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

The second half of 2008 is proving to be a time of unprecedented global volatility, and the sound performance of the Indonesian economy over the first half will be difficult to maintain. With growth for the year projected to remain around 6%, Indonesia is relatively well placed to face the challenges of the unfolding global financial crisis, but the risks to the outlook are increasing. The crisis has begun to impact directly, with trading on the Indonesian stock market suspended on 8 October after an alarming one-day fall of 10% in share prices. Sustained pressure on the currency since mid-August has also seen Bank Indonesia running down its sizable foreign exchange reserves in attempting to support the rupiah. The authorities are taking steps to relieve liquidity pressures in the financial system, but will also need to address medium-term issues of stability, especially in relation to inflation; interest rate increases have so far done little to contain prices. Although exports have remained surprisingly strong, rapid import growth has resulted in a small current account deficit. Growth of exports is likely to decelerate as demand in developed economies slows, putting further pressure on the balance of payments and the currency.

The 2009 budget reflects the government's positive outlook, but the underlying assumptions about growth, inflation and interest rates seem rather optimistic. Tax revenue has been increasing strongly, allowing the government to allocate significant new spending to education, in particular; however the budget remains hostage to global oil prices, with energy subsidies still very large despite the unpopular recent increases in domestic fuel prices. Other issues likely to affect voting in the 2009 elections include scheduled electricity blackouts in Jakarta in response to demand continuing to outstrip supply; the government's apparent indifference to the fate of the victims of the Sidoarjo mud disaster; and its failure to make much impact on the level of poverty.

Despite asking major donors for additional loans for budget support, the government has unveiled a new strategy for managing development partnerships. This will encourage smaller donors to operate through multi-donor arrangements and larger donors to use government systems for more of their programs—a signal that the government intends to shape its relationships with donors despite the global crisis.     

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

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.