Recent Developments 299

productivity; strikes; and poor law en-
forcement. The term ‘irrational’ presum-
ably refers to regulated wages having
risen by nearly 40% (25% in real terms)
in the Greater Region of Jakarta and in
Surabaya in the past two years. Al-
though they had fallen precipitously
during the crisis along with average
wages, real minimum wages (MW) in
major industrial areas had returned to
10–30% above pre-crisis levels in real
rupiah terms, and in 2002 were close to
pre-crisis levels in dollar terms at an
exchange rate of Rp 9000/$ (figures 6a
and 6b). Indonesia’s competitive advan-
tage from the crisis-induced deprecia-
tion had largely been eroded.
The term ‘irrational’ might also have
been used to describe adjustments based
on a measure of basic needs, the mini-
mum physical needs index or KHM
(Kebutuhan Hidup Minimum). On av-
erage, the needs index has, implausibly,
been estimated by provincial wage
councils, often through a process of ne-
gotiation, to have increased nationwide
by around twice the CPI (consumer price
index) over the past two years (table 6). 26
Despite the reports of business stress,
there was every indication that some
provinces were planning to raise mini-
mum wages by similar amounts in 2003.
The Jakarta (Special Capital Region,
DKI) government had already decided
to expand the basic needs index from 43
to 55 items, including the purchase of a
range of consumer durables, seen as
needs ‘fitting’ (layak) for the consump-
tion standards of Jakarta workers.27 The
DKI Wages Council came up with a fig-
ure of Rp 700,000 as the value of the
KHM in October 2002, to be used as a
standard for minimum wage increases,
implying, potentially, a rise of 18% in
January 2003 (Kompas, 11/10/02). The
association of employers, Apindo, has
argued for no increase in the present
difficult economic circumstances, a sug-
gestion met by a not so gentle reminder
from the Minister of Manpower, and

TABLE 6 Nominal Values and Estimates of the Real Value of Minimum Wages, 1996–2002

Nominal Value of Minimum Index Real Minimum

Minimum KHM Wage as % (1998 = 100) Wage
Wage of KHM (1998 Prices)
(Rp ‘000) (Rp ‘000 KHM a CPIb Deflated by
per month) a KHM CPI

Apr-96 122 132 0.92 0.52 0.48 234 257

Jan-99 180 253 0.71 1.00 1.00 180 180
Jan-00 225 266 0.85 1.05 1.02 214 220
Jan-01 307 343 0.90 1.36 1.12 226 275
Jan-02 363 422 0.86 1.67 1.26 218 289

a
The minimum wage each year takes into account estimates of the KHM (minimum physical
needs) index in October–December of the preceding year, and estimated changes in the
KHM in the preceding 12 months. The estimates of the national KHM are unweighted
averages of the provincial KHM estimates.
b
Index of the CPI for December in the preceding year.

Source: Ministry of Manpower and Transmigration, unpublished data, and BPS, Indikator
Hidup Pekerja, various issues.
300
head of the largest union, that a freeze
on nominal wages ‘could’ result in in-
dustrial action.
Compliance with MW had increased
considerably by 2000 in large and me-
dium firms, establishing the minimum
as the standard entry-level wage for
new, less skilled workers (SMERU 2001).
However, MW also feed into overtime
rates, already generous by international
standards, and the cost of severance pay,
which had been increased and broad-
ened to cover a wider range of workers
through the controversial Ministerial
Decree 150 passed in 2000 (Dick 2001:
29). Rising wage costs have contributed
not only to significant job losses in the
modern sector but also to a widening
wage gap between the protected and
unprotected wage sectors, and to crowd-
ing and lower earnings in the informal
sector (SMERU 2001; Bird and Manning
2002).
Labour Legislation:
Still an Unfinished Agenda
The Korean Chamber of Commerce
complaints about legal uncertainty (JP,
23/8/02) relate primarily to the unre-
conciled tug-of-war between workers
and employers over new labour legisla-
tion. As a result of this conflict, the pass-
ing of two proposed labour acts (a
combined version of which was shelved
in 1998) has been repeatedly delayed.
Seemingly close to a final reading in the
DPR, the passing of both acts was post-
poned yet again at the end of Septem-
ber (JP, 28/9/02).
The extraordinarily detailed Labour
Protection Act, drafted by the Ministry
of Manpower and Transmigration, cov-
ers severance pay, minimum wage
regulation, training, collective bargain-
ing and a raft of labour conditions.
Union opposition relates to articles on
employment of contract workers, insuf-
ficient protection against dismissal
Armida S. Alisjahbana and Chris Manning
(with unions arguing that the new draft
law offers less protection than the old
1964 law), changes to the wording of
severance pay conditions, 28 and condi-
tions governing the right to strike.29 Op-
position to the sister Settlement of
Labour Disputes Act arises mainly
from the proposed replacement of the
present labour disputes councils with
a labour court (to be staffed by one
regular and two ad hoc judges at dis-
trict level) which unions argue would
put them at a disadvantage in disputes
vis-à-vis wealthier employers.
Employers, for their part, were most
opposed to proposed clauses that allow
payments for striking workers (breaking
with the internationally accepted prin-
ciple of ‘no work, no pay’); prescribe three
months long-service leave; and prohibit
night work for pregnant women.
In part, over-regulation and, implic-
itly, rent seeking by the ministry con-
tribute to conflicts between the unions
and employers. Further, most of the
60-plus new unions have an interest in
opposing acts proposed by a man-
power minister who is still head of the
largest union, SPSI (Serikat Pekerja
Seluruh Indonesia), their major com-
petitor, and the only registered union
for private sector workers for most of
the New Order period. More funda-
mentally, there is widespread belief
among unions and civil society groups
that it is now labour’s turn to gain a
fairer share of the pie.
Few commentators have been pre-
pared to face up to the genuine dilemma
of how to extend labour protection while
at the same time encouraging employ-
ment. Simplistic interventions by some
influential commentators have not
helped to clarify the potential costs of
labour regulation.30 The Minister of
Trade and Industry, Rini Suwandi, has
publicly drawn attention to the poten-
tial costs of labour unrest over the new
Survey of Recent Developments
labour acts and minimum wages (JP,
7/7/02; 24/8/02). But, while the gov-
ernment has stressed the importance of
employment for welfare and social sta-
bility, there has been little evidence of
efforts to reconcile the pursuit of this
objective with the costs to employers of
increasing labour regulation.
Migrant Labour
The management of migrant workers
emerged as a major national issue with
the forced repatriation from Malaysia
of some 400, 000 illegal Indonesian
workers beginning early in 2002, cul-
minating in a minor crisis as migrants
flooded exit points to Indonesia in
July–September. 31 Illegal labour migra-
tion has been spurred by large wage
differentials between the two countries
(which widened with the large rupiah
depreciation during the economic cri-
sis), combined with the Malaysian
policy of long turning a blind eye to il-
legal immigration as it sought cheap
labour in declining industries, con-
struction and services.32
Why did the migrant worker crisis
occur? Following a series of half-hearted
crackdowns in the 1990s, the Malaysian
government announced a ban on the
hire of any new Indonesian workers,
and the planned reduction of the num-
ber of legally approved workers by 50%
in early 2002. 33 In March, it announced
an amnesty to facilitate the repatriation
of illegal workers by a 31 July deadline.
A new law provided for up to six-month
gaol terms for illegal workers and their
employers, including the possibility of
caning (cambuk) and a potential fine of
up to RM 10,000.
By the deadline, only around 250,000
illegal migrants were reported to have
returned to Indonesia (Kompas 31/7/02;
7/8/02; 10/9/02) , and a migrant–
refugee crisis emerged on the island of
Nunukan in East Kalimantan, the point
301
of departure and return for migrants in
East Malaysia, where the number of
stranded returning migrants is reported
to have swelled to 30,000 in early Sep-
tember.34
Because of this crisis, the Malaysian
government extended the amnesty, and
in mid August it repealed the ban on
hiring new Indonesian workers owing
to labour shortages on many construc-
tion projects in the vicinity of Kuala
Lumpur, including work on the new
national capital at Putrajaya (FEER,
12/9/02).
The crisis on Nunukan, and especially
the clause in the new Malaysian law re-
lated to caning of offenders, brought
strong reactions from Indonesian lead-
ers (JP, 30/8/02). In late August anti-
Malaysian demonstrations erupted in
Jakarta, Malaysian visitors were de-
tained in North Sumatra and the Malay-
sian government advised its citizens not
to travel to Indonesia.
The labour market effect of return
migration has not been as large as is of-
ten claimed, because the total number
of some 400,000 return migrants (by late
September), many with considerable
savings, is still equivalent to only
around 5% of all unemployed. How-
ever, it is likely to be significant in ma-
jor sending areas in Eastern Indonesia,
where the loss of income from remit-
tances will probably have a large indi-
rect effect on incomes.
Unfortunately, it seems unlikely that
improvements will occur in the admin-
istrative framework, given the speed of
the Malaysian government’s reversal of
its original ban, and the seeming inabil-
ity of the Indonesian government to de-
velop a clear policy response. Many
private organisations, including now
over 400 officially approved recruiting
agents, and numerous government of-
ficials in the Ministry of Manpower and
the immigration service, have long stood
302
to gain from rents earned from the place-
ment of workers abroad.35 A former
head of the Labour Recruiting Agency
Association (Apjati) argued that if Indo-
nesia wanted to clean up the labour mi-
gration process the government would
need to ‘replace the entire Ministry of
Manpower and Transmigration admin-
istration involved with overseas work-
ers’ (Kompas, 23/9/02).
Noting widespread reports of collu-
sion between officials and labour re-
cruiting agencies to profit from labour
migration, human rights observers have
recommended that Indonesia establish
an independent body to administer all
aspects of the process, as in the Philip-
pines. At the same time, however, the
current high degree of regulation of re-
cruiting, departure and placement will
need significant reassessment if mi-
grants are to be protected from rent seek-
ers on both sides of the border.
PROGNOSIS
As Indonesia moves closer to the gen-
eral election in 2004, the government
faces a major challenge to stall back-
tracking on key reforms and to sustain
newly gained macroeconomic balance
in the wake of the Bali bombings and
predicted political unrest over the fall-
out from Bali. Will Indonesia now settle
into a ‘Philippines’ pattern, with an ex-
tended period of slow and unsteady
economic growth and small improve-
ment in living standards? Or, despite
sometimes messy and unpredictable
political outcomes, can it return to the
‘East Asian’ model of rapid economic,
employment and productivity growth,
and sustained improvements in living
standards?
Sceptics, probably in the majority,
point to the absence of strong leader-
ship in providing backing for reform,
privatisation, bank restructuring and
Armida S. Alisjahbana and Chris Manning
disposal of IBRA-controlled assets. The
retiring Head of the World Bank Mis-
sion, Mark Baird, in noting that cor-
ruption was now more harmful to
development than in the past, listed
five daunting medium-term challenges:
to improve tax and customs adminis-
tration; to achieve a better balance in
labour policies; to contain the prolifera-
tion of regulations in the regions; to
speed up asset sales and privatisation;
and to improve the regulatory frame-
work for investment, especially in in-
frastructure (JP, 5/9/02).
In challenging the sceptics, a more
optimistic view would give the present
administration credit for providing
greater political stability, essential for
renewed and sustained investment. It
would note that President Megawati has
backed her finance minister in pursuing
reforms to get the budget back on track
and restore macroeconomic stability,
and in rejecting an early exit from the
IMF special support program. Despite
accusations of being a centralist at heart
and too close to the military, she has re-
affirmed her support for the major re-
forms of the previous post-Soeharto
governments, especially decentralisa -
tion and the special autonomy laws for
Papua and Aceh, and has overseen the
important constitutional amendments at
the August MPR meeting.
In the light of the Bali tragedy, the first
hurdle is surely to maintain macro-
economic stability and resist mounting
pressures for special privileges and pro-
tection, with an eye to realising a cred-
ible economic growth rate for 2003. The
pattern of growth also matters: it should
support many more ‘better’ jobs, to con-
tribute to rising living standards, and
greater resolve is surely needed in
microeconomic areas such as trade and
labour policy to achieve such an out-
come.
Survey of Recent Developments
NOTES
* Chris Manning was employed with the
Partnership for Economic Growth (PEG)
– Bappenas (USAID) at the time of writ-
ing. He wishes to thank colleagues at
PEG for support in preparing the Survey.
1 See The Van Zorge Report, 2–9 September
2002 (including a long interview with
Jacob Tobing, the Head of the Ad Hoc
Drafting Committee).
2 The role of the DPD, essentially, will be
to review the basic legislative framework
of regional government and consider
budget issues for the regions.
3 An unsuccessful PDI-P (Indonesian
Democratic Party of Struggle) candidate
reported to the press on the day after the
election that he had paid Rp 200 million
($22,200) each to 40 councillors.
4 The December figures are heavily dis-
torted by seasonal factors.
5 The interbank rate shown in figure 3
closely tracks the policy determined SBI
rate.
6 The temporary dip in the first half of 2002
would appear to reflect the delay in ad-
justment of inflationary expectations to
the tightening of monetary policy that
occurred around the beginning of 2002.
7 It is clear from figure 3 that BI puts most
emphasis on controlling nominal inter-
est rates rather than money growth, even
though all the LOIs to the IMF contain
money growth targets but not interest
rate targets.
8 At the time of writing it was too soon to
tell whether the bombing outrage in Bali
would significantly affect the average
exchange rate for calendar year 2002.
9 A Ministry of Finance analysis breaks
down the 5% target growth for 2003 into
the following components: private con-
sumption, 6.38%; government consump-
tion, 7.07%; investment, 6.24%; exports,
5.38%; and imports 10.86%.
10 See Deuster (2002) for details of total ex-
ternal and domestic debt and the matu-
rity profile of domestic debt outstanding.
11 The 2002 budget allowed for bond re-
demptions amounting to Rp 3.9 trillion
to be financed by new issues in the same
amount.
303
12 Another option that has captured atten-
tion recently is the proposal to issue Trea-
sury bills (‘T-bills’) with short maturities.
This would achieve nothing, however,
other than to put a new label on a por-
tion of the government’s debt. Debt is
debt, regardless of whether it is called
bonds, borrowings or T-bills.
13 In the case of asset for bond swaps, it is
unclear why this method would be pre-
ferred to open auctions of IBRA’s loan
portfolio. The danger of nego tiated
swaps is that the implicit prices of the
bonds and assets in question will be dis-
torted away from true market values in
a manner that is not transparent to the
general public.
14 The government also holds deposits with
commercial banks, the average amount
of which roughly doubled between 1999
and 2001 to around Rp 40 trillion. These
could be run down significantly without
increasing base money, but the scope for
this is small in comparison with the vol-
ume of bonds outstanding.
15 The details of a limited haircut approved
in a presidential decree in late July are to
be worked out jointly by the Minister of
Finance and the Minister of State Enter-
prises for SMEs.
16 Growth in exports tapered off in July and
August 2002, however, falling by 3.5%
from their June level, largely as a result
of slower growth in non-oil and gas
exports.
17 Based on a report on visits by PEG–
Bappenas consultants to large export
companies in the first half of 2002. One
major electronics manufacturer reported
that close to 100% of all more advanced
technology goods destined for the do-
mestic market (eg. DVDs, VCDs, cell
phones and higher quality consumer
durables) were being smuggled into the
country, often by major exporters.
18 See Athukorala (2002: 146) on the earlier
PSI system.
19 The Minister of Agriculture favours sub-
sidies rather than higher tariffs, arguing
that they will provide greater assistance
to farmers.
304
20 Thanks are due to valuable comments
from Steve Marks and Peter Rosner on
this issue.
21 One proposal supported by Bulog is a
quota–tariff scheme (Tabor, Sawit and
Dillon 2002).
22 Despite the CGE study’s value in exam-
ining general equilibrium effects, the va-
lidity of assumptions on the importance
of rice consumption in budgets of the
poor is unclear, and one might question
the low rate of substitutability between
imported and domestically consumed
rice implied in the model.
23 The authors are especially grateful to Pe-
ter McCawley for material on the elec-
tricity industry.
24 See especially The Van Zorge Report, 14–21
August 2002: 4–16.
25 Based on data from the BPS industrial
surveys.
26 According to official guidelines, the
KHM is only one of six factors to be taken
into account in adju sting minimum
wages, yet the other five are largely ne-
glected in the calculation.
27 In fact, owing to disagreements among
the parties on price increases, the Jakarta
government side-stepped the issue of
determining the KHM in 2001 for wage
adjustments in 2002, and instead used an
estimate of per capita income to set mini-
mum wages in January 2002.
28 The new severance pay regulations (re-
flected in articles 145–166 in the act) not
only increased the level of payments to
some workers but also explicitly set these
payments as a ‘minimum’, contributing
to claims for higher severance pay.
29 See especially reports in JP, 7/7/02; and
Kompas 8/8/02; 9/9/02.
30 Chatib Basri and Moh. Ikhsa n (JP,
15/8/02; Kompas, 8/8/02) have been al-
most lone voices drawing attention to the
Armida S. Alisjahbana and Chris Manning
costs of high minimum wages. For ex-
ample, the ILO director in Jakarta re-
ceived front-page billing in the Jakarta
Post (24/8/02), for gratuitously point-
ing out that labour problems were not the
‘major’ problem for foreign investors.
31 The total number of migrant workers in
Malaysia was estimated at around two
million in early 2002, around 70% of
whom were Indonesians and 60% of
these illegal. About two-thirds of Indo-
nesians worked in West Malaysia and a
further one-third in East Malaysia, most
of the latter group being from Eastern In-
donesia.
32 Legal workers generally earned RM 500–
1,000 (Rp 1.1–2.3 million) a month in
early 2002, 3–5 times what many could
earn in mostly uncertain jobs in Indo-
nesia, and illegal unskille d workers
earned around RM 300–600.
33 The introduction of the new policy was
followed by migrant worker riots after a
raid on a factory and the arrest of 16 In-
donesian workers in January–February
2002.
34 Over 3,000 people were reported to be
suffering health problems and 64 deaths
had been reported to the end of August,
around one-third as many as died in the
Bali bombings.
35 Migration is highly regulated, permitting
rents to be extracted from the companies
and the authorities at various stages: re-
cruiting companies hav e to obtain
employment orders from overseas com-
panies, and then recruit potential work-
ers, prepare and equip them, and arrange
for their travel to overseas destinations.
In most cases, the companies make an
advance to the workers (of Rp 3–6 million
or RM 1,500–2,500), to be deducted later
from their wages. All contracts are re-
newable after two years.
Survey of Recent Developments
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