Survey of recent developments

In the 15 years since the Asian financial crisis, the Indonesian economy has benefited from a stable macroeconomic policy framework and prudent macroeconomic policy settings. Economic growth has been solid, inflation has been contained and government finances have strengthened. Indonesia weathered the global financial crisis better than many countries, and it subsequently benefited from the low global interest rates resulting from highly stimulatory monetary conditions in many advanced economies, especially the US.

In the middle of 2013, however, speculation on when the US Federal Reserve would begin to unwind its program of quantitative easing saw global interest rates jump. Short-term capital flowed out of Indonesia, causing the stock market to fall, the currency to depreciate and interest rates to rise. On top of this, GDP growth appeared to be slowing, the trade balance worsening and inflation increasing. In late September and October, the failure of the US to raise its legislated debt ceiling led to speculation that it might fail to meet some of its debt obligations, which fuelled financial-market volatility.

It is yet to be seen whether the Indonesian economy and its financial markets are sufficiently flexible to make a smooth transition to the new external reality. The policy tools available to the government to deal with the short-term economic challenges are limited: it introduced an economic policy package in August, and Bank Indonesia (BI) raised official interest rates in August and September, following two increases earlier in the year.

These pressures from global financial markets have drawn attention to the need for further structural reforms in Indonesia, including those aimed at deepening financial markets, strengthening financial-sector supervision, freeing up trade and encouraging competition, and maintaining the government’s revenue base in the face of falling commodity prices. While some reforms, particularly in financial-sector supervision, are already in train, it may be difficult for Indonesia to make serious gains on longer-term economic reforms before the 2014 presidential elections.     

Survey of recent developments

Despite a turbulent global economy and expectations that declining exports would cause an economic slowdown, the Indonesian economy grew at 6.5% in 2011. The growth rate was supported by high consumer confidence – the result of lower inflation of just 3.8% in 2011. Nevertheless, there were indications that the global financial crisis had had an impact on Indonesia in the last quarter of 2011, notably on the growth of exports and imports.

In October 2011, President Yudhoyono reshuffled his cabinet, citing a need to improve its performance in the administration's remaining three years. The reshuffle showed that the president is still subject to political party pressures. Moreover, the governing coalition of parties remains weak. Agreements made within coalition meetings are often broken in the parliament, and coalition parties are frequently distracted by media polemics. The case of former Democrat Party treasurer Nazaruddin, arrested in Colombia following a two-month manhunt, has revealed the magnitude of the money politics surrounding the Democrat Party, whose ratings are declining rapidly.

Indonesia enters 2012 bolstered by the restoration of its investment-grade credit rating. This will expose Indonesia to increased capital flows, since many funds are permitted to invest only in investment-grade countries. The effects on foreign direct investment (FDI) are not automatic, however. These investors evaluate the wider business climate and economic governance in making their investment decisions.

The fuel subsidy remains a challenge for Indonesia in 2011/12. Parliament rejected a proposal to limit fuel consumption from April 2012 over doubts about the government's readiness to handle the policy's technical complexity. Now the government is again considering a fuel price increase, and will have to seek parliamentary approval soon.

Indonesia faces a long-term problem of regional inequality. After four decades of economic development there is little variation in the shares of GDP across regions, but GDP per capita in some regions is slipping behind that of Java. Regional development policy needs to generate more economic activities in the outer islands, and to learn from the mistakes of past initiatives to promote economic development and growth centres in the regions. It is important to align policies with the current decentralisation arrangements.

The government is revising Law 33/2004 on Intergovernmental Finance with the aim of improving some dimensions of decentralisation in Indonesia. Revenue certainty is to be enhanced in part through changes to the general allocation grant (DAU) formula and the disbursement mechanism for intergovernmental transfers. The planned revision has not, however, addressed sufficiently the problem of inefficiency in regional spending. In fact, some of the proposed solutions may well create further spending inefficiency.

The main barrier to increased FDI is infrastructure development, whose progress has been slowed by land procurement problems. Unfortunately, Law 2/2012 on Land Procurement for Public Purposes seems unlikely to deliver a clear solution to the key problem of determining fair prices for land compensation. What is needed is the creation of more independent price-setting committees, with sufficient capacity to disentangle the problems of land acquisition.     

Survey of recent developments

The Indonesian economy is maintaining its momentum at a time of ongoing uncertainty in the global economy and slowing economic growth in China. Strong domestic demand saw output grow by 6.4% over the year to June, despite a steep fall in net exports. Inflation is safely within Bank Indonesia's target range, although food prices have increased relatively quickly. The current account deficit widened to 3.1% of GDP in the June quarter due to continued growth in imports and falling prices for commodity exports. The trade environment has deteriorated in 2012, and new divestment and domestic processing requirements are likely to further reduce investor interest in the mining sector.

President Yudhoyono has recently made several speeches calling for a ‘green growth agenda’. Some progress has been seen in slowing deforestation and in establishing mechanisms for facilitating payments to reduce emissions from deforestation, but loss of natural forests remains rapid. Carbon dioxide emissions from energy are growing quickly, stoked by increasing use of coal. The proposed 2013 budget continues to be heavily burdened by energy subsidies, which encourage over-consumption of fossil fuels. In most respects, therefore, the business-asusual trajectory of the Indonesian economy is unlikely to be particularly green.

A barrier to subsidy reform is its perceived unpopularity, including the threat of public protests such as those witnessed in March. To gauge current opinion we carried out a survey of Jakarta-based university students. The results indicated majority support for the removal of fuel subsidies, but some respondents said they would protest against fuel subsidy reductions, highlighting the politically sensitive nature of the issue.

Indonesia has witnessed booms in the coal and palm oil sectors in recent years, becoming the world's largest exporter of both commodities. We review the benefits from these two booms and the tensions between the development of these sectors and environmental goals. We also review the tourism sector, which remains relatively under-developed outside Bali. Tourism is a potential source of long-run growth that may be aligned with a green economy. The development of the sector would be aided by infrastructure improvements and a renewed focus on the conservation of natural assets.     

Survey of recent developments

Recent political developments are slowing reforms. The Corruption Eradication Commission (KPK) and the finance ministry find themselves entrapped in legal inquiries and political wrangling that seem intended to weaken their reforming zeal. KPK's effectiveness has been undermined by legislative changes and the arrests of three of its commissioners. Meanwhile, the costly bail-out of a small bank has provided an opportunity for attacks on leading reformers – Vice President Boediono and the Minister of Finance, Sri Mulyani Indrawati. The president's diffident stance in both instances has played into the hands of the opposition and, although key reformers are likely to remain in office, the political imbroglio has nonetheless eroded confidence in the government.

Year-on-year GDP growth recovered strongly to 5.4% in the fourth quarter of 2009. Government spending has been the key driver, while household spending slowed and investment remained low. Both exports and imports have returned to modest growth. Although 2009 ended with low inflation, Bank Indonesia (BI) has set its target inflation rate for 2010 at double the rate it achieved in November. BI is likely to bow to populist demands to lower nominal interest rates rather than raising them somewhat to prevent inflation accelerating, even though its real policy rate has been consistent with significant acceleration of GDP growth. The 2009 budget outcomes confirm that the fiscal stimulus in response to the global financial crisis has been less than hoped for. As for 2010, high world oil prices will imply huge subsidies, given that the government is unwilling to increase domestic fuel and electricity prices commensurately.

The president announced that virtually all the government's ‘first 100 days’ program targets have been met. However, half of the ‘action plans’ amounted to nothing more than issuing or announcing new regulations, plans, blueprints, guidelines, recommendations or policies, or simply preparing drafts of these. No real progress has been made in relation to the most urgent reforms, particularly on energy subsidies and labour market regulation. Realising that the whole population would benefit in net terms, the previous government signed the ASEAN–China Free Trade Agreement (ACFTA) in November 2004. But just when the agreement was to take effect, strong resistance from business and parliamentarians emerged, leading to the government's decision to re-negotiate many tariffs with China. This is disappointing: failing to uphold its commitments under this long-standing agreement makes Indonesia appear unreliable as an economic partner.     

SURVEY OF RECENT DEVELOPMENTS

Managing the Indonesian economy in 2015 has proved challenging for the administration of Joko Widodo (Jokowi). In a first quarter plagued by external adversity—especially a sharp drop in exports to China—coupled with internal political paralysis and the delayed disbursement of fiscal spending, the economy recorded its lowest rate of growth since 2009. Observing relatively stable inflation, Bank Indonesia (BI), the central bank, eased its policy rate in February by 25 basis points, to 7.5%. The bank also adjusted its macroprudential measures to counter declining bank lending. On the fiscal side, the expected stimulus from fuel-subsidy reallocation and aggressive public-capital spending did not arrive. Meanwhile, tax revenue made slow progress towards its ambitious target, which it seems unlikely to attain.

Increases in supply costs made it difficult for the government to align domestic fuel prices more closely to the market. Major commodity exports fell significantly, but some manufactured exports showed hints of an upturn. The depreciation of the rupiah, the global strategies of leading investors, and the introduction of taxexemption policies that have been tested in neighbouring countries may have contributed to this trend. To further broaden the base of export diversification, the priorities should be to reduce business costs and enhance competition rather than enforce mandatory regulations. Jokowi has stressed that his focus on maritime development, part of a broader development strategy, includes reducing logistics costs.

The second quarter of 2015 saw the start of several projects in Jokowi's flagship ‘sea toll’ program to improve maritime connectivity. There is a concern, however, that the predominance of state-owned enterprises (SOEs) in strategic port operations will continue to limit competition and reduce efficiency. Jokowi's development strategy also focuses on reducing inequality. His government has implemented several distribution and redistribution policies, including the national social-security system initiated by the previous administration. The system suffered financially in its first year from low participation among those in the informal sector.     

Survey of recent developments

Sri Mulyani's resignation as finance 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 finance minister and deputy finance minister. Further progress with reform will depend heavily on this new team and other key officials. Strong presidential support will also be needed to resist attempts by parliament to interfere excessively with the finance ministry's work.

The economy continued its steady recovery from the impact of the global financial crisis (GFC), but the recovery could still be jeopardised if sovereign debt concerns in Europe persist and block the rebound in global trade and commodity prices. Inflation continues to accelerate, suggesting little room for complacency on monetary policy. Fiscal policy, on the other hand, remains conservative. The higher deficit 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 five-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 uninterrupted expansion of GDP and to cash transfers to the poor. Unemployment also continued to fall, although particular groups suffered slight increases in unemployment (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 significantly alters the legal environment for firms 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 government 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 conflicting requirements for provincial governors to act as agents of the central government while also being accountable to their provincial electorates.     

Survey of recent developments

The Indonesian public is becoming increasingly concerned about the gap between policy rhetoric and action. A strong contributor to this has been a long-running corruption saga involving a tax official, Gayus Tambunan, whose activities have helped confirm the public's worst fears about the ineffectiveness of the anti-corruption campaign. Claims of progress in this and other fields, including the economy, are often overstated, and opinion polls suggest that people are increasingly unwilling to take them at face value.

Nevertheless, the most recent data reveal a surprising surge of GDP growth, driven mainly by investment spending. Inflation has been quite steady for the last six months, albeit a little above the target range; this is disappointing, but not a major problem. In response to surging food prices the government has temporarily removed tariffs on rice, wheat and soybeans, and ordered increased rice imports. Energy subsidies continue to weigh heavily on the budget; the plan to remove the subsidy from petrol used in private cars but not from that used in motor cycles makes good political – if not economic – sense, since motor cycle owners greatly outnumber car owners. The 2011 budget is unlikely to have a stimulatory impact.

The composition of exports has altered quite dramatically over the last two decades, albeit in unexpected directions. The pattern of export destinations has also undergone significant change, reflecting the growing relative importance of Asia to the global economy.

The president's proposal for a new capital as the solution to the congestion problem in Jakarta is questionable. If policy makers fail to understand why existing cities perform their diverse functions poorly, the creation of a new capital is more likely to replicate than to solve problems. Cities are crucial to the modernisation of the economy, and are important vehicles for poverty reduction. City governments could greatly improve their performance by adopting a strategy of financial self-reliance.

The decision to establish a single authority to supervise the entire financial sector has now been delayed for almost 11 years. The draft law currently under discussion suggests that the central bank has no intention of giving up its role as supervisor of the banks. This means there would be wasteful and confusing duplication of that function in the new authority. In any case, it remains unclear exactly what purpose the authority's establishment is intended to achieve.

There have been several reminders recently of Indonesia's vulnerability to natural disasters, including multiple eruptions of Mount Merapi in central Java, which caused almost 400 fatalities and considerable damage to the local economy and infrastructure. Evacuation of residents of the area worst affected seems to have been handled well. An important policy decision needs to be made about whether those who lost their houses, crops and livestock should be permitted to return permanently to their villages.     

SURVEY OF RECENT DEVELOPMENTS

The 10^th anniversary of Soeharto's resignation was coloured by disappointment with the slowness of reform, and with the government's reluctance to confront blatant religious intolerance. Nevertheless, economic growth is strong and investment spending buoyant. Inflation has risen well above target, suggesting that a more effective approach to monetary policy is needed. The recent surge in global rice prices coincided with bountiful domestic harvests, putting the government under pressure to restrict rice exports rather than imports as it has in recent years. However, restricting exports has been recognised as a ‘starve thy neighbour policy’, and the ASEAN trade ministers have jointly agreed ‘to continue fair trade practices and to achieve an orderly regional rice trade’.

The government has at last increased domestic fuel prices significantly, mind-ful of the waste of valuable resources and the inequity involved in keeping such prices constant in the face of world price increases. It will implement a cash transfer program to compensate the poor for the resulting increase in living costs.

The Ministry of Finance is leading reform of the central government bureaucracy. Its most fundamental initiatives are in human resource management, where it is attempting to match remuneration to skill requirements and responsibilities, and to align the pay structure more closely with that in the private sector–with pay rates rising much more rapidly than hitherto as levels of responsibility increase. It is also encouraging competition to fill vacancies by advertising them internally, rather than continuing to rely on promotion by seniority. At local government level, a small number of heads of government have gained a reputation as pioneers of reform. Two interviewed for this survey are exemplars of precisely what it was hoped would result from bringing government closer to the people through decentralisation, and from the switch to direct election of heads of local government. Both have considerable experience in the private sector, and their success seems related to their more entrepreneurial (as distinct from bureaucratic) way of thinking.

‘Good corporate governance’ has now become the mantra for state-owned enterprises (SOEs). It is recognised that this depends heavily on choosing the right people to manage each firm and to oversee it on behalf of its owner. Accordingly, almost all directors and commissioners of the 11 SOEs indirectly studied here have been replaced in recent months, and there is now a willingness to appoint professionals from private companies and from academia in order to gain access to needed skills. In addition, the initial selection of candidates has been shifted outside the bureaucracy to professional recruitment agencies.     

SURVEY OF RECENT DEVELOPMENTS

Summary Apart from the peaceful December elections in Aceh, many major recent news stories from Indonesia have been about disasters of some kind: the sinking of an interisland ferry, the crash of a commercial plane, the continuing misery caused by a seemingly unstoppable mud flow in East Java, and severe flooding in and around Jakarta. The largely symbolic dissolution of the Consultative Group on Indonesia in January has helped neutralise economic nationalist criticism of the president.

The rate of output growth rose to 6.1% in the December quarter, driven by a sudden surge in investment spending. Inflation was modest, at 6.3% in the year to January 2007; the exchange rate has been steady; and the Jakarta Stock Exchange has been booming. The budget deficit is well under control, and public debt continues to decline relative to GDP. At the same time, it is a concern that exchange rate and monetary policies have increasingly come to resemble those in the months preceding the 1997–98 crisis.

Recent surveys confirm that Indonesia's investment climate remains poorer than those of its neighbours. The problem is exemplified by the uncertainty facing new investment in the oil and mining sectors: oil exploration has been sluggish, causing output to fall well below Indonesia's OPEC quota and, although mining operations have been highly profitable in recent years, spending on exploration and new mine development has declined steadily. Meanwhile, the government's hopes of improving infrastructure through public–private partnerships were met with a wait-and-see attitude by private sector participants attending a second infrastructure summit in November.

Non-oil manufacturing grew more slowly than GDP in 2006, reversing the outcome for 2005. Non-oil manufactured exports grew steadily over 2004–06, but there seems little prospect of a resumption of the double-digit growth of the late 1980s and early 1990s. Aside from the poor investment climate and infrastructure shortcomings, the constraints on manufactured export growth include strong competition from China and Vietnam and declining competitiveness resulting from big increases in regulation-driven labour costs.

In March 2006 the poverty rate stood at 17.8%, up from 16.0% in February 2005. A World Bank study has attributed this to the large increase in rice prices caused by the ban on rice imports. It argues that the Unconditional Cash Transfer program, which provided direct cash transfers to 19.2 million poor and near-poor households, more than offset the impact of the steep fuel price increases in 2005, although these findings have been the subject of vigorous debate.     

Survey of recent developments

The composition of the incoming cabinet has been a disappointment: the president's clear election victory seemed to give him the opportunity to appoint a more strongly reformist group of ministers. The new government says it intends to involve the private sector heavily in infrastructure provision, and that it recognises the need to improve the business environment, but there has been little concrete progress so far, and it has yet to show the will and capacity to do what is required.

In late December Aceh province was devastated by an earthquake and a catastrophic tsunami. About a quarter of a million Indonesians were killed and countless others injured. Vast numbers have lost their livelihoods, and material damage is estimated at $3 billion, although the natural gas producing facilities remain intact. The international community showed itself to be favourably disposed to the incoming government, and committed generous disaster assistance.

The economy grew increasingly rapidly in 2004, and investment spending has at last begun to record sustained high rates of growth. The budget outcome for the year is expected to be reasonably close to plan, despite the previous government's failure to reduce the enormous waste resulting from electricity and fuel price subsidies. Monetary policy was tightened toward the end of the year in response to accelerating inflation. A deposit insurance agency to be established under newly enacted legislation is unlikely to be able to prevent banking collapses, or the transfer of the resulting losses to the general public; the legislation seems merely to codify most of the actions taken on an ad hoc basis in 1999–98 when the banking system collapsed. Meanwhile, yet another banking scandal has led to the closure of a private bank, after a seemingly unwarranted delay by the central bank.

The government has announced its intention gradually to adjust electricity and fuel prices upwards. The Constitutional Court has annulled a new electricity law allowing greater private sector participation and competition in this sector, however. Similar court actions now seem likely whenever the government enacts laws aiming to enhance efficiency through these means.

After less than four years of decentralisation, the underlying laws have been replaced. The new laws can be interpreted as an attempt to shift government authority back towards the centre, but there has also been an attempt to redress the regionally inequitable fiscal impact of current revenue sharing arrangements.     

SURVEY OF RECENT DEVELOPMENTS

Summary Political and economic stability prevailed in Indonesia to early June 2007. President Yudhoyono made some badly needed changes to his cabinet, but left the core economic team unchanged. This inspired further confidence in the government's economic policies, yet it still fails to satisfy public expectations. The Lapindo mudflow disaster continues to weigh on the government, with no clear strategy apparent.

The economy shows stable macroeconomic fundamentals. Growth remained at around 6% p.a., driven mainly by investment and exports. The exchange rate strengthened and the stock market continued its rise. The central bank lowered the policy interest rate further, but this is likely to have little effect on growth, and brings some macroeconomic risks. Increasing or even maintaining current growth rates could be a challenge, given that export growth depends strongly on the global commodity boom, and improvements in the investment climate remain uncertain.

The parliament passed the long-awaited new investment law, which promises a more open and friendly investment regime. Doubts surround the implementation of the law, however. There are concerns that the new negative list could be overly protective and that the continued role of the Investment Coordinating Board may cause coordination problems among agencies and with sub-national governments. Boosting growth in manufacturing could be the key to higher overall growth. Structural change in the manufacturing sector over recent years has seen labour-intensive industry decline in terms of both output and exports, mainly because of rigid labour policies.

Efforts to boost private sector investment in infrastructure still show limited success. Implementation of regulatory and bureaucratic reforms is ineffective, and domestic financing remains in short supply. Public provision of infrastructure needs to increase, but suffers from shortcomings in fiscal management and a mismatch between the often cross-district nature of infrastructure projects and the now strongly district-based budgetary authority. Electricity supply exemplifies how the lack of well-designed investment strategies limits Indonesia's growth potential. Power sector investment has stagnated despite strong growth in electricity demand, and current plans for coal-based capacity expansion lack thorough planning.

An emerging long-term challenge for policy makers is climate change. Ahead of the December UN climate change conference in Bali, recent reports have highlighted Indonesia's vulnerability to climate change and its contribution to global greenhouse gas emissions, predominantly from deforestation. Slowing or halting of deforestation is unlikely to occur without large-scale international financial flows.     

Survey of recent developments

The arrival of a new year has brought with it an increased focus on Indonesia's 2014 legislative and presidential elections. While voters may be disillusioned with established political figures, a strong presidential candidate has yet to emerge. Many voters appear to yearn for an experienced and uncorrupt leader with new and proactive policies, which is why Jakarta's new governor, Joko Widodo, is being viewed as a potential candidate.

The Constitutional Court has made two major, controversial rulings in recent months: the first concerned the upstream oil and gas regulator BPMigas, the second the international-standard pilot-project schools (Rintisan Sekolah Bertaraf Internasional, RSBIs). The Court ruled both institutions unconstitutional and called for their immediate disbandment.

In 2012, Indonesia's year-on-year economic growth slowed slightly, to a still healthy 6.2%, owing to continued weak global demand for its exports and a contraction in government expenditure. In contrast, foreign direct investment and portfolio investment were particularly strong, with respective increases of 25% and more than 142%. At 4.3%, inflation for the 2012 calendar year still remains well within the government's and Bank Indonesia's expectations. However, inflation expectations are high for 2013, owing to likely reforms to energy subsidies; the expected effect of bad weather on food prices; and increases in minimum wages, which attracted attention in 2012 because of their magnitude and their apparent disparity among regions. Concerns also exist that these rises in minimum wages will hamper Indonesia's international competitiveness and could discourage investment in labour-intensive industries.

Minimum-wage policy is also controversial because of doubts about its relevance to the genuinely poor sections of society – those in informal employment or with primarily subsistence income, who constitute a large proportion of the population. Indonesia has experienced a steady increase in income inequality in the last decade, indicating that the benefits of strong economic growth have not been shared equally. Potential reasons for this increasing inequality relate to labour-market segmentation amid a growing middle class, weak institutional foundations, and commodity-driven growth.

It appeared in 2012 that Indonesia has also been one of the world's poorest performers in HIV/AIDS prevention in recent years. While prevalence rates are low, the number of new HIV infections in 2011 was more than four times that of any other South Asian or Southeast Asian country, and the infection rate among the working-age population has risen by more than 25% since 2001. Infection rates among high-risk groups are also alarmingly high compared with those of other Southeast Asian countries. Targeted prevention, treatment and support programs among these groups are paramount.     

Survey of recent developments

The process for Indonesia's 2014 parliamentary and presidential elections is underway. A few discernible patterns have emerged, yet the political situation at this early stage remains fluid and both races are open. Recent events have shown, however, that Indonesian democracy itself is still relatively young and evolving, the balance of power between key institutions is still unsettled, and constitutional checks and balances are still being tested.

Macroeconomic developments over the last few months have been mixed. Economic growth stayed above 6%, despite a difficult external environment, and inflation, which climbed in the first quarter, began to ease in April and May. At the same time, slower investment growth, deficits in the current and capital accounts of the balance of payments, downward pressure on the rupiah, and the risk of further increases in interest and exchange rates cast a shadow over near-term growth prospects. The recent rise in global interest rates triggered a capital outflow that contributed to a stock-market correction and placed the rupiah under new pressure. Bank Indonesia responded by raising the overnight rate, which helped to calm markets. But given relatively large non-resident holdings of Indonesian stocks and bonds and continued upward pressure on global interest rates, Indonesia's balance of payments and capital market will likely remain under strain for the foreseeable future.

Policy developments were also mixed. The appointment of a technocrat as finance minister sent a reassuring signal to markets and investors. And parliament finally approved a revised budget based on more realistic assumptions and included a much delayed across-the-board increase in fuel prices, together with compensatory programs for the poor. This achievement should help boost investor confidence and generate public resources for urgent infrastructure and social-assistance programs. At the same time, however, recent measures to restrict imports of horticultural products attracted the ire of trading partners and domestic consumers, leading to their partial reversal. These measures, together with draft trade and industry laws awaiting parliamentary approval, represent a new economic nationalism that seeks to protect domestic producers against what is seen as unfair international competition

The fuel-price increase, rising income inequality and an ambitious target of reducing the poverty rate to 8%–10% in 2014 – the last year of President Yudhoyono's final term – brings into focus the efficacy of Indonesia's social-assistance programs. It also adds fresh urgency to government efforts to improve the coverage, financing, targeting, and institutional arrangements underpinning these programs. The challenge has always been, and remains, that without central monitoring and oversight, local political pressures tend to dilute program benefits for the intended beneficiaries.     

Publications

The Kian-wie, Plantation Agriculture and Economic Growth: An Economic History of East Sumatra, 1863–1942, Jakarta, National Institute of Economic and Social Research (LEKNAS-LIPI(, 1977. Pp 142 + xii. Price not given.

Rodolphe De Koninck, D.S. Gibbons, and Ibrahim Hasan, “The Green Revolution, Methods and Techniques of Assessment: A Handbook of a Study in Regions of Malaysia and Indonesia', Notes et Documents de Recherche, No. 7, December 1977, Department of Geography, Universite Laval, Quebec, pp 409 + xiii.

Graeme J.Hugo,Population Mobility in west Java, Gadjah Mada university Press Yogyakarta, 1978,pp.

John Ingleson, Road to Exile: The Indonesian Nationalist Movement 1927–1934, Singapore: Heinemann for the Asian Studies association of Australia, 1979, pp. 254.

The Population of North Sulawesi by G.W. Jones, Gadjah Mada C. E. Beeby,Assessment of Indonesian Education, a Guide in Planning, Wellington, New Zealand Council for Educational Research in association with Oxford University Press, 1979, pp. 349. (Educational Research Series no. 59; appendices, tables and index; no price given).

Haryati Soebadio and Carine A. du Marchie Sarvaas (eds.),Dynamics of Indonesian History,Amsterdam, North-Holland, 1978, pp. 395 + xvi, $53.25.     

Publication

Masalah Usahatani-Tebu dan Industri Gula di Djawa [Problems of Sugar-cane Farming and the Sugar Industry in Java]. Report of the Agro-Economic Survey. Faculty of Economics, Gadjah Mada University, Jogjakarta, 1968. Pp. ix + 105. (In Indonesian.)

J. Panglaykim and K.D. Thomas, Indonesia's New Era - Development Administration: Supplementary Papers . Committee for Economic Development of Australia, Melbourne, 1968. Pp. xxix 86. Price $A2.00.

T. K. Tan (editor), Sukarno's Guided Indonesia, Brisbane, Jacaranda Press, 1967. Pp. xi + 196. $A5.50.

Angkatan Kerdia Penduduk Indonesia [The Indonesian Labour Force] . Report No. 2A, December 1967. Pp. 309. Angkatan Kerdia Penduduk Diawa-Madura [The Labour Force of Java and Madura]. Report No. 2B, March 1968. Pp. 282. Angkatan Kerdja Penduduk Luar Diawa [The Labour Force Outside Java]. Report No. 2C, March 1968. Pp. 282. Reports of the National Social-Economic Survey, Phase II (November 1964-February 1965). Research and Development Section, Central Statistical Bureau, Djakarta. (Text in Indonesian; tables with English subtitles.)

Buku Pedoman untuk Pentjatjah dan Pemeriksa [Instruction Manual for Interviewers and Supervisors]. Cost of Living Survey 1968-69. Research and Development Section, Central Statistical Bureau, Djakarta, June 1968. Pp. 48, mimeographed. (In Indonesian.)

Investment. The New Policies and Procedures of Foreign Capital Investment in Indonesia. Prepared by the Technical Team on Foreign Private Investment of the Government of Indonesia. Departmcnt of Iniorniation; Djakarta, 1968. Pp. 152.

G. L. Hicks and G. McNicoll, The Indonesian Economy, 1950-1967: Bibliographic Supplement. Bibliography Series No. 10, Southeast Asia Studies, Yale University, 1967. Pp. 211.     

Survey of recent developments

The president reconstituted his cabinet in early December, focusing primarily on the economic team. The highly experienced Boediono was appointed as Coordinating Minister for Economic Affairs, while Sri Mulyani Indrawati was promoted from chair of the planning agency to become Minister of Finance. The former economics coordinating minister, Aburizal Bakrie, was made Coordinating Minister for Social Affairs—out of the economic limelight, but still with considerable influence. These changes overall have been well received by the markets, as indicated by a considerable strengthening of the rupiah.

The challenges facing the new cabinet remain immense, however. On a range of macroeconomic variables, performance has fallen well short of the government's targets. Output growth declined to just 4.9% p.a. in the December quarter from 6.5% a year earlier. Investment growth has fallen to a very low level, giving rise to concern about the creation of job opportunities. In a booming global economy, exports grew by only 7.4% in the four quarters to December, despite Indonesia's wealth of natural resources. The inflation rate doubled from September to October to almost 18% p.a., although subsequent price increases have been much slower.

The president's anti-corruption campaign continues to generate much attention. The number of corruption cases involving government officials and state enterprise managers brought to the courts continues to increase. Some high-profile cases have resulted in convictions, but others have not. The campaign seems likely also to be extended to judicial reforms, which are clearly crucial, but one urgent issue yet to be tackled directly is the widespread suspicion that funding of major political parties derives largely from abuse of power by government officials.

Numerous floods and landslides early in 2006 resulted in deaths, injuries and considerable physical damage. The frequency of such natural disasters has risen significantly over time, suggesting that governments at all levels need to develop mechanisms to manage them and implement policies to mitigate or prevent them.

Reconstruction progress in Aceh and Nias during 2005 was disappointingly slow. The reconstruction authority predicts dramatic improvement in 2006, but there appears to be a need to clarify the relationships among its three components, and to make some adjustments to its master plan, particularly in relation to land use planning. A reallocation of available funds among major activities, better coordination of implementing organisations, and a rethinking of conflicts between the authority's roles as implementation agency and coordinating agency may all be needed if the ambitious and urgent targets are to be met.     

Book Reviews

Idris F. Sulaiman, G. Hanafi Sofyan and Shannon Luke Smith (eds) (1998), Bridging the Arafura Sea: Australia-Indonesia Relations in Prosperity and Adversity, Asia Pacific Press, Asia Pacific School of Economics and Management, The Australian National University, pp. xxi + 325.

David C. Cole and Betty F. Slade (1996), Building a Modern Financial System: The Indonesian Experience, Cambridge University Press, Cambridge, pp. xxvii + 379. Cloth: US$59.95; paper, US$25.

Chris Manning (1998), Indonesian Labour in Transition: An Indonesian Success Story?, Cambridge University Press, Cambridge, pp. xxii + 323.

Hal Hill and Thee Kian Wie (eds) (1998), Indonesia's Technological Challenge, Research School of Pacific and Asian Studies, Australian National University, Canberra, and Institute of Southeast Asian Studies, Singapore, paper, pp. xxv + 414.

Steven J. Keuning (1996), Accounting for Economic Development and Social Change, IOS Press, Amsterdam, Oxford, Tokyo, Washington DC, pp. x + 233. NLG100; £39; DM90;US$58.

Thomas Brandt (1996; English trans. 1997), Kunci Budaya. Business in Indonesia: The Cultural Key to Success, goasia Verlag, Bad Oldesloe, Germany.     

Publications

H. S. Kartadjoemena, The Politics of External Economic Relations: Indonesia's Options, Institute of Southeast Asian Studies, Singapore, 1977(?), pp. 179, $S 12.00

Ingrid Palmer, The Indonesian Economy since 1965: A Case Study of Political Economy, London, Frank Cass, 1978, pp. ix, 196, £11.00.

Gadjah Mada University, Faculty of Economics, Graduate Program in Economics, Four Papers on Employment and Income Distribution in Indonesian Agriculture, Yogyakarta, pp. 118 + ii, mimeo.

U.S. Department of Commerce, Country Market Sectoral Survey, Indonesia: A Survey of U.S. Business Opportunities, U.S. Government Printing Office, May 1977, pp. 320.

Borrowing By Developing Countries on the Euro-currency Market P. A. Wellons, OECD, Paris 1977 $20, pp. 449.

Mayling Oey and Ketut Sudhana Astika, The Social and Economic Implications of Transmigration in Indonesia: A Policy-Oriented Review and Synopsis of Existing Research. L. P. E. M., Fakultas Ekonomi, Universitas Indonesia, 1978, pp. 228.

Paul A. Meyer and Colin MacAndrews, Transmigration in Indonesia. An Annotated Bibliography. Gadjah Mada University Press, 1978, 245 pages.

Fox, James J., Harvest of the Palm: Ecological Change in Eastern Indonesia. Harvard University Press, Cambridge, Massachusetts 1977.     

Publication

Laporan Tahun Pembukuan 1960-65 [Report for the Fiscal Years 1960-65]. Bank Indonesia, Djakarta, 1968. Pp. xii + 3O1 and appendices.

Masalah Ekonomi Beserta Pemetjahannja [Economic Problems and their Solution]. Symposium organised by the Central Presidium of KAMI, 1-6 June 1968. Student Senate, Faculty of Economics, University of Indonesia, Djakarta, 1968. Mimeographed, pp. 260.

Business Prospects in Indonesia Today. Published by the Committee for the 17th August Celebration and the Indonesian Community in Hong Kong, August 1968. Pp. 182.

Statistical Pocketbook of Indonesia, 1964-1967. Central Statistical Bureau, Djakarta, 1968. Pp. lii + 418.

Data-data Statistik Pokok Pembangunan Ekonomi [Basic Statistics for Economic Development]. Badan Perent janaan Pembangunan Nasional, Djakarta, 17 August, 1968. Mimeographed, pp. 50.

Report of the Singapore Technical Fact-Finding Mission on the Development of Tourism in Bali. Economic Development Division, Ministry of Finance, Republic of Singapore, June 1968. Pp. 79, Sp. $3.00

Bank Negara Indonesia Unit I, Bulletin of Economic and Financial Statistics, July 1968. Mimeographed, pp. 29.

Indonesian Economic Review vol. 1, no. 1-, May 1968-. Djakarta, Berdikari Ltd (monthly).

Iklantara, No. 1-, August, 1968-, Djakarta, Iklantara Advertising Agency (monthly).     

Publications

Japanese-Indonesian Relations in the Seventies. Centre for Strategic and International Studies, Jakarta 1974. pp. x + 160.

V. V. Bhanoji Rao, (ed.), Inflation and Growth, Stamford College Press for the Economics Society of Singapore, 1974, pp. 256.

Bibliografi Teh Indonesia (Indonesian Tea Bibliography), Nazar Nur (Ed.), Research Institute for Estate Crops, 1974, pp. 335.