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Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Survey of recent developments
Mark Baird & Maria Monica Wihardja
To cite this article: Mark Baird & Maria Monica Wihardja (2010) Survey of recent developments, Bulletin of Indonesian Economic Studies, 46:2, 143-170, DOI: 10.1080/00074918.2010.486107
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ISSN 0007-4918 print/ISSN 1472-7234 online/10/020143-28 © 2010 Indonesia Project ANU DOI: 10.1080/00074918.2010.486107
SURVEY OF RECENT DEVELOPMENTS
Mark Baird Maria Monica Wihardja
Bay of Islands, New Zealand Centre for Strategic and International Studies, Jakarta
SUMMARY
Sri Mulyani’s resignation as inance minister in May disturbed markets and aroused concern about the government’s commitment to reform. This concern was partly alleviated by the appointment of two well-respected individuals as inance minister and deputy inance minister. Further progress with reform will depend heavily on this new team and other key oficials. Strong presidential sup-port will also be needed to resist attempts by parliament to interfere excessively with the inance ministry’s work.
The economy continued its steady recovery from the impact of the global inan-cial crisis (GFC), but the recovery could still be jeopardised if sovereign debt con-cerns in Europe persist and block the rebound in global trade and commodity prices. Inlation continues to accelerate, suggesting little room for complacency on monetary policy. Fiscal policy, on the other hand, remains conservative. The higher deicit in the revised 2010 budget is not excessive, and is unlikely to be realised in any case. The real budget challenge is to spend budgeted amounts fully and well. The new ive-year plan is also conservative and does little to clarify spending priorities, including for the president’s ‘connectivity’ agenda.
Despite the GFC, poverty continued to decline, thanks largely to the uninter-rupted expansion of GDP and to cash transfers to the poor. Unemployment also continued to fall, although particular groups suffered slight increases in unem-ployment (young workers 15–25 years old) and somewhat larger reductions in working hours (urban, non-poor, and male-headed households). Nevertheless the large and sustained deceleration of manufacturing growth and the closely related dramatic shift of employment from the formal to the informal sector provide cause for concern. Distortionary labour market policies may help to explain both. A new mining law signiicantly alters the legal environment for irms in this industry, and also introduces long discredited policies intended to ‘increase value added’ by requiring the domestic processing of minerals. A new law on local gov-ernment taxes attempts to reduce uncertainty for citizens and investors, but the nature of overall spending by local governments is of much greater importance for the investment climate. The central government has recently been seeking to restore the role of the ‘missing intermediate’ level of government and to boost the centre’s indirect control over local governments through provincial governments and governors. This strategy is unlikely to succeed, but it highlights the conlict-ing requirements for provincial governors to act as agents of the central govern-ment while also being accountable to their provincial electorates.
POLITICAL DEVELOPMENTS1
On 4 May 2010 the president of the World Bank, Robert Zoellick, announced the appointment of Sri Mulyani Indrawati, the then Indonesian Minister of Finance, as a managing director of the World Bank Group effective 1 June. Just hours before, Sri Mulyani had broken the news of her appointment and resignation as Minis-ter of Finance to her senior ministry oficials (Tempo, 12–18 May 2010: 33). They were as stunned as the markets, with both stock prices and, to a lesser extent, the exchange rate reacting negatively to the news (igure 1). When the dust had set-tled, questions turned to the reasons for her departure and the implications for economic policy and reform. Perhaps more than anyone, Sri Mulyani has been credited with maintaining Indonesia’s reputation for sound economic manage-ment over the past ive years and with successfully navigating the GFC. She has also championed the causes of good governance and bureaucratic reform, espe-cially within the Ministry of Finance. Would her departure signal the end of an era? Or would others emerge to take up the reform mantle?
There is no doubt that it had been a dificult few months for the minister. Along with Vice President Boediono, she had been targeted in a parliamentary investigation into the bail-out of the troubled Bank Century. They both argued that the bail-out was justiied to sustain inancial sector conidence and stability, and no evidence of wrong-doing in the decision-making process has emerged (Patunru and von Luebke 2010: 10–12). Yet the hearings, and the related walk-outs when Sri Mulyani appeared before parliament subsequently, took their toll. Just as things seemed to be settling down, another scandal erupted around accusa-tions of corruption in the tax ofice. On 31 March, a tax auditor, Gayus Tambunan, was arrested in Singapore after police investigation of a suspicious Rp 28 billion bank deposit. This followed revelations by a former national police chief detec-tive, Commander General Susno Duadji, who is also linked to the Bank Century case and attacks on the Anti-corruption Commission (KPK) (box 1). Gayus in turn threatened to expose other tax oficials involved in corruption. This was undoubt-edly an indication of the dificulty of cleaning up the tax ofice – one of the corner-stones of the minister’s reform agenda. But it also provided an opportunity for Sri Mulyani to ‘up the tempo’, and she moved swiftly to re-assign several tax oficials and push for greater disclosure of their inancial assets.
These events were no doubt trying, but not in themselves enough to dis-courage a staunch reformer such as Sri Mulyani. Perhaps more pertinent was the growing inluence of Aburizal Bakrie, the current chair of the Golkar Party and the fourth-richest man in Indonesia, according to the latest Forbes Rich List (with a reported net worth of $2.5 billion). It is no secret that Sri Mulyani and Bakrie had crossed swords on several occasions (Patunru and von Luebke 2010: 12). These included Sri Mulyani’s refusal in November 2008 to maintain a suspension of trading in Bakrie-controlled companies after they rapidly lost a large proportion of their market value the previous month; disagreements over Bakrie’s responsibility for the Lapindo mudlow disaster and his plans to buy into one of the country’s largest gold mines; and the tax ofice’s active pursuit of allegedly overdue tax payments by his companies. The president’s apparent
1 The authors gratefully acknowledge the contribution of Sunny Tanuwidjaja (Centre for Strategic and International Studies, Jakarta) to this section.
reluctance to support Sri Mulyani openly in these disputes no doubt relected his strategy of giving priority to political stability over economic reform, and it conirmed Bakrie’s growing inluence within the coalition government. Soon after Sri Mulyani’s resignation, Bakrie was appointed executive chairman of a
FIGURE 1 Composite Stock Price Index (CSPI) and Exchange Rate
1-Jun-2009 12-Aug-2009 23-Oct-2009 7-Jan-2010 18-Mar-2010 1-Jun-2010 0
500 1,000 1,500 2,000 2,500 3,000
0 3,000 6,000 9,000 12,000 15,000
CSPI Exchange rate
CSPI Rp/$
Sri Mulyani resigns
Sources: Indonesia Stock Exchange; Paciic Exchange Rate Service.
BOX 1 The SuSnO COnneCTiOn
On 12 March 2010, the Tangerang District Court acquitted Gayus Tambunan on charges of money laundering and embezzlement. However, the former national police chief detective, Commander General Susno Duadji, revealed details of tampering by police oficers and prosecutors in the outcome of the trial. This then led to further investigations into Gayus’s inances.
Susno Duadji has links to several recent legal cases, involving Bank Century, the Anti-corruption Commission (KPK) and tax corruption (for details on the irst two cases, see Patunru and von Luebke 2010: 8–12). It was Susno who facilitated a meeting between Budi Sampoerna (the former owner of a cigarette conglomerate) and Bank Century management in order to assist Sampoerna to withdraw a deposit of $18 mil-lion when the bank was collapsing. It was Susno’s phone that the KPK wire-tapped while investigating this case. Susno’s name was mentioned several times in conversa-tions between an Indonesian businessman and one of the state prosecutors when they were planning to frame two KPK deputy commissioners, Bibit Rianto and Chandra Hamzah. Susno was also allegedly involved in the suspected set-up of the KPK chief commissioner (Antasari Azhar); he later strongly denied this allegation, even becom-ing a witness for the defence in Antasari’s trial.
After he was relieved of his position, and feeling that he had been made a scape-goat, Susno started to release information to the public about several corruption and tax fraud cases. He claims to possess much more such information, so this episode may not be over yet.
new joint secretariat to improve ‘coordination and communication’ among the coalition parties.
Sri Mulyani did not mince words in explaining her resignation. She commented in an interview (Cochrane 2010):
The (Indonesian) business community is not supportive of having the system co-opted for very personal, narrow interests … If they start to allow one party to hijack it, it is at the cost of everyone else … It is really a concern. It is a battle for Indonesia now.
Other commentators agreed. While noting that Indonesia’s reputation for pru-dent economic management would probably remain intact, Hill (2010) expressed concern at the prospects for continued economic and bureaucratic reform. He warned that other reformers ‘may draw the conclusion: don’t take on the most powerful in the land, especially where their business interests are at stake’.
Some of this initial concern was alleviated by the quick appointment of Agus Martowardojo as inance minister and Anny Ratnawati as deputy minister. Agus is a respected banker who has won plaudits for his professional management of the largest commercial bank in Indonesia, the largely state-owned Bank Mandiri. Anny is a respected inance ministry oficial (Director General for Budget). In the current political environment, the two may well turn out to be more effective than Sri Mulyani in proceeding with reform in a more measured and less confronta-tional manner.
Within the ministry of inance, much will depend on Agus’s leadership and the commitment of key oficials to sustaining bureaucratic reforms. Strong support will also be needed from the president to resist excessive parliamentary interfer-ence in the budget process and spending decisions. On the policy front, the new team will have to move quickly to demonstrate its credentials and capacity to han-dle a broad range of economic policy issues (as opposed to a more narrow focus on markets and budgets). In all of these areas, Sri Mulyani has left big shoes to ill.
MACROECONOMIC DEVELOPMENTS Growth and investment
Despite the political turmoil resulting from the Bank Century case, and its impact on both the inance ministry and the central bank, the economy has continued to recover steadily from the effects of the GFC. GDP growth (year on year) returned to pre-GFC levels in the fourth quarter (Q4) of 2009 and rose further to 5.7% in Q1 2010 (table 1a). The quarter-on-quarter growth of 1.4% in Q1 2010 (table 1b) is con-sistent with projected growth rates for 2010 as a whole in the range of 5.5% to 6.0%. While China is expected to continue to grow more strongly (8.7%), Indonesia’s performance should be in line with the average for other developing countries in East Asia (5.5%) during 2010 (World Bank 2010c: 18). However, some caution is needed, given current volatility in world inancial markets due to concerns about Europe’s emerging iscal and debt problems. These concerns have the potential to slow the recovery in global trade and commodity prices.
GDP growth in 2009 was held back somewhat by the rather modest increase in private consumption, but boosted by strong growth in government consumption (table 1a). According to World Bank estimates (2010b: 25–27), the government’s
February 2009 GFC stimulus package added about 1 percentage point to growth in 2009. Budget igures suggest that the main impact came from lower taxes than originally budgeted (see budget table below). While there was also spending on stimulus programs, this was offset by spending shortfalls elsewhere in the budget. The growth of government consumption became strongly negative in Q1 2010, but there are encouraging signs of some pick-up in investment. The year-on-year data show a huge improvement in export growth, but it remains to be seen whether this will be sustained, with seasonally adjusted quarter-on-quarter growth in Q1 2010 turning negative (table 1b). Moreover, whereas imports have generally been declining more rapidly, or growing more slowly, than exports in recent times, resulting in a positive impetus to GDP growth from net exports, this outcome was reversed in Q1 2010. Observers such as Basri and Rahardja (2010),
TABLE 1a Components of GDP Growth (2000 prices; % year on year)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Gross domestic product (GDP) 5.3 4.5 4.1 4.2 5.4 5.7
GDP excluding petroleum & gas 5.7 4.9 4.5 4.5 5.8 6.1
By expenditure
Private consumption 4.8 6.0 4.8 4.7 4.0 3.9
Government consumption 16.4 19.2 17.0 10.3 17.0 –8.8
Investment 9.4 3.5 2.4 3.2 4.2 7.9
Construction 5.9 6.2 6.1 7.7 8.0 7.3
Machinery & equipment 15.9 –8.6 –11.5 –12.7 –3.9 7.7
Transport 38.3 9.6 –0.6 –2.1 –14.6 20.8
Other 6.2 –4.2 –2.6 1.8 3.0 2.4
Exports 2.0 –18.7 –15.5 –7.8 3.7 19.6
Imports –3.7 –24.4 –21.0 –14.7 1.6 22.6
By sector
Tradables 2.8 2.9 2.2 2.7 4.5 3.4
Agriculture, livestock, forestry &
isheries 5.1 5.9 2.9 3.3 4.6 2.9
Mining & quarrying 2.4 2.6 3.4 6.2 5.2 3.5
Manufacturing industries 1.8 1.5 1.5 1.3 4.2 3.6
Excluding petroleum & gas 2.1 1.9 1.8 1.5 4.9 4.0
Non-tradables 7.6 6.1 5.9 5.6 6.3 7.9
Electricity, gas & water supply 9.3 11.2 15.3 14.5 14.0 7.2
Construction 5.9 6.2 6.1 7.7 8.0 7.3
Trade, hotels & restaurants 5.5 0.6 –0.0 –0.2 4.2 9.3
Transport –1.0 2.0 5.7 7.4 6.7 4.8
Communication 33.5 30.3 26.6 23.7 16.3 17.0
Financial, rental & business services 7.4 6.3 5.3 4.9 3.8 5.5
Services 5.9 6.7 7.2 6.0 5.7 4.6
Source: CEIC Asia Database.
who have argued that Indonesia’s economy was to some extent protected from the GFC by its relatively low dependence on exports (compared, say, with Singa-pore, Malaysia and Thailand), appear to have overlooked the equally important impact of changes in import growth. Ironically, now that world trade is recover-ing, Indonesia is unlikely to beneit as much as other countries from export recov-ery, and if imports continue to grow even more rapidly than exports, GDP growth will suffer even further in the short run (although increased imports of capital goods will add to productive capacity in the medium term).
On the production side, GDP growth is still dominated by the non-tradable sec-tors (such as domestic trade and communications), which expanded collectively
TABLE 1b Components of GDP Growth (2000 prices; seasonally adjusted; % quarter on quarter)
Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Gross domestic product (GDP) 0.9 1.1 1.2 1.2 1.5 1.4
GDP excluding petroleum & gas 0.9 1.1 1.3 1.4 1.7 1.5
By expenditure
Private consumption 1.3 1.6 0.6 1.1 0.7 1.3
Government consumption 2.8 7.2 0.6 0.3 1.3 –3.7
Not seasonally adjusted 25.6 –28.7 23.7 –0.4 33.2 –44.4
Investment 0.9 –1.1 0.6 2.8 1.8 2.4
Construction 1.7 1.7 1.7 2.1 1.8 1.5
Machinery & equipment –7.8 –11.1 –1.4 8.1 1.4 –0.4
Transport 8.7 –16.0 4.2 6.4 –3.6 4.2
Other –0.9 –2.8 2.5 3.2 0.2 –3.5
Exports –4.7 –14.7 6.1 6.9 7.0 –1.5
Imports –8.7 –14.4 4.4 4.6 8.2 3.7
By sector
Tradables 0.5 0.9 0.7 0.9 1.0 0.8
Agriculture, livestock, forestry &
isheries 0.9 1.3 0.5 0.9 1.0 0.7
Mining & quarrying 0.9 0.9 1.4 2.1 –0.2 –0.6
Manufacturing –1.4 0.9 0.9 0.8 1.4 0.4
Excluding petroleum & gas –1.7 1.2 1.1 1.1 1.1 1.0
Non-tradables 1.3 0.7 1.8 1.7 1.9 2.1
Electricity, gas & water supply 2.5 4.3 3.2 2.1 2.6 1.0
Construction 1.7 1.7 1.7 2.1 1.8 1.5
Trade, hotels & restaurants –1.1 –3.4 2.1 2.3 3.3 1.3
Transport 1.3 2.0 2.3 1.4 0.8 0.2
Communication 7.4 4.0 5.0 5.5 1.0 4.6
Financial, rental & business services 2.0 0.8 0.6 1.4 0.9 2.5
Services 1.5 1.8 1.9 0.7 1.2 0.9
Source: CEIC Asia Database.
by 7.9% (year on year) in Q1 2010 (table 1a). The manufacturing sector (excluding oil and gas) is recovering more slowly, up by 4.0% in Q1 2010. According to Dana-mon (2010), manufacturing sector growth is also relatively narrowly based, being concentrated in a few sub-sectors such as vehicle manufacturing and chemicals. By contrast, the wood, paper and printing, basic metals and steel, and textiles and footwear sub-sectors are continuing to contract.
In early May 2010 the Investment Coordinating Board (Badan Koordinasi Penanaman Modal, BKPM) released new data on foreign and domestic invest-ment realisation for the irst quarter of 2010. Investinvest-ment realisation totalled Rp 42 trillion for 574 projects, of which Rp 35 trillion ($3.8 billion) was foreign invest-ment in 424 projects and Rp 7 trillion was domestic investinvest-ment in 150 projects. While these numbers suggest a signiicant rise in foreign investment and fall in domestic investment compared with Q1 2009, they are not strictly comparable. BKPM now bases its investment data on investment activity reports rather than relying, as before, on data on the issue of permanent business licences. Over time, this change should provide more accurate estimates of realised investments. However, initial compliance with the new reporting requirements is incomplete, so the new data probably under-record actual investment activity.
Balance of payments and trade policy
Exports recovered during 2009 from their March lows (igure 2a), spurred by strong demand and higher prices for commodities, but they fell back slightly in Q1 2010. Meanwhile imports continued to rise (igure 2b), narrowing the mer-chandise trade surplus from $11.5 billion in Q4 2009 to $7.9 billion in Q1 2010 (table 2). However, strong portfolio investment inlows ($6.2 billion in Q1 2010, more than three times larger than a year earlier) continued to bolster the overall balance of payments. Foreign direct investment has been more subdued, although
FIGURE 2a Exports
($ values, 3-month rolling sum, July 2008 = 100)
Feb-2009 Apr-2009 Jun-2009 Aug-2009 Oct-2009 Dec-2009 Feb-2010 0
20 40 60 80 100 120
Crude materials, inedible
Animal & vegetable oils & fats
Food, beverages, tobacco, live animals
Chemicals
Manufactures
Source: CEIC Asia Database.
FIGURE 2b Imports
($ values, 3-month rolling sum, July 2008 = 100)
Source: CEIC Asia Database.
Feb-2009 Apr-2009 Jun-2009 Aug-2009 Oct-2009 Dec-2009 Feb-2010 0
20 40 60 80 100 120
Food & live animals
Crude materials, inedible
Machinery & transport equipment
Manufactures
Chemicals
TABLE 2 Balance of Payments ($ billion per quarter)
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10
Current account 2.9 3.1 2.2 3.4 1.6
Exports 24.2 27.5 31.3 35.9 34.3
Non oil & gas 20.5 23.1 25.6 29.2 27.8
Oil & gas 3.7 4.5 5.7 6.8 6.5
Imports 17.2 18.8 22.8 24.5 26.4
Non oil & gas 15.2 16.5 19.0 20.7 22.0
Oil & gas 2.0 2.3 3.8 3.7 4.4
Merchandise trade balance 7.0 8.7 8.5 11.5 7.9
Non oil & gas 5.3 6.6 6.6 8.4 5.8
Oil & gas 1.6 2.1 1.8 3.0 2.1
Services –2.5 –3.1 –3.5 –4.6 –3.6
Income –2.7 –3.7 –4.1 –4.7 –4.0
Current transfers 1.1 1.2 1.2 1.3 1.2
Capital account 0.0 0.0 0.0 0.0 0.0
Financial account 1.7 –2.4 2.5 1.4 4.3
Direct investment 1.7 0.0 0.5 1.0 1.9
Portfolio investment 1.9 2.0 3.0 3.3 6.2
Other investment –1.8 –4.5 –1.0 –2.9 –3.9
Errors & omissions –0.7 0.4 –1.1 –0.9 0.8
Overall balance (change in
reserves) 4.0 1.1 3.5 4.0 6.6
Sources: CEIC Asia Database; Bank Indonesia.
Danamon (2010: 10) reports some signs of a recovery in the manufacturing sec-tor in Q1 2010. To offset the impact of portfolio lows on the exchange rate, Bank Indonesia (BI) has accumulated foreign reserves, which rose from $52 billion to $66 billion over 2009 and further to $79 billion by the end of April 2010. This means that Indonesia is effectively forgoing the opportunity to use available for-eign savings to inance imports, in order to support investment and growth by instead lending these savings back to the rest of the world. However, this trend has moderated more recently, because foreign investor interest in Indonesia has been adversely affected by the impact of Europe’s debt problems on risk appetite.
On the trade front, most attention in recent months has focused on the ASEAN– China Free Trade Agreement (ACFTA).2 As noted in the last survey (Patunru and von Luebke 2010: 27–30), there was considerable pressure from domestic produc-ers and parliament for Indonesia to re-negotiate tariffs on 228 items in the steel products, textiles and footwear sectors. Following a meeting between Indonesian and Chinese oficials in Yogyakarta on 3 April 2010, however, it was decided that the ACFTA would be implemented as planned. At the same time, both countries agreed that, if there is a bilateral trade imbalance, ‘the surplus country is obliged to implement steps to increase imports’ and to provide whatever ‘support is needed by the partner country’.3 This is a good outcome in terms of honouring Indonesia’s international obligations, while also recognising the potential impact of factor market and exchange rate distortions in China. However, in practice, it remains to be seen how China would respond to a bilateral trade imbalance with Indonesia. And, in economic terms, the individual country components of Indo-nesia’s overall trade balance with the rest of the world are of little consequence.
Inlation, monetary policy and inancial markets
Consumer price inlation has been creeping up since November 2009, reaching an annual rate of 4.2% in May 2010 (igure 3). However, monthly inlation in May (0.3%) was relatively mild, and there is no evidence of a strong upward trend in core inlation or wholesale prices. This is due partly to the moderating inlu-ence of the rupiah’s appreciation against the US dollar over the past year. This exchange rate effect may now unwind as the US dollar strengthens on world markets. There may also be some moderate inlationary pressure from rising prices in Indonesia’s trading partners and the proposed 10% increase in electric-ity tariffs. The impact of the latter is expected to be small, however, because tariff rises for low-end consumers (who account for around 65% of household energy usage) will be excluded, and because electricity costs comprise just 3.5% of input costs for medium and large-scale manufacturing industries (Danamon 2010: 14). Inlationary expectations remain low and inlation is expected to stay well within BI’s range of 4–6% during 2010.
That said, there is little room for complacency on monetary policy. While BI’s policy rate has stayed at 6.5% since August 2009 (igure 3), the 30-day SBI (Bank Indonesia Certiicate) rate has tracked down in recent months (from 7.3% in May 2009 to 6.3% in May 2010). This downward trend is a better indication of
2 For an analysis of the implementation and impact of ACFTA on the Indonesian economy, see World Bank (2010b): 27–32.
3 Press brieing by the trade minister, Mari Pangestu, Jakarta, 5 April 2010.
BI’s relaxed monetary stance than the ixed policy rate. Portfolio capital lows from overseas have inluenced monetary conditions, because BI’s open market operations have not been enough to sterilise the extra liquidity resulting from its accumulation of reserves (intended to moderate upward pressure on the rupiah) (World Bank 2010b: 32–5). The net effect of these developments has been a doubling in the rate of growth of currency in circulation since September 2009 (igure 3). It would be prudent for BI to moderate its ‘dovish’ position, and act if necessary, well before inlation reaches the top (6%) of its inlation band.
How this plays out over the next few months will depend a lot on develop-ments in world inancial markets and their impact on international prices and risk perceptions. As events in recent weeks have shown, Indonesian markets are very sensitive to changes in risk appetites (igure 1). A sustained crisis in Europe, for example, could cause foreign investors to pull back from Indonesia, with negative effects on the stock market and the exchange rate. While the government has had no dificulty so far in meeting its bond issue targets for 2010 (with more than half the total requirement fulilled by mid-May), fund-raising could become more dif-icult with a deterioration in foreign investor sentiment.
The banking system appears to be in good health, with reported commercial bank non-performing loan ratios remaining at around 3.4% in Q1 2010 – slightly lower than the averages for 2009 and 2008, and well below the averages for 2007 (5.6%) and 2006 (8.0%) (World Bank 2010b: 9). However, as shown in the Bank Century case, oficial numbers do not always tell the whole story, and averages, dominated by the top 14 commercial banks, may conceal weaker performance in some smaller ones. For example, Bank Eksekutif revealed a non-performing loan ratio of 15.6% in September 2009 and has been placed under enhanced BI surveil-lance. Lending growth has also started to recover, after modest growth in 2009
a CPI = consumer price index; SBI = Sertiikat Bank Indonesa (Bank Indonesia Certifcate).
Source: CEIC Asia Database; Bank Indonesia.
FIGURE 3 Monetary Policy and Inlationa
(% p.a.)
May-20090 Jul-2009 Sep-2009 Nov-2009 Jan-2010 Mar-2010 May-2010
3 6 9 12
CPI inflation
SBI rate 30 days
Real SBI rate
Currency in circulation
Policy rate
(11.5%), and average rates for working capital loans have started to fall below 14%. However, bank net interest margins, at over 5.8% in March 2010, are still among the highest in the region (World Bank 2010b: 10–11), presumably relecting the high perceived risks of doing business in Indonesia and the low eficiency of banking.
Fiscal policy
The revised budget for 2010 (table 3) was inally approved by parliament on 3 May 2010.4 The revised macro assumptions – especially the increase in the assumed oil price from $65 to $80 per barrel – are prudent given current volatility in world inancial and commodity markets. The main question mark – other than the dificulty of predicting the volatile oil price – is over the assumed level of oil production (965,000 barrels per day), which may be on the high side. The revised budget also assumes that electricity tariffs will be raised on average by 10% in July, with proportionately higher increases for larger power consumers.5 Even so, most of the increase in spending is allocated to higher subsidies, with departmen-tal spending close to original estimates.
The overall deicit is raised from Rp 98 trillion (1.6% of GDP) in the original 2010 budget to Rp 134 trillion (2.1% of GDP) in the revised budget. The increase will be funded largely by drawing on unspent funds of Rp 38 trillion from the previous year. However, if past experience is any guide, budget spending and the deicit are likely to fall well short of planned levels. Last year, for example, the revised deicit after the stimulus package was projected to be 2.5% of GDP, but the actual deicit was only 1.6% of GDP. For this year, the World Bank (2010b) is projecting a deicit closer to 1.3% of GDP, owing to higher GDP and revenue estimates and lower spending than in the revised budget.
This pattern of spending shortfalls raises more fundamental issues about the appropriate iscal stance. Indonesia has jealously guarded its reputation for is-cal prudence over the past 30 years (box 2), even though there have been lapses along the way (as during the Asian inancial crisis) and even though the means of inancing the deicit have changed over time (with a signiicant shift from oficial loans to sovereign bond issues during the past decade). Trends in budget inanc-ing and public debt are summarised in igures 4a and 4b.6 Now that public debt has been brought back down below 30% of GDP, it is appropriate to ask whether a larger deicit may be justiied to boost economic growth (through infrastructure investment, for example) or to expand coverage of anti-poverty programs.
4 Two parties, PDI–P (the Indonesian Democratic Party of Struggle) and Hanura (the Peo-ple’s Conscience Party) walked out of the parliament (DPR) during Sri Mulyani’s address on the budget, in protest at her role in the bail-out of Bank Century (Jakarta Post, 5/5/2010). 5 Vice President Boediono recently announced that the government would also raise the price of gas sold on the domestic market to levels on par with international prices, to en-courage producers to sell gas to local buyers (Jakarta Post, 19/5/2010). However, the timing and the scale of these adjustments are not yet clear.
6 The oficial inancing data shown in igure 4a exclude grants, which are recorded above the line in the budget (or not recorded at all). A signiicant growth of grants in recent years is due in large part to the expansion of the Australian aid program. Australia will provide over A$450 million to Indonesia in 2010/11, of which about A$325 million will be in grants.
From a inancing point of view, deicits of around 2% of GDP should be man-ageable without risking Indonesia’s credit rating. Deicits in this range have already been projected for 2009 and 2010 without upsetting the domestic bond markets. Additional inancing from oficial creditors and donors could also be tapped for worthwhile development programs, or to provide stand-by inancing
TABLE 3 Budgets for 2009 and 2010 (Rp trillion)
2009 2010
Original Revised Preliminary
Actual Original
a Revised
REVENUES & GRANTS 985.7 871.0 866.8 949.7 992.4
Tax revenues 725.8 652.0 641.2 742.7 743.3
Non-tax revenues 258.9 218.0 224.5 205.4 247.2
Grants 0.9 1.0 1.1 1.5 1.9
EXPENDITURES 1,037.1 1,000.8 954.0 1,047.7 1,126.2
Interest payments 101.7 109.6 93.8 115.6 105.7
Subsidies 166.7 158.1 159.5 157.8 201.3
Transfers to regional governments 320.7 309.3 308.6 322.4 344.6
Otherb 448.0 423.8 392.1 451.8 474.6
DEFICIT –51.3 –129.8 –87.2 –98.0 –133.8
% of GDP –1.0 –2.5 –1.6 –1.6 –2.1
FINANCINGc 51.3 129.8 125.2 98.0 133.8
Domestic inancing (net) 60.8 142.6 142.6 107.9 133.9
Foreign inancing (net) –9.5 –12.7 –17.4 –9.9 –0.2
Gross drawings 52.2 56.3 57.6 54.0
Amortisation –61.6 –69.0 –67.5 –54.1
UNSPENT FUNDS 0.0 0.0 38.0 0.0 0.0
MACRO ASSUMPTIONS & OUTCOMES
GDP (Rp trillion) 5,134 5,194 5,613 6,126 6,369
GDP growth (%) 6.0 4.3 4.5 5.5 5.8
Inlation (% p.a.) 6.2 5.0 2.8 5.0 5.3
Exchange rate (average, Rp/$) 9,400 10,600 9,408 10,000 9,200
3-month SBI rate (average % p.a.) 7.5 7.5 7.6 6.5 6.5
Oil price (average, $/barrel) 80.0 61.0 61.6 65.0 80.0
Oil production (‘000 barrels/day) 960 960 952 965 965
a Data in this column relect the budget approved by the DPR. Some amounts differ from those
origi-nally proposed, which were reported in the previous survey.
b ‘Other’ includes departmental spending on personnel, material, capital, social and other items. c Foreign inancing is from oficial sources only. All bonds (including those denominated in foreign
currencies and those held by foreigners) are included in the domestic inancing igures.
Sources: 2009 macro outcomes: World Bank; all other data: Ministry of Finance.
in case market conditions deteriorate.7 That said, the recent experience of coun-tries such as Greece is indicative of the dangers of relaxing the discipline of lim-its on budget deiclim-its. Small deiclim-its can expand signiicantly in just a few years as politicians respond to the pressures of populism, producing an unsustainable public debt burden. One of the great achievements of the balanced budget rule
7 In an innovative response to the GFC, Indonesia’s major creditors provided $5.5 billion in stand-by facilities and bond guarantees during 2009. While some of the guarantees from Japan have been used to guarantee samurai bonds issued by the Government of Indonesia, none of the stand-by facilities from the World Bank, the Asian Development Bank (ADB) and Australia have been drawn down to date.
BOX 2 A Brief hiSTOryOf DefiCiTSAnD DeBTin inDOneSiA
Indonesia has earned a reputation for sound iscal management over the past 30 years. During the Soeharto era, the economic team (often referred to as the ‘technocrats’) maintained iscal discipline through the ‘balanced budget rule’, which kept spending roughly equal to domestic revenues plus oficial external assistance. The level, alloca-tion and implementaalloca-tion of development spending were largely determined by loans mobilised from the international community. These were on concessional terms and were considered to be more ‘development-oriented’ than commercial credits. Wind-falls in oil revenues were often ‘hidden’ and used to cushion spending cuts when oil prices fell (and also to fund ‘off-budget’ programs). Additional program loans were also sought from donors in times of crisis (such as when oil prices collapsed in 1986).
This model broke down during the AFC. Although public debt was only 23% of GDP in 1996/97, this was quickly inlated by the impact of the rupiah depreciation on external debt, and by the issuing of new domestic debt to recapitalise banks and com-pensate BI for the non-repayment of last-resort loans issued during the early months of the crisis. Initial attempts under the IMF program to run budget surpluses proved counter-productive, as output fell sharply. Subsequent efforts to operate deicits ran into inancing constraints, because conditions for promised program lending were not met. Although the budget situation was eventually brought under control, public debt had risen to almost 100% of GDP by 2000.
Over the past decade the government has worked hard to restore the credibility of budget institutions, by passing new laws on public inancial management and reform-ing the Ministry of Finance (especially the tax and customs directorates). It has also kept tight control over the budget deicit to lower the burden of public debt. By 2009 public debt had been reduced to less than 30% of GDP. More than 60% of public debt is now in the form of government bonds (denominated in both rupiah and foreign currencies), while net borrowing (that is, new borrowing less repayments of outstanding loans) from oficial sources is negative. The decision to abolish the Consultative Group on Indonesia (CGI) in January 2007 symbolised the end of Indonesia’s ‘aid dependence’, and ushered in a new era of bilateral ‘partnerships’ with major creditors and donors.
In response to the GFC, the government implemented a modest stimulus package of tax and spending measures to raise the budget deicit to 2.5% of GDP in 2009. This higher deicit was to be funded by additional bond issues, while various stand-by facilities were also put in place in case market conditions deteriorated. But spending fell well short of plans, and the actual deicit was only 1.6% of GDP. Similar outcomes are expected in 2010. For the medium term, the policy debate has shifted back to the scope for running larger deicits to boost economic growth and anti-poverty programs, while still safeguarding Indonesia’s hard-earned reputation for iscal prudence.
during the Soeharto era was to prevent this from happening. Nevertheless, the real issues in Indonesia today lie on the spending side. Two challenges stand out.
The irst challenge is to ix the mechanics of budget spending. Past surveys (for example, Kuncoro, Widodo and McLeod 2009: 159) have highlighted the problem of bunched spending in the last quarter of the iscal year. According to the latest analysis from the World Bank (2010b), while there has been some improvement in the spending performance of line ministries, more than 40% of spending still occurred in the last quarter of 2009. This pattern leads to wasteful spending and budget shortfalls for the year as a whole. International experience suggests that the solution lies in better advance planning before the start of the iscal year, greater lexibility in spending during the iscal year and more scope to carry over funding at the end of the iscal year.8 While Indonesia’s new budget laws provide for some lexibility, oficials rarely exploit this, for fear of violating budget rules and being accused of corruption. Major changes are needed in the ‘control and compliance’ mindset of oficials in both the Ministry of Finance and line ministries.
The second challenge is to ensure that money is well spent.During the Soe-harto era, the technocrats used the planning process and the budget constraint to weed out ‘white elephant’ projects. However, as discussed below, the planning process is no longer as strong or as well linked to the budget as in the past. There-fore, in the current political environment, there is a risk that ‘pet’ projects will get funded without adequate vetting for economic and social returns. The recent,
8 For international experience with budget carry-overs, including discussion of some of the risks in developing countries, see Lienert and Ljungman (2009). For a detailed discus-sion of budget spending constraints and solutions in Indonesia, see World Bank (2009).
FIGURE 4a Budget Financinga
(% of GDP)
1996 1998 2000 2002 2004 2006 2008
-2 -1 0 1 2 3 4
Total financing
Official borrowing
a Data for the years 1996–99 refer to iscal years ending in March the following year.
Source: Ministry of Finance.
ultimately unsuccessful, proposal from Golkar – initially with the support of other parties – to allocate Rp 15 billion for each DPR law maker in the 2011 budget (Jakarta Post, 4/6/2010) is a case in point. Close scrutiny of the budget by the Min-istry of Finance provides some insurance against poor spending decisions.9 It is also important to monitor the results of budget spending. The proposed move to performance-based budgeting next year will help shift the focus of accountability from ex ante controls to ex post results. But, as with the mechanics of spending, a lot will depend on how the new system is used and how it feeds back into spend-ing decisions. If it just becomes another layer in the spendspend-ing management sys-tem, without any simpliication of ex ante controls, it could further reduce budget lexibility.
THE NEW FIVE-YEAR PLAN
The ive-year National Medium-term Development Plan (Rencana Pembangunan Jangka Menengah Nasional, RPJMN) for 2010–14 was launched in early Febru-ary 2010. It is a very large document, in three volumes. The irst volume out-lines the government’s development strategy for the next ive years to realise the president’s vision of a ‘prosperous, democratic and just’ Indonesia. The other two volumes expand on the sectoral and regional development plans. It is easy to dismiss the plan as excessive rhetoric, having little impact on budget or policy
9 A 2002 constitutional amendment stipulating that 20% of the central government budget must be spent on education also distorts the allocation and undermines the eficiency of additional spending (World Bank 2010b: 35–9).
FIGURE 4b Public Debta
(% of GDP)
19960 1998 2000 2002 2004 2006 2008
20 40 60 80 100
Public debt
Foreign official debt
Source: Ministry of Finance (foreign currency denominated debt converted to rupiah using Inter-national Monetary Fund International Financial Statistics end-of-year exchange rates). The igure for 1996 is a World Bank estimate.
decisions. Nonetheless, a lot of time and effort will now be spent translating the RPJMN into the strategic plans of line ministries (Rencana Strategis Kementerian Lembaga, Renstra–KL) and the development plans of provincial and district gov-ernments. In April the president held a two-day retreat in Bali with his full cabinet and all provincial governors to prepare a ‘roadmap’ to achieve the plan’s goals. So it is worth examining what the plan says and the main development challenges it identiies for the next ive years.
The plan projects an average annual economic growth rate of 6.3–6.8% for 2010–14. Provided the global economy stabilises and there are no further major economic crises, the growth rate is expected to reach 7% or more by 2014 (table 4). Along with various pro-poor programs, this growth is expected to reduce the pov-erty rate from 14.2% in 2008–09 to 8–10% in 2014, and the open unemployment rate from 7.9% to 5–6% over the same period. Eleven national priorities are identi-ied to achieve these outcomes: bureaucracy and governance reform; education; health; poverty reduction; food security; infrastructure; investment and business climate; energy; environment and disaster management; least developed, frontier, outer and post-conlict areas; and culture, creativity and technological innovation.
The overall tone of the plan is consistent with the vision laid out in the president’s Independence Day address in August 2009 (Yudhoyono 2009). There is a heavy emphasis on building a strong, stable, uniied country, based on self-reliance and a well-connected domestic economy. Issues of economic eficiency and international competitiveness are mentioned, but take a back seat to concerns about domestic equity and connectivity. This is perhaps understandable, especially in the aftermath of the GFC. But it is also a missed opportunity to set more ambitious growth targets, needed to make signiicant inroads on poverty over the next ive years.
The macroeconomic framework for the plan is also conservative. The budget deicit is projected to fall to 1.2% of GDP, and public debt to 24% of GDP, by 2014 (table 4). Higher tax revenues and lower subsidies apparently provide more than enough resources to inance the proposed public investment program (although numerical values are not speciied in the plan). As discussed above, there is scope on the inancing side for considering a more expansionary iscal policy to support economic growth and anti-poverty programs. However, this can only be justiied and realised if current spending constraints are addressed.
TABLE 4 National Medium-term Development Plan 2010–14, Selected Macroeconomic Targets
2010 2011 2012 2013 2014
GDP growth (%) 5.5–6.0 6.0–6.3 6.4–6.9 6.7–7.4 7.0–7.7
Inlation (CPI) (% p.a.) 4.0–6.0 4.0–6.0 4.0–6.0 3.5–5.5 3.5–5.5
Tax revenues/GDP (%) 12.4 12.6 13.0 13.6 14.2
Budget deicit/GDP (%) –1.6 –1.9 –1.6 –1.4 –1.2
Public debt/GDP (%) 29.0 28.0 27.0 25.0 24.0
Source: Bappenas (2010).
Unfortunately, the plan does little to clarify spending priorities. The 11 pri-orities outlined above are very comprehensive, and provide little guidance for the preparation of the national budget, sectoral programs and regional plans. While the program for the irst 100 days of the president’s second term has been rightly criticised for its vagueness and limited scope (Patunru and von Luebke 2010: 24–27), it did at least initiate a process for monitoring progress on priority actions. The same approach has now been carried over into Inpres (Presidential Instruction) No. 1 for 2010, which outlines the government’s priorities for 2010. It has only 155 priority activities, compared with 1,167 in the ive-year plan. The Presidential Unit for Development Supervision and Control (Unit Kerja Presiden untuk Pengawasan dan Pengendalian Pembangunan, UKP4), under Kuntoro Mangkusubroto, is responsible for monitoring progress and identifying possible bottlenecks. Although this process brings some much-needed discipline to the government’s program, it depends on the right priorities being identiied at the outset. This is where a close working relationship between the national planning agency, Bappenas, and UKP4 is essential.
Connectivity10
One of the recurring themes of the plan is the importance of ‘connecting Indo-nesia’ so as to unify the country and ensure that the beneits of economic growth are widely shared.11 This is relected in the plan’s national priorities, infrastruc-ture targets and regional development strategy. But what is less clear is what ‘con-nectivity’ means in terms of investment and policy choices. One framework for thinking about these issues is provided in the 2009 World Development Report on Reshaping Economic Geography (World Bank 2008a).12 This stresses that as econo-mies progress from low to high income, production becomes more concentrated spatially. For Indonesia the concentration is on Java, especially around the Greater Jakarta area, and in smaller regional centres in the outer islands. This is not a trend that can or should be reversed. Rather, the need is to ind ways to share the beneits of concentrated production across regions and income groups, while recognising that almost 60% of the poor live on Java.
For Indonesia, the challenge of connectivity can be broken down into three dimensions: intra-island, inter-island and international connectivity. Intra-island connectivity is important to link poorer rural areas to urban growth poles and to link growth poles to each other. Differential strategies are required, with ‘back-bone’ infrastructure on the more densely populated islands of Java and Sumatra; ‘special-purpose’ infrastructure connecting major resource-based industries with their ports on Sumatra and Kalimantan; and ‘ink-spot’ development around smaller growth poles on the more remote and less densely populated islands of eastern Indonesia. Much of the infrastructure in both urban and rural areas
10 This section draws on work done by Mark Baird for the World Bank during the irst half of 2010 and summarised in World Bank (2010d). A more complete analysis will be published by the Bank in its next Country Economic Memorandum.
11 The term ‘connectivity’ covers all aspects of infrastructure and logistics that improve the movement of people and goods, as well as related policy issues.
12 For applications to Indonesia, see Hill, Resosudarmo and Vidyattama (2008) and Deich-mann et al. (2005).
will come from local governments. The private sector can contribute to inancing infrastructure projects – including, for example, toll roads on Java and those serv-ing resource-based industries on the outer islands. But the central government also has a role to play in providing a sound regulatory framework, including for land acquisition, local borrowing and pricing and subsidy decisions.
Inter-island connectivity is especially important in a far-lung archipelago like Indonesia. At the Asia Paciic infrastructure conference in Jakarta on 14 April 2010, the president reiterated his commitment to building the Sunda bridge to connect Java and Sumatra. At an estimated cost of at least $10 billion, this would be a major investment that warrants careful economic and inancial analysis.13 A much smaller investment in better ferry services might well generate similar beneits. More generally, something needs to be done to improve the reliability and reduce the cost of inter-island shipping services. As documented in Dick (2008), current restrictions protect domestic ship-builders and shipping companies, but thereby penalise the outlying regions that depend on their services. The recent booms in telecommunications and domestic airways, following the deregulation that opened up opportunities for competition from new irms, provide a telling counter-point to the situation in inter-island shipping. There may also be a case for subsidising pioneer shipping services in eastern Indonesia, so long as the subsidies are pro-vided in a way that is transparent and encourages competition. Similar arguments for transparent and targeted subsidies may apply to the development of regional ports, although the investment requirements can be substantially reduced through the development of roll-on, roll-off services (as in the Philippines), and the exten-sion of telecommunication services to Papua and West Papua provinces.
International connectivityis vital to ensure that Indonesia remains competitive within the region and to realise the full beneits of better market access. Jakar-ta’s Tanjung Priok port handles 70% of Indonesia’s general cargo and container exports and imports, and the logistics of accessing and using the port are key components in Indonesia’s trade costs. The latest Logistics Performance Index compiled by the World Bank (2010a) shows that Indonesia’s ranking has fallen from 43rd in 2007 to 75th in 2010. While this does not put it out of line with other lower middle-income countries, Indonesia lags well behind its competitors in the region: Singapore ranks 2nd, Malaysia 29th, Thailand 35th, the Philippines 44th and Vietnam 53rd.14 The private sector is especially critical of border manage-ment, including customs procedures. Recent progress on the Logistics Blueprint – including around-the-clock port operations, a national single window for border clearances, and a dry port at Cikarang – is encouraging. But more needs to be done to improve eficiency at Tanjung Priok (including the rail link from Cika-rang) and to develop a new deep water port as quickly as possible.
These are not new issues. Given the strong vested interests involved, high-level commitment from the president and vice president will be needed to make
13 Ex-post evaluations of the (English) Channel Tunnel suggest reasons for caution. Anguera (2005) concludes that ‘overall the British economy would have been better off had the tunnel never been constructed’.
14 Indonesia received slightly better news in the latest International Institute for Manage-ment DevelopManage-ment competitiveness ratings, where it jumped from 42nd in 2009 to 35th in
2010 (Jakarta Post, 22/5/2010).
progress. A substantial commitment of public and private resources will also be required. Fortunately, the government can now afford to spend more on prior-ity infrastructure projects, and has the budget mechanisms to work with the pri-vate sector.15 While private participation in infrastructure has recovered from the lows of 2005, it has been concentrated in telecommunications and energy. Private investment can be attracted into major transport projects such as a new Jakarta port and the Trans-Java Expressway, but only if there is clarity on the regulatory framework and conidence that the project will be proitable (through tariffs and/ or subsidies). A high-level and well-coordinated push on the connectivity agenda is therefore urgently needed – both to support stronger economic growth and to share its beneits across the country.
POVERTY AND EMPLOYMENT The impact of the GFC on poverty
According to estimates by the central statistics agency (BPS), the poverty rate fell from 16.6% in 2007 to 15.4% in 2008 and 14.2% in 2009.16 This is despite the impact of higher food prices in mid-2008 and the subsequent impact of the GFC on com-modity prices (igure 5) and GDP growth later in 2008 and early 2009. Overall, the impact of the GFC on the real economy was much milder than that of the 1997–98 Asian inancial crisis (AFC), and the impact on the poor was further mitigated by direct cash transfers (bantuan langsung tunai, BLT) in July 2008, October 2008 and April 2009; by election campaign spending from July 2008 to July 2009; and by the iscal stimulus package in late 2009.
The mild effect of the crisis on poverty is consistent with the indings of Reso-sudarmo and Yusuf (2009), and is conirmed by recent quantitative and qualita-tive studies (McCulloch and Grover 2010; World Bank 2010b; SMERU Research Institute 2009). However, these studies also point to a number of differences in impact across population sub-groups. The results of qualitative and quantitative research by McCulloch and Grover (2010) for the year to February 2009 are sum-marised in table 5. The most signiicant employment effects seem to be on young workers. For 18–25-year-olds, unemployment rose from 19.8% in February 2008 to 21.6% in August 2008, before falling slightly to 21.4% in February 2009. Com-parable igures for 15–17-year-olds are slightly higher: 21.1% in February 2008, 24.9% in August 2008 and 22.3% in February 2009.17 The qualitative study also shows a more noticeable impact of the crisis on contract and migrant workers in
15 Mechanisms established by the Ministry of Finance to support private investment in infrastructure include the Indonesia Infrastructure Facility, the Indonesia Guarantee Fund and the Project Development Facility.
16 Poverty rates are sensitive to the choice of poverty line. For 2009, the $1.25 PPP (pur-chasing power parity) head-count index is 16.8%, while the $2 PPP head-count index is 50%. This result relects the large number of people living just above the oficial poverty line who are vulnerable to negative income shocks.
17 The pattern for this age group may partly be due to seasonal factors: many young peo-ple inish school around May–June; hence youth employment can be expected to be higher in August.
the commodity (rubber and coal) and manufacturing (automotive, electronics and consumer products) sectors.
The impact of the crisis was also monitored by the government’s Crisis Mon-itoring and Response System (CMRS) (World Bank 2010b) from February 2009 through February 2010.18 Workers in general experienced a reduction in work-ing hours and, although there had been some recovery by November 2009, the national average was still 0.8 hours per week lower than in May 2009. From Feb-ruary to August 2009, weekly working hours declined on average nationally, with greater declines in urban than in rural areas (after adjustment to account for seasonality).19 From May to August 2009, however, weekly working hours in rural areas declined more than those in urban areas (–1.5 hours versus –1.1 hours) (these igures do not account for seasonality) (table 6). This may indicate that the crisis might have affected the urban areas irst, which seems plausible. Overall, from May to November 2009, urban, non-poor20 and male-headed households
18 The results of the third round of CMRS monitoring (in February 2010) were not avail-able at the time of writing.
19 Weekly working hours usually increase by about 1 hour from February to August, but in 2009 the increase was not signiicant during this period (less than 0.5 hours).
20 Households identiied here as ‘poor’ are those that received both BLT and Commu-nity Health Insurance Services (Jamkesmas); these would fall into the ‘very poor’, ‘poor’ and ‘almost poor’ categories in the Ministry of Social Welfare’s Program for Documenting Social Services (Program Pendataan Layanan Sosial) – or, roughly, any household living below 1.2 times the poverty line.
FIGURE 5 Key Commodity Pricesa
(Jan-2007 = 100)
Jan-2007 Jul-2007 Jan-2008 Jul-2008 Jan-2009 Jul-2009 Jan-2010 0
100 200 300 400
Palm oil
Rubber
Coal
Rice
a Palm oil: Malaysia Palm Oil Futures (irst contract forward) 4–5% FFA; rubber: No. 1 Rubber
Smoked Sheet, fob Malaysia/Singapore; coal: Australian thermal coal, 12,000-btu/pound, less than 1% sulphur, 14% ash, fob Newcastle/Port Kembla; rice: 5% broken milled white rice, Thailand nomi-nal price quote.
Source: IndexMundi, <http://indexmundi.com/commodities/>.
TABLE 5 Impact of the Crisis: February 2008 to February 2009
Qualitative Study
(Feb-2009) (Feb-2008, Aug-2008, Feb-2009)Quantitative Study
School enrolment
and attendance No change, but some arrears in payment Generally no change or contin-ued improvement for 13–14-year-olds, but some seasonal
withdrawal in August for girls and 17-year-olds
Female labour
participation No change No change
Child labour
participation No change Signiicant falls in labour force participation of 12–17-year-olds Unemployment Increase for young, migrant
industrial workers and workers in rubber and coal industries
Rising for 15–17 and 18–25-year-olds, falling for 25–55-year-olds
Hours of work Reduced for contract
work-ers No signiicant changes
Informal
employ-ment Some suggestion of a shift to informal employment Some increases in own business and casual non-agricultural work in 2008, but little overall change Wages and income Large falls in take-home pay
for contract workers; reduc-tion in income for local busi-nesses
Signiicant increases in real wages for formal sector employ-ees, but little change in incomes in the informal sectora
a McCulloch and Grover (2010) argue that inlation in mid-2008 might have caused the increase in
nominal wages in the formal sector after August 2008 and before the onset of the GFC in October 2008. The subsequent collapse of commodity and food prices resulted in reduced inlation, increasing real wages signiicantly.
Source: McCulloch and Grover (2010).
TABLE 6 Changes in Weekly Hours Worked (hours)
Location Income Group Household Head
Urban Rural Non-poor Poor Male Female
May–August 2009 –1.1 –1.5 –1.3 –1.5 –1.4 –1.1
May–November 2009 –1.1 –0.5 –1.0 0.3 –1.0 1.2
Source: World Bank (2010b).
had relatively greater reductions in working hours than rural, poor and female-headed households, although rural and poor households experienced greater reductions between May and August 2009.
Households coped in part by buying lower-quality non-staple food. The pro-portion of households reporting dificulty in meeting consumption needs rose by about 4 percentage points from April to July 2009 (World Bank 2010b). The increase was higher among the poor and in rural areas. However, by October 2009, the proportion of households reporting dificulty in meeting consumption needs had fallen back to about 3 percentage points below the April level.
Household expenditures on health care and education remained constant. There was no evidence of households coping with economic hardship by sending their children into the labour force. One qualitative study (SMERU Research Institute 2009) shows that few school-age children dropped out of school at any level, even though there were cases where children at high-school level moved to cheaper schools. Some changes in attitudes towards expenditure on health care were noted in this study, including a shift to cheaper medical treatment in certain case stud-ies.21 There was no evidence of non-working females being forced to enter the labour force.
In summary, the impact of the GFC on poverty was mild (compared with that of the 1997 AFC), but it was not uniform among sub-groups of the population. Commodity prices and export volumes have now picked up, easing employ-ment concerns in the export sector. But the crisis may still be prolonged for those hardest hit, because of missed opportunities for receiving proper education or good health care, for example. Fortunately, the direct cash transfers and election campaign spending cushioned the impact of this crisis on the poor. Given that different crises have very different impacts, more targeted interventions would require regular and up-to-date monitoring of poverty levels and social conditions. It would not seem too dificult to institutionalise the CMRS surveys to play this role in the future, although the feasibility of undertaking targeted interventions, tailored on an ad hoc basis to the particular effects of each new crisis, should not be taken for granted.
The impact of the 2003 Manpower Law on employment
Like poverty rates, unemployment rates have steadily declined from a peak of 11.2% in 2005 to 8.4% in 2008, 7.9% in 2009 and 7.4% in February 2010 (BPS, National Labour Force Survey).However, there is continuing concern about the quality of employment, as more and more people have been seeking work in the low-productivity informal sector since the AFC. The formal sector accounted for 44% of employment in 1996 (World Bank 2008b), but this proportion has fallen dramatically during the last several years to only 31% – compared with an aver-age of 43% in East Asia and a global averaver-age of 47% (Asher 2010: 7).
21 Although this shift was not systematic in the SMERU Research Institute indings, it provides some contrast with the World Bank (2010b) inding that household expenditures on health remained constant.
To some extent the shift to informal sector employment may relect Indonesia’s changing industrial structure (Manning 2008),22 with manufacturing growth falling from double digits before the AFC to low single digits after the crisis, and below 2% during the GFC. However, there are other factors, including regulatory distortions, which at best discourage movement from the informal to the formal sector, and at worst encourage movement in the opposite direction. In particular, the post-AFC Manpower Law (13/2003) discourages formal sector employment and encourages a proliferation of contract and casual work. According to a study by ive Indonesian universities (Naskah Akademik 2006) commissioned by the president in 2006, there are two major distortions that need to be addressed.
The irst is the minimum wage, which is now based on the concept of kebutu-han hidup layak (KHL, reasonable living needs) instead of kebutukebutu-han hidup minimum (KHM, minimum living needs). It has become a ‘political football’ in local elections, as candidates compete by offering larger increases. The average minimum wage of 26 provinces rose sharply from 2000 to 2002 (with the advent of decentralisation, and under a strong manpower minister from a trade union background), and it has subsequently been adjusted to provide for increases above the rate of inlation.
The second major distortion relates to terminations of employment. These require employers to engage in complex procedures involving the relevant labour union and, if necessary, an arbitrator, and to make large severance payments. Moreover, when terminations are based on eficiency considerations (rather than bankruptcy or force majeure), the payment is doubled. In this environment, busi-nesses have to think twice before hiring workers.
Those who suffer because of these legal distortions are the less educated, low-skilled and therefore low-productivity workers – precisely those who are most vulnerable – and the businesses that otherwise could proitably employ such workers, but that now struggle to expand. Seen in this light, both the reversal of the trend to formal sector employment and the severe deceleration in the growth of low-skill labour-intensive manufacturing can be interpreted as unintended consequences of the new law. Analysis of this important empirical issue is beyond the scope of this survey, however.
Another independent study is now being conducted by the Indonesian Insti-tute of Sciences (LIPI) – at the initiative of the national tripartite industrial rela-tions forum (Badan Pekerja Lembaga Kerja Sama Tripartit Nasional), consisting of representatives of the government, labour unions and business associations, and the DPR – on possible revisions to the 2003 Manpower Law. This is expected to endorse the Naskah Akademik (2006) recommendation to return to a ‘safety net’ minimum wage related to the poverty line, rather than a minimum wage deter-mined by political considerations. This recommendation has not yet been acted on because of strong pressure from NGOs, student activists and trade unions. In the absence of political leadership and commitment, it is unlikely that the expected LIPI recommendation will be any more effective.
In the meantime, unpublished World Bank estimates (based on a survey of workers’ perceptions) suggest that only 7% of irms are complying with the
22 Manning (2008) also notes declining employment elasticities (with respect to economic growth) in almost all sectors after the AFC, which resulted in slower employment growth through 2006.
employment termination requirements in the law, while 27% are partially com-plying and 66% are not comcom-plying. Compliance is likely to be greater among larger employers, especially foreign irms, given the reality of economies of scale in enforcement. Revision of the law so as to simplify the terminations process and to make severance payments more reasonable would increase compliance among smaller irms and help to reverse the trend away from formal sector employment.
DECENTRALISATION
Local governments increasingly determine Indonesia’s development trajectory following the decentralisation that commenced in 2001. The original decentrali-sation laws have been modiied, and recently enacted laws on mining and local taxes have also changed the incentives facing regional governments. There has also been debate recently about the appropriate role for provincial governors.
Mining issues
The most signiicant changes under the new Law on Mining of Coal and Minerals (Law 4/2009) are:
• a new system of licences and permits issued by central, provincial and local governments to replace the old system of contracts (article 35);
• authorisation of regional governments to issue licences for mining coal and some types of minerals that were previously under the central government’s sole authority (articles 6–8);
• requirements for miners to ‘increase value added’ by conducting ore processing and reining activities domestically (articles 102–103);
• a requirement for coal and metal minerals mining licences to be issued only on the basis of tenders (articles 51 and 60).
Under the old contract system there were three types of contract: Contracts of Work (Kontrak Karya, KK), Mining Concessions (Kuasa Pertambangan, KP), and Coal Contracts of Work (Perjanjian Karya Pengusahaan Pertambangan Batu Bara, PKP2B). Under the licence system, there will be three types of licence: Mining Business Permits (Izin Usaha Pertambangan, IUP), People’s Mining Permits (Izin Pertambangan Rakyat, IPR), and Special Mining Permits (Izin Usaha Pertamban-gan Khusus, IUPK). The criteria for each type of permit include the area of the mine, the type of mineral, the ownership type (individual, private or public com-pany, community) and the permissible duration of mining activity.
Under the new law, the issuing authority for a mining licence depends on the geographic location of the mine and on whether it crosses provincial or local government boundaries. This is a signiicant change. Coal mining, for example, was previously classiied as involving a ‘strategic’ natural resource, and there-fore was regulated by the central government,23 but now it is regulated by local government if it does not straddle any local government boundary, and by the
23 Government Regulation 27/1980 categorised coal and various types of minerals as type A (‘strategic’), B (‘vital’) or C (‘other’).
