The role of foreign direct investment in Indonesia's manufacturing exports

This article examines whether foreign direct investment (FDI) has contributed to the changing structure of Indonesia's manufacturing exports. It uses industry-level data from 1990 to 2008, classified by factor intensity. Our analysis reveals that FDI promotes exports in most panel observations, especially exports from physical-capital-intensive (PCI), human-capital-intensive (HCI) and technology-intensive (TI) industries. Yet by applying a differentiated cross-section-effect model, we determine that the export-generating potential of FDI is stronger in PCI, HCI and TI industries than in natural-resource-intensive or unskilled-labour-intensive industries, in which Indonesia has a comparative advantage. We also assess the influence of other determinants of export performance – namely, private domestic capital investment, GDP growth and exchange rates. Our findings have implications for policymakers seeking to sustain Indonesia's export performance.     

Foreign direct investment and growth in East Asia: lessons for Indonesia

Foreign direct investment (FDI) has been important in the growth and global integration of developing economies. Both Northeast and Southeast Asia, especially the latter, have been part of this development, with increasing inflows of FDI and greater foreign participation in local economies. However, Indonesia has been an outlier within the region. Inflows of FDI have been lower to Indonesia than to other countries, especially in manufacturing, and they have been lower than could be expected from Indonesia's size, population and other country characteristics. We show that the inflows that have occurred have benefited Indonesia, and use the East Asian experience to identify measures that are likely to increase these flows. A relatively poor business environment, inefficient government institutions, low levels of education and poor infrastructure all seem to be important explanations for the low inflows of FDI to Indonesia.     

Dawn of Industrialisation? The Indonesian Automotive Industry

This article traces the development of industrial policy towards the Indonesian motor industry within the automotive global value chain. Showing the current dominance of Japanese motor assemblers in Indonesia, it notes the rather undeveloped nature of the locally owned supporting industry, particularly compared with that of neighbouring Thailand. Most investment in auto-parts production has been by foreigners. Nevertheless, Indonesia's rapid domestic-market growth has allowed it to attract foreign automotive investment without having to offer excessively generous incentives. While the continued entry of foreign suppliers of auto parts into Indonesia offers opportunities for local suppliers to upgrade their productive capabilities, it also limits their chances of becoming first-tier suppliers themselves. Japanese automotive investors are optimistic about Indonesia's export potential, more so than Malaysia's.     

What can Indonesia learn from China's industrial energy saving programs?

Even though Indonesia's CO₂ emissions are dominated by deforestation while China's are dominated by industry, Indonesia has much to learn from China's industrial energy saving programs. To begin with, it is only a matter of time before Indonesia's emissions from fossil fuels overtake those from deforestation. Given the long technological lock-in effects of energy systems and industries, Indonesia needs to think now about how it will tackle this problem. There are other reasons for believing that Indonesia might learn something from China – the CO₂ intensities of GDP, of industry and of cement production have been rising in Indonesia, while they are falling in China. China's better intensity performance is due to policies that Indonesia would do well to follow – adopting a technological catch-up industrial development strategy; raising energy prices to scarcity values; liberalising domestic markets and opening the economy to trade and investment; and mounting a massive energy saving program.     

ASIAN DEVELOPMENT STRATEGIES: CHINA AND INDONESIA COMPARED

China's and Indonesia's development strategies have been compared with others, but rarely with each other. Radically different political contexts have produced both similar and distinctly different development patterns. Each using formal planning, Indonesia spurred radical reforms to promote growth, whereas China opted for incremental reforms to ‘grow out of the Plan’, as a political device and to discover what policies and institutions worked. Both strategies produced environments largely conducive to rapid development. Indonesia relied on a few economic technocrats to oversee development; China used decentralisation and party reforms to create a credible environment for non-state investment. Both shared concern for agricultural reform and food security; both opted to open up for trade—China gradually, Indonesia radically. Both did well in growth and poverty reduction following reform. China's growth performance is in a league of its own, especially since Indonesia's Asian crisis setback, but Indonesia had more equitable growth and survived a difficult political transition with, in hindsight, modest costs.     

Has China Crowded out Foreign Direct Investment from Its Developing East Asian Neighbors？

This paper applies a gravity model to investigate the determinants of foreign direct investment (FDI) in East Asia. Economic fundamentals, such as market size, per capita income and country risk indicators, economic and cultural ties, exchange rate volatilities and information asymmetry are found to be important determinants for FDI. Globally, the inward FDI among high-income OECD economies declined significantly on average over the period of 1990-2003, whereas the inward FDI of the high-income OECD economies in emerging market economies gained substantially. In the East Asian region, the ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand) received above-average inward FDI from the high-income OECD economies after controlling for their economic fundamentals. By contrast, China's FDI from the high-income OECD economies is below average relative to its economic fundamentals. Therefore, it is difficult to establish that China has crowded out FDI from its developing ASEAN neighbors.     

PROSPECTS FOR SKILLS-BASED EXPORT GROWTH IN A LABOUR-ABUNDANT,RESOURCE-RICH DEVELOPING ECONOMY

In an integrated global economy, specialisation in trade is an increasingly prominent strategy. A labour-abundant, resource-rich economy like Indonesia faces stiff competition in labour-intensive manufactures; meanwhile, rapid growth in demand for resources from China and India exposes it to the ‘curse’ of resource wealth. This diminishes prospects for more diversified growth based on renewable resources like human capital. Using an international panel data set we explore the influence of resource wealth, foreign direct investment and human capital on the share of skill-intensive products in exports. FDI and human capital increase this share; resource wealth diminishes it. We use the results to compare Indonesia with Thailand and Malaysia. Indonesia's reliance on skill-intensive exports would have been greater had it achieved higher levels of FDI and skills. Its performance in accumulating these endowments, and its relative resource abundance, impede diversification in production and trade. We present policy options flowing from these findings.     

Foreign direct investment in China: Policy,recent trend and impact 1

One of the most important elements of China's economic reform has been the promotion of foreign direct investment (FDI) inflow. Government polices on FDI have gone through different stages in their main objectives since the late‐1970s, from gradually opening to foreign investors, to actively encouraging inward investment, directing FDI in accordance with domestic industrial restructuring, and complying with China's World Trade Organization (WTO) obligations. FDI in China has experienced rapid growth especially since the mid‐1990s, as well as structural change. Most of the earlier investments were small scale, labor‐intensive and export‐oriented. In recent years, more investment has been large scale and more capital and technology intensive, aiming at both domestic and export markets. Moreover, increasingly more investment has come from the industrial world, and has located along the eastern coastal regions, in additional to the two southeastern provinces. FDI has played a crucial role in China's rapid growth, economic transition, and, mostly importantly, integration with the world. China's recent accession to the WTO provides more incentives to foreign investors. At the same time, it will also result in more intense competition for domestic firms.     

Widjojo Nitisastro and Indonesian development

Widjojo Nitisastro (2010) Pengalaman Pembangunan Indonesia: Kumpulan Tulisan dan Uraian Widjojo Nitisastro [The Experience of Development in Indonesia: A Collection of the Writings of Widjojo Nitisastro], Penerbit Buku Kompas [Kompas Book Publishing], Jakarta.

Widjojo Nitisastro is one of Indonesia's best-known economic policy makers. Much has been written by others about his role as a top adviser over more than three decades. This collection of his own essays helps fill out the picture. Seven main policy themes may be identified: the role of economic growth in helping overcome mass poverty; the need for economic policy makers to pay close attention to risk management and be constantly ready to respond to economic shocks; the importance of strong leadership and discipline in government; the need to scrutinise investment programs closely; the high priority to be given to borrowing programs and debt management; the role of the price mechanism; and the management of Indonesia's relations with the international community. Strong messages about growth, leadership and stability permeate the essays. The collection is a valuable contribution to the literature on economic policy making in developing countries.     

ECONOMIC REFORM WHEN THE CONSTITUTION MATTERS: INDONESIA'S CONSTITUTIONAL COURT AND ARTICLE 33

Article 33 of Indonesia's Constitution requires the state to ‘control’ important branches of production and natural resources. The meaning of ‘control’ has been a matter of significant debate since Indonesia's independence: does it require the state to manage directly, or is regulation enough? The government has recently sought to break down government monopolies and attract private investment in key sectors. To this end it has enacted a raft of new statutes, but they have been challenged in Indonesia's new Constitutional Court. The Court has opted for the ‘direct manage ment’ interpretation of article 33, striking down statutes that implicitly interpret it as requiring government regulation only. This paper discusses these decisions and, more broadly, problems arising from judicial intervention in economic policy formation. It also considers how the government has sought to circumvent the decisions, and the possible consequences of state non-compliance for the Court's future.     

Recollections of My Careerlections of My Career

Suhadi Mangkusuwondo, Professor Emeritus of the Faculty of Economics at the University of Indonesia (FEUI), was born in Solo, Central Java, in December 1927. After participating in the war of independence, he resumed his secondary education in Malang, completing it in 1949. He then studied economics at the University of Indonesia (UI) and later became a teaching assistant there. Suhadi spent two years doing postgraduate study at the Massachusetts Institute of Technology and later obtained a PhD in economics at the University of California at Berkeley. Returning to Indonesia and his teaching post at FEUI, he became editor of the journal Economics and Finance in Indonesia (EKI). He was Head of the R&D Agency in the Department of Trade from 1973 to 1975 and again in 1983-88, and Director General of Foreign Trade from 1975 to 1983. Professor Suhadi served as the Representative of the Government of Indonesia in the Uruguay Round when it was launched in 1986, and since 1992 has been a member of the Eminent Persons Group of the APEC (Asia–Pacific Economic Cooperation) forum. His other activities include membership of Indonesia's National Research Council (DRN), and of organisations such as the Regional Advisory Board of the ASEAN Economic Bulletin, the journal of the ASEAN Economic Research Unit of the Institute of Southeast Asian Studies in Singapore. He is now also Vice Chairman of the Jakarta-based Trade and Development Institute. On 8 July 1994, Professor Suhadi talked with H.W. Arndt, Hal Hill and Thee Kian Wie about his views on Indonesia's economic development under the New Order, and particularly about trade policy. On 19 September 1995, in a second interview with H.W. Arndt, Mari Pangestu and Thee Kian Wie, he elaborated further on his work at the Ministry of Trade and his participation in the Uruguay Round and the APEC Eminent Persons Group (EPG).     

The Demography of Indonesia in Comparative Perspective

Having reduced its fertility rate over the past 40 years, Indonesia has reached a new demographic crossroad. Its fertility rate is now around 2.5 births per woman, which, if sustained, would add substantial numbers to Indonesia's population in the future. There are concerns within Indonesia that the present level of population growth is an obstacle to continued economic development and, accordingly, that fertility should be reduced to the replacement level of 2.1 births per woman as soon as possible. Yet a comparative perspective indicates that countries such as Singapore, Japan, and Thailand are concerned about the effects that their very low rates of fertility are having on their labour forces and their rates of population ageing. This article suggests that with the right policy settings Indonesia can avoid this outcome yet continue to reduce its fertility. It discusses the implications of Indonesia's population growth and distribution for its economy, as well as the poor quality of demographic data.     

Forestry,Forest Fires,and Climate Change in Indonesia

In recent months, strong global growth, rebounding commodity prices, and relatively accommodative financial conditions have benefited the Indonesian economy. The first quarter of 2017 in Indonesia saw resilient GDP growth, moderate inflation, stable exchange rates, an increase in the growth of non-oil exports, and an investment upgrade from ratings agency Standard & Poor's. Investment growth, however, did not pick up enough to drive overall growth to a higher rate. The poor quality of banking-sector assets and the gaps in tax revenue—despite the fulfilment of the government's tax-amnesty program—are two of the most immediate economic concerns. President Joko Widodo (Jokowi), who is well into the second half of his term, is under pressure to deliver on his development platform, which includes making progress in sustainable development and climate change mitigation. The effective management of forests is key to this platform. There has been longstanding tension over Indonesia's forests between the protection of environmental values, including carbon storage, and the production of valuable commodities, including timber, palm oil, and pulpwood, which generate revenue and employment. We survey recent developments in four storylines related to forestry and climate change: first, Indonesia's commitment to reducing emissions to 29%–41% below projected business-as-usual levels by 2030, as well as the international climate agreements and finance that can help achieve this commitment; second, land-use rights and regulations, including a moratorium on clearing, draining, or setting fires on peatland; third, measures to prevent catastrophic forest fires like those during the 2015 El Niño, including the establishment of the Peatland Restoration Agency; and, fourth, the actions of non-state actors, especially large agribusinesses, in managing forests and peatland. We conclude by discussing differences in the approaches of Jokowi's administration and those of former president Susilo Bambang Yudhoyono's administration and by questioning whether Indonesia's budgeted resources, actions, and results to date are commensurate with its climate commitments.     

Recollections of My Career

Editorial Note:Professor Sumitro Djojohadilcusomo is one of the principal architects of Indonesia's post-independence economic policy. He has held key economic portfolios in both the immediate post-independence era and in the New Order. In addition, as Professor of Economics at the University of Indonesia, and as a tireless lecturer and writer on economic issues, he has been instrumental in shaping the education of several generations of economics students in Indonesia, many of whom are now in key government positions. At the end of August, Professor Sumitro generously agreed to be interviewed on his long career by two members of the BIES editorial board, Anne Booth and Thee Kian Wie. In preparing this interview for publication, the editors have tried to preserve Professor Sumilro's own words to the greatest extent possible; his lucid and entertaining remarks are thus reproduced with a minimum of editing. The interview began with a question to Professor Sumitro about his early training in economies.     

Growth,Poverty, and Inequality under Jokowi

SUMMARY

The political authority of President Joko Widodo (Jokowi) was bolstered in the third quarter of 2015 by a cabinet reshuffle, his coalition's gaining a parliamentary majority, and several foreign-policy developments. Indonesia's request to rejoin OPEC, for example, after having left in 2008, seemed more about international relations than oil prices, while official visits to the Middle East and the United States allowed Jokowi to project his presidency on the international stage. He still faces resistance from within his own party, however.

Jokowi's politically bold reshuffle of economic ministers in August soon yielded a range of policy announcements. In September and October, his government introduced its first substantial set of reforms—a number of economic policy packages intended, among other things, to attract investment and stimulate domestic demand. If even half of these policies are put in place, the impact on Indonesia's economy should be tangible.

Few countries have escaped the effects of falling global commodity prices and China's growth slowdown. At 4.7%, year on year, in the third quarter Indonesia's rate of economic growth again fell short of the government's target. Slowing growth and a negative outlook have lowered market expectations and weakened the rupiah, which is also burdened by the large outstanding external debt held by corporate borrowers. Indonesia's real effective exchange rate has recently begun to depreciate, however, which may stimulate exports. Growth prospects will also improve if the substantial increase in capital and infrastructure spending allocated in the state budget is realised.

Against this backdrop, we focus on what has happened to poverty and inequality in Indonesia since Jokowi took office. The distributional impacts of the current macroeconomic climate are likely to be hardest felt by the poor. Indonesia is well known for its record on poverty reduction, but between September 2014 and March 2015 the share of the population in poverty increased, even though economic growth was close to 5.0%. Slowing growth, rising food prices, the falling real wages of farmers, and the delayed disbursement of fuel-price compensation all had an effect. Such impacts may be mitigated in the medium term by Jokowi's budget reallocations to infrastructure, if realised, and his expansion of social spending.     

Recollections of my Career

Subroto, Professor at the Faculty of Economics, University of Indonesia (FEUI), is one of the architects of the economic policies that brought growing prosperity to Indonesia over the New Order years Educated in Dutch colonial and Japanese occupation schools, he joined Indonesia's independence struggle, and later studied economics at FEUI, McGill University, MIT, and Stanford and Harvard Universities. He taught international economics and business cycles at FEUI and was Secretary of the Faculty. With Widjojo Nitisastro, Mohammad Sadh, Ali Wardhana and Emil Salim, Subroto was appointed a Personal Economic Adviser to General (later President) Soeharto's new government in 1966 In 1968 he joined the Department of Trade, and later was minister of departments responsible for transmigration, cooperatives, mining and energy. After a 17-year ministerial career serving in four consecutive cabinets, Subroto was Secretary General of OPEC for six years from 1988 He remains active in Indonesia's nongovernmental Indonesian Institute for Energy Economics (IIEE), writing on energy problems, and is also Rector of the private Pancasila University in South Jakarta As part of our occasional series of interviews with economists who have helped shape New Order Indonesia, Professor Subroto talked with Chris Manning and Thee Kian VVie of the Bulletin's Editorial Board about his experience as a cabinet minister and as Secretary General of OPEC, and about his views on Indonesia's economic development, particularly its energy problems.     

Foreign Investment in East Asia: A Survey

This article updates the May 1989 literature survey on foreign direct investment (FDI) in the East Asian region published in this journal. Following an overview of trends of FDI in the 1990s, it focuses on three key issues: the impact of the recent Asian economic crisis on FDI inflow relative to other forms of capital inflows; the link between FDI and trade; and technology transfer and adaptation. It is too early to discern the implications of the crisis for host-country policies and investment decisions of multinational corporations, but the indications are that FDI will continue to play a pivotal role in economic transformation, and in regional and global economic integration.     

The Role of Markets,Technology, and Policy in Generating Palm-Oil Demand in Indonesia

Indonesia produces more palm oil and consumes more palm oil per capita than any country in the world. This article examines the processes through which Indonesia has promoted palm-oil consumption and some of the consequences of that promotion. Partial equilibrium modelling shows that Indonesia's remarkable increase in palm-oil consumption since 1985 is not largely attributable to population and income growth. Instead, much of this consumption growth has resulted from substitution away from coconut oil, facilitated by government policies on technology, pricing, distribution, and trade. The switch from coconut oil to palm oil in Indonesia was associated with increased land conversions to agriculture and diminished smallholder competitiveness. Despite lower rates of cooking-oil substitution in the future, simulations suggest that Indonesia's total palm-oil consumption in 2035 will be at least double that of 2010.     

Indonesia's Investment Negative List: an evaluation for selected services sectors

In March 2007, Indonesia's parliament approved a landmark new law on investment. Law 25/2007 replaces separate laws on foreign and domestic investment from 1967 and 1968, and provides a single legislative framework for domestic and foreign investment. The law states that all business sectors are open to investment, including foreign investment, unless specified in a presidential regulation containing Indonesia's Investment Negative List (DNI). This paper summarises the results of four sector studies undertaken to review implementation of the investment law. The purpose of the DNI is to provide certainty to investors by documenting restrictions in a single list, thereby eliminating the power of ministries to set their own rules. This paper finds that, in practice, considerable uncertainty remains, arising particularly from the law's implementing regulations. Furthermore, new ministerial decrees and laws appear to bypass the list and may reflect a trend towards greater restriction of foreign investment in Indonesia.     

M. Hadi Soesastro: Indonesian public intellectual,Asia Pacific visionary

This note commemorates and celebrates the life and contribution of M. Hadi Soesastro, a Bulletin board member who passed away on 4 May 2010. Hadi was arguably Indonesia's leading public intellectual in the fields of international economic policy and political economy, ASEAN economic cooperation, and East Asian economic integration. He made seminal contributions in these fields, and on the political economy of reform in Indonesia, the economic development of East Timor, and energy economics. He also played a major role in institutional development, most notably at the Centre for Strategic and International Studies, and in many other official, academic and research endeavours in Indonesia and East Asia.