Economy of Indonesia
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| Economy of Indonesia | |
| Currency | Rupiah |
|---|---|
| Fiscal year | Calendar year |
| Trade organisations | APEC, ASEAN, WTO, OPEC |
| Statistics | |
| GDP (PPP) | $899bn (2005) (15th) |
| GDP growth | 5.6% (2005) |
| GDP per capita | $3,700 (2005) |
| GDP by sector | agriculture (16.6%), industry (43.6%), services (39.9%) (2004) |
| Inflation (CPI) | 17.1% (2005) |
| Population below poverty line |
27.1% (1998) |
| Labour force | 105.7m (2004) |
| Labour force by occupation |
manufacturing 46%, agriculture 16%, services 39% (1999) |
| Unemployment | 10.3% (2005) |
| Main industries | petroleum and natural gas; textiles, apparel, and footwear; mining, cement, chemical fertilizers, plywood; rubber; food; tourism |
| External | |
| Exports | $63.89bn (2004) |
| Export goods | oil and gas, plywood, textiles, rubber |
| Main export partners | Japan 22.3%, United States 12.1%, Singapore 8.9%, South Korea 7.1%, the People's Republic of China 6.2% (2003) |
| Imports | $40.22bn (2003) |
| Import goods | machinery and equipment; chemicals, fuels, food |
| Main import partners | Japan 13%, Singapore 12.8%, China 9.1%, United States 8.3%, Thailand 5.2%, Australia 5.1%, South Korea 4.7%, Saudi Arabia 4.6% (2003) |
| Public finances | |
| Public debt | $454.3bn (56.2% of GDP) |
| Revenues | $40.91bn (2004) |
| Expenses | $44.95bn (2004) |
| Economic aid | recipient: $43 billion from IMF (1997–2000) |
| Main data source: CIA World Factbook All values, unless otherwise stated, are in US dollars |
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Indonesia has a market-based economy in which the government plays a significant role. It owns more than 164 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity. In the aftermath of the financial and economic crisis that began in mid-1997, the government took custody of a significant portion of private sector assets through acquisition of nonperforming bank loans and corporate assets through the debt restructuring process.
Contents
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[edit] Background
Current GDP per capita grew an astonishing 545% in the seventies fueled by oil demand. But this proved unsustainable and growth fell sharply to a manageable 20% in the Eighties and 13% in the Nineties.
During the thirty years of president Suharto's "New Order" government, Indonesia's economy grew from a per capita GDP of $70 to more than $1,000 by 1996. Through prudent monetary and fiscal policies, inflation was held in the 5%–10% range, the rupiah was stable and predictable, and the government avoided domestic financing of budget deficits. Much of the development budget was financed by concessional foreign aid.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987–1997, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market.
High levels of economic growth from 1987–1997 masked a number of structural weaknesses in Indonesia's economy. The legal system was very weak, and there was and is no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade, and export restrictions all created economic distortions.
The regional financial problems that swept into Indonesia in late 1997 quickly became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Suharto. The rupiah failed to stabilize for any significant period of time, however, and President Suharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B.J Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform, and governance targets.
The effects of the financial and economic crisis were severe. In 1998, real GDP contracted by an estimated 13.7%. The economy bottomed out in mid-1999, and real GDP growth for the year was an anemic 0.3%. Inflation reached 77%in 1998 but slowed to 2% in 1999. The rupiah, which had been in the Rp 2,400/USD1 range in 1997 reached Rp 17,000/USD1 at the height of the 1998 violence, returned to the Rp 6,500–8,000/USD1 range in late 1998. It has traded in the Rp 6,500–9,000/USD1 range since, with significant volatility. Although a severe drought in 1997–1998 forced Indonesia to import record amounts of rice, overall imports dropped precipitously in the early stage of the crisis in response to the unfavorable exchange rate, reduced domestic demand, and absence of new investment. Although reliable unemployment data are not available, formal sector employment contracted significantly.
In late 2005 Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency reached Rp 12,000/USD1 before stabilizing. The government was forced to cut its massive fuel subsidies, which were to cost $14 billion for 2005, in October.[1] This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation has stabilized, but the economy continues to struggle with inflation at 17% in January 2006. To mitigate consequent economic hardship, the government has offered one-time subsidies to eligible citizens, effectively becoming Indonesia's first significant government-funded social security benefit scheme.[2][broken footnote]
As of early 2006, Indonesia's economic outlook is more positive. Economic growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached pre-crisis levels. Growth is driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was the best performing market in Asia in 2004, up some 42%. Problems that continue to put a drag on growth include low foreign investment levels, bureaucratic red tape, and very widespread corruption which causes 51.43 trillion Rupiah or 5.6573 billion US Dollar or approximately 1.4% of GDP to be gone on a yearly basis.[3] However, there is very strong optimism with the conclusion of peaceful elections during the year 2004 and the election of the reformist president Susilo Bambang Yudhoyono.
[edit] Investment
Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of US banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and South Korea.
The economic crisis made continued private financing imperative but problematic. New foreign investment approvals fell by almost two-thirds between 1997 and 1999. The crisis further highlighted areas where additional reform was needed. Frequently cited areas for improving the investment climate were establishment of a functioning legal and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights regime remains weak; lack of effective enforcement is a major concern. Under Suharto, Indonesia had moved toward private provision of public infrastructure, including electric power, tollroads, and telecommunications. The financial crisis brought to light serious weaknesses in the process of dispute resolution, however, particularly in the area of private infrastructure projects. Although Indonesia continued to have the advantages of a large labor force, abundant natural resources and modern infrastructure, private investment in new projects largely ceased during the crisis.
The stock market capitalization of listed companies in Indonesia was valued at $81,428 million in 2005 by the World Bank. [1]
[edit] Economic relations with the United States
U.S. exports to Indonesia in 1999 totaled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. U.S. imports from Indonesia in 1999 totaled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear. Economic assistance to Indonesia is coordinated through the Consultative Group on Indonesia (CGI), formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance.
The U.S. Agency for International Development (USAID) has provided development assistance to Indonesia since 1950. Initial assistance focused on the most urgent needs of the new republic, including food aid, infrastructure rehabilitation, health care, and training. Through the 1970s, a time of great economic growth in Indonesia, USAID played a major role in helping the country achieve self-sufficiency in rice production and in reducing the birth rate.
USAID's current program aims to support Indonesia as it recovers from the financial crisis by providing food aid, employment generating activities, and maintaining critical public health services. USAID is also providing technical advisers to help the Indonesian Government implement economic reforms and fiscal decentralization and is supporting democratization and civil society development activities through non-governmental organizations.
[edit] Macro-economic trend
This is a chart of trend of gross domestic product of Indonesia at market prices estimated by the IMF with figures in millions of rupiah.
| Year | GDP | USD exchange (rupiah) |
Inflation index (2000=100) |
|---|---|---|---|
| 1980 | 60,143,191 | 626.98 | 12 |
| 1985 | 112,969,792 | 1,110.58 | 20 |
| 1990 | 233,013,290 | 1,842.80 | 29 |
| 1995 | 502,249,558 | 2,248.60 | 44 |
| 2000 | 1,389,769,700 | 8,396.33 | 100 |
| 2005 | 2,678,664,096 | 9,705.16 | 155 |
For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only. Average wages in 2007 were approximately $9-10 per day.[citation needed]
[edit] Structure of the economy
[edit] Agriculture, livestock, forestry and fishery
Statistics Indonesia provisionally valued food crop yields at 213,529,700 million rupiahs in 2006 thus registering over 35% growth since 2003. [2] Badan Pusat Statistik provisionally valued estate crop yields at 62,690,900 million rupiahs in 2006 thus registering over 34% growth since 2003. [3] Badan Pusat Statistik provisionally valued livestock and its derivative products at 51,276,400 million rupiahs in 2006 thus registering over 37% growth since 2003. [4] Badan Pusat Statistik provisionally valued forestry at 30,017,000 million rupiahs in 2006 thus registering over 63% growth since 2003. [5] Badan Pusat Statistik provisionally valued fishery at 72,979,900 million rupiahs in 2006 thus registering over 60% growth since 2003. [6]
[edit] Mining and quarrying
Badan Pusat Statistik provisionally valued the oil and gas mining industry at 187,893,200 million rupiahs in 2006 thus registering over 97% growth since 2003. [7]
Indonesia is the only Asian member of the Organization of Petroleum Exporting Countries (OPEC) outside of the Middle East, and is the only OPEC member that is a net oil importer. In early 2005, Indonesian crude oil and condensate output was 1.07 million barrels per day. This is a substantial decline from the 1990s, due primarily to aging oil fields and a lack of investment in oil production equipment. In 1999, Crude and condensate output averaged 1.5 million barrels (240,000 m³) per day, and in the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP. This decline in production since the 1990s has been accompanied by a substantial increase in domestic consumption, about 5.4% per year, leading to an expected US$1.2 billion cost for importing oil in 2005.
The state owns all petroleum and mineral rights. Foreign firms participate through production-sharing and work contracts. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.
Indonesia's fuel production has declined significantly over the years, owing to aging oil fields and lack of investment in new equipment. As a result, despite being an exporter of crude oil, Indonesia is now a net importer of oil and had previously subsidized fuel prices to keep prices low, costing US$ 7 billion in 2004 [8]. The current president has mandated a significant reduction of government subsidy of fuel prices in several stages [9]. In order to alleviate economic hardships, the government has offered one-time subsidies to qualified citizens. The government has stated the cuts in subsidies are aimed at reducing the budget deficit to 1% of gross domestic product (GDP) this year, down from around 1.6% last year.
[edit] Non-oil and gas mining
Badan Pusat Statistik provisionally valued the non-oil and gas mining industry at 130,861,000 million rupiahs in 2006 thus registering over 145% growth since 2003. [10]
Indonesia is the world's largest tin market. Although mineral production traditionally centered on bauxite, silver, and tin, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between UK firms - BP and Rio Tinto. Total coal production reached 74 million metric tons in 1999, including exports of 55 million tons. Two US firms operate three copper/gold mines in Indonesia, with a Canadian and British firm holding significant other investments in nickel and gold, respectively. In 1998, the value of Indonesian gold production was $1 billion and copper, $843 million. Receipts from gold, copper, and coal comprised 84% of the $3 billion. Earned in 1998 by the mineral mining sector.
[edit] Quarrying
Badan Pusat Statistik provisionally valued the quarrying industry at 35,872,700 million rupiahs in 2006 thus registering over 87% growth since 2003. [11]
[edit] Manufacturing
[edit] Oil and gas manufacturing
Badan Pusat Statistik provisionally valued the petroleum refinery industry at 119,833,900 million rupiahs in 2006 thus registering over 139% growth since 2003 [12] while the liquefied natural gas industry was valued at 53,791,300 million rupiahs in 2006 thus registering over 94% growth since 2003.
[edit] Non-oil and gas manufacturing
Badan Pusat Statistik provisionally valued the food, beverage and tobacco industry at 213,173,300 million rupiahs in 2006 thus registering over 38% growth since 2003. [13]
Textile, leather products and footwear industry was valued at 90,871,700 million rupiahs in 2006 thus registering over 34% growth since 2003.
Wood and wood products industry was valued at 44,410,400 million rupiahs in 2006 thus registering over 48% growth since 2003.
Paper and printing products industry was valued at 39,968,900 million rupiahs in 2006 thus registering over 43% growth since 2003.
Fertilizers, chemicals and rubber products industry was valued at 95,765,000 million rupiahs in 2006 thus registering over 68% growth since 2003.
Cement and non-metallic quarry products industry was valued at 29,015,100 million rupiahs in 2006 thus registering over 50% growth since 2003.
Iron, steel and other basic metals industry was valued at 20,492,200 million rupiahs in 2006 thus registering over 52% growth since 2003.
Transport equipment, machinery and apparatus industry was valued at 221,891,800 million rupiahs in 2006 thus registering over 87% growth since 2003.
Other manufacturing industries were valued at 7,148,300 million rupiahs in 2006 thus registering over 67% growth since 2003.
[edit] Electricity, gas and water supply
[edit] Electricity
Badan Pusat Statistik provisionally valued the electricity industry at 21,247,200 million rupiahs in 2006 thus registering over 51% growth since 2003. [14] The vast majority of production is with conventional fossil units, but hydroelectric and other renewables make a contribution. Total electric production in 2005 was 100 TWh.
Indonesia has expressed interest recently in possible use of nuclear plants.
- See also: Nuclear power in Indonesia
[edit] City gas
Badan Pusat Statistik provisionally valued the city gas industry at 5,036,100 million rupiahs in 2006 thus registering over 119% growth since 2003. [15]
[edit] Water supply
Badan Pusat Statistik provisionally valued the water supply industry at 4,115,200 million rupiahs in 2006 thus registering over 43% growth since 2003. [16]
[edit] Construction
Badan Pusat Statistik provisionally valued the construction industry at 249,127,800 million rupiahs in 2006 thus registering over 98% growth since 2003. [17]
[edit] Trade, hotel and restaurant
[edit] Wholesale and retail trade
Badan Pusat Statistik provisionally valued the wholesale and retail trades at 386,872,500 million rupiahs in 2006 thus registering over 48% growth since 2003. [18]
[edit] Hotels
Badan Pusat Statistik provisionally valued the hotel industry at 17,248,800 million rupiahs in 2006 thus registering over 52% growth since 2003. [19]
[edit] Restaurants
Badan Pusat Statistik provisionally valued the restaurant industry at 92,214,900 million rupiahs in 2006 thus registering over 45% growth since 2003. [20]
[edit] Transportation and communication
[edit] Transportation
Badan Pusat Statistik provisionally valued railway transport at 1,345,000 million rupiahs in 2006 thus registering over 16% growth since 2003. [21]
Road transport was valued at 81,449,500 million rupiahs in 2006 thus registering over 106% growth since 2003.
Sea transport was valued at 16,120,700 million rupiahs in 2006 thus registering over 34% growth since 2003.
River, lake and ferry transport was valued at 4,510,700 million rupiahs in 2006 thus registering over 53% growth since 2003.
Air transport was valued at 14,685,200 million rupiahs in 2006 thus registering over 96% growth since 2003.
Other services allied to transport industry were valued at 24,868,900 million rupiahs in 2006 thus registering over 49% growth since 2003.
[edit] Communication
Badan Pusat Statistik provisionally valued the communication industry at 87,941,600 million rupiahs in 2006 thus registering over 123% growth since 2003. [22]
[edit] Finance, real estate and business services
[edit] Banking
Badan Pusat Statistik provisionally valued the banking industry at 97,708,300 million rupiahs in 2006 thus registering over 31% growth since 2003.[23]
[edit] Non-bank finance institutions
Badan Pusat Statistik provisionally valued the non-bank finance industry at 26,682,500 million rupiahs in 2006 thus registering over 87% growth since 2003. [24]
[edit] Services allied to finance
Badan Pusat Statistik provisionally valued other services allied to finance industry at 2,006,300 million rupiahs in 2006thus registering over 82% growth since 2003. [25]
[edit] Real estate
Badan Pusat Statistik provisionally valued the real estate industry at 97,764,400 million rupiahs in 2006 thus registering over 72% growth since 2003. [26]
[edit] Business services
Badan Pusat Statistik provisionally valued other business support services at 47,381,600 million rupiahs in 2006 thus registering over 71% growth since 2003. [27]
[edit] Other services
[edit] General government
Badan Pusat Statistik provisionally valued government administration and defence services at 103,508,800 million rupiahs in 2006 thus registering over 63% growth since 2003. [28]
Other government services were valued at 64,290,900 million rupiahs in 2006 thus registering over 67% growth since 2003.
[edit] Private
Badan Pusat Statistik provisionally valued the social and community services at 60,319,400 million rupiahs in 2006 thus registering over 92% growth since 2003. [29]
Amusement and recreational services were valued at 10,018,800 million rupiahs in 2006 thus registering over 46% growth since 2003.
Personal and household services were valued at 100,247,900 million rupiahs in 2006 thus registering over 69% growth since 2003.
[edit] Public expenditure
Since the Asian financial crisis in the late 1990s, which brought down the Suharto regime in its wake in May 1998, Indonesia’s public finances have undergone a major transformation. The financial crisis itself caused a huge economic contraction and a commensurate decline in public spending. Not surprisingly, debt and subsidies increased dramatically, while development spending was sharply curtailed.
Now, one decade later, Indonesia has moved out of crisis and into a situation in which the country once again has sufficient financial resources to address its development needs. This change has come about as a result of prudent macroeconomic policies, the most important of which has been very low budget deficits. Also, the way in which the government spends money has been transformed by the 2001 ‘big bang’ decentralization, which has resulted in over one-third of all government spending being transferred to sub-national governments by 2006. Equally important, in 2005, spiraling international oil prices caused Indonesia’s domestic fuel subsidies to run out of control, threatening the country’s hard won macroeconomic stability. Despite the political risks of major price hikes in fuel driving more general inflation, the government took the brave decision to slash fuel subsidies.
This decision freed up an extra US$10 billion for government spending on development programs. [30] Meanwhile, by 2006 an additional US$5 billion had become available thanks to a combination of increased revenues boosted by steady growth of the overall economy, and declining debt service payments, a hangover from the economic crisis. [31] This meant that in 2006 the government had an extra US$15 billion to spend on development programs. [32] The country has not seen “fiscal space” of such magnitude since the revenue windfall experienced during the oil boom of the mid-1970s. However, an important difference is that the 1970s oil revenue windfall was just that: a lucky and unforeseen financial boon. In contrast, the current fiscal space has been achieved as a direct result of sound and carefully thought through government policy decisions.
However, while Indonesia has made tremendous progress in freeing up financial resources for its development needs, and this situation is set to continue in the newt few years, subsidies continue to place a heavy burden on the government’s budget. The 2005 reductions on subsidies notwithstanding, total subsidies still accounted for some US$10 billion in government spending in 2006, or a significant 15 percent of the total budget. [33]
Thanks to the decision of the Habibie government (May 1998 to August 2001) to decentralize power across the country in 2001, increasingly high shares of government spending are being channeled through sub-national governments. As a result, provincial and district governments in Indonesia now spend 37 percent of total public funds, which represents a level of fiscal decentralization that is even higher than the OECD average.
Given the level of decentralization that has occurred in Indonesia and the fiscal space now available, the Indonesian government has a unique opportunity to revamp the country’s neglected public services. If carefully managed, this could allow the lagging regions of eastern Indonesian to catch up with other more affluent areas of the country in terms of social indicators. It could also enable Indonesian to focus on the next generation of reforms, namely improving quality of public services and targeted infrastructure provision. In effect, the correct allocation of public funds and the careful management of those funds once they have been allocated have become the main issues for public spending in Indonesia going forward.
For example, while education spending has now reached 17.2 percent of total public spending ─ the highest share of any sector and a share of 3.9 percent of GDP in 2006, compared with only 2.0 percent of GDP in 2001 ─ in contrast total public health spending remains below 1.0 percent of GDP. [34] Meanwhile, public infrastructure investment has still not fully recovered from its post-crisis lows and remains at only 3.4 percent of GDP. [35] One other area of concern is that the current level of expenditure on administration is excessively high. Standing at 15 percent in 2006, this suggests a significant waste of public resources. [36]
[edit] See also
- Taxation in Indonesia
- Next Eleven
- G20 industrial nations
- G20 developing nations
- Positive market perception of Indonesian stock market(2007)
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[edit] References
- ^ BBC News. "Indonesia plans to slash fuel aid", BBC, London, 31 August 2005. (English)
- ^ Cite error: Invalid
<ref>tag; no text was provided for refs namedECONOMIST_FACTSHEET - ^ The Jakarta Post. The Jakarta Post (2007). Retrieved on 2007-11-11.
