DEVELOPMENT IN
INDONESIA
University of
the West Indies
Kingston, 26 October 2005
Overview
The Indonesian economy has always been
strongly characterized by its rich endowments of natural resources,
particularly in the agricultural sector. For this reason in the late
16th century, many foreigners were greatly attracted to such an abundance
of natural resource, particularly spice.
Indonesia’s economy gradually
moved away from its reliance on agriculture and shifted to industrialization.
This gradual process of industrialization in Indonesia began with highly
centralized small-plot farming and state owned manufacturing and later
turned Indonesia into a modern, industrial and dominated by the private
sector. Manufacturing industry for the past ten years has also played
the role of prime mover of the country’s economy by contributing
to the biggest share to the GDP, surpassing the agriculture in 1995.
Indonesia has emerged as a world-standard producer of diverse industrial
products, including iron and steel, aluminum, petrochemicals, electronic
and electric appliances, processed rubber, apparel and textiles, footwear
and leather goods, wood products, paper and pulp, chemicals, a variety
of food and beverage products and motor vehicles. The share of the manufacturing
industry to GDP in 2003 was 24.7% larger than the agriculture industry
which accounted for 16.6% to GDP.
Despite such promising outlook, the
Indonesian economy was severely struck by an Asian financial crisis
in 1998. This external shock forced the Indonesian Government to review
its development program, with a view to maintaining its basic principles
of democracy, market liberalization and global outreach. Slowly but,
surely the Indonesian Government and People pulled itself from the damaging
effects of the crisis, as the country reviews its policies while continuing
to embrace the inevitable trends of globalization.
In 2005, Indonesia’s macro-economy
enjoys significant improvement and in threshold of sustainable growth.
Starting from last year, the economy has grown rapidly and reach its
post-crisis level for as high as 5.1%. This remarkable achievement is,
undoubtedly, a result of a safeguarded macro economy; a policy of which
we carry out to push the growth up to 5.5% this year. This was due to
increase in investment of 13.6% and export of 10.2%. Production sector
has also been improving with non-oil and gas industry could grow at
8%.
The government has determined economic
priority programs for the year 2004, namely: to maintain continuous
economic recovery and reform, to execute strategy of growth based on
competitive edge improvement through investment and exports, to boost
more growth of the 2005 GDP for the sake of the people’s welfare
improvement, to continue to strive for poverty eradication and creation
of job opportunities through human resource quality improvements, and
better economic development which takes social welfare into action.
The growth pattern has been moved from
a consumption-driven economy to a more balanced one with higher role
of export and investment in the last two years. The sharp pick-up in
investment stemmed from strong domestic demand and lowering financing
cost. Similarly, exports of goods and services expanded in line with
higher world trade volume. On the other side, the buoyant domestic demand
has generated a higher level of production.
However, with 2.4 million people joining
the labor force, such a high growth is not sufficient to absorb it.
In these circumstances, there is no other choice than pursuing a higher
and more stable economy in the coming years. Clearly, it is not an easy
task. Therefore, the government is now gearing policies to boost economic
growth while at the same time maintaining macro-economic stability.
Monetary policies were consistently directed at achieving the medium-term
inflation target and banking policy remain focused on enhancing banking
stability and its role as financial intermediaries. Fiscal policy is
directed to maintaining its sustainability while leaving a room for
growth inducement. On the real sector, policies are directed to create
a more favorable investment climate and to tackle the lack of competitiveness
in manufacturing industry as well as in agriculture.
Trade
Overseas trade plays a key role in marketing
oil and gas as well as non-oil and gas commodities. Some kinds of the
country’s products have proved themselves successful in competing
in and gaining international market to bring in large amount of foreign
exchange. In one hand, in fact the country’s export commodities
destination have been expanding, but on the other hand large proportion
of those exported commodities is still concentrating to several countries,
and though sorts of non-oil and gas commodities have been growing more
varied only some have export basis.
By the improvement of competitive edge
of the country’s non-oil and gas export commodities at international
market, it is marked by the augment of exports in terms of volume and
value, and the betterment of non-oil and gas export structure as well
as expansion of their market, it is expected that the dependence on
oil and gas export will significantly be reduced.
In encouraging non-oil and gas exports,
necessary measures were taken, including the reduction of export tariff
of some commodities and the improvement of textile quota management
system. In this context, market expansion to countries of non-quota
has been carried out through various activities, including selling missions,
trade exhibitions and trade diplomacy as well as the operation of overseas
trade promotional offices.
Exports of oil and gas grew at an annual
average rate of 1.2 percent. The increase trend of oil prices in world
market caused unfortunately trade balance deficit for the Indonesian
oil export value was below its oil import value.
Financial Reform
Since 1998, Indonesia continues to adjust
its economy to an ever changing world financial market, pushing for
national development and financial stability
During his State address to the members
of Parliament in August 2005, the President of the Republic of Indonesia,
HE Dr. Susilo Bambang Yudhoyono expressed his confidence that despite
the many external shocks that influence the Indonesian economy, there
is still room for optimism and hope for the development program in Indonesia.
This will be attained by conducting a well-coordinated fiscal, monetary
and real sector policy whilst also taking into consideration of the
prospects of the international financial development, the exchange rate
of the Rupiah for 2006, the fluctuating price of oil and also the projected
inflation rate and interest rate of 7% and 8% respectively. Particularly
for the formulation of the monetary policy, the Government is committed
to the continuity of the free floating exchange rates system with the
discretionary use of a tight monetary system by the Indonesian Reserve
Bank to monitor the fluctuating exchange rate value.
In this regard, efforts have been made
to refine regulations, improve the effectiveness of the supervision
system, apply governmental procedures, and consolidate the financial
sector comprehensively. One of the expectations is to have the Banking
sector optimize its credit distribution, including increasing capital
access to micro, small, and medium scale businesses. In the effort to
ensure sustainable national economic growth, it deems necessary to maintain
a stable financial sector. This is to be attained by the improvement
of the financial sector supervision system, revamping the inter-authorities
coordination system and the ability to prevent the risk regularly faced
by the financial sector.
To this end, the Government of the Republic
of Indonesia is designing a concept of a Financial Sector Safety Net,
intended to establish an integrated, efficient and effective work mechanism.
Through revamping measures in the real sector and the financial sector,
people’s participation in development could continue to be improved
Investment
On capital investment, policies are
directed towards enhancing its role as alternative financing resources
for real sector. Further, we are developing more reliable and safeguarded
investment facilities for investors while keeping up the attractiveness
of profit earning from the market. Thus, through the Capital Market
Law, the Indonesian securities regulator has been granted with strong
regulatory and enforcement power. Support from other investigative agencies
such as the Attorney General and the Police Department are all aimed
to underpin the effective work of the regulator in protecting the investor’s
right.
Ensuring market to be efficient and
transparent is important. However, protecting investors that invest
in Indonesia’s markets, regardless their nationalities, are the
principal one. Protection measures will be much more effective if markets
are well-governed and parties involved – especially public companies
and management – run their business in highly ethical manners.
In this matter, among all standards, it is the OECD Guidelines on Good
Corporate Governance that the government is trying to adopt. With supports
from the IMF and World Bank, corporate governance country assessment
was completed last year.
The effort certainly does not stop here.
Indonesian government had revitalized the National Committee on Governance
to cover not only governance issues in private sectors, but in public
sectors as well. Moreover, a nation-wide program to promote the implementation
of good corporate governance principles to Indonesian business community
has been taken place annually. Companies with high level of compliance
with corporate governance principles were awarded and granted with special
reduction as well as free annual listing fee from the Stock Exchange.
The principles are fundamental for the
industry to last. Full implementation of those principles ensures market
credibility; and most importantly, this gives best protection to the
investors. Last but not least, it is the government’s aim to make
companies listed on the stock exchange as benchmark for other companies
and business community as a whole, to fully implement the principles
for the sake of the nation.
South-South Cooperation
In 1981, Indonesia established the Indonesian
Technical Cooperation Program (ITCP), which has continuously offered
programs to all developing countries in the framework of Technical Cooperation
among Developing Countries (TCDC). Through ITCP, Indonesia has shared
its experiences, expertise and vision of development with other developing
countries, thereby accelerating their acquisition of appropriate technology
and their integration into the international economic system.
The concept of TCDC was formulated by
the Non-Aligned Movement (NAM) in collaboration with the Group of 77
and China in 1978. TCDC has served many purposes, such as fostering
national as well as collective self-reliance among developing countries,
promoting exchanges of experiences, sharing of their technical resources,
development of their complementary capacities, and strengthening the
capability of developing countries to formulate appropriate strategies
in their development.
ITCP has involved more than 90 countries
and more than 4,000 participants from the Asia-Pacific, Africa and Latin
America. The Program has been financed through the national budget and
by tripartite or multipartite arrangements. ITCP activities include
training programs for foreign technical personnel, visits by officials
from other developing countries who study Indonesia’s experience
in various development fields, study visits by Indonesian officials
to other developing countries, apprenticeship program for farmers from
developing countries, send of Indonesian experts and advisors to other
developing countries for the preparation of development programs and
projects, and holding of expert group meetings and meetings of national
focal points.
The Indonesian training programs cover
various subjects: family planning, information, natural resources, social
services, public works, agriculture, finance, aviation, and education.
Since 1993, Indonesia has been promoting self-propelling growth programs
in its TCDC activities. The self-propelling growth strategy has been
developed in order to generate community self-reliance and the promotion
of people-centered development in the developing countries. Its emphasis
is on programs that are action-oriented, pragmatic and realistic. The
aim of this program is to help people rise from poverty in a way that
they would be seen as both the beneficiaries and main authors of their
development.
After the end of the bipolar world,
and the onset of globalization, developing countries faced a growing
tendency to be marginalized from the new geopolitical configuration
and sought to strengthen itself through South-South cooperation. As
one of the platforms for South-South cooperation, the Group of 77 and
China has remained steadfast as a coalition keeping focus on the needs
and interests of developing countries. Indeed, the Group should deepen
its role by facilitating the South to work more closely together to
increase national and collective self-reliance.
It was noted also that while the overall
African region had been the least prosperous region in the South, it
had made progress in efforts toward integration among sub-regional economic
communities. The regional economic frameworks, such as NEPAD, had also
emerged and provided potential opportunities for cooperation.
In the issue of regional frameworks, Indonesia is pleased to have contributed
to inter-regional strengthening through the launching of the New Asian-African
Strategic Partnership (NAASP) at the Asia-African Summit and the Golden
Jubilee Commemoration of the Asian-Africa Conference of 1955 held in
Indonesia from 23-24 April 2005. Many Heads of States of Asian and African
countries and the Secretary-General of the United Nations attended the
Summit and endorsed the NAASP, which is based on three pillars of economic,
political and social affairs. The NAASP will complement other existing
initiative in the region. The summit between Asia and Africa will be
held every four years with biennial meetings at the ministerial levels.
The next summit will be held in South Africa in 2009.
In this context, the effort to consolidate
related developing countries grouping and movements such as NAM, G-15,
D-8, G-24 and G-25 is becoming clearer and more relevant given the challenges
posted by the globalization and trade liberalization. To respond adequately
to these challenges, there is a need for a modality among those grouping/movement
that can be developed through functionalizing and utilizing the South-South
think tank’s capital known as South Centre for the maximum benefit
of South-South cooperation.
Under South-South cooperation, during
the IFCC XI in Havana last April, Indonesia has proposed technical cooperation
on the following: (a) Training on Development of SMEs; (b) Training
on Micro-finance; and (c) Training on Application of ICT. We look forward
to working together with other countries and international organizations
to implement this programme of capacity building for developing countries.
Furthermore, as the host of the Non-Aligned
Movement Centre for South-South Technical Cooperation (NAM CSSTC) in
Jakarta, Indonesia encourages the full use of the facilities offered.
This Centre was established at the initiative of the Government of Indonesia
and Brunei Darussalam during the eleventh NAM Summit in Cartagena in
1995. Since its establishment, the Centre has been launching various
programmes and activities to support the development efforts of the
South. These programmes offer direct and long-term benefits to render
the economies of developing countries more broad-based, efficient and
resilient, enabling them to participate effectively in the globalization
process. Under the framework of triangular cooperation, the Centre has
also been working with other international donor institutions that share
common vision of the development of the South.
In conclusion, South-South cooperation
could further be strengthened through perseverance, effective coordination,
and focus on practical and achievable action that would have positive
long-term outcomes for the Group.
Thank you.
